Watchdogs may move the goalposts: new accounting practice could force firms to list leases alongside loans, debt.

A new accounting standard that would alter how leases are reported on financial statements could change the way tenants take office space, experts say.

Under current United States accounting regulations, leases for such things as office space, cars and equipment are treated as off balance sheet liabilities and are not required to be disclosed on companies' balance sheets.

In March however, the organizations that outline the standards for international and US accounting practices issued a joint discussion paper suggesting that companies list leasing commitments as they would other financial liabilities that they are already required to reveal, such as loans and other debts.

Experts say the paper is the first step in a process that could institute the changes by 2011.

Todd Anderson, a senior managing director at the real estate services firm CB Richard Ellis, said that adoption of the new rules could push tenants to take steps to mitigate the burden that will be placed on their balance sheets.

"The knee jerk reaction could be twofold," Anderson said. "First, tenants would want to minimize the impact of an operating lease by having shorter leasing terms. Under those conditions, landlords would be less inclined to provide incentives such as lower rents, periods of free rent and improvement money to build the space out, because now the tenant is not going to be committing for as long."

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Having to report a lease as a liability could affect a tenant's ability to borrow money and may impact preexisting credit facilities, which often come with restrictions limiting what other obligations a borrower can assume without having to post additional collateral or cash reserves.

For companies that report earnings, leases would now subtract from income, potentially eating into widely looked at measures of profitability.

"Corporations hardly need another setback in reporting their financial position," Anderson wrote in a white paper he coauthored that was released last Thursday by CBRE.

"However, as a result of efforts to create better financial transparency and institute other compliance safeguards, accounting boards and government regulators may generate another round of balance sheet blows."

Although the change would appear to suddenly make commercial leases a far more onerous commitment, weighing on tenants' balance sheets at a time when credit is scarce and when income for many has already been impacted by the downturn, proponents of the rule change say it will also prevent companies from easily stashing potentially costly liabilities out of sight.

Anderson said that the timing of the accounting changes traces to a broader effort to overhaul the nation's regulatory system in the wake of upheaval in the economy.

Tenants not only may refrain from signing long-term deals, they may also seek to buy the real estate they occupy rather than rent Anderson said. Manhattan's office market wouldn't appear to accommodate these potential shifts in preference. Office buildings in the city carry some of the highest rents in the country, long lease up terms stretching 15 to 20 years and beyond and few opportunities for tenants to purchase office space.

To avoid the accounting impacts of such costly deals, tenants may shy away from expensive markets like Manhattan, especially for office functions that can be performed elsewhere.

Anderson suggested the rule change could be an impetus to increase the city's inventory of commercial condo spaces for sale and that, if such space could be made available, more tenants might acquire their offices.