Can you work with your landlord to restructure your lease?

As the changes for lease accounting come into play, companies and organizations currently reporting under US GAAP or IFRS accounting standards will get affected in terms of how their lease transactions are recognized in financial statements, albeit to different extent.

The impact of these changes have been discussed extensively and they range from implications for sub-leasing to weighing your options for renewal.

So do you have any wriggle room with your landlords? The truth is, there are limitations to landlord flexibility.

Real estate markets around the world are governed by market norms. If your landlord is a reputable commercial landlord commanding a certain scale in the industry, it would be highly unlikely for them to agree to restructure a deal that does not conform to market standards. Why the case? Landlords want to steer away from the negative impact a valuation can have on their building because simply put, commercial valuers do not like bespoke leases. In addition, this will have a knock-on effect on the ability of the landlord to use the building as collateral to secure loans.  At the very least, it will cause the landlord’s cost of borrowing to increase, which will most likely find its way back to you in the form of higher rent.

For landlords which are Real Estate Investment Trusts (REITs), the ability to meet its distribution targets to shareholders is a key performance metric and any deal restructure that jeopardizes it is a definite no-no. While this does not rule out the possibility of lease restructuring, you will need to be realistic in your expectations of how much landlords will accommodate to your requests.

Post 2019, the structure of real estate leases and the assumptions behind the calculations to determine the financial implications will be audited. It will be time to justify and defend leases with structure and contractual terms that deviate from market norms to auditors. In such a scenario, it might be a better idea to keep portfolio management simple by going for the simplest and cleanest deal structure that meets business operational requirements to prevent unnecessary complication during year-end reporting.