Making headway in today s real estate market

2014 Real Estate Industry Update Making headway in today s real estate market Chris Dubrowski Industry Professional Practice Director Real Estate Services Deloitte & Touche LLP Wyn Smith Deputy Industry Professional Practice Director Real Estate Services Deloitte & Touche LLP

Agenda Standards Setting FASB Projects Regulatory Update

Disclaimer This presentation does not provide official Deloitte & Touche LLP interpretive accounting guidance The views expressed are solely those of the presenter and are not formal Deloitte & Touche LLP positions Check with a qualified advisor before taking any action See slides at the end for additional resources available on these topics

Standards Setting Where are we and where are we going?

Convergence Progress in 2013 and 2014 Approximately 30 FASB meetings and 20 IASB meetings during 2013 In addition, approximately 10 Joint FASB/IASB meetings during 2013 The majority of the FASB meetings included convergence topics The Boards have also held several education sessions and roundtables Project Current Path Revenue recognition Converged FI - classification and measurement Diverged FI impairment Diverged Leases Converged Investment companies Partially Converged Consolidation Partially Converged Insurance contracts Partially Converged

Convergence Challenges Hans Hoogervorst (IASB): Recent appointments of Americans to the IASB illustrate direct U.S. participation in the IASB standard-setting process. However, the future level of U.S. leadership at the IASB would need to be proportionate to its support of IFRS. IFRS constituents need the United States to clearly communicate its level of commitment to a single set of global standards. Leslie Seidman (former FASB Chair): Accounting standards, to be usable in the U.S. cultural environment, must be: Open to consistent interpretation over time and between companies Accompanied by additional interpretive guidance, even after the implementation period Russ Golden (current FASB Chair): I envision a long-term global standard-setting environment in which the FASB, the IASB and other major capital market standard setters co-exist and cooperate. FASB s first priority is to improve financial reporting for the benefit of investors and other users of financial information in U.S. capital markets.

Joint FASB and IASB Projects Expected date 2012 2013 2014 Projects H1 H2 Investment Companies Comments Final Effective Consolidation - Agent v. Principal Final Leases ED Comments??? FI: Classification & Measurement ED Comments Final FI: Impairment ED Comments Final FI: Hedging (General Model) Final (IASB Only) Revenue Recognition Comments Final Insurance Contracts ED Comments???

Major FASB-only Projects Expected date 2012 2013 2014 Projects Financial Instruments: Liquidity & Interest Rate Disclosures ED H1 H2 H1 Liquidation Basis of Accounting ED Final Going Concern ED Transfers and Servicing: Repurchase Agreements Final Discontinued Operations ED Final Clarification of the Definition of a Business (formerly Asset- or Entity-based Guidance for Nonfinancial Assets)???

Small GAAP vs. Big GAAP

Private Company Council In May 2012 the FAF (FASB s parent foundation) decided to establish the Private Company Council (PCC) to Determine whether exceptions or modifications to existing U.S. GAAP would benefit private company financial statement users Advise the FASB on how private companies should treat current active projects The FASB still has the final say All exceptions and modifications proposed by the PCC are subject to FASB ratification This is similar to how the EITF functions

Private Company Council The PCC has tentatively decided to: Tenant relationships may no longer be recognized Not require separately recognizing non-contractual based intangibles Allow goodwill to be amortized over the life of the primary asset, not to exceed 10 years and use of simplified impairment model ASU 2014-02, Intangibles Goodwill and Other (Topic 350), was issued January 16, 2014; early adoption permitted. Provide for a simplified hedge accounting treatment for vanilla variable-tofixed interest rate swaps Can assume 100% effectiveness Carry swap at settlement amount Hedge designation/documentation can wait until financials are ready to issue ASU 2014-03, Derivatives and Hedging (Topic 815) was issued January 16, 2014; early adoption permitted.

Projects Impacting the Real Estate Industry

Clarification of the Definition of a Business

Asset- or Entity-Based Guidance Current GAAP is inconsistent Commercial property acquisitions are generally business combinations, but dispositions are treated as asset sales For business combinations, expense acquisition costs, but for asset acquisition, capitalize acquisition costs The FASB has added a project that will: Determine whether asset-based or business-based accounting literature would apply to entities that substantially consist of non-financial assets (e.g., in-substance real estate) Reassess the definition of a business maybe narrower Will NOT address accounting for acquisition costs

Asset- or Entity-Based Guidance The project will address the existing accounting differences between assetbased and business-based guidance that include: The measurement and timing of gain or loss recognition on sales of assets when continuing involvement exists, including situations whereby companies sell partial interests; and The measurement of retained interests that occur when a company sells a partial interest in an asset For the proposed revenue guidance, from whose perspective do you evaluate control in a partial sale? If I sell you a part of an asset and we now have joint control, I have given up control but you haven t taken control either!

Conflict of Accounting Treatment on Partial Sales Transaction ASC 810 (FAS 160) Accounting Treatment ASC 360-20 (FAS 66) Accounting Treatment Sell 50% interest and lose control Gain on the 50% interest sold AND for the difference between FV and carrying amount of 40% retained Business Gain only on the 50% interest sold; retained interest stays a book value Asset

Partial Sale Guidance - Example 1 REIT owns an office building with a carrying amount of $500 and fair value of $1,000. REIT and Investor form a JV. Investor contributes $600 for a 60% interest in JV. REIT contributes the building and receives a 40% interest in JV and a cash distribution of $600. The JV is now jointly controlled. Question: What literature governs REIT s accounting for this transaction? Question: What is REIT s accounting?

Partial Sale Guidance - Example 1 (continued) ASC 360-20 (FAS 66) guidance on partial sales addresses the REIT s accounting: Why? Transaction is a sale of real estate The journal entry to record the transaction: Cash $600 Investment in JV ($500 X 40%) 200 Building $500 Gain on partial sale $600-($500 X 60%) 300 The REIT s investment in JV is recorded at its carryover basis.

Partial Sale Guidance - Example 2 REIT has a wholly-owned subsidiary that provides commercial real estate brokerage services. The carrying amount of the subsidiary is $500 and it has a fair value of $1,000. REIT sells a 60% interest in the stock of the subsidiary to Investor for $600 cash. The subsidiary is now jointly controlled. Question: What literature governs REIT s accounting for this transaction? Question: What is REIT s accounting?

Partial Sale Guidance - Example 2 (continued) ASC 810 guidance on deconsolidation of a subsidiary governs this transaction: The journal entry to record the transaction: Cash $600 Investment in unconsolidated sub 400 Net assets of consolidated sub $500 Gain 500 The gain on the 60% sold is $300 ($600-($500X60%)). The retained investment in the subsidiary is adjusted to fair value ($1,000 X 40%), resulting in an additional gain of $200 ($400-($500X40%)). So total gain is $500.

Partial Sale Guidance - Example 3 REIT has a wholly-owned subsidiary whose assets consist solely of an office building. The carrying amount of the subsidiary is $500 and it has a fair value of $1,000. REIT sells a 60% interest in the stock of the subsidiary to Investor for $600 cash. The subsidiary is now jointly controlled. Question: What literature governs REIT s accounting for this transaction? Question: What is REIT s accounting?

Partial Sale Guidance - Example 3 (continued) ASC 360-20 guidance on partial sales addresses the REIT s accounting: Why? Pursuant to EITF 98-8, Accounting for Transfers of Investments That Are in Substance Real Estate: the sale or transfer of an investment in the form of a financial interest that is in substance real estate should be accounted for in accordance with ASC 360-20. The journal entry to record the transaction: Cash $600 Investment in unconsolidated sub($500 X 40%) 200 Net assets of consolidated sub (building) $500 Gain on partial sale ($600-($500 X 60%)) 300 Same accounting as Example 1

Business Combination or Asset Acquisition? ASC 805-10-55: A business consists of inputs and processes applied to those inputs that have the ability to create outputs. Although businesses usually have outputs, outputs are not required for an integrated set to qualify as a business.

Business Combination or Asset Acquisition? ASC 805-10-55: To be capable of being conducted and managed for the purposes defined, an integrated set of activities and assets requires two essential elements inputs and processes applied to those inputs, which together are or will be used to create outputs. However, a business need not include all of the inputs or processes that the seller used in operating that business if market participants are capable of acquiring the business and continuing to produce outputs, for example, by integrating the business with their own inputs and processes.

Business Combination or Asset Acquisition? ASC 805-10-55: Determining whether a particular set of assets and activities is a business should be based on whether the integrated set is capable of being conducted and managed as a business by a market participant. Thus, in evaluating whether a particular set is a business, it is not relevant whether a seller operated the set as a business or whether the acquirer intends to operate the set as a business.

Business Combination or Asset Acquisition? Hotel?

Business Combination or Asset Acquisition? Office Building?

Business Combination or Asset Acquisition? Corporate Headquarters Building Simultaneously Leased Back to Seller/User?

SEC Comments You acquired two properties and simultaneously leased them back to the seller, and these acquisitions were accounted for as asset acquisitions. Please tell us how you evaluate each purchase transaction to determine whether the acquired assets meet the definition of a business or are an asset acquisition. Please tell us the basis for your conclusion and cite the relevant accounting literature relied upon. Given that you did not acquire a lease in the acquisition of the property, please tell us how you determined it would be appropriate to allocate value to an in-place lease intangible asset as well as a belowmarket lease intangible liability.

Business Combination or Asset Acquisition? Vacant Industrial Building?

Business Combination or Asset Acquisition? Industrial Building Leased NNN to a Single Tenant?

SEC Comment Please tell us how you determined that your acquisitions of 100% net leased industrial buildings were business combinations as opposed to asset acquisitions. Please refer to ASC 805-10-55.

Business Combination or Asset Acquisition? Apartment Complex?

Business Combination or Asset Acquisition? Four-Unit Apartment Complex?

Sign That the Apocalypse is Upon Us Single-Family Home with a Lease in Place?

Single family homes are businesses? Please explain how you determine whether a home is accounted for as a business or an asset upon acquisition. Explain to us how you determined that all of your property acquisitions to date should be accounted for as asset acquisitions, including the extent to which your portfolio includes properties that had in-place leases versus properties that were vacant upon acquisition. This comment resulted in a restatement Corp Fin Staff believes that a single family home with a lease in place is a business!

Joint Ventures

Joint Ventures Accounting at Formation Generally contributed assets and businesses are recorded by the JV at historical cost Step-up possible when an equivalent amount of cash is contributed SFAS 160 became effective in 2009 Loss of control of a business in return for an equity method investment results in gain/loss (change in basis) for venturer Does this change the historical cost of the contributed assets for the JV s accounting? Data points Big 4 discussed with the SEC Staff a few years ago; no resolution E&Y joint venture guide seems to allow flexibility in step-up

Joint Ventures Example Businesses (not in-substance real estate) contributed by A and B, each for a 50% interest A: Book value of $100, fair value of $500 B: Book value of $300, fair value of $500 SFAS 160 gains to A and B A: $400, resulting in investment carrying value of $500 B: $200, resulting in investment carrying value of $500 Basis at joint venture level Generally would be carryover basis of $400 ($100 plus $300) SFAS 160 view would be $1,000 ($500 plus $500)

Revenue Recognition

Revenue Project Timeline Larry Smith, FASB - the Board has spent more than a decade writing its revenue recognition standard, longer than it took to meet the 1960s goal of putting a man on the moon. - 1999 (Dec) SEC Staff Accounting Bulletin No. 101 issued - 2000 + Various EITF activity related to revenue recognition - 2002 (Jan) FASB discusses revenue recognition project - 2002 (May) Revenue recognition project added to FASB s agenda - 2008 (Dec) FASB Discussion Paper - 2010 (June) Exposure Draft on revenue recognition - 2011 (Nov) Revised Exposure Draft (360 comment letters) - 2014 (1 st Q) Final Standard on revenue recognition expected - 2017 Effective date of final standard (2018 nonpublic)

Revenue Project Overview Core principle: Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled in exchange for those goods or services Identify the contract with a customer (Step 1) Identify the performance obligations in the contract (Step 2) Determine the transaction price (Step 3) Allocate the transaction price to performance obligations (Step 4) Recognize revenue as the entity satisfies a performance obligation (Step 5) Revenue recognition under the model is control based.

Revenue Project Scope Applies to an entity s contracts with customers Applies to a transfer or sale of nonfinancial assets (such as real estate) that do not meet the definition of a business. Also includes insubstance assets Partial sales of nonfinancial assets are not addressed Does not apply to sale-leaseback transactions (continue to follow current GAAP) Does not apply to: Lease contracts (ASC 840), Insurance contracts (ASC 944), Certain financial instruments and other contractual rights or obligations, Guarantees (other than product or service warranties), and Nonmonetary exchanges to facilitate a sale to another party

Potential Effects on Real Estate Elimination of bright-line tests Prescriptive guidance provided by ASC 360-20 (Sales of Real Estate) and ASC 605 (Construction) will be lost: Buyer s financial commitment - Guarantee buyer return Collectibility of transaction price - Partial sales Continuing involvement by seller - Condominium sales Sales to limited partnerships/joint ventures Will likely result in more transactions qualifying as sales of real estate with gains being accelerated Example: Consider probability of a conditional repurchase obligation outside the seller s control UPDATE: Collectibility threshold was added in the October 30 joint board meeting Must be probable (not necessarily reasonably assured) that the entity will ultimately collect the consideration it is entitled to receive

Investment Companies

Investment Companies Three Phases I. Revised definition and certain disclosure requirements (ASU 2013-08) III. Accounting for investments in real estate in context of investment companies II. Disclosure about investments in another investment company (fund of funds)

Investment Companies Two Phases I. Revised definition and certain disclosure requirements (ASU 2013-08) III. Accounting for investments in real estate in context of investment companies II. Disclosure about investments in another investment company (fund of funds)

Overview of Phase I ASU 2013-08 Scope Does not impact regulatory classification (e.g. 1940 Act) Will amend definition, provide measurement requirements and additional disclosures Retains the REIT scope exception REITs are not investment companies (yet) (well, unless already investment companies) The Board does not intend to change practice for real estate entities for which it is industry practice to issue financial statements that are consistent with the measurement principles in Topic 946. IASB issued final guidance October 2012, effective January 1, 2014; early adoption is permitted FASB issued final guidance (ASU 2013-08) on June 7, 2013, effective January 1, 2014; early adoption prohibited

Definition and Typical Characteristics of an Investment Company Required Attributes Obtains funds from investor(s) and provides professional investment management service Business purposes & substantive activities are to invest funds for returns from capital appreciation, investment income, or both Investment Company Do not obtain benefits from their investments that are either: Other than capital appreciation or investment income Not available to other noninvestors / not normally attributable to ownership interests Additional 5 characteristics (Not required to meet all of these criteria) Multiple investments Multiple investors Unrelated investors Equity or partnership interests Manages and evaluates its investments on a fair value basis

Measurement and Consolidation Accounting for non-ic parent s interest in IC subsidiary: Parent entity retains specialized accounting used by an investment company subsidiary (consistent with current GAAP) Not converged with IASB IC controls another IC: No guidance on how an investment company would measure its controlling interest (allow current industry practice to prevail) Not converged with IASB IC has non-controlling interest in another IC: Record at FV

Disclosure and Presentation Additional required disclosures Disclose that entity is an investment company applying specialized accounting Change in status and reasons for change Financial support to any investees: Provided to investees during reporting period Support contractually required & not previously contractually required Contractually required but not yet provided to investees

Leases

The Neverending Story 52 Issued in August 2010 Original Exposure Draft (ED) Comment period ended December 2010 Over 750 letters received Issued in May 2013 Revised ED Comment period ended September 13, 2013 Over 600 letters received Final Standard Expected to be issued 2014? Effective Date Expected to be no sooner than 2017

Lessee Accounting A lessee s determination of the appropriate expense recognition pattern would be based on whether the lessee acquires and consumes more than an insignificant portion of the underlying asset Yes Is the leased asset property? No Lease term is a major portion of asset s remaining economic life OR PV of fixed lease payments accounts for substantially all of the FV Lease term is insignificant to asset s total economic life OR PV of fixed lease payments insignificant relative to asset FV? Yes No Yes No Financing Approach (Type A) Straight-line Expense Approach (Type B) Straight-line Expense Approach (Type B) Financing Approach (Type A)

Lessor Accounting A lessor s determination of the appropriate expense recognition pattern would be based on whether the lessee acquires and consumes more than an insignificant portion of the underlying asset Yes Is the leased asset property? No Lease term is a major portion of asset s remaining economic life OR PV of fixed lease payments accounts for substantially all of the FV Lease term is insignificant to asset s total economic life OR PV of fixed lease payments insignificant relative to asset FV? Yes No Yes No Receivable and Residual Approach (Type A) Operating Lease Approach (Type B) Operating Lease Approach (Type B) Receivable and Residual Approach (Type A)

Respondent Feedback In general Most agree with stated objectives of the leases project and many support rightof-use asset approach Overall view is proposal does not satisfy the project s objectives General feeling that the cost and complexity introduced by new model will not result in any meaningful benefits to financial statement users Lessor model is not sufficiently built out might make sense to keep existing GAAP Substantially all recommend at least 3 to 5 years for implementation On lease payments Generally agree with definition of fixed lease payments. Mixed views on considering variable payments based on index/rate and on reassessing lease payments.

Respondent Feedback On lease and non-lease components Consider allowing lessees to estimate standalone selling price when an observable standalone selling price is not available. Account for arrangement as a service when observable standalone price is not available Additional guidance needed to understand the accounting for executory costs such as common area maintenance, insurance, and taxes. On lease classification Some recommend a single-model approach rather than dual-model approach. Do not support classification of lease based on nature of the underlying asset. Classification should be based on basis similar to ASC 840 and IAS 17 Definition of property needs to be expanded to include assets of similar economic characteristics (integral equipment). Many feel land should always default to Type B classification as it is not consumed.

The Critics Have Spoken! Certain constituents may advocate that all leases be accounted for under a single approach. NAREIT would not object to this conclusion so long as the single approach mirrors the currently proposed approach for Property or Type B leases. We believe that the vast majority of financial statement preparers and users support the straight-line lease expense pattern proposed for Type B leases. - NAREIT

The Critics Have Spoken! Certain constituents may advocate that all leases be accounted for under a single approach. NAREIT would not object to this conclusion so long as the single approach mirrors the currently proposed approach for Property or Type B leases. We believe that the vast majority of financial statement preparers and users support the straight-line lease expense pattern proposed for Type B leases. - NAREIT We have significant concerns with the approach... We also believe that the boards have not yet sufficiently developed the ROU model for lessors and have not made a compelling case that the information provided by the proposed lessor accounting model represents a significant improvement over the existing accounting model. Rather, the model introduced in the ED, if implemented, may obscure the financial statements of lessors - Deloitte

More Rave Reviews! costs to preparers of obtaining and reporting the information required by the proposed new standard would be demonstrably higher with no definite benefits to users. A standard that creates unneeded uncertainty at such a high cost without guaranteeing an improvement for all parties is not a standard that should be promulgated We strongly recommend that the Boards abandon the proposed lessor accounting changes at this time. - Healthcare Realty Trust, Inc.

More Rave Reviews! costs to preparers of obtaining and reporting the information required by the proposed new standard would be demonstrably higher with no definite benefits to users. A standard that creates unneeded uncertainty at such a high cost without guaranteeing an improvement for all parties is not a standard that should be promulgated We strongly recommend that the Boards abandon the proposed lessor accounting changes at this time. - Healthcare Realty Trust, Inc. Having to unwind an accounting construct put on the balance sheet and then having to do my own analysis is not very desirable. I d rather just have the data there, and let me do with it what I think I ought to do with it. - David Trainer, Member of FASB s Investor Advisory Committee

The Hits Just Keep On Coming! Critics think the rule-change is a costly solution to a minor problem. People who read company accounts are all sophisticated enough to take into account firms lease obligations when they assess them. The change would force businesses to set up central databases to record every lease of a year or more, even for items such as coffee-machines that are now lumped into branch offices petty expenses. In most cases there is no jiggery-pokery behind a company s decision to lease: it is often just a convenient way of spreading the cost of a vital but expensive asset. - The Economist

The Hits Just Keep On Coming! Critics think the rule-change is a costly solution to a minor problem. People who read company accounts are all sophisticated enough to take into account firms lease obligations when they assess them. The change would force businesses to set up central databases to record every lease of a year or more, even for items such as coffee-machines that are now lumped into branch offices petty expenses. In most cases there is no jiggery-pokery behind a company s decision to lease: it is often just a convenient way of spreading the cost of a vital but expensive asset. - The Economist We believe the current proposals do not represent an improvement over current GAAP, will not satisfy users, and will not justify the costs of implementation and ongoing application. Change for the sake of change does not necessarily equate to progress. We believe the Boards should aim for a high quality accounting standard, not settle for the least bad compromise. - KPMG

So what now?

FASB Staff Proposals Lessor Accounting Stick with existing risks and rewards model in IAS 17, which says a lease is a sale or financing transaction when the lease: Transfers ownership at the end of the lease Grants a purchase option with significant economic incentive to exercise Otherwise transfers risks and rewards, for example- Lease term is for major part of economic life of the asset PV is substantially all of the fair value of the asset Asset is so specialized that lessor would have no alternative use

FASB Staff Proposals Lessor Accounting Go to a lessor business model approach Sale or financing lessors typically- Lease the asset only once or maybe twice Price any associated services separately Purchase the asset only as a result of the lease Operating lessors typically- Lease the asset multiple times to multiple lessees Lease a long-lived asset Price the lease as a commodity, not for a specific return Embed some services in the lease payments FASB and IASB are jointly meeting next Tuesday and Wednesday to discuss!

Consolidation: Principal vs. Agent

Consolidation Project Overview and Timeline FASB issues FAS 167 FASB defers FAS 167 for certain investment funds FASB votes to converge on some, but not all aspects of IASB model FASB begins to redeliberate certain aspects of the model IASB publishes ED 10 FASB & IASB agree to develop single model FASB holds public roundtables IASB issues Consolidation Standards; FASB exposes principal vs. agent FASB to issue guidance on principal vs. agent Dec 2008 June 2009 Oct 2009 Jan 2010 Nov 2010 Jan 2011 Q4 2011 Sept 2013 2 nd Half 2014

FASB Principal vs. Agent: Overview Contains a single model for qualitatively assessing whether a decision maker (or general partner) is a principal or agent of the other stakeholders When assessing whether the reporting entity has the power to direct the most significant activities of the VIE that most impact the VIE s economic performance in ASC 810, the reporting entity would need to evaluate its decision-making authority as a principal or an agent Proposal would revise the definitions of participating rights and kickout rights and would align the analysis of theses rights under variable interest entities, voting interest entities, and partnership models Would eliminate the deferral from ASU 2009-17 (formerly FASB Statement No. 167) for certain investment fund advisors

FASB Principal vs. Agent: Factors to Consider 1) Rights held by other parties (including kick-out and participating rights) Substantive participating rights held by other parties are an indicator that the decision maker is an agent Substantive kick-out rights held by a single party would be conclusive decision maker is an agent Removal rights requiring the agreement of multiple parties (including BOD) may still be considered substantive but would not, in isolation, allow a decision maker to conclude that it is an agent. As number of multiple parties required to come together to exercise removal rights increases, the likelihood that those rights would be substantive decreases

FASB Principal vs. Agent: Factors to Consider 2) The decision maker s compensation Is the compensation of the decision maker commensurate with the services provided? 3) Exposure to variability in returns from other interests (including exposure through related parties) Magnitude and variability associated with the decision maker s economic interests (e.g., investments and guarantees) Is there exposure to both positive and negative returns? An interest that only exposes the decision maker to positive returns would be less indicative of a principal relationship

Financial Instruments

Classification and Measurement IASB Model Debt-instrument financial assets (e.g., debt security, loan, receivable) Financial liabilities amortized cost* With certain exceptions FV option for debt is eliminated Assess business model SPPI Financial assets assess cash flows SPPI = Solely payments of principal and interest Not SPPI Do not assess business model Held to collect: amortized cost Hold & sell: FV-OCI FV-NI (residual) FV-NI

Classification and Measurement FASB Model Overview Debt instrument financial assets (e.g., debt security, loan receivable) FASB is further analyzing, and considering improvements of current requirements related to the classification and measurement of loan receivables and investments in securities under U.S. GAAP Outcome will either be a single classification and measurement model for both loans (including trade receivables) and investments in debt securities, OR retain the separate accounting guidance under U.S. GAAP for classifying and measuring investments in debt securities and loans Financial liabilities amortized cost (with certain exceptions) Fair value option for debt is eliminated

Classification and Measurement FASB and IASB Investments in equity securities New (tentative) Approach Marketable and nonmarketable equity securities at FV-NI Practicability exception Nonmarketable equity securities at cost less impairment plus or minus changes in observable prices. Equity method Investors that have significant influence apply the equity method of accounting unless the investment is held for sale, in which case FV-NI. Single-step impairment approach to nonmarketable equity securities and equity method investments. What s Changed? For marketable equity securities, no AFS category with changes in FV recorded in OCI. The FVO for equity method investments replaced by an FV-NI requirement for equity investments that are held for sale. Present HFS separately. Entities would no longer be required to determine whether impairment losses are other than temporary.

Impairment Overview FASB Issued a proposed ASU in December 2012 and received approximately 350 comment letters Proposal presents FASB s model for the impairment of financial assets (including loans, debt securities and trade receivables) measured at amortized cost or at FV-OCI IASB Proposed amendments to IFRS 9 issued in March 2013 with comments due early July Proposals are similar in scope, but present a different model for the impairment of financial assets Joint deliberations began in the 4 th Quarter of 2013

Impairment FASB proposed model - current expected credit loss model Single measurement method for all financial assets (not limited to 12 months and no transfer notion) Current expected credit losses i.e., current estimate of future contractual cash flows that management does not expect to collect during life of financial assets Measurement Objective Contemplates all supportable internally and externally available information, including past events, current conditions, and reasonable and supportable forecasts Requires consideration of a scenario where a loss occurs. Observation: Lifetime loss allowances on otherwise performing balances could occur.

Impairment IASB proposed model 3 bucket approach Bucket 1 Bucket 2 Bucket 3 Financial assets classified as amortized cost or FV- OCI generally start in this bucket (excluding certain receivables and purchased credit impaired loans) Financial assets evaluated as a group Financial assets evaluated individually for which there has been a significant deterioration in credit quality since initial recognition (except high quality assets) Allowance: Lifetime losses taking into account the probability of default over the next 12 months Allowance: Lifetime losses taking into account the probability of default over the life of the loan

Discontinued Operations

Discontinued Operations Project objective To improve the definition and reporting of discontinued operations Converges with IFRS Raises the threshold for reporting disc ops The component or group of components is part of a single coordinated plan to dispose of a separate major line of business, or A separate major geographical area of operations Current scope exception for equity method investments is now removed Transition will be effective prospectively Timing Standard to be issued in March or April of 2014 Will be effective on January 1, 2015 for public companies and January 1, 2016 for private companies Early adoption will be permitted

Regulatory Update PCAOB and SEC

PCAOB Update

PCAOB Proposed Changes to Audit Report PCAOB proposed two new standards on the auditor s reporting model and on the auditor s responsibilities. Changes would include: Addition in the auditor s report of a new section in which critical audit matters (CAMs) specific to an audit would be communicated Enhanced language in the auditor s report about the auditor s responsibilities, and new statements in the report intended to communicate more information about the audit and the auditor, including disclosures about auditor independence and tenure An expansion to specify the auditor s responsibilities for other information in the annual report, and disclosure about this responsibility in the auditor s report, along with a statement about the results of the new required evaluation of that other information

PCAOB Proposed Changes to Audit Report NAREIT comments on Critical Audit Matters The requirement to disclose critical audit matters in the audit report could potentially: Confuse and mislead users with a piecemeal discussion of audit procedures that readers of the financial statements have no context or basis to understand; Introduce situations when the auditor is disclosing sensitive information that is not otherwise required to be disclosed by the issuer: Duplicate information already disclosed by the issuer: Increase audit fees for, among other things, the senior level time the auditor would incur describing the critical audit matters for purposes of drafting the proposed disclosure and incremental time discussing those matters and the related disclosure with management and the audit committee; and Exacerbate existing time pressures to meet financial reporting deadlines.

PCAOB Inspection Findings Internal controls over non-routine transactions Internal controls over cash flow statement Internal controls over evaluation and documentation of accounting issues Revenue completeness testing Journal entry testing Information Produced By the Entity (IPE) used in the performance of a control

SEC Comments on Real Estate Companies

SEC Review Process About 9,000 domestic and 1,000 foreign registrants All issuers reviewed at least every three years Percentage of issuers reviewed: Continuous reviews of large financial services registrants New Office of Disclosure Standards clarity, repetition Use of data analytics in the review of filings (ROBOCOP) Staff is listening to analyst/earnings calls, reviewing press releases and websites and issuing comments

Give examples in your response Where a comment below requests additional disclosures to be made, please show us in your response what the revisions will look like.

Yes, they follow up on their comments! We note that, in response to our comment 7 of our comment letter dated you stated that you will revise future Exchange Act reports to include the statement that the Company believes that these rents are indicative of rents to be achieved on leases expiring in the next period. We have been unable to locate this disclosure.

MD&A results of operations Please revise your MD&A to include a more detailed discussion of the consolidated operating results of the company prior to your discussions of segments. In this regard, we believe your segment analysis should be used as a supplement to, not a replacement of, a discussion and analysis of the line items presented within your audited financial statements.

Cash flow statement investing activities Please disclose the cash outflows from real estate acquisitions, development, and lease costs separately for each year presented in your statement of cash flows.

Debt covenants You are subject to financial covenants under your debt agreements. Please disclose the specific terms of the covenants to which you are subject with any required ratios/amounts. Please disclose the actual ratios/amounts as of each reporting date for any material debt covenants for which it is reasonably likely that you will not be able to meet, along with the computations used to arrive at the actual ratios/amounts with corresponding reconciliations to US GAAP amounts.

Consolidation We note that you own a 75% interest in XX LLC, but do not consolidate the entity since you share decision making abilities and control with your joint venture partner. Please provide us with your analysis of this entity, including how you determined that you share decision making and control with the joint venture partner, your determination of whether or not the entity is a variable interest entity, and how you identified the primary beneficiary.

Dividends per share We note that you have included distributions per share on the face of your income statement versus in the notes to your financial statements. Tell us how your disclosure complies with the guidance in ASC 260-10-45-5. Here s ASC 260-10-45-5: Per share amounts not required to be presented by this Subtopic that an entity chooses to disclose shall be computed in accordance with this Subtopic and disclosed only in the notes to the financial statements OK, I GOT IT, GAAP SAYS NOT ON THE FACE, BUT

Dividends per share (continued) SEC s 10-Q rules say: S-X 210.10-01(b): the following additional instructions shall be applicable for purposes of preparing interim financial statements: (2) If appropriate, the income statement shall show earnings per share and dividends declared per share applicable to common stock.

Exhibits - Certifications We note that in paragraphs 4 and 5 you have deleted the "(s)" following "certifying officer(s)," you have replaced directors with trust managers and have deleted the parenthetical "(or persons performing the equivalent functions)." In future filings, please file your certifications exactly as set forth in Item 601(b)(31)(i) of Regulation S- K.

Reclassifications Given the types, amounts, and number of reclassifications from prior year, please provide to us management s assessment as to whether these changes were the result of errors in previously issued financial statements.

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