Do you know when a lease starts? When does a lease start? Every lease has a “start” date, but most people do not understand what that date really is. When precisely does a lease start? Does a lease start on the execution date or on the commencement date? What about the possession date? Or the date the company opens for business at that location?
Lease Start date vs Move in Date vs Possession Date vs Commencement Date vs Execution Date. Which one is correct?
Ladies and gentlemen, for accounting purposes, a lease “starts” on the date possession is passed from the landlord to the tenant. On that date, the lessee or tenant should start recording straight-line expense, even if that date is earlier than the “commencement date” specified on the lease. Let me stress this again as it is a very important point. The “commencement date” specified on the lease document has ABSOLUTELY no bearing whatsoever on the lease start date under current (and the new) lease accounting rules. For accounting purposes, the commencement date specified on the lease may be used to determine the leaseend date, as most of the time the “lease term” specified on the lease document “starts” on the commencement date. You have probably seen language in a lease as follows: Lease Term: A term commencing on January 1, 2016 (Commencement Date) and continuing for sixty-six (66) full calendar months. Tenant shall be granted access to the Premises sixty (60) days prior to the Commencement Date to install equipment and furnishings (the “Early Access Period”). Such access shall be subject to all the terms and conditions of this Lease, except that the Commencement Date and the payment of Rent shall not be triggered thereby.
Based on the language above, for accounting purposes, the lease start date is actually November 1, 2015 (or whenever access is granted), and the lease term is actually 68 months. The tenant would record expense in the months of November and December (the offset is to deferred rent), even though the lease explicitly asserts that the commencement date is January 1, 2016. Here’s another example: The Lease Term shall be for a period of one hundred twenty (120) months commencing one hundred fifty (150) days after the date upon which Tenant Opens for business at the Demised Premises (the “Commencement Date”). Assuming the tenant takes possession of the premises on January 1, 2016 (to construct leasehold improvements) and opens for business on June 1, 2016, then the commencement date per the lease document is November 1, 2016. However, for accounting purposes, the lease start date is actually January 1, 2016 (the possession date), and the tenant would have to record expense for January through October 2016, even though the lease asserts that the commencement date is November 1, 2016. In addition, the accounting lease term is actually 130 months, as opposed to 120 months as stated in the lease. So there you have it; the difference between commencement dates as stated in the lease, and the commencement date for accounting purposes. As you are making decisions about your lease accounting software, be sure to ask if the software tracks both the commencement AND possession dates, and make sure the software amortizes rent expense from the possession date and not the commencement date. LeaseQuery does this effortlessly. Here is a free tool you can use to determine if your lease is a Capital or Operating Lease. It goes though the 4 tests for capital leases. To access the test (for free), click here.
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