USA Lease Incentives exceeding rent

[JessiG]

Hello,

My company signed a lease for a new building and in the lease it says the Landlord (them) will pay the Tenant (us) $200k the first 3 months in compensation of our existing leases in another building. This exceeds the normal monthly rent, so how would I account for the difference in the rent paid, and would I apply the payment towards the new lease or toward the other leases we have.

History: There's 3 building with different lease amounts that the $200k is to compensate for. However, the Landlord takes no ownership. The lease wording only states "Landlord agrees to compensate Tenant due to commitments to its previous landlord". Also, the new lease has abatements for the first 14 months so the $200k wouldn't be applied to this lease until month 15 at the earliest if not taken against the other 3 current leases.

Confused,
Jessi

 

[Steve-LevelUp]

One way that I approach these is to look at the total spend for the length of the full lease, less all discounts, to get to a total net cost. This total net cost can then be divided by the number of months in the lease to get a monthly cost.

That might help give you some guidance as to how to book the entries.

 

[kirby]

First make a schedule of the actual cash payments you will make over the term of the new lease. Let's say they go into Column B, where Column A is the month and year of each payment.
Next sum all those payments and divide by the term of the lease in months. That is your monthly lease expense applicable to ALL months. So put that number next to each of the column B amounts in Column C.
Now add a column D which subtracts Column B from Column C. That is the amount of the accrual or deferral to be recorded. So for example in those months in the middle of the lease where you pay nothing, you will record the entry
DR Lease Expense CR Accrued Lease Liability in the amount of your Column D amount.