Accounting for Lease Commissions

Lease commissions are the amount that lessor paid to the real estate broker to bring the tenant and execute the lease. It will be paid only when tenant and landlord agree to lease the property. The real estate broker will not get paid for the unsuccessful tenant introduction. The lease commission is usually paid base on the percentage of the rental fees.

In accounting perspective, lease commission is considered as the initial direct cost which is the cost that necessary to execute the lease agreement. It is the cost that would not incur if the lease does not execute. The landlord will not pay this fee if both parties do not agree to rent the property.

Initial Direct costs include legal fees associate with lease, cost of performing credit check over tenant, and so on. Lease commission is one of the costs. If the lease is not happening, the lessor does not require to pay a real estate broker.

Accounting for Lease commissions

The accounting treatment for lease commissions is different depending on the type of lease. For the treatment of lease commission please refer to the following condition:

Lease Commission – Deferred and Amortize

Lease commission will be capitalized and amortized over the lease term if it meets the following condition:

• Lease it the operating lease
• Lease is the finance lease without the option to sell or purchase of lease property
• Lease term is more than 12 months

If the lease meets these three criteria, the lease commission will be capitalized and amortized to expense over the lease term. The balance will present as non-current assets on the balance sheet or it can be current asset if the lease is less than a year. The capitalized assets will be amortized on a monthly basic. It is treated as the other initial direct cost which needs to capitalize and amortize every month.

On the Lease Commencement Date, lessor will debit assets (initial direct cost) and credit cash paid to broker.

Account	Debit	Credit
Capitalized Initial direct cost	000
Cash		000

At the end of each year, lessor needs to allocate the assets to the lease commission expense base on the lease term.

They need to make journal entry by debiting lease commission expense and credit the initial direct cost.

Account	Debit	Credit
Lease commission expense	000
Capitalized Initial direct cost		000

Lease Commission – Expense on the lease commence date

Lease commission will be recorded as expense on the lease comment date if the lease contract is the finance lease with sale option. The transaction will classify as expense on the income statement.

Account	Debit	Credit
Lease commission expense	000
Cost		000