Under Japan’s new lease accounting standard, hotels that operators lease will, in principle, appear on the balance sheet as “right-of-use assets” and “lease liabilities” from the beginning of fiscal years starting on or after April 1, 2027. ASBJ Statement No. 34, “Accounting Standard for Leases,” published by the Accounting Standards Board of Japan (ASBJ) in September 2024, abolishes the lessee’s distinction between finance leases and operating leases and recognizes almost every lease—other than short-term and low-value exceptions—as an asset and a liability. At the same time, the standard excludes variable rent linked to sales or GOP (gross operating profit) from the measurement of the lease liability. This article sets out how each of the three structures—lease, management contract (MC) and franchise (FC)—may be assessed, estimates the size of the lease liability for a 100-room model and how it changes with the variable rent ratio, and examines the contract design issues facing both owners and operators.

Source: Prepared by MetroEngines Research & Consulting from ASBJ Statement No. 34 and the Japan Hotel REIT Investment Corporation portfolio list (estimates based on this article’s assumptions)

What Changes — The Lessee Classification Is Abolished and Leased Hotels Go on the Balance Sheet

Under the current ASBJ Statement No. 13, most hotel building leases are treated as operating leases, and operators simply expense the rent they pay. Statement No. 34, by contrast, adopts a “right-of-use model” consistent with IFRS 16 (published in 2016) and does not classify leases on the lessee side. Paragraph 33 requires the lessee to recognize a lease liability at the commencement date, and to recognize a right-of-use asset at that amount plus lease payments made before commencement, incidental costs and removal costs corresponding to asset retirement obligations, less any lease incentives received.

The “lessee’s lease payments” included in the lease liability are limited by paragraph 35 to five items: (1) the lessee’s fixed lease payments; (2) the lessee’s variable lease payments that depend on an index or a rate; (3) amounts expected to be payable by the lessee under residual value guarantees; (4) the exercise price of a purchase option the lessee is reasonably certain to exercise; and (5) penalties for terminating the lease, if the lease term reflects exercise of a termination option. Performance-linked variable rent such as “a set percentage of sales” is not on this list—and that is the point that matters most for hotel contracts.

Exceptions are also specified. Implementation Guidance No. 33 allows a simplified treatment for “short-term leases,” with a lessee’s lease term of 12 months or less, and immaterial “low-value leases”: no asset or liability is recognized, and the cost is expensed on a straight-line basis (Implementation Guidance paragraphs 20 and 22). However, hotel building leases are usually contracted on terms of 10 to 20 years, so these exceptions will rarely apply. The discount rate is the interest rate implicit in the lease if the lessee can determine it; otherwise, a rate reasonably estimated to apply to the lessee’s incremental borrowing (Implementation Guidance paragraph 37).

Source: Prepared by MetroEngines Research & Consulting from ASBJ Statement No. 34, “Accounting Standard for Leases,” and Implementation Guidance No. 33 (September 13, 2024)

For the year of initial application, the principle is retrospective application to prior periods, but an entity may instead adjust opening retained earnings for the cumulative effect at the beginning of the year of initial application and apply the new standard from that opening balance (Implementation Guidance paragraph 118). For operators with a March fiscal year-end, the fiscal year beginning April 1, 2027 is the first year of mandatory adoption, and the roughly five months remaining are best spent taking inventory of contracts and reviewing their terms.

Assessing the Three Structures — Who Holds “the Right to Control the Use of the Asset”

Contracts that separate hotel ownership from operation fall broadly into three types: lease, management contract (MC) and franchise (FC). Under the new standard, whether a contract contains a lease depends not on what the contract is called but on whether it “conveys the right to control the use of an identified asset for a period of time in exchange for consideration” (paragraph 26). According to Implementation Guidance paragraph 5, the right to control use has been transferred when the customer has, throughout the period of use, both (1) the right to obtain substantially all of the economic benefits from use of the identified asset and (2) the right to direct the use of that asset.

By this yardstick, a lease in which the operator rents the building and runs the hotel for its own account typically qualifies as a lease, because the operator both obtains the economic benefits and directs how the asset is used. Under a management contract, by contrast, the owner usually runs the business for its own account and the operator handles operations in exchange for fees, so it is hard to say the operator controls the use of the asset. Actual contracts vary, however, so whether an MC or FC contains a lease depends on the assessment of “the right to control the use of the asset” and cannot be decided across the board. The revenue structure and risk allocation of each of the three structures are covered in Hotel Leasing Explained: Lease, MC, and Franchise in 52 REIT Hotels.

Source: Prepared by MetroEngines Research & Consulting from ASBJ Statement No. 34, paragraphs 3, 26 and 28, and Implementation Guidance No. 33, paragraphs 5–8 (a general summary, not an assessment of any individual contract)

On franchises, paragraph 3(2) of the standard excludes from its scope licenses of intellectual property granted by a lessor that fall within the revenue recognition standard, and paragraph 4 allows entities not to apply the standard to leases of intangible assets. In practice, it is less the brand fee itself than how the franchisee secures the building—owned or leased—that determines the impact on the balance sheet.

Contract Structures in REIT Disclosures — JHR Discloses 52 Hotels in Four Categories

So under which structures are listed hotel REIT properties leased to operators? Of the 336 domestic hotels held by nine listed investment corporations tracked by MetroEngines Research & Consulting (listed hotel REIT ownership data as of November 9, 2026, N=336), only some investment corporations show property-level rent structures in their portfolio lists. Among them, Japan Hotel REIT Investment Corporation (JHR, 8985) classifies all 52 of its hotels into four categories—”fixed + variable,” “fixed,” “variable” and “management contract”—in the “rent structure” column of its portfolio list, so the distribution of contract types can be confirmed from a primary source.

Source: Prepared by MetroEngines Research & Consulting from the Japan Hotel REIT Investment Corporation portfolio list (rent structure, accessed November 2026) (N=52 hotels)

The breakdown is 36 hotels “fixed + variable,” 7 “fixed,” 5 “variable” and 4 “management contract” (ibis Styles Kyoto Station, ibis Styles Sapporo, Mercure Sapporo and Mercure Okinawa Naha). With contracts containing a fixed portion accounting for 43 of the 52 hotels, the design lets the owner combine downside support for rent with participation in the upside. Seen from the operator as lessee, however, the fixed portion is precisely what will determine the lease liability under the new standard. For the distribution of variable rent ratios and contract maturities across REITs, see also Hotel Leasing Explained: Lease vs MC and Rent Types at 4 J-REITs.

Source: Japan Hotel REIT Investment Corporation portfolio list (rent structure); room counts and locations from MetroEngines Research & Consulting (N=52 hotels)

Disclosures by Invincible Investment Corporation (8963) make the content of the fixed + variable type easy to see. In the “fixed-term building lease and management services agreement” for Hotel MyStays Kanda and Hotel MyStays Asakusa announced on May 22, 2024, fixed rent was set at ¥72 million per year for Hotel MyStays Kanda and ¥75 million per year for Hotel MyStays Asakusa, with a 10-year term from May 23, 2024 to May 22, 2034. Variable rent equals operating income (gross revenue less operating and general administrative expenses) minus the management services fee and the fixed rent, calculated every six months. The disclosure explains that this variable rent is linked to the hotel’s GOP and lets the investment corporation capture the GOP upside.

Applying the new standard to this contract, the fixed rent is included in the lease liability, while the GOP-linked variable rent counts as “lease payments that vary with the lessee’s performance derived from the underlying asset” and is excluded from the liability (Basis for Conclusions paragraphs BC41 and BC42). The starting point of this article is that, even for the same total annual rent, the split between fixed and variable changes the lessee’s balance sheet substantially.

Estimating a 100-Room Model — ¥120 Million a Year for 20 Years Means a Lease Liability of About ¥1.96 Billion

To get a sense of scale, we set up a hypothetical model in which an operator leases a 100-room limited-service hotel in Tokyo. According to MetroEngines Research, the estimated transacted ADR of business hotels in Tokyo averaged about ¥14,400 over the 12 months from November 2025 to October 2026 (N=894–924 properties per month). Assuming 80% occupancy, annual room revenue is about ¥420 million, and annual fixed rent of ¥120 million is about 29% of that. The rent ratio and occupancy are assumptions for the estimate and do not represent any specific contract level.

Source: MetroEngines Research & Consulting (estimated transacted ADR); other figures are this article’s assumptions

On these assumptions, discounting 20 years of fixed rent at 2% gives an initial lease liability of about ¥1.96 billion. Roughly 16 times the annual rent is recognized as a liability at once, and the difference of about ¥440 million from total rent of ¥2.4 billion is allocated as interest expense over the 20 years. The sensitivity to the discount rate and the term is as follows.

Unit: ¥100 million. Present value of ¥120 million annual fixed rent paid annually in arrears. Source: MetroEngines Research & Consulting estimates

Source: MetroEngines Research & Consulting estimates (annual fixed rent ¥120 million)

The sensitivity table shows that the lease term moves the recognized amount far more than the discount rate. Raising the discount rate from 2.0% to 3.0% reduces the liability on a 20-year contract by only about ¥180 million, while extending the term from 20 to 30 years increases it by about ¥730 million. If a 20-year fixed-term building lease carries a 10-year extension option whose exercise is judged “reasonably certain,” the lessee’s lease term becomes 30 years and the liability swells to about ¥2.69 billion. Conversely, under an ordinary building lease, even if the contractual term is short, the lease term is assessed in light of the likelihood of renewal and the importance of the site to the business. Determining the term comes down to the consistency between the contract wording and the business plan.

The Effect of the Variable Rent Ratio — 50% Fixed Halves the Liability to ¥0.98 Billion

Next, we kept the expected total annual rent at ¥120 million and compared the lease liability under different splits between fixed rent and performance-linked variable rent. Because performance-linked variable rent is excluded from the liability, the recognized amount shrinks almost in proportion to the fixed rent ratio.

Source: MetroEngines Research & Consulting estimates (expected total rent ¥120 million/year, 20 years, 2% discount rate; the variable portion is assumed to be linked to sales or GOP)

With 100% fixed rent the liability is about ¥1.96 billion; at 75% fixed, about ¥1.47 billion; at 50% fixed, about ¥0.98 billion; and at 25% fixed, about ¥0.49 billion. If all rent is performance-linked, no lease liability is recognized (the right-of-use asset is then limited to separate payments and incidental costs). Designs with a higher variable rent ratio lighten the operator’s balance sheet and are an option for preserving how its equity ratio and ROA look.

Not every variable rent falls outside the liability, however. Rent linked to an index or rate, such as the consumer price index, is included in the lease liability under the reasoning in paragraph BC42. Paragraph BC43 also states that payments that vary in form but are in substance unavoidable, or whose variability is resolved so that the amount becomes fixed, are included in the liability in the same way as fixed lease payments. “Minimum guaranteed rent,” common in hotel contracts, and clauses in which the floor on variable rent effectively functions as fixed rent need careful review from this perspective.

Source: Prepared by MetroEngines Research & Consulting from ASBJ Statement No. 34, paragraph 35 and paragraphs BC41–BC43

Sensitivity by Region and Contract Terms — The Same Rent Ratio Yields Liabilities of ¥1.1–2.0 Billion

The estimates so far are a single case based on Tokyo’s estimated transacted ADR. Keeping the same conditions—100 rooms, 80% occupancy (an assumption for a full-year estimate) and fixed rent of about 29% of room revenue—but substituting the estimated transacted ADR of business hotels in other major prefectures, the lease liability is about ¥1.28 billion in Osaka and about ¥1.14 billion in Aichi, roughly 60% of Tokyo’s ¥1.96 billion (Table 6). Because the size of the lease liability is roughly proportional to the rent level—that is, to room rates at the location—operators leasing many sites in the Tokyo metropolitan area are likely to see the largest impact from the new standard.

Source: MetroEngines Research & Consulting (estimated transacted ADR, monthly average for November 2025–October 2026); other figures are estimates based on this article’s assumptions. Hokkaido is highly seasonal, and its 12-month average smooths out peak and off-peak periods

What can actually be negotiated at contract renewal is the combination of the fixed rent ratio and the term. Moving both at once, for example, “75% fixed, 15 years” gives about ¥1.16 billion and “50% fixed, 30 years” about ¥1.34 billion—so a design that lengthens the term while lowering the fixed ratio keeps the liability below that of a 20-year, fully fixed lease (about ¥1.96 billion) (Table 7). For owners, this means they can present combinations that secure long-term stability while capturing upside through the performance-linked portion, side by side with the impact on the operator’s balance sheet.

Source: MetroEngines Research & Consulting estimates (present value, paid annually in arrears; the variable portion is assumed to be linked to sales or GOP and excluded from the liability)

How the P&L and Financial Ratios Look — First-Year Expense Is About 14% Higher Than Rent

Bringing leases on balance sheet also changes how expenses appear in the income statement. In place of rent, depreciation of the right-of-use asset (operating expense) and interest on the lease liability (non-operating expense) are recognized. In the base case, depreciation is about ¥98 million every year and interest is about ¥39 million in the first year, bringing total first-year expense to about ¥137 million—about 14% above the ¥120 million rent. Because interest declines along with the outstanding liability, expenses are front-loaded and taper off later, and the 20-year total equals total rent of ¥2.4 billion.

Source: MetroEngines Research & Consulting estimates (base case; right-of-use asset depreciated straight-line to zero residual value)

To see the impact on financial ratios, take a hypothetical operator with total assets of ¥5.0 billion and net assets of ¥1.5 billion (equity ratio 30%). Adding a ¥1.96 billion right-of-use asset and an equal lease liability raises total assets to about ¥6.96 billion and lowers the equity ratio to about 21.5%. On the other hand, because rent drops out of operating expenses, EBITDA rises by ¥120 million a year, and first-year operating profit is also about ¥22 million higher (the difference between rent and depreciation). Cash flows themselves do not change, but repayments of the lease liability move to cash flows from financing activities. It is worth noting that, depending on which definition a lender’s financial covenants or a rating’s metrics are based on, the same business can look different.

Arranged by fixed rent ratio, the equity ratio is about 25.1% at 50% fixed and about 27.3% at 25% fixed—the decline from bringing leases on balance sheet narrows almost in proportion to the fixed ratio (Table 8). The amount by which first-year total expense exceeds rent also shrinks, from about 14.5% at 100% fixed to about 3.6% at 25% fixed.

Source: MetroEngines Research & Consulting estimates (variable rent assumed to be expensed at its expected value; right-of-use asset depreciated straight-line to zero residual value)

Implications for Owners, REITs and Regional Banks — Contract Renewal as a Chance to Refine Terms

For lessors such as REITs and private funds, the accounting change is small. The new standard retains the lessor’s distinction between finance leases and operating leases, and most hotel leases are expected to continue to be recognized as rental income. The impact appears instead in the financial statements of the tenant operators. At contract renewals, therefore, operators mindful of the lease liability they must recognize are likely to propose restructured terms more often—on the term, extension options and the split of rent.

This can also be a good opportunity for owners to revisit contracts. Lowering the fixed rent ratio in exchange for a larger GOP-linked share lets an owner capture more of the upside when hotel performance grows. The Invincible Investment Corporation contract discussed above keeps fixed rent while aligning the variable rent calculation period to six-month units that match its fiscal periods—a useful example of balancing rental stability with consideration for the operator’s financial base. Owners who prioritize long-term fixed rent may find that using a fixed-term building lease with a clearly defined term, which stabilizes the assessment of the lease term, also fits well with the operator’s accounting. For how far fixed rent under a fixed-term building lease is legally protected, Hotel REIT Fixed Rent vs Rent-Cut Claims analyzes the disclosures property by property.

On the operator side, some are also reconsidering how they split between owning and leasing. A real estate market research report by Mitsubishi UFJ Trust and Banking (August 24, 2026) notes that most companies’ responses have centered on practical work such as estimating the impact and consulting with auditors, and cites Resorttrust—which develops and operates hotels—as having announced a policy of shifting from leasing to owning in connection with the standard’s adoption. The report also points out that because leased real estate becomes subject to impairment as a right-of-use asset, understanding the profitability of each site becomes more important.

For landowners and developers with development sites, and for regional banks, the bargaining chips change when attracting operators through leases. Operators that want to keep their recognized liability down may prefer management contracts or leases with a high variable rent ratio, in which case owners take on more business risk in exchange for more upside. For regional banks considering loans, checking how a tenant’s financial ratios will be presented under the new standard, and whether covenants remain set on the old standard’s basis, is an opportunity to sharpen credit decisions.

Contract Design Checklist — Seven Items to Check Before Renewal Negotiations

Source: Prepared by MetroEngines Research & Consulting from ASBJ Statement No. 34 and Implementation Guidance No. 33 (a general summary, not an assessment of any individual contract)

Summary

Under the new lease accounting standard, leased hotels will in principle be recognized as right-of-use assets and lease liabilities from the beginning of fiscal years starting on or after April 1, 2027. In a hypothetical model of 100 rooms, ¥120 million annual fixed rent, a 20-year term and a 2% discount rate, the lease liability is about ¥1.96 billion, rising to about ¥2.69 billion if the term is taken as 30 years. Because variable rent linked to sales or GOP is excluded from the liability, setting fixed rent at 50% keeps the liability to about ¥0.98 billion.

Listed REIT disclosures show that 43 of Japan Hotel REIT Investment Corporation’s 52 hotels have rent structures that include a fixed portion, and the split between fixed and variable rent is likely to be the most debated issue in upcoming contract renewals. The accounting change itself does not alter cash flows, but it is a trigger for rethinking on what terms hotels are leased and let. As owners, operators and lenders refine terms while looking at the same numbers, there is more room to design more sustainable contractual relationships, including how the upside is shared.

Frequently Asked Questions

Q. When does the new lease accounting standard take effect?
A. It applies from the beginning of consolidated and individual fiscal years starting on or after April 1, 2027. Early adoption from the beginning of fiscal years starting on or after April 1, 2025 is also permitted (ASBJ Statement No. 34, paragraph 58).

Q. Is percentage-of-sales rent on a hotel included in the lease liability?
A. Rent that varies with the lessee’s performance derived from the underlying asset is excluded from the measurement of the lease liability (paragraphs BC41 and BC42). However, portions that are in substance unavoidable, such as minimum guaranteed rent, are treated in the same way as fixed lease payments (paragraph BC43).

Q. Are management contracts and franchise agreements also leases?
A. It depends on whether the contract transfers the right to control the use of an identified asset, so there is no blanket answer. Under a management contract the owner generally runs the business, but the specific terms of each contract need to be confirmed with professionals.

Q. Does the accounting for REITs (lessors) change too?
A. Lessors retain the distinction between finance leases and operating leases, so the change is much smaller than for lessees. The impact appears mainly in the financial statements of the tenant operators.

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