In the world of Commercial Real Estate, numbers are king. However, as a CRE professional, you have likely realized that, well, there are a lot of numbers to keep up with and none of them can be neglected. This is why CRE pros should always strive for continuous improvement in business practices and use of technology.
Now that ASC 842 has been in effect for some time, it’s more important than ever to have your lease accounting standards under control. Part of that is being mindful of how liabilities affect your balance sheet. Here are five ways lease liabilities impact your balance sheet.
1. Transparency
In the world of CRE, transparency is king. ASC 842 took transparency in lease accounting to a new level by requiring lessees to recognize lease liabilities on their balance sheets. In the past, operating leases were kept off the balance sheet, but this led to obscured financial obligations. Lenders and stakeholders rely on accurate metrics and transparent lease liabilities. This will allow owners to better assess goals and risks while also avoiding any potential surprises down the road.
2. Higher Debt Ratios
Lease liabilities often function as debt. As a result, debt-to-equity ratios can and often do suffer. From a financial perspective, lease liabilities are similar to debt and that’s why lenders include them when it comes to leverage calculations. CRE professionals with heavy lease usage often see the largest ratio fluctuations. Whatever your volume, the recommendation is to accurately represent these lease liabilities in order to maintain credibility and secure financing in the future.
3. Debt Covenants
Debt covenants play a critical role when it comes to how lease liabilities affect financial reporting for commercial property owners. When you record your lease liabilities properly, it can trigger violations with debt covenants or even require a renegotiation of terms. Covenants typically define what counts as actual debt and that’s why it’s so important to record liabilities accurately from the start. Exceeding thresholds set in loan agreements is not ideal, but proactive lease liability management can help you avoid breaching contracts and keep your relationship with creditors a positive one.
4. Valuations
As you can imagine, valuations are paramount when it comes to lease liabilities. A lease liability is not just an accounting entry. It is a market-sensitive financial obligation. When an owner or Investors take lease obligations into account, it helps with determining an asset’s fair market value. Not reflecting lease liabilities in your balance sheet can lead to misinterpretations and even an undervaluation of the business.
5. Decision Making
Finally, when your financials are perfectly accounted for by way of both assets and liabilities, this will help you to improve strategies and gain ground in the marketplace. Don’t fool yourself. Let it all out, bruises and all, so that you are able to truly see where you sit and how to adjust as needed. The more accurate and transparent your balance sheet is, the more informed your strategic decision making will be. Whether you’re evaluating leases, negotiating terms or assessing financial implications of scaling your portfolio, understanding lease liability practices better will only help you.
If you’re ready to see how Quarem can help you manage and record your lease liabilities better (in compliance with ASC 842 and other lease accounting standards), schedule a demo today!
Last Updated: March 9, 2026
