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The economic impact brought by the coronavirus disease 2019 (covid-19) to both tenant and landlords is not furtive.
The Department of Trade and Industry’s suggestion to abate or even deferment the payment of lessees could only help them so much.
The civil law on leases says lessees are not easily exempted from payment of lease.
Lessors’ consensus with their clients whose businesses were affected by the situation is then stress-tested nigh to its limit.
Needless to say, the real estate industry is now finding its way to adjust to a “new normal.”
In Metro Manila, office landlords are starting to adjust their lease rates.
According to Mr. Nikko Baluyot, President of Zonac Co, the decrease in lease rates reached up to 30% lower.
Lower office demand
Leechiu Property Consultants chief executive officer David Leechiu also said they now expect “office space supply 44% lower than originally forecasted.”
“With the enhanced community quarantine (ECQ), we expect delays in construction, therefore we are reforecasting 2020 supply to be 842,000 square meters down from 1.498 million square meters,” he said in an online media briefing in April.
Leeichu noted, the demand for office supply dropped by 47% year-on-year in the first quarter alone.
“There are 636,000 square meters of live requirements being transacted today, and we expect this demand to grow by another 25%. Many of these transactions are expected to close beginning the second half 2020,” he said.
LPC sees the demand for office space will rebound once the condition returns to normal, “driven mainly by the Philippine Offshore Gaming Operations (POGOs) and the information technology-business process management (IT-BPM) sector.”
Accounting for Lease
P&A Grant Thornton recently published a “COVID-19 Accounting for Lease Modifications.”
Grant Thornton explains that for lessees, “a lease modification arises when the lease contract is altered such that future cash flows and/or the scope of the lease change.”
“Where an increase in scope occurs, and the payment for this increase in scope is commensurate, a separate lease is accounted for.”
Otherwise, the original lease is remeasured by the following:
identifying a revised discount rate appropriate to the revised lease term, underlying asset and the lessee;
determining the net present value of future cash outflows using the revised discount rate;
adjusting the remaining right-of-use asset for the increase or decrease in the lease liability. If the adjustment exceeds the carrying value of the right-of-use asset, the excess is recognized as a gain in profit or loss.