On May 21, the Securities and Exchange Commission (SEC) adopted (with one dissenting vote) Amendments to Financial Disclosures about Acquired and Disposed Businesses (Amendments or Final Rule). The Amendments, adopted pursuant to the SEC’s ongoing, multi-year Disclosure Effectiveness Project, will modify the rules for determining whether an acquisition or disposition is “significant.” Importantly, with respect to real estate operations, the Amendments include changes to Rule 3-14, endorsed by Nareit, to require the use of a modified investment test to determine whether an acquisition is “significant,” because the historical amounts of assets and income of the acquired or to be acquired real estate operation are not always available. The Amendments will be effective on Jan. 1, 2021, but voluntary compliance will be permitted in advance of the effective date.

On Oct. 22, 2019, Nareit submitted a comment letter supporting the SEC’s May 3, 2019 proposal for this rule change (Proposal), which included several features that Nareit had suggested in previous comments to the SEC relating to its Disclosure Effectiveness Project. Nareit’s submission. was drafted with the assistance of a task force of Nareit members, including members of Nareit’s Best Financial Practices Council. The Final Rule referenced Nareit’s submission nine times.

Nareit supported the key components of the Proposal, which were retained in the final Amendments, including provisions that would:

  • Limit the financial statement requirement regarding the acquired business to the two most recent fiscal years;
  • Permit the use of, or reconciliation to, International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) in certain circumstances;
  • Eliminate the requirement for separate acquired business financial statements after nine months/one year; and,
  • Clarify the application of Rule 3-14 regarding the determination of significance, the need for interim income statements, special provisions for blind pool offerings, and the scope of the rule’s requirements.

Of relevance to public non-traded REITs (PNLRs), the Amendments codify existing staff guidance related to “blind pool” offerings, which permit PNLRs to apply an adapted significance test to compare an acquired real estate operation with total assets on the date of acquisition, plus the proceeds (net of commissions) expected to be raised over the next 12 months. The Amendments also extend the use of this adapted significance test to Rule 3-05 acquisitions.

In addition to the change in the investment test to determine an acquisition’s significance to a real estate operation referred to above, Nareit’s submission highlighted its support for several features in the Amendments relevant to real estate operations. These include provisions intended to align key provisions of Rule 3-14 regarding significant real estate operations with the proposed changes to Rule 3-05, including:

  • Aligning the Rule 3-14 significance threshold for individual acquisitions to the 20% threshold for acquired businesses in Rule 3-05 and for the aggregate impact of acquisitions to the 50% threshold in Rule 3-05;
  • Eliminating the Rule 3‑14 requirement to provide three years of financial statements for acquisitions from related parties;
  • Revising Rule 3‑06 to permit the filing of financial statements covering a period of nine to 12 months to satisfy the requirement for filing financial statements for a period of one year for an acquired or to be acquired real estate operation;
  • Amending Rule 3‑14 to include the same period for the filing of Rule 3‑14 financial statements in registration statements and proxy statements as exists under Rule 3‑05; and,
  • Eliminating the required inclusion of Rule 3‑14 financial statements in registration statements and proxy statements once the acquired real estate operation is reflected in filed post-acquisition registrant financial statements for a complete fiscal year.

Please contact Victoria Rostow, Nareit’s Senior Vice President, Regulatory Affairs & Deputy General Counsel at vrostow@nareit.com; Christopher Drula, Senior Vice President, Financial Standards at cdrula@nareit.com; or George Yungmann, Senior Vice President, Financial Standards at gyungmann@nareit.com with any questions.