Roundtable Weekly by The Real Estate Roundtable

LEASE ACCOUNTING
FASB Rewrite of Lease Accounting Rules Could Have “Disastrous Consequences” For Real Estate, House Lawmakers Warn; Cost-Benefit Analysis Urged

ENVIRONMENT AND ENERGY POLICY
House Energy and Water Appropriations Bill Seeks Clarification of Wetlands Enforcement as White House Threatens Veto; GOP Senators Concerned EPA is Ignoring Recent Supreme Court Wetlands Ruling


LEASE ACCOUNTING

FASB Rewrite of Lease Accounting Rules Could Have “Disastrous Consequences” For Real Estate, House Lawmakers Warn; Cost-Benefit Analysis Urged

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The May 17, 2012 letter from House lawmakers to FASB Chairman Leslie Seidman on lease accounting standards.

As the lease accounting coalition (which has over 30 trade association members, including The Roundtable) prepares to meet with Financial Accounting Standards Board (FASB) Chairman Leslie Seidman on Monday, June 4 in Washington DC, a coalition of House lawmakers — led by Reps. John Campbell (R-CA) and Brad Sherman (D-CA) — sent a letter to FASB just before Memorial Day urging them to carefully rethink proposed changes to lease accounting standards that could have “disastrous consequences” for the real estate industry, if enacted. The letter — signed by 61 House lawmakers — also recommended a comprehensive cost-benefit analysis of the proposed changes.

In an April 16 “Dear Colleague” letter requesting signatures from other U.S. lawmakers, Campbell and Sherman said, “Under the proposal, U.S. companies that lease office, industrial and retail space would be required to capitalize the costs of that lease — just as if they purchased the property — instead of recognizing the true costs of the lease transaction.” They cited estimates that, under current terms, “businesses would be required to capitalize over $1.1 trillion in leased real estate assets onto their balance sheets. For businesses leasing space, especially small businesses, this will change these leases into a major liability.”

The lease accounting overhaul issue first emerged in Aug. 2010, when FASB and International Accounting Standards Board (IASB) proposed new lease accounting rules that would dramatically change the way businesses of all kinds account for their leasing activities — while forcing income-producing real estate to be re-characterized as a financing business on financial statements.

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The  Financial Accounting Standards Board (FASB) will propose new lease accounting standards affecting CRE.

Responding to an outpouring of concerns from The Roundtable and other stakeholders, FASB and the IASB this past fall agreed to exempt at least some commercial property owners from the new requirements — while still requiring tenants (lessees) to capitalize real estate leases on their balance sheets. [Roundtable Weekly, Oct. 28, 2011].

This proposed requirement would likely discourage businesses from leasing commercial space, or prompt them to seek shorter lease terms without renewal options or contingent rents to minimize the non-cash lease costs. The proposed changes could also jeopardize income property fundamentals, loan structures, property valuations, financing covenants, and the underlying economics of commercial real estate — all at the worst possible time.

After many twists and turns since U.S. and international accounting standards-setters first unveiled their proposal, they now plan to issue an entirely new draft later this year — in hopes of finalizing new standards by the middle of 2013.

As part of preparations for the June 4 meeting between FASB and the Lease Accounting Coalition, The Roundtable this week asked members of its Real Estate Capital Policy Advisory Committee (RECPAC) for anecdotal examples of how the proposed new standards are affecting the commercial real estate marketplace.

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ENVIRONMENT AND ENERGY POLICY

House Energy and Water Appropriations Bill Seeks Clarification of Wetlands Enforcement as White House Threatens Veto; GOP Senators Concerned EPA is Ignoring Recent Supreme Court Wetlands Ruling

As the House of Representatives considers a $32.1 billion energy and water spending bill (H.R. 5325) – including a provision that would prevent the Army Corps of Engineers from expanding its jurisdiction over wetlands and property use – the White House today threatened to veto the bill if it is passed.

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The FY2013 Energy and Water Development Act (H.R. 5325)would appropriate $26.3 billion for the Department of Energy and bar the Corps from expanding its jurisdiction over waters to include “nonnavigable” waters under the federal protection of the Clean Water Act.  

The FY2013 Energy and Water Development Act (H.R. 5325) would appropriate $26.3 billion for the Department of Energy and bar the Corps from expanding its jurisdiction over waters to include “nonnavigable” waters under the federal protection of the Clean Water Act. The Roundtable has been active in tracking numerous developments on federal regulation affecting wetlands that have significant implications for real estate. (Roundtable Weekly, Sept. 30, 2011)

H.R. 5325 is likely to reach the floor next week for a vote, according to the office of House Majority Leader Eric Cantor (R- VA). The Senate is waiting for the House to act first on the legislation, according to Sen. Dianne Feinstein (D-CA), who chairs the Subcommittee on Energy and Water Development. (BNA Daily Environment Report, May 25)

In related news, 16 Republican senators on May 24 wrote to EPA Administrator Lisa Jackson expressing “deep concern” that the agency may be ignoring a recent Supreme Court decision that ruled in favor of land owners who disputed an EPA order classifying their property as a wetland under the Clean Water Act. (Sackett vs. EPA)

The March 21 decision in Sackett v. EPA (U.S. No. 10-162) holds that federal agencies can be subject to litigation initiated by aggrieved landowners, to question government orders that halt development activities due to overly zealous permit requirements over ditches, drains, marginal wetlands, and other similar aquatic features on private lands. (Roundtable Weekly, March 23, 2012 )

In their letter, the senators cited media reports about Mark Pollins, director of EPA’s Water Enforcement Division, who appears to be downplaying the Supreme Court’s Sackett ruling affect on the agency’s enforcement efforts.

 Supreme Court fountain

The Roundtable, NAHB and NAA filed an amicus brief with the U.S. Supreme Court supporting the petitioners inSackett v. EPA. The Supreme Court in March 2012 found in favor of the Sacketts and reversed the lower court’s decision.

Mr. and Mrs. Sackett sued EPA because the agency issued an order mandating them to restore their property to pre-development conditions. Lower federal courts dismissed the Sackett’s lawsuit, ruling the EPA’s demands were merely “pre-enforcement” and could not (yet) be judicially reviewed. In other words, the Sacketts would have to wait for EPA to sue before they could mount their own legal challenge against the federal government.

As “Sackett” wound its way through the courts, petitioner Mike Sackett claimed he had no reason to believe that his lot contained “waters of the United States” subject to control by EPA and the U.S. Army Corps of Engineers (Corps). As he was quoted in The Washington Post on Jan. 2, 2012 “How can you call it a wetland when it’s a lot in an existing subdivision that has a sewer hookup?”

The Roundtable, the National Association of Home Builders (NAHB) and the National Apartment Association (NAA) filed anamicus brief with the U.S. Supreme Court supporting the petitionersin Sackett v. EPA. The Supreme Court in March 2012 found in favor of the Sacketts and reversed the lower court’s decision.

The May 24 letter from Republican senators noted, “EPA should not use its enforcement authority to intimidate citizens into compliance.”  The senators also requested EPA Administrator Jackson to explain Pollins’ remarks and clarify how the agency plans to pursue their Clean Water Act enforcement efforts in light of the Supreme Court’s ruling in Sackett.

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