The new Lease Accounting Standards (IFRS 16) came into force at the beginning of 2019, and there is much for building owners and occupiers to understand, perhaps most importantly, what data needs to be collected in order to meet these new standards .
One of the mandatory data points is described as restoration costs. So, what exactly does this mean? Online accountancy sources describe it variously as repairing wear and tear, or the cost of refurbishing the property, maybe restoring it in some way - but restoring to what?
A common response is: ‘It must be an estimate of building cost, no?’ so ‘That means my builder or project manager can advise, right?’
Not quite - the extent to which you need to earmark cost depends on the specific requirements of each lease, the building itself, and the changes you as occupier make to it during that period. As a result, the likely range of restoration costs could be very broad.
Terms of occupation will vary from lease to lease. Some tenants may only have to remove their furniture and clean the premises when the lease comes to an end. Others may have to demolish entire buildings upon termination. More commonly, at the end of a lease, the building needs to be returned as it was at the beginning. Therefore, the costs could involve repairing wear and tear, refurbishing or restoring the building in some way.
No single lease clause captures all of these termination obligations in one place so to establish what is required, the effect of multiple clauses needs to be considered. In turn, the impact of these obligations has to be assessed on site to form a full picture of the cost of addressing breaches in the lease. The skills needed to do this effectively are wide ranging, including a knowledge of legal practice and evolving case law, access to current repair and maintenance costs and an understanding of complex construction technology issues. Consequently, developing a reliable estimate of restoration cost has become quite a niche area of surveying practice.
As if this wasn’t complicated enough, not only does the liability vary from lease to lease but also from country to country.
So, if your company holds a global portfolio, how can you get to grips with establishing the appropriate sums to set aside so you can comply with the Lease Accounting Standards? When it comes to budgeting for dilapidations and reinstatement costs on a global portfolio, the task can seem overwhelming.
Inspecting every asset may not be feasible but auditors will still expect a best estimate to be available. Applying a single rule of thumb rate across the portfolio is likely to result in a significant margin for error. Using a cost per square foot appropriate for UK liabilities will most likely result in notable over accounting because construction costs vary significantly between global economies.
CBRE’s global reach of experts in this field means we have a deep level of understanding of the processes needed to accurately estimate costs in the way the legislation demands. Our team can profile your portfolio with a greater degree of insight and accuracy compared with other providers. Our building consultancy team already has a strong track record in helping companies map out these costs on their global portfolios.
Take a look at our European Guide to Dilapidations
which summarises how liabilities are built up from country to country.
We would love you hear from you to discuss your needs.
Associate Director – Dilapidations
CBRE Building Consultancy
[email protected] | DDI 020 7182 3108 | M 07540 818721 | T 020 7182 2000