Rent Abatements and Deferrals in a COVID-19 Environment

The National Council of Real Estate Investment Fiduciaries’ (NCREIF) Accounting Committee’s May webinar, as you can imagine, centered on the current pandemic. Specifically, the discussion focused on the accounting treatment of rent abatements and deferrals in the era of COVID-19, the—hopefully short-lived—economic and accounting struggles it created in the real estate industry, and the policies and approaches industry leaders are adopting. 

These are the same issues that have been at the forefront of the discussions among the members of EisnerAmper’s Real Estate Group and their clients for the past several months. Here are a few best practices to consider:

• Revisit your current accounting policies related to revenue recognition and leases in light of the Financial Accounting Standards Board’s (FASB) tentative decision to defer the mandatory effective date of Topic 606, Revenue from Contracts with Customers, and Topic 842, Leases, as they may affect private real estate companies. The FASB is expected to finalize its decision over the next couple of months.
• The FASB has tentatively decided to delay the effective date of Topic 606 for private companies that have not yet adopted the new standard. The effective date for the new revenue recognition standard may be extended to annual reporting periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020. Early application will still be permitted.
• For Topic 842, the FASB has tentatively decided to extend the effective date for private companies to fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early application will still be permitted.
• In order for management and investors to monitor activity directly related to the COVID-19 outbreak, consider the creation of separate general ledger codes to account for the items such as rent abatements and concessions, bad debt, other specific COVID-19 outbreak-related allowances and reserves, valuation adjustments, and revenue and expense items.
• Real estate companies should carefully and thoroughly document their rent deferral and abatement arrangements with tenants, including lease amendments, riders, email communications and verbal agreements.
• Real estate companies should develop policies to address accounting for short-term rent deferrals and document whether rental revenue is recorded with no reserves, partial or full reserves, or if such reserves are evaluated on a case-by-case basis.

The webinar participants acknowledged that there are different views and parameters about matters such as the establishment and adjustment of current accounting policies, the recording of rental revenue during the deferment period, and the evaluation of reserves based on certain thresholds or on a case-by-case basis. At the same time, the overall approaches appear to be fairly consistent among the industry professionals.

Our real estate experts will continue to learn and discuss best practices to be able to navigate clients through these uncertain times, as well as assist and advise them in understanding and implementing all matters related to accounting and business matters caused by the current public health crisis.