Renewal probability and the New FASB Rules
Lucernex real estate finance expert Jim Duport (see Jim’s management summary here), after completing an upgrade to our core financial engine to support the new proposed FASB / GAAP rules, discusses questions surrounding how renewal option probability will be calculated under the new FASB rules.
This is the third in a series of Blogs by Jim describing his findings during the process of developing the architecture within the core Lucernex financial engine to handle the new proposed FASB rules.
Under the proposed FASB rules tenants are required to estimate the probability of exercising their renewal taking into account past practices which includes assigning “more likely than not to occur renewal probability”. For example, assume a tenant has 30 offices with similar leases and renewed 20 of them and allowed the other 10 to lapse; then the past practice is to renew for 2/3rd of the portfolio of similar leases (66% probability of exercising).
