Accounting Treatment White Paper
Stake offers landlords and tenants an innovative solution to attract new residents, reduce turnover,
incentivize timely rental payments, and help residents build savings. Through its loyalty platform, Stake
offers cash or other rebate incentives to its members for paying rent on time (when they pay) and for
saving their cash within the account (when they save). As a result of their rewards, many Stake members
have more money in their Stake accounts than they do in their personal savings accounts. This translates
into a portable and tangible benefit for timely payment and savings which the tenant retains at the end of
the rental period.
The benefits to landlords are reduced rental turnover (thus, reducing marketing expenses, leasing commissions, free rent, lost rent, etc.) and more security over future rental payments (cash retained by the tenant in the Stake app which can be utilized for payment of future rent). As a result of the Stake Loyalty Program, owners have observed 7 – 15% increases in renewal rates, significantly reducing marketing and leasing commission expenses. Also, Stakes' partners have seen 4 times better response to ads that reference Stake’s Cash Back, helping them to lease faster, reduce downtime, and lower marketing and leasing commission expenses. Additionally, with Stake, owners of real estate see lower rates of delinquency.
Under the terms of standard Stake agreements with asset owners / managers, the owner will agree to reimburse Stake for cash incentives paid to renters as they undertake activities which trigger the receipt of payment. Owners have some discretion as to maximum levels of benefits that loyal members can achieve, but Stake retains full discretion on how and when those benefits are distributed. For example, an owner may agree to total benefits of up to 5% of face rent across a property. Based on Stakes' loyalty data, it may determine that a total loyalty benefit of 3% is sufficient to maximize rental renewals. Stake is paid on a fee basis, a percentage of the monthly rent residents pay their landlords.
The purpose of this white paper is to evaluate alternative views to the treatment of payments to Stake, and remittances to tenants, under current accounting literature. This white paper assumes the following:
- Stakes' compensation under the arrangement (i.e. its percentage fee) is a genuine marketing expense of the property
- The rental agreements impacted by Stakes' loyalty platform are Operating Leases as defined in ASC 842, and are not Sales-Type or Direct Financing leases
- Owners have adopted ASC 842, Leases
Rewards to Stake Loyalty Members
For properties deploying the Stake loyalty program, owners have a certain amount of discretion in assessing the amount of loyalty rewards Stake members would receive for qualifying activities. This is a major difference between the traditional incentive structure, as lease incentives are not paid at the outset of a lease.
ASC 842 does not offer guidance on how to recognize rewards to loyal members which are based on the outcome of future events outside of the owner’s control and which are neither paid nor payable at lease commencement.
View #1 – Lease Incentives
View #1 would reduce rental revenue and would reduce property-level NOI.
View #2 – Initial Direct Costs
ASC 842 requires lessors of operating leases to defer initial direct costs at lease commencement and amortize them over the lease term on the same basis as lease income. Consistent with the facts in View #1, identifying loyal member benefits as initial direct costs would require a significant degree of estimation on the owner’s part to assess the total amount of loyal benefits it would expect to reimburse Stake for related to the individual tenant over the lease period, and subsequently amortize those costs as expenses over the lease term (assumed to be a 12 month period).
Owners will need to assess whether an estimation of expected initial direct costs (the probability-weighted total reimbursements to Stake for loyal member benefits) at lease commencement materially differs from the recognition of these costs as period expenses (i.e. recognition of expense in the period paid to Stake depending on the actual benefits earned by the tenant).
In addition, it should be noted that certain accounting firms have published views regarding the treatment of lessee receipt of payments from third parties in connection with the execution of a lease. In those scenarios, which could include a leasing commission rebate, when it is determined that other GAAP guidance is not applicable, lessees should account for such payments as negative indirect costs. Therefore, it would be consistent to conclude that Stakes' payments of loyalty benefits to members would be treated as reductions in initial direct costs of a tenant. As such, it could be consistent to conclude that the payment of such costs by a landlord through a third-party would be similarly treated as initial direct costs.
View #2 would not reduce rental revenues but would generally be expected to reduce property-level NOI.
View #3 – Periodic marketing or other expenses
- General overheads, including, for example, depreciation, occupancy and equipment costs, unsuccessful origination efforts, and idle time
- Costs related to activities performed by the lessor for advertising, soliciting potential lessees, servicing existing leases, or other ancillary activities
- Costs related to activities that occur before the lease is obtained, such as costs of obtaining tax or legal advice, negotiating lease terms and conditions, or evaluating a prospective lessee’s financial condition
Additionally, while owners have some amount of discretion as to the amount of loyalty benefits that tenants can receive, Stake is fully responsible for the final benefit levels and their composition. This can come in the form of cash back, gift cards or other goods. Stake may also enter into direct partnerships with other financial institutions or investment brokerages to provide alternative savings methods for loyal members. The provision of the latter type of benefits would generally not be considered clearly or closely related with the underlying lease arrangement that the tenant enters into.
Furthermore, as tenants have the option, not the obligation, to participate in the Stake loyalty program, it can be argued that Stake benefits represents a variable marketing expense to owners, which would be recognized as a period expense as incurred.
View #3 would not reduce rental revenues and may have a positive impact on property-level NOI depending on each owner’s operating expense definition.