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February 20, 2012
Message from the President
 For a number of years, the U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been working to harmonize accounting standards in an effort to produce a set of high-quality global financial standards that would contribute to clearer understanding of corporate financial statements by investors around the world. The boards have made progress toward this goal; however, not all of their proposals have been equally useful.
As the stories in this issue report, NAREIT provided comments to the FASB last week on proposals contained in two exposure drafts that would be highly detrimental to the REIT industry.
FASB’s exposure draft on Investment Property Entities, which would apply generally to equity REITs, would cause the U.S. accounting standard for investment property to actually diverge from, rather than converge with, its IASB counterpart standard – a significant problem for a REIT and publicly traded real estate industry that today extends across 40 countries around the globe and is based primarily on the same U.S. REIT model.
Additionally, its overly complex and ambiguous language would result in some REITs accounting for their leases and lease income in one manner, while other REITs would be required to account for them in a different manner on their financial statements.
A second FASB exposure draft on Investment Companies could impact some mortgage REITs, potentially requiring them to report changes in the value of their holdings in the same manner as mutual funds, rather than in the manner used now, which reflects the financial nature of the businesses they conduct.
NAREIT also joined with its partners in the Real Estate Equity Securitization Alliance (REESA) to provide additional comments to FASB. NAREIT and its REESA partner organizations will participate in international roundtables hosted by FASB and IASB in the weeks ahead to express our industry’s views on these exposure drafts. We will continue to actively monitor and provide input to the boards on these projects.
Steven A. Wechsler
President and CEO
NAREIT Comments on FASB’s Investment Property Entities Exposure Draft
 On Feb. 15, NAREIT submitted a letter to the FASB on its Investment Property Entities exposure draft. The proposed update would provide criteria to determine whether an entity would be considered an investment property entity. Those entities that qualify as investment property entities would be required to measure their investment properties at fair value, with changes in fair value recorded in earnings. Additionally, rental revenue would be recognized on a contractual basis as opposed to the current straight-line basis in the income statement.
In the letter, NAREIT recommended that the FASB withdraw the proposed update and move to develop an activity-based standard that would: a) converge with International Accounting Standard No. 40 Investment Property (incorporating recommended changes); and, b) achieve consistency with the board’s operating principle to avoid issuing complex specialized industry accounting standards. Consistent with previous direction from the NAREIT Executive Board, NAREIT continues to believe that any U.S. GAAP standard for accounting for investment property should require that all investment property be reported at fair value with changes in unrealized value reported in net income and that the IAS 40 standard be clarified to make certain that it applies to lodging and health care REITs.
NAREIT provided the following arguments in support of its recommendation to the FASB:
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The proposed update does not converge with International Financial Reporting Standards (IFRS) – a primary goal of developing the standard.
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The proposed update is contrary to a fundamental conclusion of the final report of the Advisory Committee on Improvements to Financial Reporting (CIFR) to the SEC dated Aug. 1, 2008, that accounting standards should “focus on the nature of the business activity itself, since the same activities, such as lending (or owning investment property), may be carried out by companies from different industries” – italicized wording inserted.
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The proposed update does not recognize the significant distinction between the business and relevant financial reporting of: a) owning and operating investment property; and b) simply holding real estate as a passive investment.
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The proposed update creates an entirely false distinction as to whether an entity holds investment property for income only or for income and appreciation in the value of the property – because the goal of owners/operators of investment property is to maximize total financial return from the aggregate of operating cash flow and appreciation in value.
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The proposed update provides criteria to define an investment property entity (IPE) that are so unclear as to falsely create the impression that it requires the proposed accounting while in reality it provides preparers with implicit optionality.
The FASB and the IASB will host a series of joint public roundtable meetings to discuss their proposals on Investment Property Entities, as well as on Investment Companies. The U.S. roundtable is scheduled for Friday, March 16. NAREIT has requested a “seat” at this roundtable, while other members of the Real Estate Equity Securitization Alliance (REESA) plan on participating in the sessions being held in Canada and the United Kingdom.
(Contact: George Yungmann at gyungmann@nareit.com)
REIT.com Video: Jonathan Morris, Jones Lang LaSalle
 REITs continue to benefit from their access to both debt and equity markets, but lately they have been focusing on the rates available in the unsecured markets, said Jonathan Morris, managing director with Jones Lang LaSalle. Rates on unsecured debt are nearly equal to those of mortgages. It makes sense to use this capital to pay off maturing loans, he said.
“So they’re reducing their overall debt-to-market cap, but they’re doing so by virtue of unsecured loans,” Morris said. He believes that REITs will cut their debt-to-market-cap ratios down to a maximum of 45 percent because of this trend.
Morris said he does expect to see a number of REITs use their fresh capital to make acquisitions. That won’t mean a massive upswing in deal-making, though.
“I think the perception is that if public REITs raise a significant amount of money, the next day they’re going to be in the market buying assets,” Morris said. “That’s just not the case. They have a programmatic approach to buying properties. The fact that they’ve got an additional amount of capital doesn’t translate into aggressively buying a whole bunch of new buildings for very low cap rates.”
(Contact: Matt Bechard at mbechard@nareit.com)
NAREIT Comments on FASB’s Investment Companies Exposure Draft
Also on Feb. 15, NAREIT submitted a comment letter to the FASB on its Investment Companies exposure draft.
This proposed update would provide criteria to determine whether an entity would be considered an investment company for purposes of the accounting rules. Those entities that qualify as investment companies would measure all investments at fair value, including investments in investment property, with changes in fair value recorded in earnings. Additionally, the proposed update would eliminate the explicit REIT exception that is included in existing Investment Companies guidance. To the extent that a company meets the scope criteria of both the Investment Property Entities and Investment Companies standards, it would follow the guidance included in the Investment Property Entities guidance.
The major concerns of NAREIT, as expressed by NAREIT's Mortgage REIT Council, are that, for those REITs that meet the criteria of a so-called investment company: a) changes in the unrealized value of investments would be reported in net income rather than in other comprehensive income outside of net income; and 2) the investment company label for financial standards in the U.S. would be generally at odds with the facts for many companies and would be confusing to the public, especially since the relevant international standard is for "investment entities," not investment companies.
NAREIT requested that the FASB preserve the REIT scope exception.
If the FASB chooses not to follow NAREIT’s recommendation to preserve the REIT scope exception, NAREIT recommended that the board make the following amendments to the proposed update:
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Retain the current accounting model for available-for-sale securities currently applied by mortgage REITs.
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Add an illustrative example that addresses mortgage REITs.
Irrespective of whether the FASB chooses to follow NAREIT’s aforementioned recommendations on the proposed update, NAREIT recommended that the board make the following amendments to the proposed update: -
Adopt the IASB’s definition of “fair value management.”
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Add a seventh scope criterion on Transactions Priced at Net Asset Value for the proposed update.
NAREIT believes by following these recommendations, the FASB would address its concerns on ambiguous terminology, further differentiate mortgage REITs from investment companies, and provide for a consistent and coherent accounting framework that is based on the economics of the underlying transactions in the proposed update.
(Contact: Christopher Drula at cdrula@nareit.com)
REESA Submits Comments to FASB, IASB
 Last week, NAREIT and its partners in the Real Estate Equity Securitization Alliance (REESA) sent two separate comment letters to the accounting standards boards.
On Feb. 15, REESA submitted a letter in response to the request for public comment by the FASB with respect to its proposed Accounting Standards Updates on Consolidation (Topic 810): Principal versus Agent Analysis.
“We believe that the proposed update will improve the comparability of financial statements and disclosures prepared in accordance with U.S. GAAP and IFRS. Therefore, REESA believes that the proposed update is a step in the right direction in order to achieve ultimate convergence of U.S. GAAP with IFRS at some point in the future,” according to the letter.
REESA also wrote to the FASB and the IASB regarding the IASB Exposure Draft: Investment Entities.
“Our view is that most corporate property groups do not meet the criteria as defined in the exposure draft, primarily because they operate just like any other normal corporate business and do not have an explicit commitment to invest for capital appreciation, investment income (e.g. dividends, interest) or an explicit exit strategy in the way that a typical investment entity would have,” REESA wrote.
(Contact: Christopher Drula at cdrula@nareit.com)
NAREIT Welcomes New Corporate Member
 NAREIT welcomes GCREP REIT I as its newest Corporate Member.
GCREP REIT I is a private, externally managed equity REIT that focuses on diverse niche real estate sectors, including land-lease communities, parking garages/lots, mixed-use retail and manufactured housing throughout the U.S. Based in Lake Forest, IL, GCREP REIT I is managed by Green Courte Partners, LLC.
Randy Rowe is Green Courte's chairman, and Jane Mody is the CFO.
(Contact: Bonnie Gottlieb at bgottlieb@nareit.com)
REITWise One Month Away
 REITWise 2012®: NAREIT's Law, Accounting & Finance Conference® brings together REIT executives and leading service providers that support their legal, financial and accounting needs. Registration is now available online for this important event, which will be held March 21 to 23 in Hollywood, Fla.
More than 40 sessions, roundtables and events provide attendees with many opportunities to hear the latest legal, financial and accounting insights concerning capital markets, financial standards, global investment opportunities, SEC policies, tax updates and more. The breadth of the REITWise educational program provides attendees the opportunity to earn up to 22 hours of CPE credits or 18 hours of CLE credits.
In addition to core sessions of interest like SEC and Financial Standards Developments, Tax Planning for U.S. REITs Investing Abroad, The Treasury Speaks, and State of the Commercial Real Estate Markets, REITWise offers valuable roundtable sessions lead by engaging moderators.
(Contact: Katelyn Rowland at krowland@nareit.com)
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