SFO Alert (January 6, 2012)

January 6, 2012

NAREIT Modifies FFO Definition to Also Exclude Impairment Write-Downs of Investments in In Substance Real Estate Investees Under Certain Circumstances

In an Oct. 31, 2011, SFO Alert and a Nov. 4, 2011, SFO Alert, NAREIT issued guidance for reporting Funds From Operations (FFO) that reaffirmed NAREIT’s view that impairment write-downs of depreciable real estate should be excluded from the computation of NAREIT FFO. This view is based on the fact that impairment write-downs are akin to and effectively reflect the early recognition of losses on prospective sales of depreciable property or represent adjustments of previously charged depreciation. Since depreciation of real estate and gains/losses from sales are excluded from NAREIT FFO, it is NAREIT’s view that it is consistent and appropriate for write-downs of depreciable real estate to also be excluded.

Subsequent to issuing the guidance on Oct. 31, 2011, and Nov. 4, 2011, a number of NAREIT members asked if impairment write-downs of other assets should also be excluded from FFO. Of the fact patterns raised, NAREIT has concluded that the only impairment write-downs consistent with the concept of write-downs of depreciable assets or the early recognition of losses on sale of depreciable real estate are the write-downs of investments in affiliates (i.e., joint ventures and partnerships), when there is clear evidence that the write-downs of the investor’s investment in the affiliate have been driven by a measurable decrease in fair value of depreciable real estate held by the affiliate. NAREIT has concluded that these write-downs should be excluded from the FFO of the investor in the affiliate.

NAREIT has discussed this modification in the treatment of these specific impairment write-downs with SEC staff. The staff informed NAREIT that it expects that a REIT excluding these write-downs from FFO would include clear and detailed disclosure of how it determined that the write-down was driven by a measurable decrease in the fair value of depreciable real estate held by the affiliate. The staff also informed us that they may request further clarification if the reasonable basis for this conclusion is not clear.

Further, NAREIT reminds members that the definition of FFO as modified excludes only impairment write-downs of depreciable real estate or of investments in non-consolidated investees that are driven by measurable decreases in the fair value of depreciable real estate held by the investee. This exclusion of impairment write-downs does not apply to impairment write-downs of other assets.

Contact

For further information, please contact Christopher Drula, NAREIT’s Senior Director, Financial Standards, at cdrula@nareit.com.