Last Updated on May 5, 2022 by Andrew Flint
Within a commercial lease document, there are fundamental term dates that impact accounting and real estate teams. For instance, did you know that the day your lease officially begins, the day you begin paying rent, and the day you can move into your new space can all be different? While all three dates may be synonymous in some cases, they aren’t interchangeable. Let’s dive into the terminology:
Lease Commencement Date Terms
- Lease Commencement Date: the date the lease officially begins and the tenant assumes the rights and obligations under the lease.This is day one of your lease agreement.
- Rent Commencement Date: the date the tenant starts to pay the landlord rent for the use of the space.
- Occupancy Date: the date the tenant is given occupancy of the space and is free to move in and begin operating.
- Lease Start Date: the date the landlord passes the possession of the space to the tenant. Majority of leases start on the first of the 15th of the month.
- Move in Date: the date in which the tenant has keys and can start moving in. This can be negotiated and different from the lease start date.
Given the amorphous nature of lease commencement, the term of a commercial lease is not always easy to identify. Commercial lease commencement dates are often contingent upon the existing condition of the commercial space being rented or what is negotiated, thus tenant improvements may be needed.
If the rent commencement date begins before the landlord completes any tenant improvements, the tenant will be paying rent for a space that they can’t use yet. Similarly, those tenant improvements can also affect the occupancy date.
Brokers can help minimize these risks for tenants by pushing for stipulations, such as setting a time limit for how long the tenant waits for the landlord to deliver the space.
Lease Commencement Date for Real Estate Teams
As noted earlier, the lease commencement date is the official date in which the rights & obligations of a lease contract begin for both the tenant and landlord.
This date is imperative for real estate teams to document because years into the lease, it may be forgotten or mixed up with other dates written in the lease. This can be problematic because the lease commencement date is intimately tied to lease escalations and expirations which have financial implications tied to them.
Understanding, documenting and tracking lease commencement dates across your entire lease portfolio is foundational to successful lease management.
Lease Commencement Date for Accounting Teams
This date is important for accounting teams to know and track. The Lease Commencement Date is the date the lease officially begins and the tenant assumes the rights, obligations, and control under the lease.
Under ASC 842 and IFRS 16, the lease commencement date acts as the starting line in your team’s creation of journal entries. In other words, the lease commencement date is the date in which the lessor makes an underlying asset available for use by a lessee.
Lease Commencement Date – Example
In lease accounting, the lease commencement date language dictates accounting processes.
For instance, “This Lease Agreement is made and entered into on the 15th day of May, 2022 between City Properties, LLC (“Landlord”) and Local Burgers (“Tenant”).
Premise: The Landlord hereby leases to the Tenant and the Tenant leases from the Landlord, the agreed upon terms and conditions set forth in this lease document. The rentable square footage totals 5,000 square feet, commencing on May 20, 2022. Upon delivery of the Leased Premises to the Lessee, the Lessee shall execute an Acceptance of the Lease Premises.
Term: The primary term of this Lease shall be for a period of five (5) years commencing on May 23, 2022 and end on May 23, 2025.
B. The first payment of rent hereunder shall be due and payable on the date which is (90) days after the Commencement Date (“The Rent Commence Date”)
In this particular example:
- The lease start date is May 15, 2022
- The lease commencement date is May 23, 2022
- The rent commencement date is August 23, 2022
Managing the Lease Commencement Date
In any real estate portfolio, tracking critical dates is a business imperative. In this instance, using an incorrect date for lease commencement has a seismic impact on lease accounting calculations from journal entries, amortization schedules and ultimately closing the books. The financial chaos this creates is enough to get your entire finance team up in arms.
In order to gain ASC 842, and IFRS 16 compliance, the lease commencement date plays a key role in your calculations. Looking to automate the lease management process? Occupier enables finance teams to seamlessly calculate journal entries and amortization schedules with data imports via lease abstraction of all critical data points including lease commencement date! Request a demo to learn about streamlined lease accounting processes.
Check out our Lease Accounting Compliance Hub for all things ASC 842.