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Highlights
 

• SEC to Focus on Decision to Adopt IFRS in the U.S.
• NAREIT/REESA Continue to Advocate Lessor Accounting Views with FASB/IASB
• NAREIT/REESA Evaluate Fair Value Proposals
• EITF Reaches Tentative Conclusion on Retrospective Reporting of Elective Stock/Cash Dividends
• SEC Examines Operating Partnership Capital Reporting
• SEC Extends Final Sarbanes-Oxley Deadline for Small Businesses
• FASB Provides Fair Value Guidance for Investments in Investment Companies
• 2009 NAREIT Financial Standards Events

SEC to Focus on Decision to Adopt IFRS in the U.S.
 

The 2008 Securities and Exchange Commission (SEC) proposal that would require the 2014 adoption of International Financial Reporting Standards (IFRS) in the U.S. has resurfaced on the SEC's upcoming agenda. At the International Accounting Standards Committee Foundation (IASC Foundation) meeting on July 6, 2009, Mary Schapiro, SEC Chair, stated that the SEC is continuing its detailed analysis of all comment letters and will readdress the potential adoption of IFRS during the fall.

Among the 230 letters received by the SEC, the majority of respondents generally support a single set of high-quality global accounting standards. In its April 20 letter to the SEC, NAREIT recommends that, rather than the SEC requiring the mandatory adoption of IFRS for U.S. issuers within the aggressive timeframe proposed, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) should continue their deliberate convergence of U.S. Generally Accepted Accounting Principles (GAAP) and IFRS. In the SEC's 2010-2015 strategic plan, which was issued for public comment on October 8, 2009, the SEC affirms its commitment toward a single set of high-quality global accounting standards and on-going convergence initiatives between the FASB and IASB (collectively, the Boards).

While the SEC promotes its support for global accounting standards, it also acknowledges that undisputed independence for the IASC Foundation (the governing body of the IASB) is a critical issue tied to the adoption of IFRS – a major issue also raised by NAREIT in its letter. In a step toward achieving independence for the IASC Foundation, SEC Chair Schapiro now serves as a member of the Monitoring Board that was recently established to maintain the public accountability of the IASC Foundation in order to promote investor protection, market integrity and capital formation.

NAREIT/REESA Continue to Advocate Lessor Accounting Views with FASB/IASB
 

NAREIT and its global partners in the Real Estate Equity Securitization Alliance (REESA) continue to march forward and express their common views on the approaches to lessor accounting under consideration by the FASB and IASB. Background information on the Boards' proposals that would dramatically modify the current financial statements can be accessed in the July 2009 Financial Standards Update by clicking HERE. The July 2009 update also provides links to the comment letters previously submitted by REESA and NAREIT, which describe their opposition to the Boards' proposals.

REESA is actively engaged in evaluating IASB and FASB proposals and providing input to the Boards on those proposals that may impact accounting and financial reporting by real estate companies. Besides NAREIT, the REESA member organizations include:

- Asian Public Real Estate Association (APREA)
- Association for Real Estate Securitization (ARES)
- British Property Federation (BPF)
- European Public Real Estate Association (EPRA)
- Property Council of Australia (PCA)
- Real Property Association of Canada (REALpac)

REESA Meets with the IASB/FASB

Based on the staff's request during REESA's July 14, 2009 meeting with the IASB and FASB, REESA organized a follow-up meeting with the IASB, FASB and key industry investors and investment analysts to provide further support for REESA's views on the Boards' proposals.

On August 25, major real estate investors and analysts from the United States, Europe and the United Kingdom met with representatives of the IASB and FASB. These users of our industry's financial statements shared their methods of analyzing the investment quality of real estate companies and their views regarding the Boards' preliminary proposals, which corresponded to REESA's views.

John Lutzius of Green Street Advisors, one of the financial statement users in attendance, stated that "a change in accounting presentation to show real estate broken out between the net present value of leases in place and residual value would, in my view, be very disruptive to the user community in both the U.S. and Europe." Other industry financial statement users sharing their views with the Boards' representatives included: Harm Meijer, JP Morgan; Rogier Quirijns, Cohen & Steers; David Smetana, Morgan Stanley; Rafael Torres Villalba, APG; and Stuart Martin, First State Investors.

NAREIT/REESA Respond to FASB/IASB Possibility for Multiple Lessor Accounting Models

On September 8, FASB and IASB staff requested input on a possible lessor accounting model that may eliminate certain of the issues that landlords of investment property would face under the Boards' current proposals.

Until very recently, the Boards have been attempting to develop a single model for accounting by all lessors. The recent request asks whether there should be different leasing models depending on the business model of the company.

NAREIT and REESA responded that the Boards should develop at least two models that would recognize the substantive differences between leases that simply finance assets and those that are clearly an integral part of the operating business plan of the lessor – an "operating lease." To read the letter, click HERE. The response provided specific criteria that would be considered to determine whether a lease is an "operating lease." These criteria include:

- the leased asset can not be purchased/financed;

- multiple leases cover a larger asset – specific leases cover only a portion of a larger asset;

- the lessor maintains and operates aspects of the overall asset while the lease is in place;

- the lease agreement has no residual value or implicit interest rate;

- the lease has no purchase option at the end of the lease term;

- the lease terms are driven by the supply/demand for the leased asset – the leased space in a real estate lease;

- the term of the lease is substantially shorter than the useful life of the leased asset; and,

- the same portion of the larger asset will generally be leased multiple times during the asset's useful life.

NAREIT will continue its active participation in the Boards' process toward developing new lease accounting models. The Boards will consider this input as they develop a new converged global standard for the accounting of leases that is expected to be issued in 2011. The exposure draft is expected to be issued in the second half of 2010.

NAREIT/REESA Evaluate Fair Value Proposals
 

FASB Fair Value Disclosure Proposal

In August 2009, the FASB released its proposal to expand disclosures about fair value measurements. Most notably, the proposal would require entities to disclose the effects of alternative inputs on fair value measurements. The additional disclosures would provide information about the effect of "reasonably possible" alternative level 3 inputs and transfers in and/or out of the level 1 and 2 input categories, as well as increased disclosures of activity in level 3 measurements and other disclosures about inputs and valuation techniques. Level 3 inputs are unobservable inputs that include management's assumptions in determining fair value, while levels 1 and 2 involve observable inputs based on the market.

The proposals would apply to all entities reporting fair value measurement disclosures under U.S. GAAP. The majority of the proposed disclosures would be effective for interim and annual reporting periods ending after December 15, 2009, while the sensitivity disclosures for level 3 measurements would be effective for interim and annual reporting periods ending after March 15, 2010.

IASB Fair Value Proposal

REESA submitted a comment letter in response to the IASB's fair value measurement proposal and addressed the following main concerns:

- loss of fair value guidance currently part of IAS 40 Investment Property that has proven to be useful and relevant to measuring investment property fair value;

- issues regarding disclosure requirements for investment property pertaining to a sensitivity analysis of fair value and the impact of changes in valuation techniques;

- the requirement to disaggregate the fair value of investment property into land and building components;

- inconsistency in the accounting for transaction costs and the recognition of day one gains or losses; and,

- lack of full convergence with U.S. GAAP.

To read a summary of the proposal, click HERE. REESA's comment letter was submitted on September 24, 2009 and is available by clicking HERE.

EITF Reaches Tentative Conclusion on Retrospective Reporting of Elective Stock/Cash Dividends
 

As a result of the 2008 IRS Revenue Procedure that allows listed REITs to offer a combination of stock and cash to satisfy their dividend distribution requirement through 2009, a financial reporting question arose early in 2009 with respect to the impact of the stock portion of these dividends on reported per share amounts. Currently, there are two accounting treatments that have been equally applied by REITs. The retrospective treatment, which is similar to the treatment of stock splits or stock dividends, restates any prior period per share amounts to reflect the dividend arrangement as if the shares were outstanding during each period presented in the current financial statements. The alternative is the prospective treatment, which reports the dividend arrangement prospectively as if the stock portion of the dividend was a stock issuance.

The Emerging Issues Task Force (EITF) has examined this presentation issue of reporting the stock portion of the dividends, including the effects on the calculation of per share amounts, and discussed their considerations and alternative views with NAREIT on August 4, 2009.

On September 30, 2009, the EITF issued a proposal that the stock portion of elective stock dividends should be applied retrospectively. The final consensus is expected to be effective for year-end 2009 reporting. The comment deadline was October 26, 2009. NAREIT is asking its members concerned with this issue to submit comments to the EITF expressing their views, even though the due date for comments has technically lapsed.

SEC Examines Operating Partnership Capital Reporting
 

A number of NAREIT member companies have been responding to SEC comments regarding the classification of redeemable operating partnership (OP) capital on the financial statements of the OP. The primary concern of the SEC staff seems to be gaining an understanding of the basis of a company's conclusion with respect to the classification of OP capital and whether it should be reported outside of permanent capital under U.S. GAAP.

An important focus of the SEC staff is to understand the fiduciary relationship between the REIT and the OP, and whether there are potential conflicts of interest between the REIT and OP in terms of the decision to redeem OP units using cash or REIT shares. In comments to a number of REITs, the SEC staff has requested a legal analysis supporting a conclusion that no conflicts of interest exist that would preclude the REIT from providing shares to redeem OP units.

In a collaborative industry-wide effort, member companies, NAREIT staff, industry attorneys and representatives of accounting firms involved in responding to the SEC comments advocated that the REIT and the OP are functionally the same entity. At this time, based on its discussion with NAREIT members, their outside counsel and auditors, as well as staff of the SEC's Office of Chief Accountant, the SEC Division of Corporate Finance has, in the case of a number of REITs, concurred with the company's reporting for the capital in the OP.

SEC Extends Final Sarbanes-Oxley Deadline for Small Businesses
 

Non-accelerated filers, public companies with a public float below $75 million, are now required to include an auditor's report on the effectiveness of internal control over financial reporting beginning with their annual reports for fiscal years ending on or after June 15, 2010. The SEC previously issued a deadline of December 15, 2009; however, the SEC extended the deadline to perform cost analyses and to allow more time for smaller companies and their auditors to prepare for the auditor attestation required under the provisions of Section 404(b) of the Sarbanes-Oxley Act.

FASB Provides Fair Value Guidance for Investments in Investment Companies
 

In September 2009, the FASB issued an Accounting Standards Update for investments in certain entities that calculate net asset value per share, which is effective for reporting periods ending after December 15, 2009. Investors now may use net asset value reported by the investees to estimate the fair value of investments in investment companies that do not have a readily determinable fair value. This new guidance is permitted if the investees have the attributes of investment companies and the net asset values or their equivalents are calculated consistent with the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide, Investment Companies, which generally requires investments to be measured at fair value.

FASB defines an investment company as an entity that: 1) invests in multiple substantive investments; 2) invests for current income, capital appreciation, or both; and, 3) invests with investment plans that include exit strategies. Most notably, an investment company does not acquire or hold investments for strategic operating purposes, which may be a distinguishing factor when comparing an investment company to a REIT that owns and operates investment properties.

2009 NAREIT Financial Standards Events
 

Senior Financial Officers/Investor Relations Officers Workshop

NAREIT held its 2009 Senior Financial Officers/Investor Relations Officers Workshop on September 21 and 22 in New York City. Approximately 100 members attended the workshop, which was specifically designed for senior officers in the fields of accounting, financial reporting, capital markets, insurance and investor relations. Sessions focused on the latest developments and trends impacting the financial management of real estate companies. NAREIT extends its gratitude to the program directors, sponsors and presenters for their contributions toward the success of this event.

Internal Audit Forum

On August 18 and 19, BRE Properties, Inc. and Boston Properties, Inc. hosted the 2009 Internal Audit Forum in San Francisco, CA. This year's forum featured special guest speakers Constance Moore, President and CEO, BRE Properties, Inc. and NAREIT Chair; Hollis Skaife, Standards Advisory Council (SAC) of the IASB; and, Patricia Miller, Partner, Deloitte and former Chair of the Institute of Internal Auditors. The program covered topics such as enterprise risk management, data analytics, fraud and IFRS and included sector breakouts. NAREIT appreciates the hosts and presenters for providing another informative forum.

Congress Continues to Debate Energy Policy, Clarifications Needed to Benefit REITs

Earlier this year, the House of Representatives narrowly passed comprehensive energy and climate change legislation, H.R. 2454, the “American Clean Energy and Security Act of 2009.” To view the July 2009 Hill Snapshot which describes this legislation, CLICK HERE. Work on similar proposals is underway in the Senate where six committees have shared jurisdiction over climate change legislation.

In June 2009, Senator Bingaman (D-NM), Chairman of the Energy and Natural Resources Committee, passed out of his Committee a proposal that would promote energy conservation and the development of clean energy technology. For more information on this bill, CLICK HERE. Similarly, Senator Barbara Boxer (D-CA), Chairwoman of the Senate Environment and Public Works Committee, has worked with Senator John Kerry (D-MA), Chairman of the Senate Foreign Relations Committee, to introduce a proposal that would implement a cap and trade system while also investing in energy efficiency and renewable energy. For more information on this bill, CLICK HERE.

Similar to the House-passed bill, both the Bingaman and Boxer proposals would provide federal funding for state-based retrofitting grant programs intended to help building owners comply with ambitious new national energy standards. From the time that similar grants were proposed in the House, NAREIT has been pursuing a legislative clarification to ensure that any new grants for retrofitting commercial buildings are considered as qualified income under the REIT income tests and that the grants themselves would be considered qualifying REIT assets. For additional information on this effort, CLICK HERE.

NAREIT has also been engaged in an effort to allow REITs to benefit from a provision enacted in February 2009 as part of the “American Recovery and Reinvestment Act” (Pub. L. 111-5) (Recovery Act) that would provide grants in lieu of tax credits for investments in qualifying renewable energy projects (energy grants). Despite having been specifically designed to benefit taxpayers with insufficient tax liabilities to benefit from existing energy tax credits, this provision has been interpreted to benefit REITs only to the extent that taxable income is retained.

NAREIT continues to pursue a legislative solution that would allow REITs to benefit from the Recovery Act’s energy grants, either as part of forthcoming energy or cap and trade legislation, or as part of any effort to extend provisions of the Recovery Act or other expiring tax provisions. This may include the introduction of a stand alone bill by members of the House Ways and Means Committee from states with significant solar power capacity or a Senate bill that contains several energy tax provisions. For additional information on this effort, CLICK HERE.

In addition, NAREIT is engaging with the sponsors of S. 1637, a proposal which would: 1) double the deduction for energy efficient commercial buildings and expedite the process for obtaining the deduction; and, 2) expand the existing energy efficient home credit to apartments higher than three stories. Specifically, NAREIT is discussing two potential modifications with the bill’s sponsors: 1) harmonizing the deduction for energy efficient buildings with the deduction taken for earnings and profits purposes to make this deduction useful to REITs; and, 2) allowing a REIT to convert the energy efficient home credit to a deduction. To read the text of S. 1637, CLICK HERE.

Through these efforts, NAREIT is investigating possible legislative solutions that would improve the ability of REITs to access other energy and sustainability incentives that exist under current law or that may be enacted in the future.

Financial Regulators Update Policy Encouraging Commercial Real Estate Loan Workouts

On October 30, 2009, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision announced a coordinated and updated policy that provides a template for lenders and bank examiners to address the workout of troubled commercial real estate loans.

In a statement announcing this policy, the regulators indicate that “prudent loan workouts are often in the best interest of both financial institutions and borrowers, particularly during difficult economic conditions.” The regulators also state that financial institutions which, “implement prudent workout arrangements after performing comprehensive reviews of borrowers’ financial conditions will not be subject to criticism for engaging in these efforts, even if the restructured loans have weaknesses that result in adverse credit classifications.” Finally, the regulators provide assurances that performing loans renewed or restructured on reasonable modified terms to creditworthy borrowers, “will not be subject to adverse classification solely because the value of the underlying collateral declined.”

To illustrate the potential impact of this policy on commercial real estate loan workouts, the statement released by the Federal Reserve includes examples of how the policy would work. The policy statement reinforces existing guidance to examiners that they are “expected to take a balanced approach in assessing institutions’ risk-management practices for loan workout activities.” To read the statement from the financial regulators, CLICK HERE.

Financial Services Regulatory Reform Continues to Move through the House While the Senate Prepares to Begin Work

In June 2009, the Obama Administration released its blueprint for financial services regulatory reform, which outlines a plan to, “build a new foundation for financial regulation and supervision that is simpler and more effectively enforced, that protects consumers and investors, that rewards innovation and that is able to adapt and evolve with changes in the financial market.” To read the full proposal, CLICK HERE.

House Financial Services Committee Chairman Barney Frank (D-MA) continues to pursue an ambitious schedule to consider the various components of the Administration’s proposal. In October 2009, the Committee passed five components of the broader plan, including proposals that would create a Consumer Financial Protection Agency, impose new regulations on the over-the-counter (OTC) derivatives market, and provide new oversight over the credit rating agencies, investment advisers and private pools of capital. To see the schedule of hearings and to access related materials, CLICK HERE.

In the Senate, where the focus has remained on health care reform, the schedule for action is currently less clear. Senate Banking Committee Chairman Chris Dodd (D-CT) had once expressed a strong interest in working with Ranking Member Richard Shelby (R-AL) to develop bipartisan legislation. However, it is now expected that Dodd will introduce a comprehensive reform proposal without Shelby’s support.

NAREIT will continue to monitor developments on regulatory reform and will continue to directly engage on issues of particular importance to REITs and the publicly traded real estate industry.

Two House Committees Pass Derivatives Reform Proposals

The Obama Administration and policymakers in Congress have undertaken a detailed review of over-the-counter (OTC) derivatives as part of the broader financial regulatory reform effort. NAREIT staff, with the guidance of the NAREIT Derivatives Reform Task Force, has been monitoring these efforts and studying the potential impact that various proposals would have on REITs and publicly traded commercial real estate companies. For additional information, CLICK HERE.

NAREIT has joined with the U.S. Chamber of Commerce, the National Association of Manufacturers, The Real Estate Roundtable and other trade associations in forming the Coalition for Derivatives End-Users. The Coalition continues to educate members of Congress and their staff on the importance of low-cost customizable derivatives products for businesses seeking to manage their exposure to variable interest rates, foreign currency, fluctuating commodity prices or other risks.

In October, both the House Financial Services Committee and the House Agriculture Committee passed proposals to regulate major dealers of OTC derivatives while exempting business end-users from the more onerous provisions. Under both proposals, major derivatives dealers would face new registration, record-keeping, and reporting rules; new capital standards; and new margin requirements. The proposals would also require many derivatives transactions to be cleared by a third-party clearinghouse or traded on a regulated exchange to provide enhanced transparency and reduce systemic risk. To read NAREIT’s October 23, 2009, Policy Report which discusses the two bills, CLICK HERE.

With action completed in both the House Financial Services and Agriculture Committees, the two proposals must now be reconciled as a single bill. It is currently believed that it will then be combined with the other components of regulatory reform before it is brought before to the House floor for a vote. This vote will likely occur after the Thanksgiving Congressional Recess. In the Senate, Banking Committee Chairman Christopher Dodd (D-CT) is expected to present his comprehensive regulatory reform proposal in the coming days, with hearings and debate to follow.

NAREIT staff will continue to work with the members of the NAREIT Derivatives Reform Task Force, the Coalition for Derivatives End-Users, and others to educate policymakers and advocate for the continued availability of these important risk management tools.

Net Operating Loss (NOL) Carryback Provision Attached to Bill to Extend Unemployment Benefits

On November 6, 2009, President Obama signed into law a bill to extend unemployment insurance benefits for jobless Americans. This law also provides a temporary extension of the $8,000 first-time home buyer tax credit and expands the net operating loss (NOL) carryback provision that was enacted in February 2009 as part of the “American Recovery and Reinvestment Act” (Pub. L. 111-5).

The bill, which was drafted by Senate Finance Committee Chairman Max Baucus (D-MT) expands the NOL provision to allow all U.S. companies to carry back for up to five years losses they incurred in either 2008 or 2009. These losses could offset up to 100 percent of income from the first four carryback years and up to 50 percent of income from the fifth year. The revenue lost by the home buyer credit and NOL provisions was offset by delaying the enactment of special rules that would allow U.S. corporations to reduce the interest expenses they allocate to foreign assets. To read the text of the new law, CLICK HERE.

Comprehensive Financial Services Regulatory Reform Proposal to be Debated on the House Floor This Week

In June 2009, the Obama Administration released its blueprint for financial services regulatory reform. Over the past several months, House Financial Services Committee Chairman Barney Frank (D-MA) has considered and passed legislation containing the key components of the Administration's proposal. This includes proposals that would create a Consumer Financial Protection Agency, impose new regulations on the over-the-counter (OTC) derivatives market, and provide new oversight over credit rating agencies, investment advisers and private pools of capital. It is anticipated that the House of Representatives will debate a comprehensive bill this week and vote on it by next week. To access information on this bill, click here.

In the Senate, the schedule for action is less clear. On November 10, 2009, Senate Banking Committee Chairman Chris Dodd (D-CT) introduced a comprehensive reform proposal, without bipartisan support. To read the proposal, click here. Since that time, bipartisan negotiations have resumed. While Dodd and Senate leaders have indicated an intention to finish consideration of this proposal in the Senate Banking Committee prior to the end of the year, this is unlikely given the other legislative priorities that are expected to dominate the remainder of the 2009 legislative session.

NAREIT will continue to monitor developments on regulatory reform and will continue to directly engage on issues of particular importance to REITs and the publicly traded real estate industry.

House Regulatory Reform Proposal May Limit the Ability of REITs to Hedge Risk

The Obama Administration and policymakers in Congress have undertaken a detailed review of over-the-counter (OTC) derivatives as part of the broader financial regulatory reform effort. NAREIT staff, with the guidance of the NAREIT Derivatives Reform Task Force, has been monitoring these efforts and studying the potential impact that various proposals would have on REITs and publicly traded commercial real estate companies. For additional information, click here.

NAREIT has joined with the U.S. Chamber of Commerce, the National Association of Manufacturers, The Real Estate Roundtable and other trade associations in forming the Coalition for Derivatives End-Users. The Coalition has undertaken extensive efforts to educate members of Congress and their staff on the importance of low-cost customizable derivatives products for businesses seeking to manage their exposure to variable interest rates, foreign currency, fluctuating commodity prices or other risks.

In October, both the House Financial Services Committee and the House Agriculture Committee passed proposals to regulate derivatives transactions. These proposals have been reconciled and will be voted on this week as part of a broader regulatory reform effort. NAREIT understands that, while the agreement between the two Committees represents a significant improvement over prior proposals that would have virtually eliminated the ability of end-users to use derivatives to hedge their risk, significant concerns remain. In particular, there continues to be uncertainty about which firms will be considered "major swap participants" and therefore automatically subjected to the most onerous regulations as well as cash margin and collateral requirements.

Amendments have been offered that would undermine the progress that end-users have made in the debate, including an amendment that would give regulators the authority to impose cash margin requirements on bilateral derivatives transactions used by end-users to hedge risk. If you would like to participate in an effort to defeat these amendments, or to improve the Senate proposal, please contact Kirk Freeman at kfreeman@nareit.com or 202-739-9415.

NAREIT staff will continue to work with the members of the NAREIT Derivatives Reform Task Force, the Coalition for Derivatives End-Users, and others to educate policymakers and advocate for the continued availability of these important risk management tools.

At Risk: Protection for Commercial Real Estate Owners During Tenant Bankruptcy

NAREIT was advised that some Democratic members of the House Judiciary Committee were considering seeking an amendment to the broader regulatory reform bill that would roll back section 365(d)(4) of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, which currently provides needed clarity for a commercial real estate owner or operator whose tenant has filed for bankruptcy.

Prior to the enactment of section 365(d)(4), bankruptcy judges had the sole discretion to allow renters that filed for bankruptcy to leave their stores or offices closed for long periods of time, negatively impacting other renters in the facility, the landlord's access to credit, and the economy of the surrounding community. 365(d)(4) provided certainty for all parties by establishing a 210-day period for the debtor to assume or reject its lease. With agreement from the landlord, this period can be extended further as the situation requires.

This provision allows landlords to protect their other tenants from being negatively impacted by vacant storefronts or offices. Additionally, without the certainty provided by 365(d)(4), lenders may determine that extended vacancies increase the credit risk of the commercial properties and therefore further limit access to credit for commercial real estate owners and operators.

Last week, NAREIT sent out an alert to its retail and office corporate members asking them to reach out to their Representatives to oppose any such amendment. Fortunately, in the end no such amendment was submitted as part of the House's consideration of the financial regulatory reform bill. NAREIT will monitor developments on this issue and will oppose any amendment that would repeal section 365(d)(4).
 

Technical Fixes Needed for REITs to Benefit from Renewable Energy and Energy Efficiency Incentives – Legislation to be Introduced in House

With other legislative priorities dominating the Congressional schedule in December, debate on energy and climate change legislation is likely to slip into 2010. NAREIT has been engaged in an effort to allow REITs to benefit from a provision enacted in February 2009 as part of the "American Recovery and Reinvestment Act" (Pub. L. 111-5) (Recovery Act) that would provide grants in lieu of tax credits for investments in qualifying renewable energy projects (energy grants). Despite having been specifically designed to benefit taxpayers with insufficient tax liabilities to benefit from existing energy tax credits, this provision has been interpreted to benefit REITs only to the extent that taxable income is retained.

NAREIT continues to pursue a legislative solution that would allow REITs to benefit from the Recovery Act's energy grants, either as part of forthcoming energy or cap and trade legislation, or as part of any effort to extend provisions of the Recovery Act or other expiring tax provisions. We are optimistic that Representative Linda Sanchez (D-CA), a member of the House Ways and Means Committee, will soon introduce stand alone legislation to provide the necessary clarification. For additional information on this effort, click here.

In addition, NAREIT is engaging with the sponsors of S. 1637, a proposal which would: 1) double the deduction for energy efficient commercial buildings and expedite the process for obtaining the deduction; and, 2) expand the existing energy efficient home credit to apartments higher than three stories. Specifically, NAREIT is discussing two potential modifications with the bill's sponsors: 1) harmonizing the deduction for energy efficient buildings with the deduction taken for earnings and profits purposes to make this deduction useful to REITs; and, 2) allowing a residential REIT to convert the energy efficient home credit to a deduction. To read the text of S. 1637, click here.

Through these efforts, NAREIT is investigating possible legislative solutions that would improve the ability of REITs to access other energy and sustainability incentives that exist under current law or that may be enacted in the future.

Fed Clarifies TALF Policy to Benefit Public Companies

The Federal Reserve Board of New York (FRBNY) recently issued guidelines for the administration of its Term Asset-Backed Securities Loan Facility (TALF) program to clarify its foreign control strictures and ensure that publicly traded companies, including REITs, can participate in TALF.

Under the initial guidelines established by the FRBNY, the body with primary responsibility for administering the TALF program, an eligible participant may not be controlled by a foreign government, defined as a 25 percent ownership stake in the company, or in the case of an investment fund, a 25 percent ownership stake in the manager of the fund.

The new FRBNY guidance addresses NAREIT's concerns by stating that TALF administrators can use applicants' filings with the Securities and Exchange Commission (SEC) to assess whether they are controlled by a foreign government. To read the FRBNY's FAQ on the new guidance, click here.

NAREIT worked closely with Senator Charles Schumer (D-NY) and House Financial Services Committee Chairman Barney Frank (D-MA) to clarify the TALF policy. Senator Schumer played a particularly significant role in this effort, thus clearing the way for REITs to participate in the TALF program.

Carried Interest Proposal Used by the House as Offset for Annual Tax Extenders Package

As the year comes to a close, the House is expected to consider and pass a proposal to extend a number of tax provisions that under current law would expire on December 31, 2009. Provisions such as the research and development credit and the 15-year straight-line cost recovery period for qualified leasehold, restaurant and retail improvements are politically popular, but they also reduce federal revenues.

To offset against this lost revenue, House Democratic leadership will rely on a proposal introduced by Rep. Sander Levin (D-MI), which would recharacterize as ordinary income any "carried interest" income. A "carried interest" would include a partnership interest in the long-term capital gain from the sale of partnership property. To view the package of tax extenders, which includes Rep. Levin's proposal, click here.

A significant issue for REITs in the "carried interest" debate is its potential to jeopardize REIT status in one of two ways. First, if "carried interest" partnership income is recharacterized as ordinary income from the performance of services it could be considered as non-qualifying REIT income. Second, if a REIT-owned partnership is considered a "publicly traded partnership" (PTP) – because the partnership units can be converted into publicly traded REIT stock – and the partnership earns "carried interest," the partnership could be treated as a corporation. If this change causes a REIT to own more than 10% of a corporation, it would lose its REIT status.

Last year, NAREIT worked with Reps. Levin and Rangel to modify their bills to include language that addressed these concerns. Specifically, the modified proposals clarified that the REIT gross income and asset tests would be applied without regard to the recharacterization of partnership income as ordinary income and that the PTP rules would be applied so that REIT-owned partnerships would not face being taxed as corporations. This would have prevented both double taxation of a REIT's operating partnership income and loss of REIT status by the REIT partner.

The "carried interest" provision in the package of tax extenders is similar to the modified proposal Rep. Levin advocated in the last Congress, and NAREIT understands that it appropriately addresses the REIT qualification issue related to the a recharacterization of "carried interest" income.

While it is anticipated that the House will pass this proposal in the coming weeks, it appears unlikely that the Senate would approve "carried interest" legislation this year as part of an extenders bill. NAREIT will continue to monitor this issue as it develops.

Highlights
 

• FASB/IASB to Focus on Alternative Accounting for Leases by Lessors of Investment Property
• FASB Ratifies EITF Consensus on Reporting Elective Stock/Cash Dividends
• Boards to Discuss Staff Recommendations for Reporting Discontinued Operations

FASB/IASB to Focus on Alternative Accounting for Leases by Lessors of Investment Property
 

On December 4, 2009, the Financial Accounting Standards Board (FASB)/International Accounting Standards Board (IASB) (FASB/IASB or Boards) staff issued a paper that discusses alternatives for accounting for leases by lessors of investment property and provides the staff's recommendations. The recommendations integrate standards for reporting "investment property" (i.e. real estate held to earn rentals or for capital appreciation or both) in the statement of financial position, as well as reporting rental income in the statement of comprehensive income.

Three alternative approaches are set forth in the staff paper:

Under Approach A, investment property would be reported in the balance sheet consistent with existing standards. In addition, the lessor would record a lease receivable and a performance obligation equal to the present value of rents to be received under the lease over the term of the lease. Revenue would be recognized over the lease term as interest income and amortization of the performance obligation.

Under Approach B, the investment property would be carried in the balance sheet at either depreciated cost or fair value – a choice similar to that provided for in International Accounting Standards No. 40, Investment Property. If the cost approach is chosen, the estimated fair value of investment property would be reported in the notes to the financial statements. Under this approach, the lessor would not record a separate lease receivable or a performance obligation as currently proposed under the lease accounting project. In addition, lessors would recognize lease income over the lease term – rather than interest income and amortization of the performance obligation generally required under the proposed standard.

Approach C is similar to Approach B except that it would require that the investment property be reported at fair value in the balance sheet.

Significantly, the staff paper rejects Approach A and recommends that the Boards adopt either Approach B or C. Approach B is consistent with positions advocated by NAREIT and its global partners.

Staff paper 4E, Lessor Accounting – Investment Property, is available HERE. These recommendations will be discussed at the December 9, 2009 FASB meeting and the December 16, 2009 joint FASB/IASB meeting. George Yungmann, NAREIT's Sr. VP, Financial Standards will attend both of these meetings.

FASB Ratifies EITF Consensus on Reporting Elective Stock/Cash Dividends
 

On December 2, 2009, the FASB ratified the Emerging Issues Task Force (ETIF) consensus reached on November 19 that calls for the stock portion of an elective stock/cash dividend to be reported as a stock issuance. As a result of this final decision, companies will be required to report the stock portion of the dividends prospectively in per share amounts under the FASB's current earnings per share guidance. This requirement will be effective for interim and annual periods ending on or after December 15, 2009 and will be applied on a retrospective basis.

The background and discussion with respect to the project is available HERE.

Boards to Discuss Staff Recommendations for Reporting Discontinued Operations
 

The Boards' staff is recommending the following converged definition of a discontinued operation, which we believe would reduce considerably the number of dispositions currently reported as discontinued operations under U. S. GAAP:

A discontinued operation is a component that either has been disposed, or is classified as held for sale and:
(a) represents a separate major line of business or geographical area of operations;
(b) is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or
(c) is a business that meets the criteria to be classified as held for sale on acquisition.

The staff recommendations include required disclosures.

These recommendations are consistent with positions advocated for several years by NAREIT and its global partners.

Staff paper 9, Discontinued Operations – Definition and Disclosures, is available HERE. These recommendations will be discussed at the December 16, 2009 joint FASB/IASB meeting.

Highlights
 

• FASB/IASB Conclude on Converged Discontinued Operations Definition and Disclosures
• Update on FASB/IASB Lease Accounting Project
• SEC Provides Status on IFRS Roadmap
• NAREIT Participates on EITF Investment Companies Working Group

FASB/IASB Conclude on Converged Discontinued Operations Definition and Disclosures
 

On December 17, 2009, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) (collectively, the Boards) agreed that a discontinued operation should be defined as follows: a component of an entity that either has been disposed, or is classified as held for sale, and:
 

• (a) represents a separate major line of business or geographical area of operations;
  
  (b) is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or
  
  (c) is a business that meets the criteria to be classified as held for sale on acquisition.

The new definition is consistent with the recommendations of NAREIT and its global partners of the Real Estate Equity Securitization Alliance (REESA) as presented in comment letters on the Boards' initial exposure drafts. The Boards' conclusion will eliminate the financial reporting burden for those NAREIT member companies that regularly dispose of properties and, therefore, have been required to regularly and retroactively reclassify amounts between continuing and discontinued operations for sales of most individual investment properties. The conclusion may also eliminate the need for companies to reissue previously filed financial statements to reflect such sales as discontinued operations under certain Securities and Exchange Commission (SEC or Commission) rules.

Disclosures for Discontinued Operations

The Boards also approved the following additional required disclosures with respect to disposals that qualify as discontinued operations under criteria (a) and (b) above:

• (a) the profit or loss disaggregated by major income and expense items (including impairments, interest, depreciation and amortization);
  
  (b) the major classes of cash flows – operating, investing and financing;
  
  (c) the carrying amounts of the major classes of assets and liabilities classified as held for sale and a reconciliation of these amounts to the total held for sale assets and liabilities presented on the statement of financial position;
  
  (d) a reconciliation of the profit or loss for disposals in the notes to the after-tax profit or loss from discontinued operations on the statement of comprehensive income; and,
  
  (e) if the discontinued operation includes a noncontrolling interest, the profit or loss attributable to the parent.

These disclosures would be required to be reported for all periods presented in the financial statements and would be required in addition to FASB's disclosure requirements as modified in the initial proposal. Further, the Boards determined that certain disclosures relating to the continuing involvement with discontinued operations and the continuing cash flows between entities and their discontinued operations would be required.

Disclosures for Disposals of Significant Components of an Entity that are not Discontinued Operations

For the disposal of a significant component of an entity that does not meet the above discontinued operations definition, the Boards agreed that disclosures (c), (d) and (e) above, as well as the component's pre-tax profit or loss, will be required. The current IASB definition of a component of an entity will apply to these disclosures; however, companies will be required to determine whether such components are significant. Similar to the FASB definition, the IASB defines a component of an entity as operations and cash flows that can clearly be distinguished, operationally and for financial reporting purposes, from the rest of the entity.

This disclosure requirement is intended to continue to provide financial statement users with the information that they receive under the current discontinued operation reporting and disclosure requirements. Accordingly, NAREIT expects that most sales of investment property would be subject to these disclosure requirements.

Disclosures for Disposals of Long-Lived Assets

In addition to the FASB and IASB disclosures already required for the disposal of long-lived assets that are not discontinued operations or significant components of an entity, disclosure (c) above would be required under the proposed guidance.

Exposure Draft, Effective Date and Transition

The Boards anticipate the issuance of a revised Exposure Draft (ED) in the first quarter of 2010 with a 60-day comment period. The ED would include the decisions discussed above. The final standard is tentatively planned for the second quarter of 2010 and would be effective for fiscal years beginning after December 15, 2010 and interim periods within those fiscal years with early application permitted. For most NAREIT member companies, the new standard would be effective beginning the first quarter of 2011 unless the standard is adopted early. While the Boards originally proposed that the new guidance be applied on a retrospective basis, the final standard is now expected to be applied prospectively. Prospective application would ease the transition for NAREIT member companies in adopting this new standard.

The discussion above reflects information from a staff paper available here, NAREIT staff observance at the December 17, 2009 discussion of the staff paper and a follow-up discussion with FASB staff.

If you would like to participate on a task force to help develop the industry's views on this ED, please contact Sally Glenn at sglenn@nareit.com.
 

Update on FASB/IASB Lease Accounting Project
 

Lessor Accounting for Investment Property Leases

At the December joint meeting, the Boards rescheduled their discussion on the staff's recommendations for alternatives to lessor accounting of investment property for the January 2010 joint meeting. To read the staff's recommendations outlined in the previous issue of NAREIT's SFO Report, click here.

FASB/IASB Favor Contingent Rental Recognition

The Boards have agreed that a lessee's rental obligation, as well as a lessor's rent receivable, would include contingent rentals. For example, if a retail tenant that is obligated to pay a percentage of sales to the landlord, both the lessee and lessor would include an estimate of that rental in measuring the assets and liabilities under the lease. An extreme example of this proposed accounting is represented by the requirement for a ground lessee to pay a percentage of operating cash flow to the lessor over the life of the ground lease.

A discussion of this issue is contained in Agenda Papers 4A and 4B available here.

Leases of Non-Core Assets and Short-Term Leases

At the December 2009 joint meeting, the Boards determined that leases of non-core assets would be included in the scope of the lease accounting project. However, the Boards are considering the exclusion of short-term leases from the project's scope and directed the staff to research the issue further. Additionally, the Boards deemed short-term leases as those leases of less than one year under the possible scope exemption.

The Boards expect to issue an Exposure Draft on the joint leases project in the second quarter of 2010. If you would like to participate in NAREIT's consideration of the Exposure Draft, please contact Sally Glenn at sglenn@nareit.com.

SEC Provides Status on IFRS Roadmap
 

On December 9, 2009, SEC Commissioner Elisse Walter provided an update on the SEC's proposed roadmap toward the potential adoption of International Financial Reporting Standards (IFRS) for U.S. issuers. At the national conference of the American Institute of Certified Public Accountants, Commissioner Walter stated that the SEC staff is developing a recommendation for the Commission's review and the SEC would consider further action in early 2010.

The Commissioner added that, while most respondents to the proposal generally agreed on a goal to achieve a single set of high quality global accounting standards, respondents disagreed on how to attain a universal set of standards. She assured that the issues raised in the comment letters received from constituents are cautiously being considered and the SEC will "proceed deliberately and thoughtfully." The SEC will move forward with IFRS if it is "the right thing to do for investors."

With regard to the role of the FASB under an IFRS regime, the Commissioner does not believe that the FASB would be removed from the standard setting process. The FASB is expected to continue to be a crucial part of the standards setting process and would continue to report to the Commission.

NAREIT Participates on EITF Investment Companies Working Group
 

The Emerging Issues Task Force (EITF) of the FASB appointed George Yungmann, NAREIT's Sr. VP of Financial Standards, to serve on a working group designed to provide feedback to help eliminate differences surrounding the accounting and reporting by entities participating in the real estate investment industry today. These differences impact both statements of financial position and statements of income and were raised as a result of the EITF staff's observations of differences primarily existing among real estate funds that account for investments under FASB Codification Topic 946, Financial Services – Investment Companies, by analogy to Topic 946 or based on industry practice.

On December 14, the working group met to discuss, among other questions, whether an entity that is excluded from the scope of Topic 946, can carry real estate investments at fair value by analogy to Topic 946 or on the basis of industry practice. Further, they discussed the reporting of real estate properties that are owned directly by entities that carry real estate at fair value by analogy to Topic 946 or industry practice.

The EITF staff recognizes that at least two of the questions raised in this EITF project may be resolved under an accounting alternative being presented by the joint FASB/IASB leases project team. Under this alternative, lessors of investment property would be scoped out of the proposed lease accounting standard and, instead, account for leases in the context of International Accounting Standard 40, Investment Property (IAS 40). IAS 40 allows owners of investment property to choose to carry investment property at fair value or cost. If the cost approach is chosen, the fair value of the property would be disclosed in the notes to the financial statements.

The EITF staff will use the feedback received from the working group to develop an issue summary expected to be discussed at the March 17-18, 2010 EITF meeting.

Washington Leadership Forum 2010 – REIT CEOs Head to Capitol Hill

The 2010 Washington Leadership Forum (WLF) is scheduled for February 23 and 24 in Washington, D.C., and all NAREIT member CEOs are invited to participate.

WLF provides an annual forum for REIT executives to meet with key lawmakers and Administration officials to discuss the latest developments in our industry and NAREIT’s legislative agenda for 2010. This year, the agenda will be focused on measures that encourage and enhance the REIT approach to real estate investment at a time of lingering economic weakness.

For example, NAREIT will continue to seek modification of the Foreign Investment in Real Property Tax Act (FIRPTA) to facilitate greater non-U.S. equity investment in U.S. real estate, and will advocate for continued efforts, such as the Federal Reserve’s temporary Term Asset-Backed Securities Lending Facility (TALF), to restore commercial real estate lending and shore up the securitization market. In addition, NAREIT will seek to limit unnecessary margin requirements on end-users of derivatives and will pursue modifications to allow REITs to access energy tax incentives.

This year’s WLF will be a tremendous opportunity for REIT executives to reach out to policymakers and discuss the critical issues impacting the industry. We ask you to encourage your CEO to attend this year’s WLF to help promote your company and the industry within the halls of Congress. To review the proceedings of last year’s WLF, click here.

In Congress and on the Campaign Trail, 2010 Promises to be a Busy Year

Congress returns to Washington, D.C., in January poised to continue work on health care reform, financial regulatory reform, and economic recovery proposals. It is anticipated that Congress will take steps to address the estate tax and other tax cuts that were enacted under President Bush, but which are scheduled to expire at the end of 2010. In the wake of recent events, it is also likely that the Congress will turn renewed attention to homeland security and national defense policy.

Even with a full agenda in D.C., attention is increasingly shifting toward the 2010 Congressional elections. Conventional wisdom holds that the President’s party typically loses seats in mid-term Congressional elections. A remarkable and recent example was the 1994 mid-term election, which gave Republicans the majority in both the House and the Senate. With growing concerns among the electorate and increased tension within and between the major parties, the 2010 election season is expected to be a dramatic one.

NAREIT will continue to pursue its legislative agenda on Capitol Hill, and will closely monitor developments in the 2010 election that may impact supporters of the REIT approach to real estate investment.

Bill to Allow REITs to Benefit from Recovery Act Energy Grants Introduced, Gains Support

NAREIT continues to seek a legislative fix that would enable REITs to benefit from energy grants enacted last February as part of the “American Recovery and Reinvestment Act” (Pub. L. No. 111-5). These grants, which are made in lieu of tax credits for investments in qualifying renewable energy projects, were specifically designed to benefit taxpayers with insufficient tax liabilities to benefit from existing energy tax credits. However, this provision has been interpreted to benefit a REIT only to the extent that it retains taxable income.

In December, Rep. Linda Sanchez (D-CA), a member of the tax writing Ways and Means Committee, introduced H.R. 4256, the “Sustainable Property Grants Act of 2009,” to allow REITs to fully participate in this grants program. This bipartisan measure is also cosponsored by the following Ways and Means Committee members: Reps. Shelley Berkley (D-NV), Dean Heller (R-NV), Rep. John Larson (D-CT) and Devin Nunes (R-CA). To view the legislative language, Rep. Sanchez’ introductory statement and other materials, click here.

Rep. Sanchez will pursue the inclusion of her bill in legislation that Congress will be considering in the coming week to spur job growth or other domestic investments. NAREIT is working with her to generate additional Congressional support for H.R. 4256, especially with other members of the Ways and Means Committee.

Financial Regulatory Reform – including Derivatives Reform – Passes House

On December 11, 2009, the House of Representatives passed a comprehensive financial regulatory reform proposal that would create a Consumer Financial Protection Agency, impose new regulations on the over-the-counter (OTC) derivatives market, and provide new oversight over the credit rating agencies, investment advisers and private pools of capital.

NAREIT staff, with guidance from the members of the NAREIT Derivatives Reform Task Force and in conjunction with the Coalition for Derivatives End-Users, have been educating policymakers about the ways in which corporate end-users utilize derivatives products to manage their exposure to variable interest rates, foreign currency, fluctuating commodity prices or other risks. While end-users generally support additional transparency in the derivatives market, they have significant concerns about proposals that would require them to tie up working capital to satisfy mark-to-market margin calls. For more information on this issue and NAREIT’s efforts, click here.

During House consideration of amendments to the wider reform proposal, it became clear that lawmakers had heard many of the concerns of derivatives end-users. First, by a vote of 304-124, the House accepted an amendment offered by Reps. Scott Murphy (D-NY), Mike McMahon (D-NY) and Frank Kratovil (D-MD) that would protect most business end-users from the bill’s most onerous provisions. Second, the House rejected, by a vote of 150-280, an amendment offered by House Financial Services Committee Chairman Barney Frank (D-MA) that would give regulators to require end-users to cash collateralize their bilateral transactions. The House also rejected two amendments, offered by Representative Bart Stupak (D-MI), that would have imposed significant restrictions on end-users.

The focus of this debate now turns to the Senate, where the Banking Committee is expected to begin consideration of a comprehensive financial regulatory reform proposal as soon as the end of January. The Senate Agriculture Committee will also play a significant role in the drafting of the derivatives provisions in this bill. While it is certain that the debate will be impacted by the recent announcement by Senate Banking Committee Chairman Chris Dodd (D-CT) that he not seek reelection in November, the exact nature of this impact remains to be seen.

NAREIT will continue to engage with policymakers on financial regulatory reform issues important to REITs and publicly traded real estate companies. If you or your company would like to participate in this effort, please contact Kirk Freeman at kfreeman@nareit.com or 202-739-9415.

NAREIT Submits Comments to Treasury about the Obama Administration’s Entity Classification Legislative Proposals

Many REITs that invest in non-U.S. real estate do so through wholly-owned foreign limited liability entities that are permitted under current rules to “check the box” (CTB) to be disregarded entities for tax purposes. This structure allows the REIT to achieve immediate flow-through of the foreign income to its shareholders and to comply with the REIT income and asset tests.

President Obama’s Fiscal Year 2010 budget included a proposal that would enact a fundamental shift in U.S. tax policy by repealing the current CTB rules for non-U.S. entities. As a result, most wholly-owned non-U.S. limited liability entities would be treated as corporations. If enacted, this proposal would raise many questions about the classification of rental income generated by a REIT's international subsidiaries and, in the worst cases, could lead to a loss of REIT status. For more information, click here.

NAREIT has joined a coalition of business entities in support of the current tax rules. The coalition has undertaken an advocacy effort to educate policymakers about how U.S. companies utilize these rules in the foreign context and to oppose any changes to the current rules outside of a broader international tax reform effort. Last fall, coalition members met with officials from the Treasury Department, Joint Tax Committee, and a number of staff members from offices of key members of Congress.

Although no legislative action was taken on this proposal in 2009, it is expected that the Obama Administration will again include this proposal in its Fiscal Year 2011 budget. To demonstrate the particular concerns REITs may face by this proposal, NAREIT submitted a letter to the Treasury Department in December 2009, and met with Joint Committee on Taxation officials on January 11. To read the letter to Treasury, click here.

While comprehensive international tax reform is unlikely in 2010, this proposal may be considered as a revenue offset for other tax legislation. NAREIT will work with its coalition partners to oppose this proposal while continuing to educate policymakers about the specific concerns it creates for REITs.

Highlights
 

• FASB Considers Adding Fair Value Reporting of Investment Property to its Agenda
• FASB/IASB Reach Tentative Decisions on Lease Accounting
• SEC Issues a Compliance and Disclosure Interpretation Referring to FFO

FASB Considers Adding Fair Value Reporting of Investment Property to its Agenda
 

As a result of a tentative decision on lease accounting reached by the International Accounting Standards Board (IASB) on January 20, 2009, the Financial Accounting Standards Board (FASB) instructed its staff to prepare an agenda proposal for the potential adoption of a standard that would provide the option or requirement to report investment property at fair value under U.S. Generally Accepted Accounting Principles (GAAP).

The IASB's tentative decision was the product of a joint FASB/IASB meeting, which was attended by NAREIT. The discussion at the meeting was based on a staff agenda paper that is available by clicking HERE. The IASB reached a tentative decision to allow lessors to continue to account for leases of investment property as operating leases consistent with International Accounting Standard 40 (IAS 40) under certain circumstances.

IAS 40 requires investment property to be carried at fair value (with fair value adjustments recognized in net income) or at cost (similar to U.S. GAAP with the exception that fair value is provided in the disclosures). Under International Financial Reporting Standards (IFRS), rental income from investment property leases is recognized over the lease term, typically on a straight-line basis.

If lessors elect to report investment property at fair value under IAS 40, they would not be required to account for investment property leases pursuant to the proposed lease standard currently being developed by the Boards.

If lessors choose the cost approach for reporting investment property under IAS 40, these lessors of investment property would be required to apply the proposed new FASB/IASB lease accounting model. This new model would require landlords to report a receivable for the right to receive lease payments and a performance obligation for providing lessees with the right to use space. Additionally, the proposed new lease accounting would require interest income to be recognized in the income statement, which would preclude rental payments from being recognized in their entirety as rental income.

NAREIT staff expects that, if the FASB adds this fair value project to its agenda, it would complete the project as expeditiously as possible, since conclusions with respect to the leases project may depend on the conclusions in this project. The leases project is expected to be completed in 2011.

FASB/IASB Reach Tentative Decisions on Lease Accounting
 

In connection with the FASB/IASB discussions regarding the lease accounting project mentioned above, the Boards addressed the discount rates that would be applied to future rental amounts in measuring the lessee's obligation and lessor's receivable subsequent to initial recognition. At initial recognition, the present value of the lease payments would be discounted using: i) the lessee's incremental borrowing rate to measure the lessee's obligation; and, ii) the interest rate implicit in the lease to measure the lessor's receivable. The Boards agreed that the discount rates for lessees and lessors would not be revised for subsequent changes in the expected lease term and contingent rental payable (provided that the rentals are not contingent upon variable reference interest rates).

At the meeting, the Boards also addressed the application of the proposed new lease accounting model to short-term leases – leases with a maximum possible term of less than 12 months. For lessees, they tentatively decided to allow a simplified approach to the proposed lease accounting model that would report the gross rental amounts payable on the balance sheet without having to apply a discount rate. Therefore, rental payments would not be bifurcated between interest expense and payments on the rental obligation. For short-term lease accounting by lessors, the Boards are considering an option that would permit the application of the proposed new lease accounting model (or certain aspects of the model), or the current accounting requirements under U.S. GAAP.

The Boards will reconvene on lease accounting issues during their joint meeting in February 2010. The Exposure Draft is scheduled to be issued in the second quarter of 2010.

SEC Issues a Compliance and Disclosure Interpretation Referring to FFO
 

On January 11, 2009, the Securities and Exchange Commission (SEC or the Commission) issued Compliance & Disclosure Interpretations (C&DIs) that focus on reporting non-GAAP measures generally and Funds From Operations (FFO) specifically. To access the full C&DI, click HERE.

Question 102.01 of the C&DI asked:

Question: What measure was contemplated by "funds from operations" in footnote 50 to Exchange Act Release No. 47226, Conditions for Use of Non-GAAP Financial Measures, which indicates that companies may use "funds from operations per share" in earnings releases and materials that are filed or furnished to the Commission, subject to the requirements of Regulation G and Item 10(e) of Regulation S-K?

Answer: The reference to "funds from operations" in footnote 50 refers to the measure as defined and clarified, as of January 1, 2000, by the National Association of Real Estate Investment Trusts. The staff accepts this definition of FFO as a performance measure and, as a performance measure it may be presented on a per share basis. [January 11, 2010]

Question 102.02 of the C&DI asked:

Question: May a registrant present "funds from operations" on a basis other than as defined and clarified, as of January 1, 2000, by the National Association of Real Estate Investment Trusts?

Answer: Yes, provided that any adjustments made to "funds from operations," as defined in footnote 50 of Exchange Act Release No. 47226, comply with Item 10(e) of Regulation S-K. Any adjustments made to "funds from operations" as defined in footnote 50 must comply with the requirements of Item 10(e) of Regulation S-K for a performance measure or a liquidity measure, depending on how it is presented. If the adjusted measure is a performance measure, it may be presented on a per share basis; if it is a liquidity measure, it may not be. [January 11, 2010]

The full SEC Rule Conditions for Use of Non-GAAP Financial Measures is available by clicking HERE.

As a reminder, NAREIT recommends that amounts labeled Funds From Operations or FFO be measured consistent with the NAREIT definition of FFO and, if not consistent with the NAREIT definition, that any adjusted metric be clearly labeled as such, e.g. Adjusted FFO.

Washington Leadership Forum 2010 – REIT CEOs "Hike the Hill"

All NAREIT member CEOs are invited to participate in the 2010 Washington Leadership Forum (WLF), scheduled for Feb. 23 and 24. WLF brings REIT executives from across the country together to meet with key policymakers in Congress and the Administration to discuss the latest developments in our industry and NAREIT's legislative agenda for the upcoming year. If you have not done so already, please encourage your CEO to attend WLF to help promote your company and the industry within the halls of Congress.

This year's WLF includes a number of special guests and events. Alan Sloan, Senior Editor-at-Large for Fortune magazine and a weekly contributor to Public Radio International's Marketplace, will speak at the board meeting. Later that afternoon, several NAREIT executives have joined with REITPAC, NAREIT's political action committee, to host an event in support of the campaign of Rep. Richard E. Neal (D-MA), a senior member of the House Ways and Means Committee and co-chairman of the Congressional Real Estate Caucus. All WLF attendees are invited to the Board meeting and all NAREIT members are encouraged to contribute to the fundraiser.

The WLF dinner will include featured guest Peggy Noonan, a columnist for The Wall Street Journal, a best selling author of seven books on American politics, history and culture, and a former White House assistant to President Ronald Reagan and chief speechwriter for George H.W. Bush for his presidential campaigns. Also during dinner, NAREIT will present its 2009 Small Investor Empowerment Award to Rep. Pete Stark (D-CA).

On Wednesday, Feb. 24, after breakfast remarks from Senate Majority Whip Richard Durbin (D-IL), REIT executives will meet with members of the House and the Senate to update legislators on the state of the industry and on NAREIT's 2010 legislative priorities. WLF is an important part of NAREIT's efforts on Capitol Hill and we look forward to your company's participation.

Bill Introduced to Enable Additional Foreign Equity Investments in U.S. Real Estate

With ongoing difficulties in commercial real estate debt markets, there is growing concern that traditional loans and commercial mortgage-backed securitization may not fully address the refinancing needed for the approximately $400 billion of commercial real estate debt matures in each of 2010 and 2011. And, with declines in property values and more stringent lender requirements, new loans may not fully cover maturing debt.

Increased foreign investment in U.S. real estate is viewed as one way to bridge this equity gap. NAREIT continues to support legislative solutions that would remove barriers to foreign investment that were established by the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).

One proposal to amend FIRPTA was introduced on Jan. 27, 2010, by Rep. Joseph Crowley (D-NY), with co-sponsors Rep. Melissa Bean (D-IL) and Rep. Patrick Tiberi (R-OH). To read the Jan. 28, 2010, FirstBrief with more information on H.R. 4539, the Real Estate Revitalization Act of 2010 (RERA), CLICK HERE.

NAREIT supports RERA as one of many possible constructive steps to reform FIRPTA.

Congress Considers Measures Allowing REITs to Benefit from Renewable Energy and Energy Efficiency Incentives

NAREIT continues to pursue legislation to enable REITs to fully benefit from a variety of federal tax incentives for investments in renewable energy and energy efficiency.

In particular, NAREIT supports H.R. 4256, the Sustainable Property Grants Act of 2009, introduced by Rep. Linda Sanchez (D-CA). This bill would allow REITs to receive grants made in lieu of tax credits for qualifying investments in renewable energy projects that were enacted as part of the American Recovery and Reinvestment Act of 2009 (Pub. L. 111-5). We urge you to reach out to the Congressmen representing your company's headquarters and the districts in which your company operates to ask them to co-sponsor this bill. For the complete list of co-sponsors to date, CLICK HERE.

Rep. Sanchez has also worked with Rep. Earl Blumenauer (D-OR) to craft legislation, H.R. 4599, the Renewable Energy Expansion Act of 2010, that would essentially convert the Recovery Act grants, which expire at the end of this year, into refundable tax credits for investments entered into before Jan. 1, 2013, and placed into service by a specified date determined by the relevant property type. NAREIT and Rep. Sanchez have worked with Rep. Blumenauer to include clarification in his bill that would make REITs eligible for the proposed credit without regard to the dividends paid deduction. For more information on the bills introduced by Reps. Sanchez and Blumenauer, CLICK HERE.

NAREIT also continues to work with Sens. Olympia Snowe (R-ME), Jeff Bingaman (D-NM) and Diane Feinstein (D-CA), to determine how REITs could fully utilize S. 1637, their proposal to enhance the deduction for energy efficient commercial buildings and extend energy efficient home credits to apartments. Specifically, NAREIT has recommended both harmonizing the energy efficient buildings deduction for tax and earnings and profits purposes and allowing a REIT to elect an economically equivalent deduction for apartments and senior living facilities in place of the existing energy efficient home credit.

NAREIT will pursue these and other legislative solutions and is hopeful that these proposals will be considered as part of upcoming legislation to spur job growth and other domestic investments.

Senate Banking Committee Expected to Act Soon on Financial Regulatory Reform

The Senate Banking Committee is expected to formally consider a comprehensive package of financial regulatory reform proposals in the coming weeks. Among other things, this effort will attempt to address systemic risk, increase consumer protections, impose new regulations on the over-the-counter (OTC) derivatives market, and provide new oversight over the credit rating agencies, investment advisers and private pools of capital.

After hitting a roadblock in negotiations last year, Committee Chairman Chris Dodd (D-CT) and Ranking Member Richard Shelby (R-AL) tasked bipartisan working groups to find agreement on the various proposals. While the bipartisan groups have not fully completed their work, Chairman Dodd has instructed his staff to draft a comprehensive bill for Committee consideration by the end of February. On Feb. 11 it was announced that Sen. Bob Corker (R-TN), a member of the Banking Committee, is working with Chairman Dodd in this effort. This recent development may help Democratic leadership find the 60 votes they will need to pass legislation on the Senate floor.

NAREIT staff, with guidance from the members of the NAREIT Derivatives Reform Task Force, continues to work with the Coalition for Derivatives End-Users to maintain the ability of businesses to use derivatives to manage risk, such as variable interest rate exposure, without being required to tie up working capital to satisfy mark-to-market margin calls. For more information on this issue and NAREIT's efforts, CLICK HERE.

While the Coalition for Derivatives End-Users successfully advocated for a number of protections in the bill that the House passed in December 2009, Senate consideration will present its own unique challenges. The Coalition continues to engage both the Senate Banking Committee and the Agriculture Committee, which share jurisdiction over derivatives legislation. To read a letter sent by the Coalition to every member of the Senate, which was signed by 176 companies and trade associations, CLICK HERE.

NAREIT will continue to work with policymakers on financial regulatory reform issues important to REITs and publicly traded real estate companies. If you or your company would like to participate in this effort, please contact Kirk Freeman at kfreeman@nareit.com or 202-739-9415.

"Check-the-Box" Change for Non-U.S. Subsidiaries Not Included in Obama Administration's Budget Proposal

NAREIT is pleased to report that the Obama Administration's Fiscal Year 2011 budget proposal, released on Feb.1, 2010, does not contain a change to "check-the-box" (CTB) rules that currently allow companies to disregard for tax purposes their wholly-owned non-U.S. corporate subsidiaries. This is a departure from the Obama Administration's first budget submission for Fiscal Year 2010, which would have ended the application of the Clinton Administration CTB regulations for most wholly-owned foreign subsidiaries.

The Administration's earlier position was based on a concern that CTB rules were being used inappropriately to defer foreign income. However, the proposal raised significant issues for the REIT industry because it could have affected a REIT's tax qualification notwithstanding that REITs that elect to disregard their foreign subsidiaries for tax purposes generally do so to allow for current pass-through to shareholders of foreign earned income and to maintain compliance with the REIT rules that prohibit the ownership of more than 10% of another corporation.

NAREIT has worked independently to educate lawmakers and the Administration about the specific REIT concerns about the CTB proposal, and as part of a coalition of businesses that argued that it should only be considered in the context of larger international tax reform proposals. To read the Feb. 1, 2010, FirstBrief with more information about the proposal and NAREIT's efforts, CLICK HERE.

Obama Budget Plan Again Proposes Changes to TRIA

The Obama Administration has again proposed revisions to the Terrorism Risk Insurance Act, or TRIA (Pub. L. 107-297) that would decrease the potential federal share of compensation that would result from an act of terrorism. Specifically, the Administration has proposed eliminating TRIA coverage for acts of domestic terrorism. It also proposes unspecified increases in 2011 and 2013 to the insurer deductible, the insurer's co-payment, and the $100 million event trigger amount for Federal payments. Additionally, the proposal recommends a reduction to post-event recoupment payments to 100%, and allowing insurers additional time to remit their surcharges to Treasury. To view the proposal as contained in the Obama Administration's Fiscal Year 2011 Budget proposal, CLICK HERE.

NAREIT believes the Obama Administration's proposal would result in higher terrorism insurance premiums to the commercial real estate industry, and that it would be very difficult to obtain coverage against domestic terrorism despite the Administration's assertions to the contrary. When this proposal was included in the Obama Administration's Fiscal Year 2010 Budget proposal, it received no support from Congress and it did not receive further consideration. NAREIT and its partners in the Coalition to Insure Against Terrorism (CIAT) have already received indications from key policymakers that they expect the same result this year.

NAREIT and CIAT strongly supported the 2007 legislation that extended TRIA through 2014 and made critical policy changes to stabilize terrorism insurance. NAREIT also successfully argued for the inclusion of coverage for domestic terrorism. NAREIT will continue to closely monitor any proposed modifications to TRIA.

REIT CEOs Meet Policymakers on Capitol Hill - WLF 2010 Recap

The 2010 Washington Leadership Forum (WLF) was held on Feb. 23 and 24 in Washington, D.C., with 30 REIT CEOs participating in this year’s activities. WLF provides an opportunity for REIT executives to meet with key policymakers in Congress and the Administration to discuss the latest developments in the industry and NAREIT’s legislative agenda for the upcoming year. This year, WLF participants attended a record number of 40 congressional meetings, including 28 in the House and 12 in the Senate.

WLF attendees discussed three primary issues with lawmakers. First, they requested support for additional non-U.S. equity capital investments in commercial real estate through modifications to the Foreign Investment in Real Property Tax Act (FIRPTA). Second, WLF participants encouraged Members of Congress to make energy tax credits and grants more accessible and workable for REITs. Third, attendees educated lawmakers on the need to preserve real estate companies’ ability to manage risk by accessing reasonably priced and customized OTC derivative products. Finally, executives from mortgage REITs made presentations to Members of the Senate Banking Committee and the House Financial Services Committee on their role in providing liquidity to the commercial real estate marketplace. CLICK HERE to view a special WLF edition of Capitol Report that highlights the activities and congressional meetings at the 2010 WLF.

NAREIT appreciates the special effort made by participants in this year’s WLF, and encourages all NAREIT companies to plan on attending next year’s Washington Leadership Forum to be held in Washington, D.C., on Feb. 22 and 23, 2011.

FIRPTA Reform Effort Picks Up Momentum

With ongoing difficulties in commercial real estate debt markets, there is growing concern that traditional loans and commercial mortgage-backed securitization may not fully address the refinancing needed for the approximately $400 billion of commercial real estate debt matures in each of 2010 and 2011. And, with declines in property values and more stringent lender requirements, new loans may not fully cover maturing debt.

WLF participants raised these concerns in their meetings on Capitol Hill and called on lawmakers to remove unnecessary barriers to foreign investment in U.S. real estate as one way to bridge this equity gap. NAREIT continues to be engaged in an effort to amend the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) to end the punitive tax treatment of foreign equity investments in domestic REITs and other real estate companies.

One proposal to amend FIRPTA was introduced on Jan. 27, 2010, by Rep. Joseph Crowley (D-NY), with co-sponsors Rep. Melissa Bean (D-IL) and Rep. Patrick Tiberi (R-OH). For more information on H.R. 4539, the Real Estate Revitalization Act of 2010 (RERA), CLICK HERE to read the Jan. 28, 2010, edition of FirstBrief. This proposal and the wider effort to reform FIRPTA have gained momentum in both the House and Senate, in part due to the efforts of WLF participants, who helped focus attention on this issue. For example, after meeting with REIT executives, Rep. Linda Sanchez (D-CA) agreed to join as a cosponsor of RERA.

NAREIT continues to work with Rep. Crowley and other interested policymakers to further refine workable FIRPTA reform proposals.

Bill Allowing REITs to Benefit from Energy Incentives Gains Support

NAREIT continues to pursue legislation in the 111th Congress to enable REITs to fully benefit from a variety of federal tax incentives for investments in renewable energy and energy efficiency. This subject was one of the primary issues discussed in congressional meetings at this year’s WLF.

As a result of meetings with REIT executives, Reps. Joseph Crowley (D-NY), Danny Davis (D-IL) and John Lewis (D-GA), all members of the House Ways and Means Committee, cosponsored H.R. 4256, the “Sustainable Property Grants Act of 2009,” introduced by Rep. Linda Sanchez (D-CA). This bill would allow REITs to receive grants made in lieu of tax credits for qualifying investments in renewable energy projects that were enacted as part of the “American Recovery and Reinvestment Act of 2009” (Pub. L. 111-5). Additionally, Sen. Ben Cardin (D-MD), a member of the Senate Environment and Public Works Committee, expressed to several REIT executives his intention to introduce companion legislation in the U.S. Senate that is identical to H.R. 4256. NAREIT expects this measure will be introduced soon with bipartisan support. When Sen. Cardin introduces his proposal, NAREIT will ask for your help in requesting support for the Cardin bill from the Senators representing the states in which your company is headquartered and/or in which it operates.

WLF attendees also advocated for H.R. 4599, the “Renewable Energy Expansion Act of 2010,” introduced by Rep. Earl Blumenauer (D-OR), that would essentially convert the Recovery Act Grants, which expire at the end of this year, into refundable tax credits for investments entered into before Jan. 1, 2013. NAREIT and Rep. Sanchez have worked with Rep. Blumenauer to make REITs eligible for the proposed credit without regard to the dividends paid deduction. CLICK HERE for more information on both H.R. 4256 and H.R. 4599.

In meetings with Sen. Olympia Snowe (R-ME) and the staff of Sen. Jeff Bingaman (D-NM), WLF attendees encouraged these lawmakers to modify S. 1637, their proposal to enhance the deduction for energy efficient commercial buildings and extend energy efficient home credits to apartments, so that it is more effective for REITs. Specifically, NAREIT supports harmonizing the energy efficient buildings deduction for tax and earnings and profits purposes and allowing a REIT to elect an economically equivalent deduction for apartments and senior living facilities in place of the existing energy efficient home credit.

Derivatives Reform Remains on Senate Agenda

Against the backdrop of ongoing bipartisan negotiations on the details of a comprehensive financial regulatory reform proposal, 2010 WLF participants discussed with lawmakers the ways in which real estate companies use derivatives products to manage business risk.

NAREIT staff, with guidance from the members of the NAREIT Derivatives Reform Task Force, have been working with the Coalition for Derivatives End-Users to encourage lawmakers to protect the ability of businesses to use derivatives to manage risk, such as variable interest rate exposure, without being required to tie up working capital to satisfy mark-to-market margin requirements. CLICK HERE for more information on this issue and NAREIT's efforts.

For the past month, Banking Committee Chairman Chris Dodd (D-CT) has been working closely with Sen. Bob Corker (R-TN) to develop a bipartisan and comprehensive reform package. While these conversations are expected to continue, Dodd has announced his intention to begin formal committee consideration of a new proposal during the week of Mar. 22 – with or without Republican support.

At the same time, Sen. Jack Reed (D-RI) and Sen. Judd Gregg (R-NH) have continued their work to find bipartisan approach to derivatives reform for the Banking Committee. Chairman Blanche Lincoln (D-AR) and Ranking Member Saxby Chambliss (R-GA) of the Senate Agriculture Committee have also been negotiating their own bipartisan derivatives reform proposal. It remains to be seen how these proposals will address the concerns of “end-users,” and whether the broader effort will result in an agreement that can earn the 60 votes necessary for passage on the Senate floor.

NAREIT will continue to work with policymakers on financial regulatory reform issues important to REITs and publicly traded real estate companies. If you or your company would like to participate in this effort, please contact Kirk Freeman at kfreeman@nareit.com or 202-739-9415.

Gavel Changes Hands at the Ways and Means Committee

Facing ongoing investigations into allegations of ethical misconduct, Rep. Charlie Rangel (D-NY) announced he was temporarily leaving his post as Chairman of the House Ways and Means Committee on Mar. 3. Political observers watched an inside-the-beltway drama unfold as Democratic Leadership and Ways and Means Democrats determined the path forward for the powerful Committee, which has jurisdiction over tax and trade policy, as well as Medicare and Social Security.

Initially, the chairman’s gavel was passed to Rep. Pete Stark (D-CA), the panel’s second ranking Democrat. The following day, after a meeting with Speaker Pelosi, the Committee announced that Stark was stepping aside and Rep. Sander Levin (D-MI), the panel’s third ranking Democrat was appointed chairman.

By following the seniority system, the Democrats avoided a prolonged and divisive intraparty fight. However, while it is possible that Rangel could resume the Chairmanship pending the outcome of additional ethics committee investigations, it appears likely that several Committee members will vie to be the panel’s top ranked Democrat (either as Chairman or Ranking Member) when the 112th Congress convenes in Jan. 2011. Likely candidates include Levin and Reps. John Lewis (D-GA) and Richard Neal (D-MA).

WLF Special Edition

NAREIT held its 2010 Washington Leadership Forum (WLF) in Washington, D.C. on Feb. 23 and Feb. 24. WLF is the annual opportunity for NAREIT members to meet with key policymakers in Congress and the Administration to discuss the industry’s legislative agenda for the year and other key issues important to the industry. During WLF, NAREIT also held leadership meetings with its Executive Committee and Board of Governors.

On Feb. 23, Board members and invited guests heard from Rosie Rios, the Treasurer of the United States, who commented on the current economic conditions and the efforts of the Treasury Department to restore financial stability in the wake of the 2008 crisis. She also spoke briefly about her past private sector experience in the commercial real estate industry, when she facilitated equity transactions for development projects. Later, Laurence Meyer, a former member of the Federal Reserve Board of Governors and the current Vice Chairman of Macroeconomic Advisors, spoke to the Board and discussed the gradual unwinding of the Federal Reserve’s emergency measures, such as the recent increase in the discount rate, and the possible positive implications of comprehensive financial regulatory reform now being considered by Congress.

REITPAC and NAREIT members held a reception to honor Rep. Richard E. Neal (D-MA), a senior member of the House Ways and Means Committee, an At-Large Whip for the House Democratic Caucus, and Co-Chairman of the Congressional Real Estate Caucus. He is also chairman of the House Subcommittee on Select Revenue Measures. Rep. Neal is a public official who truly understands commercial real estate and its importance to the economic and social fabric of the communities that make up our nation, having served as Mayor of Springfield, MA prior to being elected to Congress.

During the Board dinner, NAREIT Chair Debra Cafaro announced that NAREIT bestowed its 2010 Small Investor Empowerment Award to Rep. Pete Stark (D-CA), now Acting Chairman of the House Ways and Means Committee, for his long-standing understanding of the important role REITs can play in portfolios of small investors during his 19 terms in Congress, and his consistent and strong support of legislation to improve the environment for REITs and the publicly traded real estate industry to thrive.

Later that evening during a dinner speech, Peggy Noonan, Wall Street Journal columnist, and former White House assistant to President Ronald Reagan, provided her insights on each of the five most recent U.S. presidents, from Ronald Reagan to Barack Obama, who she has personally known or worked for in some capacity.

On Feb. 24, Sen. Richard Durbin (D-IL), Majority Whip and second ranking Democrat in the U.S. Senate, addressed NAREIT members at a breakfast on Capitol Hill. He expressed his concerns with the current financial distress in the U.S. economy and its impact on the commercial real estate industry. He acknowledged efforts by NAREIT and other real estate groups to modify the Foreign Investment in Real Property Tax Act, or FIRTPA, as a means to encourage greater foreign equity investment in U.S. real estate. In addition, Sen. Durbin provided an update on the ongoing health care debate and how he anticipates Congress will proceed later this year. His comments came on the eve of the White House Health Care Summit that was held the following day.

After the briefing by Sen. Durbin, NAREIT members began a series of meetings with various members of Congress in both the House and the Senate. On average, each executive was scheduled to visit with five policymakers. By day’s end, a total of 40 different congressional offices were visited by NAREIT members (28 House offices and 12 Senate offices), a record number of visits for a WLF. As usual, meetings were held with Members of Congress from both political parties and focused on those members in leadership positions or who serve on a committee of importance to the REIT industry, e.g., the tax, banking and financial services committees. A full listing of the congressional offices visited during WLF is located in the adjoining column.

There were three main issues discussed in each congressional meeting: 1) encouraging non-U.S. equity capital investments in the commercial real estate industry by modifying FIRPTA, 2) enhancing energy tax credits and grants to make them more workable to REITs, and 3) preserving real estate companies’ ability to manage risk by accessing reasonably priced and customized OTC derivative products. In addition, those executives from several mortgage REITs made presentations so Members would understand their role in providing liquidity to the commercial real estate marketplace.

Again, we thank all those executives who participated in this year’s WLF for helping to educate Members of Congress about the REIT and publicly traded real estate industry, especially at such a critical time facing the industry. We invite you to join us in Washington, D.C. on Feb. 22-23, 2011, for NAREIT’s 2011 Washington Leadership Forum which will highlight the role REITs have played over 50 years to make real estate investment available to investors from all walks of life.

Included below are photographs highlighting various meetings and speakers, and attendees, at this year’s WLF. CLICK HERE to view additional pictures located on NAREIT’s website.

February 23 - NAREIT Board of Governors Meeting, REITPAC Reception and NAREIT Board of Governors Dinner

 

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Rosie Rios, Treasurer of the United States, speaks to NAREIT’s Board of Governors on the efforts of the Treasury Department to restore financial stability in the wake of the 2008 crisis.



Laurence Meyer, a former member of the Federal Reserve Board of Governors and the current Vice Chairman of Macroeconomic Advisors, addresses NAREIT’s Board of Governors on the gradual unwinding of the Federal Reserve’s emergency measures and comprehensive financial regulatory reform now being considered by Congress.



Representative Richard Neal (D-MA) speaks to NAREIT members at a reception held in his honor.



NAREIT President and CEO Steve Wechsler, right, presents Walter Rakowich, CEO, Prologis, with the REITPAC Leadership Award and the REITPAC Teamwork Award. Prologis was recognized for contributing the largest amount of funds and from the greatest number of individuals to REITPAC during 2009. This was the fourth year in a row that Prologis has received both awards.


Peggy Noonan, Wall Street Journal columnist, and former White House assistant to President Ronald Reagan, speaks at the Board of Governors Dinner.

 

February 25 - Breakfast Briefing

 

Senator Richard Durbin (D-IL), Senate Majority Whip and the second ranking Democrat in the United States Senate, addresses WLF attendees at breakfast prior to their beginning a full day of Capitol Hill meetings.

 

Capitol Hill Visits with Members of the 111th Congress

 

House Majority Leader Steny Hoyer (D-MD), third from right, stands with (from left to right) Joe Downey, Senior Vice President, Willis; NAREIT Treasurer Ed Walter, President and CEO, Host Hotels and Resorts, Inc.; Doug Donatelli, Chairman and CEO, First Potomac Realty Trust; NAREIT Second Vice Chair Don Wood, President and CEO, Federal Realty Investment Trust; and Steve Wechsler, NAREIT President and CEO.


House Minority Leader John Boehner (R-OH), second from right, stands with (from left to right) Steve Wechsler, Brad Butcher, Managing Director, Raymond James; Denny Oklak, Chairman and CEO, Duke Realty Corporation; and Sam Zell, Chairman, Equity Group Investments.


Senator Blanche Lincoln (D-AR), Senate Agriculture Chairman, is pictured with (from left to right), Don Wood, Edward Walter, and Mark Zalatoris, President and CEO of Inland Real Estate Corporation.


Senator Richard Shelby (R-AL), right, Ranking Member, Senate Banking Committee, is briefed by (from left to right) Mark Zalatoris, Thomas Lowder, President and CEO, Colonial Properties Trust; Edward Fritsch, President and CEO, Highwoods Properties, Inc.; and Howard Nelson, Director, Government Relations, Colonial Properties Trust.


Representative Christopher Van Hollen (D-MD), Assistant to the Speaker and a Member of the House Ways & Means Committee, third from right, meets in the U.S. Capitol with (from left to right) Joe Downey, Ed Walter, Sam Zell, Steve Wechsler, Don Wood, and Doug Donatelli.


Senator Olympia Snowe (R-ME), second from right, is pictured with (from left to right) John Robertson, Managing Director & Portfolio Manager, RREEF America LLC; Brad Molotsky, Executive Vice President and General Counsel, Brandywine Realty Trust; and Mark Zalatoris.


Senator Ben Cardin (D-MD), second from right, is pictured with (from left to right) Joe Downey, Doug Donatelli, Don Wood, and Ed Walter.

 

Regulatory Reform Expected on the Senate Floor before May – Derivatives End-User Fly-In Scheduled

On Monday, March 22, the Senate Banking Committee met to consider the Restoring American Financial Stability Act of 2010, its 1,336 page comprehensive financial regulatory reform proposal. After only twenty minutes of debate, comprised almost entirely by opening statements by Chairman Chris Dodd (D-CT) and Ranking Member Richard Shelby (R-AL), the Committee approved the proposal for consideration by the entire Senate by a party-line vote of 13-10. To read the comprehensive proposal, CLICK HERE.

Of particular concern to some NAREIT members, this proposal would impose significant costs and requirements on business end-users that rely on derivatives, such as interest rate swaps, to manage risk. Negotiations on these provisions will continue before the bill comes to the Senate floor, which is expected be as soon as the week of April 26.

It is also anticipated that the Senate Agriculture Committee, under the leadership of Chairman Blanche Lincoln (D-AR) and Ranking Member Saxby Chambliss (R-GA), will produce a bipartisan derivatives reform proposal in the coming days that will address many of the concerns raised by end-users. However, Obama Administration officials, including Treasury Secretary Timothy Geithner and CFTC Chairman Gary Gensler, have indicated they will oppose efforts to exempt end-users from new requirements.

NAREIT and our partners in the Coalition for Derivatives End-Users have scheduled a "fly-in" on Tuesday, April 20. NAREIT members are invited to join with executives from a broad range of industries to encourage Senators to support clear exemptions for businesses to use derivatives to manage risk, so that they are not required to tie up significant amounts of working capital to satisfy mark-to-market margin requirements.

If you, or someone else from your company, would like to participate, please contact Kirk Freeman, Senior Director, Government Relations, at 202-739-9415 or kfreeman@nareit.com.

NAREIT Opposes Effort to Expand State Regulation of Securities Offerings in Senate Financial Regulatory Reform Bill

A provision contained in the comprehensive financial regulatory reform legislation referred to above would permit states to impose their own set of regulations on private securities offerings utilized by many U.S. companies, including listed and publicly-registered, non-traded REITs.

On April 8, NAREIT joined the U.S. Chamber of Commerce, the Real Estate Investment Securities Association, the Investment Program Association, The Real Estate Roundtable, the Financial Services Roundtable, the Private Equity Council, and the Securities Industry and Financial Markets Association in sending a letter to all members of the U.S. Senate indicating that the language included in Section 926 of the bill passed by the Senate Banking Committee would “significantly harm the ability of companies to raise capital and expand their enterprises through private placements” pursuant to Rule 506 of Regulation D (“Reg D”) of the Securities Act of 1933. To view Section 926 in the Senate Banking Committee bill, CLICK HERE. To view the letter supported by NAREIT, CLICK HERE.

Rule 506 offerings have become the standard by which companies raise money privately from investors. In 1996, as part of the National Securities Markets Improvement Act (NSMIA), Congress provided a federal preemption from state securities laws, known as “Blue Sky laws,” for securities covered under Rule 506. Section 926 of the Senate Banking Committee bill would effectively repeal this preemption by granting authority to the SEC to determine which securities would be “covered” by Rule 506, and thus allow individual states to impose their own, unique requirements on any “non-covered” securities.

As the joint letter states, Section 926 would unwind “clear Congressional intent to facilitate capital formation in the U.S. by streamlining and modernizing the regulatory framework governing private offerings,” and “create uncertainty and additional expenses that would preclude many business from engaging in private offerings under Reg D.” NAREIT and the other signatories to the letter believe Section 926 lacks an understanding of the critical importance of private placement financing and the mechanics by which such financing occurs, especially at a time when capital is already scarce.

Efforts are underway to address this issue before the comprehensive reform bill is brought to the Senate floor. It is also important to note that the financial regulatory reform bill passed by the House of Representatives last December did not include changes like those proposed in Section 926, making it an issue that would need to be resolved if the two chambers combine their proposals into a final bill that could be sent to the President.

House Ways and Means Committee to Review Energy Tax Incentives

On April 14, the House Ways and Means Committee is scheduled to hold a hearing on “Energy Tax Incentives and the Green Job Economy.” NAREIT will submit written testimony to this hearing, requesting that appropriate attention be paid to REITs as Congress considers energy tax incentives.

Specifically, NAREIT has been working with lawmakers to address many of the issues facing REITs that would like to benefit from current or proposed energy tax incentives. Among other things, NAREIT supports H.R. 4599, the "Renewable Energy Expansion Act of 2010," introduced by Rep. Earl Blumenauer (D-OR), which would provide a refundable tax credit for investments in renewable energy projects entered into before Jan. 1, 2013.

This proposal is one way to extend an expiring grants program that was included as part of the "American Recovery and Reinvestment Act of 2009" (Pub. L. 111-5). Importantly, this proposal includes language authored by Rep. Linda Sanchez (D-CA) that would allow REITs to receive the refundable credit without regard to the dividends paid deduction. For more information on the proposals offered by Rep. Blumenauer and Rep. Sanchez, CLICK HERE.

NAREIT has also been working with members of the House and Senate who have proposed enhancements to the existing deduction for energy efficient commercial buildings and the extension of credits for the construction of new energy efficient homes to all apartments. Specifically, NAREIT is seeking language that would harmonize the energy efficient buildings deduction for tax and earnings and profits purposes and allowing a REIT to elect an economically equivalent deduction for apartments and senior living facilities that would otherwise benefit from the expanded energy efficient home credit.

Lawmakers, Obama Administration and Industry Representatives Consider the Future of Housing Finance and the Government-sponsored Enterprises (GSE)

On March 23, the House Financial Services Committee held a hearing titled, "Housing Finance-What Should the New System Be Able to Do?" During this hearing, members of the Committee heard from Treasury Secretary Timothy Geithner, as well as industry representatives and affordable housing advocates, on possible reforms to the Government-sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac.

Lawmakers and the invited witnesses discussed issues related to the role the GSEs play in promoting private lending by enabling a secondary market for mortgage securities, as well as their critical support for financing in the multifamily sector.

Secretary Geithner spoke of the Obama Administration's intent to develop a GSE reform proposal in the coming months. Among other things, he said this proposal should continue to promote private investment in mortgage finance. “Through securitization and other forms of intermediation, a well functioning mortgage finance system should be able to draw efficiently upon a wide variety of sources of capital and investment,” he said in his prepared statement. He also noted the important role of rental housing, testifying that, “Government support for multifamily housing is important and should continue in a future housing finance system to ensure that consumers have access to affordable rental options.”

Several real estate organizations, including the National Multi Housing Council, the Mortgage Bankers Association and the National Association of Realtors also participated in this hearing. To read their prepared testimonies, CLICK HERE.

NAREIT will continue to monitor developments related to GSE reform, with particular interest in proposals that may impact multifamily, senior living, and mortgage REITs. If you or your company would like to lend your expertise in this area, please contact Robert Dibblee, Vice President, Government Relations at 202-739-9411 or rdibblee@nareit.com or Kirk Freeman, Senior Director, Government Relations at 202-739-9415 or kfreeman@nareit.com.

HIGHLIGHTS

 

• SENATE-PASSED DERIVATIVES REFORM PROPOSAL CONTINUES TO THREATEN END-USERS
   
• SENATE ADOPTS NAREIT-SUPPORTED AMENDMENT TO PRESERVE FEDERAL PREEMPTION OF PRIVATE PLACEMENT SECURITIES OFFERINGS
   
• PROPOSED NEW TAX TREATMENT FOR CARRIED INTERESTS LIKELY TO BE VOTED ON SOON, UPREIT CONCERNS ADDRESSED BY LAWMAKERS
   
• HOUSE WAYS AND MEANS COMMITTEE REVIEWS ENERGY TAX INCENTIVES; LEVIN EXPRESSES SUPPORT FOR REIT FIX
   
• SENATOR CARDIN INTRODUCES ENERGY GRANT BILL TO BENEFIT REITS
   
• NEW CLIMATE CHANGE BILL UNVEILED IN SENATE
  

   

  SENATE-PASSED DERIVATIVES REFORM PROPOSAL CONTINUES TO THREATEN END-USERS

  On May 20, the Senate passed comprehensive financial reform legislation that includes dramatic changes to the over-the-counter derivatives markets. Unlike the derivatives reform proposals that the House of Representatives passed in Dec. 2009, this legislation could significantly limit the ability of REITs and publicly-traded real estate companies to utilize derivatives, such as interest rate swaps, to manage their exposure to risk.
  
  As recently as mid-April, it was expected that Senate Agriculture Committee Chairman Blanche Lincoln (D-AR) and Ranking Member Saxby Chambliss (R-GA) would come to a bipartisan agreement that would provide transparency for the entire derivatives market and protect so-called “end-users” from new clearing and margin requirements that would limit the risk of derivatives dealers, speculators and systemic institutions.
  
  Unfortunately, due to a variety of political pressures, those bipartisan negotiations fell apart, and the proposal passed by the Senate raises significant questions for end-users. Most importantly for NAREIT members, it remains unclear if those entities that own, operate, develop or lease physical assets will be able to avail themselves of protections provided in the bill for “commercial end users.”
  
  As the House and Senate negotiate final legislation to be sent to President Obama for his signature, NAREIT will continue to advocate both for specific provisions that will protect REITs and publicly-traded real estate companies, and – in coordination with its partners in the Coalition for Derivatives End-Users – for more fundamental changes that will protect all derivatives end-users. For more information on NAREIT’s efforts, CLICK HERE.
  
  If you would like to participate in this advocacy, please contact Kirk Freeman, Senior Director, Government Relations at kfreeman@nareit.com.

  SENATE ADOPTS NAREIT-SUPPORTED AMENDMENT TO PRESERVE FEDERAL PREEMPTION OF PRIVATE PLACEMENT SECURITIES OFFERINGS

  The comprehensive financial regulatory reform legislation, passed by the Senate on May 20, will preserve the Federal preemption of private placement securities offerings utilized by many U.S. companies, including listed and public-registered, non-traded REITs. As a result of NAREIT’s advocacy, senators unanimously supported an amendment to the bill that removed a provision allowing states to impose their own set of regulations on private securities offerings.
  
  Last month, NAREIT joined the U.S. Chamber of Commerce, the Real Estate Investment Securities Association, the Investment Program Association, The Real Estate Roundtable, the Financial Services Roundtable, the Private Equity Council, and the Securities Industry and Financial Markets Association in sending a letter to all members of the U.S. Senate indicating that Section 926 of the financial regulatory reform bill would “significantly harm the ability of companies to raise capital and expand their enterprises through private placements” pursuant to Rule 506 of Regulation D ("Reg D") of the Securities Act of 1933. To view the letter supported by NAREIT, CLICK HERE.
  
  Rule 506 offerings have become an important method by which companies raise money privately from investors. In 1996, as part of the National Securities Markets Improvement Act (NSMIA), Congress provided a federal preemption from state securities laws, known as “Blue Sky laws,” for securities covered under Rule 506. As initially written, the Senate bill would have effectively repealed this preemption by allowing individual states to impose their own, unique requirements on any securities that the SEC did not determine to be preempted after 120 days of consideration. NAREIT and the other signatories to the letter believed the current proposal failed to acknowledge the critical importance of private placement financing at a time when capital is already scarce.
  
  On May 17, the Senate unanimously approved an amendment offered by Sen. Kit Bond (R-MO) to replace the language in Section 926 with wording that disqualified felons and bad actors from participating in Rule 506 offerings, while protecting legitimate private offerings. NAREIT worked with the staffs of Senate Banking Committee Chairman Christopher Dodd (D-CT) and Sen. Bond to craft this amendment, which was cosponsored by seven Senators. In addition, the Bond/Dodd amendment modified the standard for “accredited investors,” or angel or private investors, by adjusting the current standard for net worth of $1 million to exclude the investor’s primary residence. NAREIT and the multi-industry coalition sent a letter supporting the Bond/Dodd amendment to all member of the U.S. Senate prior to its adoption. To view Sen. Bond’s amendment, CLICK HERE; to view the coalition letter supporting the Bond amendment, CLICK HERE.
  
  NAREIT is pleased with this positive development, and appreciates the efforts of Sen. Bond and others to rectify a situation that could have significantly harmed the ability of companies to raise capital and expand their enterprises through private securities offerings. The House financial regulatory reform bill, which passed last December, does not contain any reference to Regulation D or “accredited investors.” Therefore, the upcoming House-Senate conference committee that will negotiate the details of a final bill will either include the Senate’s language in Section 926 or eliminate it from the conference report.

  PROPOSED NEW TAX TREATMENT FOR CARRIED INTERESTS LIKELY TO BE VOTED ON SOON, UPREIT CONCERNS ADDRESSED BY LAWMAKERS

  Prior to Memorial Day, Congress is expected to vote on an extension of several popular tax preferences and social programs that have or will soon expire. Faced with requirements to offset any legislation that will reduce tax revenues, Congress continues to seek new revenue-raising measures. In this case, both the Senate and the House plan to turn their attention to taxing partnership interests attributable to investment-related services - also known as carried interests - as ordinary income rather than capital gains.
  
  Previous carried interest proposals that have passed the House of Representatives could have caused immediate recognition of built-in carried interest gains at ordinary income rates in the context of UPREIT "roll ups" or intra-group transfers of partnerships interests that today qualify as tax-deferred transactions. This acceleration of tax could have significantly decreased UPREIT formations as well as contributions to existing UPREITs and DownREITs.
  
  On April 29, representatives from NAREIT and The Real Estate Roundtable met with staff members of the Joint Taxation, House Ways & Means and Senate Finance Committees to discuss the potential impact of carried interest legislation on REITs. As a result of this meeting, the statutory language of a new extenders proposal was released by the Ways and Means Committee on May 20 that could be considered by the House as soon as next week. In this draft, a new section has been added which would allow an election under which a services partner who contributes his or her carried interest to a partner could defer the recognition of his or her gain. Another new section would provide a similar rule for partnership distributions. To review the statutory language of this proposal, CLICK HERE.

  HOUSE WAYS AND MEANS COMMITTEE REVIEWS ENERGY TAX INCENTIVES; LEVIN EXPRESSES SUPPORT FOR REIT FIX

  On Apr. 14, the House Ways and Means Committee held a hearing entitled “Energy Tax Incentives and Green Job Economy.” NAREIT submitted written testimony for this hearing and requested that appropriate attention be paid to REITs as Congress considers tax incentives to promote energy efficiency. To view the statement, CLICK HERE.
  
  Specifically, NAREIT has been working with lawmakers to eliminate many of the barriers that prevent REITs from taking full advantage of current or proposed energy tax incentives. Among several items, NAREIT supports H.R. 4599, the “Renewable Energy Expansion Act of 2010,” introduced by Rep. Earl Blumenauer (D-OR), which would provide a refundable tax credit for investments in renewable energy projects entered into before Jan. 1, 2013. This proposal is likely the best way to extend an expiring energy grants program authorized in last year’s economic stimulus bill. H.R. 4599 includes language authored by Rep. Linda Sanchez (D-CA) that would allow REITs to receive this incentive without regard to the dividends paid deduction. For more information on H.R. 4599 and the proposal by Rep. Sanchez, CLICK HERE.
  
  NAREIT is pleased that multiple times during the hearing, Rep. Blumenauer highlighted the REIT-specific provisions in his bill and encouraged the invited witnesses and his colleagues support its enactment.

  SENATOR CARDIN INTRODUCES ENERGY GRANT BILL TO BENEFIT REITS

  On Apr. 29, Sen. Ben Cardin (D-MD), a member of the Senate Environment and Public Works Committee, and co-chair of the Congressional Real Estate Caucus, introduced legislation to allow REITs to fully participate in the expiring energy grants program authorized in last year’s economic stimulus law.
  
  S. 3289, the “Sustainability Grants Program Act of 2010,” is identical to legislation in the House of Representatives authored by Rep. Linda Sanchez (D-CA) and included in H.R. 4599, the “Renewable Energy Expansion Act of 2010” (see reference above). S. 3289 has been referred to the Senate Finance Committee and awaits further action. To view S. 3289, CLICK HERE
  
  NAREIT will be working with Sen. Cardin’s staff to secure additional cosponsors in the coming weeks.

  NEW CLIMATE CHANGE BILL UNVEILED IN SENATE

  Sens. John Kerry (D-MA) and Joseph Lieberman (I-CT), have released the details of the “American Power Act”, a comprehensive proposal they authored to address issues related to climate change. For more information on this proposal, CLICK HERE.
  
  An initial review of the proposal indicates that it does not contain provisions harmful to the real estate community similar to those that were included in H.R. 2454, the “American Clean Energy and Security Act,” which passed the House of Representatives in June 2009. For example, the prior proposal included provisions related to building codes, labeling, and retrofitting incentives, that caused concern for real estate interests.
  
  It appears the Kerry-Lieberman proposal will also be silent on tax incentives promoting energy efficiency in commercial buildings that have been introduced this Congress. NAREIT will closely monitor this proposal to determine its long-range impact on REITs and the publicly traded real estate community.

  Contact

  For further information, please contact Kirk Freeman at kfreeman@nareit.com or Robert Dibblee at rdibblee@nareit.com.

Highlights of this Issue
 

• NAREIT Urges Member Participation in Upcoming FASB/IASB Exposure Drafts
• FASB Reaches Out to NAREIT as it Examines the Potential Retirement of SFAS 66 Accounting for Sales of Real Estate
• FASB Initiates Project to Examine Reporting Investment Property at Fair Value
• NAREIT Comments on IFRS Taxonomy 2010 Exposure Draft

NAREIT Urges Member Participation in Upcoming FASB/IASB Exposure Drafts
 

Several Exposure Drafts are expected to be issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) in May and June of this year. These Exposure Drafts are the products of major joint FASB and IASB projects that, if successfully completed, will significantly converge U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).

The FASB and IASB (the Boards) released a March 31, 2010 quarterly progress report, which included a brief status update for each project, milestones met in the first quarter of 2010 and the Boards' timetable for publishing documents between April 2010 and December 2011. For more information on each project and the status of the FASB and IASB convergence process, please CLICK HERE.

NAREIT will organize task forces to assist in the development of comment letters in response to these Exposure Drafts and strongly encourages members to participate. NAREIT will also work with its global partners of the Real Estate Equity Securitization Alliance (REESA) to continue to provide the Boards with global real estate industry views. The list below provides the Exposure Drafts on the current agenda of NAREIT and REESA and their expected date of issuance:

Discontinued Operations: Create a converged definition of a discontinued operation, as well as related disclosures – May 2010

Revenue Recognition: Refine the principles for recognizing revenue and develop a universal standard for revenue from contracts with customers under U.S. GAAP and IFRS – May 2010

Consolidations: Develop comprehensive guidance for consolidation of all entities, including voting interest entities, variable interest entities (not expected to significantly change from current U.S. GAAP) or similar interests – May 2010

Fair Value Measurement: Converge fair value measurement guidance so that fair value is consistently defined under U.S. GAAP and IFRS – May 2010

Lease Accounting: Establish common lease accounting requirements to ensure that the assets and liabilities arising from lease contracts are recognized in the statement of financial position – June 2010

Financial Statement Presentation: Provide a standard that will direct the content and presentation of information in the financial statements to improve the usefulness for financial statement users – June 2010

If you are interested in participating in any of the task forces that will develop NAREIT's positions on these projects, please contact Sally Glenn at sglenn@nareit.com.

FASB Reaches Out to NAREIT as it Examines the Potential Retirement of SFAS 66 Accounting for Sales of Real Estate
 

The decision of whether to eliminate the existing guidance focused on accounting for sales of real estate is one of the many decisions that occupy the agenda of the FASB. The FASB's current guidance, Subtopic 360-20 or Statement of Financial Accounting Standards 66 (SFAS 66), provides a very prescriptive approach in determining when and how to record revenue/gains from sales of real estate. If the FASB decides to remove the current guidance, accountants may be required to rely on the proposed principles-based revenue recognition standard currently being developed by the FASB and IASB.

NAREIT believes that the proposed revenue recognition standard would generally improve financial reporting by enhancing the relevance and the usefulness of financial statements. This conclusion is based on the belief that the application of the proposed standard would more faithfully reflect the substance of real estate sales transactions.

FASB Invites NAREIT to Discuss the Accounting for Sales of Real Estate

On April 28, 2010, George Yungmann, NAREIT's Senior Vice President, Financial Standards, and Sally Glenn, Director, Financial Standards, visited the FASB office in Norwalk, Conn., to discuss, with Board members and staff, accounting for sales of real estate in connection with the FASB and IASB joint revenue recognition proposal noted above.

Along with Teresa Neto, a representative of the Real Property Association of Canada (REALPac), NAREIT delivered a presentation focusing on: 1) the potential effects of the proposed standard on accounting for real estate sales; 2) the impact of the proposal on the accounting for specific common real estate sales transactions that include some form of continuing involvement, such as partial sales of real estate; 3) issues that may arise if current guidance is eliminated; and, 4) whether the proposed accounting would improve financial reporting. CLICK HERE to view the presentation.

NAREIT's views are based on the Boards' current tentative decisions and NAREIT's analysis to date, which are subject to change based on future developments made by the Boards and further analysis made by NAREIT.

FASB/IASB Proposed Revenue Recognition Model

NAREIT believes the proposed principle-based model would improve financial reporting and better portray the substance of real estate transactions because it would require that companies recognize revenue according to a single principle: when the seller satisfies a performance obligation – when the buyer takes control of the good or service. This principle would most likely increase the consistency of when companies record revenue.

In contrast, the measurement of revenue under the proposed model may vary from company to company. The proposal may provide inconsistent results in measuring revenue due to the determination of: 1) the transaction price (the probability-weighted estimate of the amount of consideration, which may be adjusted for variable consideration and collectibility); and, 2) the allocation of the transaction price to multiple performance obligations based on the relative standalone selling price of each performance obligation.

SFAS 66 vs. FASB/IASB Proposed Revenue Recognition Model

While SFAS 66 promotes consistently calculated results, the results may not always reflect the substance of real estate transactions. Recognition of revenue under SFAS 66 considers collectibility of the purchase price and significant continuing involvement, rather than the proposed model's single consideration of when a seller satisfies a performance obligation. The formula-driven guidance under SFAS 66 that focuses on the buyer's initial and continuing investments may prohibit revenue recognition when in fact the buyer has the present ability to direct the use of and receive the benefit of the asset.

Under both SFAS 66 and the proposed model, the total amount of revenue recognized over the term of the contract may be the same because total revenue is measured based on the contract price. However, the timing of revenue recognition under the two approaches may differ. In many cases, the proposal may allow for earlier recognition of revenue because the transfer of control to the buyer (which satisfies the performance obligation) triggers recognition, as opposed to SFAS 66's prescriptive guidance on collectibility and continuing involvement.

Collectibility

Under the proposal, collectibility would impact the amount of revenue recognized rather than the timing of revenue recognition. For example, assume that at the date of sale: 1) the seller receives a minimal (inadequate according to SFAS 66 criteria) initial investment by the buyer; 2) the buyer assumes control of the property; and, 3) the seller expects to receive the entire contracted amount. SFAS 66 would preclude recognition of revenue until the SFAS 66 "buyer's initial investment" criteria has been met. Conversely, the proposal would allow for the full amount of revenue to be recognized at the date of sale. If the seller does not expect to receive the entire contracted price, the proposal would require that revenue be recognized at the date of sale in the amount of consideration that the company expects to collect.

Continuing Involvement

Continuing involvement discussed extensively in SFAS 66 is not explicitly addressed in the current proposed model. The effects of the proposal on the accounting for sales transactions that entail continuing involvement depend on the type of continuing involvement. Under the proposal, continuing involvement may impact the determination of whether a contract exists, the identification of performance obligations, the determination of the contract price or the determination of whether control has transferred. For example, a guarantee to support operations after a sale may represent variable consideration and would be factored into the transaction price.

In other instances, continuing involvement may be taken into consideration when determining whether control has transferred, such as with certain repurchase agreements. In determining whether revenue should be recognized and, therefore, whether control has transferred, NAREIT believes the seller would assess the likelihood of reacquiring the property under the agreed upon circumstances. The FASB has yet to decide on the accounting treatment for repurchase agreements under the proposed model and welcomes the industry's views with respect to this issue (see below).

FASB Subsequently Considers Staff's Proposed Alternatives

Following its meeting with NAREIT, the FASB considered the following alternatives to account for real estate sales at a Board meeting on May 5:

Alternative A: Amend Subtopic 360-20 (formerly SFAS 66) so that it would apply only when an entity sells real estate that is not an output of the entity's ordinary activities. Sales of real estate that are part of the entity's ordinary activities would be accounted for in accordance with the proposed revenue model, since the current scope of the proposal applies to contracts with customers to obtain an asset that represents an output of an entity's ordinary activities.

Alternative B: Require that an entity apply the proposed revenue model for all sales of real estate. If real estate is part of an entity's ordinary activities, the entity would recognize revenue in accordance with the proposed model. Otherwise, an entity would recognize gains when applying the proposed revenue model. In other words, the same recognition principles would apply to both types of sales and only the presentation in the income statement would change.

Alternative C: If the sale of real estate is not part of an entity's ordinary activities, the entity would account for the real estate in accordance with the guidance on subsequent measurement of property, plant, and equipment in Section 360-10-35 (essentially SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets). The entity would derecognize the real estate when the buyer obtains control of the real estate (in accordance with the proposed revenue recognition guidance) and would recognize a gain for the fair value of the consideration in excess of the carrying amount of the real estate.

In its April 28 presentation, NAREIT raised concerns that became the basis of a broader Board discussion at its May 5 meeting. Specifically, the FASB questioned how the proposed FASB/IASB revenue recognition standard would be applied in the determination of the transfer of control for sales that involve repurchase agreements and sales that include non-recourse seller financing and whether such transactions constitute a sale, financing or lease. Additionally, as pointed out by NAREIT, the Board noted that there may be inconsistencies in how companies distinguish between activities that are ordinary and not ordinary.

As a result of the unresolved issues, the Board did not reach a conclusion on a preferred alternative at the meeting. Before moving forward with a firm decision, the Board decided to raise its overarching concerns around the transfer of control with the IASB to ensure consistency with other convergence projects.

The FASB requested that NAREIT continue to provide input on the issue as the Board continues its deliberations. If you have questions or comments regarding this issue, please contact Sally Glenn at sglenn@nareit.com.The Boards' project plan indicates that an Exposure Draft of the proposed revenue recognition standard will be issued in the second quarter of 2010 and a final standard will be issued in 2011.

FASB Initiates Project to Examine Reporting Investment Property at Fair Value
 

On March 10, 2010, the FASB added to its agenda a project that will:

• "consider whether entities should be given the option (or be required) to measure an investment property at fair value through earnings. The existing international accounting standard (IAS 40, Investment Property) provides such an option. This project also will consider how an entity should consider a lease when measuring the fair value of a leased investment property.
  
  As part of this project, the Board also may address related issues that are within the scope of EITF Issue No. 09-D, Application of Topic 946, Financial Services – Investment Companies, by Real Estate Investment Companies."

FASB staff has reached out to NAREIT for support of this project.

For more FASB information regarding this project, CLICK HERE. For additional background information on this project as reported in the January edition of NAREIT's SFO Report, CLICK HERE.

A NAREIT task force will be formed to consider any FASB proposals with respect to this project. If you would like to participate in this task force, please contact Sally Glenn at sglenn@nareit.com.
 

NAREIT Comments on IFRS Taxonomy 2010 Exposure Draft
 

On April 22, 2010, NAREIT submitted a comment letter to the International Accounting Standards Committee (IASC) Foundation in response to the IFRS Taxonomy 2010 Exposure Draft. The Exposure Draft applies to preparers that issue IFRS financial statements in eXtensible Business Reporting Language (XBRL) format.

In the letter, NAREIT reasserted the same views that were previously provided in its May 2008 comment letter. NAREIT primarily recommended that the IASC Foundation offer industry specific tags to enhance the usefulness of XBRL financial statements that report on businesses with unique economic characteristics. For example, it would enhance the usefulness of XBRL financial statements if real estate companies could report net operating income. To read the letter, CLICK HERE.

Contact
 

For further information, please contact George Yungmann at gyungmann@nareit.com or Sally Glenn at sglenn@nareit.com.

HIGHLIGHTS

 

• HOUSE-SENATE CONFERENCE UNDERWAY ON COMPREHENSIVE FINANCIAL REGULATORY REFORM BILL
   
• PROPOSED AMENDMENT TO SENATE TAX “EXTENDERS” BILL WOULD CONTINUE ENERGY GRANTS PROGRAM, INCLUDE REITs
   
• EPA CONSIDERING ACTION ON STORMWATER AND LEAD-BASED PAINT REGULATIONS; NAREIT SUPPORTS INDUSTRY EFFORTS EXPRESSING CONCERNS
  
  
  
  

   

  HOUSE-SENATE CONFERENCE UNDERWAY ON COMPREHENSIVE FINANCIAL REGULATORY REFORM BILL

  For the first time since the Sarbanes-Oxley Act made its way through Congress in 2002, House and Senate negotiators are engaging in a formal conference process to sort out the differences between the comprehensive financial regulatory reform proposals that passed in each chamber. This process is playing out in a very public and formal way as negotiators seek to complete their work so the legislation can be passed and sent to the President prior to Independence Day.
  
  NAREIT has been closely monitoring provisions in each proposal that would reform the over-the-counter derivatives market. From the beginning of this debate, NAREIT, with guidance from its Derivatives Reform Task Force, has supported new transparency requirements for all derivatives transactions, while also advocating for clear protections for derivatives "end users" from mandatory clearing or margin requirements. For more information on NAREIT's efforts, CLICK HERE.
  
  Unfortunately for end users, the conferees are using the Senate proposal as a starting point, which, among other things, could significantly impact the ability of REITs and publicly-traded real estate companies to utilize low-cost derivatives to manage their exposure to risk. This is primarily because the Senate bill narrowly defines the type of businesses that can avail themselves of end user protections in a way that does not clearly include owners, operators or developers of commercial real estate.
  
  This is different than the House approach, which would focus clearing and margin requirements on those entities whose derivatives transactions could pose risk to the broader financial system, while protecting non-systemic entities that rely on derivatives to hedge risk – regardless of their primary business activity. NAREIT and nine other real estate organizations have engaged with policymakers to encourage their support of the House language. To view a letter sent by the real estate organizations, including specific legislative remedies to further protect real estate end users, CLICK HERE.
  
  Many policymakers have strongly supported the issues raised by end users. In particular, 43 members of the New Democrat Coalition, a group that was instrumental in crafting the balanced House bill, signed a letter to the Conference Committee urging them provide meaningful end user protections in the final bill. To view this letter, CLICK HERE.
  
  The Conference Committee is expected to address the issue of derivatives later this week. NAREIT, both independently and in coordination with the Coalition for Derivatives End-Users, will continue to urge policymakers to come to a balanced compromise. If you would like to participate in this advocacy, please contact Kirk Freeman, Senior Director, Government Relations at kfreeman@nareit.com.

  PROPOSED AMENDMENT TO SENATE TAX “EXTENDERS” BILL WOULD CONTINUE ENERGY GRANTS PROGRAM, INCLUDE REITs

  As the Senate continues to consider legislation to extend certain expiring tax provisions, Sen. Maria Cantwell (D-WA) and Sen. George LeMieux (R-FL) plan to offer an amendment to extend the expiring energy grants program authorized in last year’s economic stimulus law (Pub. L. 111-5) through 2012.
  
  Included within the Cantwell/LeMieux amendment is language that is identical to the “Sustainable Property Grants Act,” legislation introduced in both the House (H.R. 4256) and the Senate (S. 3289), that will allow REITs to fully participate in the program. To read the text of the amendment, CLICK HERE.
  
  NAREIT has been advocating the inclusion of similar language in legislation moving through the Congress since the beginning of the year. NAREIT is pleased these Senators recognize the importance of extending the energy grants program to encourage renewable energy technology, but also broadening the program to include a significant segment of the commercial real estate sector.
  
  Even though this amendment has bipartisan support, it remains to be seen whether the Senate will consider and adopt it prior to final passage of the “extenders” legislation. NAREIT will continue to work with Sens. Cantwell and LeMieux to encourage other Senators to support the amendment should it be considered by the full Senate next week. To read a letter of support NAREIT sent to Sen. Cantwell, CLICK HERE.

  EPA CONSIDERING ACTION ON STORMWATER AND LEAD-BASED PAINT REGULATIONS; NAREIT SUPPORTS INDUSTRY EFFORTS EXPRESSING CONCERNS

  The Environmental Protection Agency (EPA) is pursuing new regulations related to stormwater run-off and lead-based paint in commercial real estate. NAREIT has joined a coalition that includes The Real Estate Roundtable, the International Council of Shopping Centers, and the Building Owners and Managers Association, to express the industry’s concerns with these proposals.
  
  In a departure from the agency’s historical regulation of stormwater run-off only from active construction sites, the EPA has expressed interest in expanding its regulatory reach to fully developed and operating properties. This could require significant retrofitting of existing commercial buildings and properties in order to obtain permits under the federal Clean Water Act (CWA).
  
  As part of the initial rulemaking process, EPA has put forward a lengthy questionnaire that it plans to send to thousands of real estate owners and developers later this summer. Among other things, the questionnaire would request confidential information related to the recipients’ balance sheets, cash flows and project costs for previous stormwater projects. EPA indicates such information is necessary in order for the agency to craft the new rules, which it hopes to finalize by November 2012. To view the questionnaire drafted by EPA, CLICK HERE.
  
  On June 9, NAREIT and its partner real estate organizations sent a letter to the EPA questioning the agency’s authority under the CWA pursue this regulation, and raising concerns about the questionnaire’s request for confidential information. To view the coalition’s letter, CLICK HERE. The coalition has also met with key Congressional staff to alert them to this issue.
  
  The EPA is also pursuing a rulemaking that would regulate commercial building remodeling and renovation activities that may create hazards from lead-based paints. This would be the first time a rulemaking has been proposed to regulate lead-based paint in commercial buildings, and the EPA intends to use its existing residential lead paint rules as a model for this effort. The EPA hopes to have the rules targeted at exterior commercial building renovation in place by July 2013, and those focused on interior renovations in 2014. To view the EPA’s proposal, CLICK HERE.
  
  NAREIT and its coalition partners have begun to voice concerns about this rulemaking proposal, and will work with legal experts to craft an appropriate response to the EPA’s rulemaking proposal.

  CONTACT

  For further information, please contact Kirk Freeman at kfreeman@nareit.com or Robert Dibblee at rdibblee@nareit.com.

Highlights of this Issue
 

• Standard Setters Alter Work Plan Toward Convergence
• FASB and IASB Issue Revenue Recognition Exposure Draft
• FASB Leans toward Requiring Fair Value Reporting for Investment Property
• FASB Proposes Financial Instruments Overhaul
• FASB Releases Fair Value Measurement and Disclosure Exposure Draft
• FASB and IASB Tentatively Arrive at a Hybrid Lessor Accounting Model
• NAREIT Discusses Proposed Lease Standard with IASB Members
• FASB Seeks Input on Financial Statement Presentation
• 2010 NAREIT Financial Standards Events
   

Standard Setters Alter Work Plan Toward Convergence
 

On June 24, 2010, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) issued a joint progress report providing more details to their previously announced plans to modify their strategy toward convergence. The Boards revised their work plan in response to constituents' concerns over the large number of significant exposure drafts originally scheduled to be issued in the second quarter of 2010.

Under the modified strategy, the Boards intend to: 1) prioritize the major convergence projects based on the most critical issues and greatest potential to improve and converge US Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS); 2) stagger the publication of exposure drafts and related consultations (i.e., public round tables) and release no more than four significant exposure drafts in any one quarter; and, 3) seek stakeholder input about effective dates and transition methods. CLICK HERE to read the quarterly progress report.

Based on the June 24 quarterly report, the Boards are committed to completing the following projects in June 2011 or earlier: financial instruments, revenue recognition, leases, the presentation of other comprehensive income and fair value measurement. With the exception of leases, the Boards have already issued exposure drafts on these high-priority projects. The Leases Exposure Draft is expected in August 2010.

The remaining projects that the Boards believe are of less priority or may require additional research and analysis are expected to be completed in the second half of 2011. These projects include financial statement presentation (including discontinued operations), financial instruments with characteristics of equity and consolidations. In May, the Boards decided to make the timing of the discontinued operations project parallel with the completion date of the financial statement presentation project, which is planned for the second half of 2011.

Although the revised work plan is expected to only extend the completion dates of certain projects for six months, the Boards indicated that they believe the revised plan would allow constituents to more effectively respond to the upcoming proposals.

Prior to the Boards' announcement to revise their strategy, NAREIT submitted a letter, on behalf of its global partners of the Real Estate Equity Securitization Alliance (REESA), that expressed concerns regarding the current pace of global convergence of accounting standards. The letter indicated that: 1) REESA continues to be committed to supporting the development of a single set of high quality global accounting standards; 2) REESA has been fully engaged in the Boards' due process toward achieving convergence; and, 3) REESA urges the Boards to modify the timetable with respect to completing their due process for over 20 exposure drafts to be issued in the near term. CLICK HERE to read the May 26, 2010 letter.

FASB and IASB Issue Revenue Recognition Exposure Draft
 

On June 24, 2010, the FASB and IASB released their Exposure Draft on recognition of revenue from contracts with customers, including revenue or gains resulting from contracts for all sales of real estate. The overarching principle of this contract-based model is that revenue would be recognized in the amount of consideration expected to be received when goods or services transfer to the customer. This proposal generally excludes leases, insurance contracts and financial instruments. To read the Exposure Draft, CLICK HERE. Comments on the Exposure Draft are due by October 22, 2010. As mentioned above, the Boards' project plan indicates that a final standard will be issued in the first half of 2011.

The revenue recognition proposal would significantly impact the approach toward accounting for all sales of real estate and result in the potential removal of FASB's current rules-based standard, Subtopic 360-20 or Statement of Financial Accounting Standards 66 (SFAS 66). NAREIT believes that the proposal would improve financial reporting for sales of real estate because it would require that companies recognize revenue according to a single principle: when the seller satisfies a performance obligation, which would be when the buyer takes control of the good or service.

As previously reported in NAREIT's May 2010 SFO Report, the FASB's examination of this issue included an invitation to NAREIT to present its views of the potential removal of SFAS 66 at a FASB Education Session in April 2010. At the meeting, NAREIT asserted that all sales of real estate should be accounted for under the proposed revenue recognition standard whether or not they are outputs of a company's ordinary activities. The Boards' preliminary revenue recognition views would have applied the proposed standard only to those sales of real estate representing outputs of ordinary activities. For more information on NAREIT's views of this issue, CLICK HERE to access the May 2010 SFO Report.

Another proposed change that may impact the industry is the accounting for services included in lease contracts. While the revenue recognition proposal excludes leases, the Boards have tentatively decided, in connection with the lease accounting project, that lessors and lessees would be required to allocate lease payments between service and lease components. This allocation would be based on whether the service components are distinct from the lease components under the proposed revenue recognition principles.

According to the Exposure Draft on revenue recognition, a service is distinct if either: 1) the entity (or another entity) sells an identical or similar service separately; or, 2) the entity could sell the good or service separately because it has a distinct function and a distinct profit margin. If the service is distinct, total payments would be allocated between service and lease components using the proposed revenue recognition principles. If the service component is not considered distinct, total payments would be accounted for as a lease under the lease accounting project.

NAREIT will monitor the Boards' progress with respect to accounting for services, as well as continue to examine the revenue recognition proposal to determine further impacts that it would have on the industry. A task force to develop the industry's views on this proposal is underway. If you would like to join the task force, please contact Sally Glenn at sglenn@nareit.com.

FASB Leans toward Requiring Fair Value Reporting for Investment Property
 

At its July 14, 2010 meeting, the FASB concluded that it should issue a proposed Accounting Standards Update (exposure draft) that would require that investment property be reported at fair value. This FASB examination of investment property reporting is being pursued in connection with the IASB's conclusion that lessors of investment property would be exempt from the Boards' proposed lease accounting standard if the properties are reported at fair value pursuant to International Accounting Standard No. 40 Investment Property (IAS 40). This international accounting standard provides a choice to report investment property at cost or fair value. Since there is no such standard in US GAAP, the FASB is compelled to develop a US GAAP standard similar to IAS 40 to facilitate the issuance of a converged lease accounting standard. Most significant to NAREIT member companies, the FASB concluded that its proposed standard would require rather than allow a choice to report investment property at fair value.

The Board's discussion was based on a paper developed by the staff. CLICK HERE to read the issues in the staff paper regarding investment property, which are addressed on pages 7 through 18. This staff paper focused on the definition of investment property and included the following questions:
 

• Should the project's scope only include real estate investment properties?
• Should the definition of investment property be limited to only land and buildings?
• Whether owner-occupied properties qualify as real estate investment property?
• Can properties partially occupied by owners qualify for real estate investment property?
• Can rental properties qualify as real estate investment property if leases provide property-related services to lessees?
• Does real estate property held for sale in the ordinary course of business qualify as investment property?

The views and conclusions with respect to these questions could result in a definition of investment property that would be inconsistent with IAS 40. The conclusion of this discussion was that the proposed US GAAP standard should mirror IAS 40 to the greatest extent possible and, therefore, the Board should issue a proposed Accounting Standards Update similar to IAS 40 and not open up these broader questions at this time. Eventually, the Boards may choose to modify both the US and international standards. The proposed Accounting Standards Update is expected to be issued in the third quarter of 2010.

NAREIT will form a task force to develop a response to the FASB's Exposure Draft. If you would like to participate in this task force, please contact George Yungmann at gyungmann@nareit.com.
 

FASB Proposes Financial Instruments Overhaul
 

On May 26, 2010, the FASB released an Exposure Draft: Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities. The primary objective of the proposal is to provide financial statement users with a more relevant and accurate understanding of an entity's financial instruments. The Board's focus is on the characteristics of the instruments and an entity's business strategy – two underlying factors in determining the proper accounting for financial instruments. To read the Exposure Draft, CLICK HERE. Comments are due by September 30, 2010 and a final standard is expected in the first half of 2011 with an estimated effective date of 2013.

Although the FASB and IASB intend to converge their accounting for financial instruments, differences currently exist in the proposed models developed by each Board. The FASB's proposal would result in more financial instruments being measured at fair value than the proposals of the IASB. In its Exposure Draft, the FASB would require that most financial instruments be measured at fair value in the balance sheet at each reporting date with changes in fair value during the reporting period recognized in net income (loss).

However, for certain financial instruments that meet the Exposure Draft's specified criteria, a portion of the change in fair value would be recognized in other comprehensive income. All of the following criteria must be met to qualify for other comprehensive income recognition: 1) there is an amount transferred to the debtor at inception that will be returned to the creditor at maturity; 2) the contractual terms of the debt instrument identify any additional contractual cash flows to be paid to the creditor either periodically or at the end of the instrument's term; 3) the debt instrument cannot contractually be prepaid or be settled in such a way that the investor would not recover substantially all of its initial investment, other than through its own choice; 4) an entity's business strategy is to hold certain financial instruments for collection or payments of contractual cash flows; and, 5) it is not a hybrid instrument which would require that the embedded derivative be accounted for separately from the host contract.

A portion of the change in fair value of those financial instruments that meet the above criteria would be recognized in other comprehensive income each reporting period. This portion would represent the change in fair value less changes from interest accruals, credit impairments and realized gains (losses). Additionally, on the face of the balance sheet, a reconciliation from amortized cost to fair value would be required for these financial instruments.

Although most financial instruments are measured at fair value under the proposal, certain financial instruments that meet the criteria for other comprehensive income recognition are permitted to be measured at amortized cost in the balance sheet. These instruments include short-term receivables and payables and financial liabilities in which the fair value measurement would create (or increase) a mismatch in the measurement of other recognized assets and liabilities. For example, mortgage debt would continue to be recognized at amortized cost because it is contractually linked to property that is measured on a cost basis.

In addition to the proposed changes discussed above, the FASB's proposal addresses changes in a variety of other areas related to financial instruments, including impairment, hedge accounting and equity investments. The proposal provides a common approach for credit impairments of financial assets and removes the current probable threshold for recognizing credit impairments. A credit impairment would be recognized in net income (loss) for a financial asset when the company does not expect to collect all contractual amounts due for originated financial assets and all amounts originally expected to be collected upon acquisition for purchased financial assets.

With regard to derivatives, the FASB proposal would generally: 1) add more qualitative guidance to the qualifications for hedge accounting; 2) reduce the threshold to qualify for hedge accounting from highly effective to reasonably effective; 3) eliminate the shortcut and the critical terms match methods; 4) prohibit the discontinuation of hedge accounting based on the removal of a hedge designation; and, 5) retain existing guidance to designate hedge relationships by risk. CLICK HERE to read NAREIT's August 2008 letter to the FASB recommending the retention of the bifurcation-by-risk model and supporting the change from highly effective to reasonably effective hedging relationships.

For those entities that currently account for equity investments under the equity method of accounting, the proposal would continue to require that the entity has significant influence over the investee. Currently, investors may choose to report these equity investments at cost or fair value. However, the proposal would add a new requirement before the cost basis may be applied. The additional criteria would be that the operations of the investee are considered related to the investor's consolidated operations. If only one of the two criteria is met, the equity investment would be required to be reported at fair value with changes in fair value recognized in net income (loss). This proposal may significantly change the accounting for those equity investments that have operations that are not related to the operations of the consolidated investor.

For more details of these issues, please refer to the Exposure Draft. If you are interested in participating on a task force to assist in the development of the industry's views on this proposal, please contact Sally Glenn at sglenn@nareit.com.

FASB Releases Fair Value Measurement and Disclosure Exposure Draft
 

On June 29, 2010, the FASB issued a proposal on the Amendments for Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRSs. The proposal is a product of a joint FASB and IASB project to consistently define fair value under both sets of standards and to converge fair value measurement and disclosure guidance. The Exposure Draft is not intended to change the scope of existing fair value guidance or establish new or modified requirements for items that should be measured at fair value.

The Exposure Draft would impact certain aspects of measurement and disclosure for those items currently required to be reported at fair value, such as:
 

• Highest and best use and valuation premise: highest and best use valuation premise would only apply to measuring the fair value of non-financial assets;
• Measuring the fair value of an instrument classified in shareholders' equity: a company would measure the fair value of its own equity instrument from the perspective of a market participant who holds the instrument as an asset; and,
• Additional disclosures about fair value measurements: disclosures would be expanded, such as: 1) including the measurement uncertainty inherent in fair value measurements categorized within Level 3 of the fair value hierarchy (a sensitivity analysis); 2) disclosing when the highest and best use of an asset differs from its current use; and, 3) providing the fair value by level for items that are not measured at fair value in the balance sheet but are reported at fair value in the disclosures.

The Exposure Draft also provides proposed guidance on the application of blockage factors and other premiums and discounts in measuring fair value and measuring the fair value of financial instruments that are managed within a portfolio. To read the Exposure Draft, CLICK HERE.

NAREIT, along with its REESA global partners, are currently evaluating this proposal and will submit a comment letter to the Boards by the September 7, 2010 comment deadline. A final standard is expected in the first quarter of 2011. If you have certain issues with respect to this Exposure Draft that you would like to discuss with NAREIT, please contact George Yungmann at gyungmann@nareit.com.
 

FASB and IASB Tentatively Arrive at a Hybrid Lessor Accounting Model
 

At their joint meeting on June 17, 2010, the FASB and IASB tentatively concluded to apply a hybrid lessor accounting model that would use: 1) a performance obligation approach for leases that expose the lessor to significant risks and benefits associated with the underlying asset; and, 2) a derecognition approach for all other leases. NAREIT believes that the accounting for most leases of investment property would generally fall under the performance obligation approach – unless the property is reported at fair value.

In addition to maintaining the leased asset on the balance sheet, the performance obligation approach would require lessors to recognize: 1) a lease receivable for the right to receive lease payments; and, 2) a liability, or performance obligation, for the obligation to provide leased space. Both the receivable and the performance obligation would be based on the lease payments (including contingent rentals that can be reliably measured) to be received over the longest possible term that is more likely than not to occur. The receivable and liability would be initially measured at the present value of the lease payments using the rate the lessor is charging the lessee. In addition, the receivable would include initial direct costs incurred by the lessor.

Under the hybrid lessor accounting model, the derecognition approach would require the lessor to remove the leased asset from the balance sheet and recognize: a) a lease receivable for the right to receive lease payments; and, 2) a residual asset representing the lessor's rights to the underlying leased asset at the end of the lease term. The lease receivable would initially be measured in a manner similar to the performance obligation approach.

On the income statement, the performance obligation approach would result in the bifurcation of lease payments received by the lessor into rental revenue and interest income (under the effective interest method). The rental revenue portion would be recognized when performance obligations are satisfied, which would typically be on a straight-line basis over the lease term. However, under the derecognition approach, the rental revenue portion of lease payments would be recognized at inception of the lease when the lessor transfers the leased asset to the lessee and removes it from its accounts. This approach would also result in interest income related to the lease receivable being recognized using the effective interest method.

As reported in previous issues of NAREIT's SFO Report, the IASB has tentatively decided to exclude from the proposed hybrid lessor accounting model, leases of investment property where the lessor/landlord measures the investment property at fair value. Since IFRS currently allows investment property to be measured at fair value, the FASB has added an investment properties project to its agenda to determine whether to permit or require investment properties to be carried at fair value. See above for more information on the investment properties project.

The Boards expect to issue exposure drafts on both leases and investment properties in the third quarter of 2010 and final standards in June 2011.

NAREIT Discusses Proposed Lease Standard with IASB Members
 

On July 7, 2010, NAREIT, along with other real estate and retailer organizations, met with Patricia McConnell and Patrick Finnegan of the IASB to discuss the views of real estate lessors and lessees on the Board's proposed lease accounting model (please refer to the above article). Industry participants expressed a general concern that the proposed accounting would not accurately reflect the economics of leasing transactions.

Participants also shared the view that, while lessees generally do not object to reporting contractual amounts on the balance sheets created by leases, they are very concerned about the negative impact of the proposed accounting on lessees' earnings. In addition, especially for lessees of ground leases, NAREIT asserted that the proposal would require extensive use of estimates (covering multiple years) to determine rental amounts reported in the financial statements.

NAREIT further commended the Board members' tentative decision to exclude from the proposed lease accounting model lessors of investment property that elect to report investment property at fair value. At the same time, NAREIT expressed a concern that, under the proposed standard, income statements and earnings of companies that choose to report investment property at depreciated cost would not be comparable to earnings of companies that report investment property at fair value.

The Board members were receptive to understanding participants' views and sought input on several issues, including accounting for service components of leases. NAREIT will gain more information from the Boards' staff regarding their specific concerns and reach out to members to provide more insight to the Boards.

FASB Seeks Input on Financial Statement Presentation
 

On July 1, 2010, the FASB released a draft of the FASB staff's financial statement presentation proposal – a proposal that has not been officially approved by the FASB or IASB. The purpose of issuing the staff draft is to solicit feedback from preparers and users on the current views of the Boards prior to the Exposure Draft, which is expected to be issued in the first quarter of 2011. A final standard is anticipated to be issued toward the end of 2011.

The objective of the overall joint FASB and IASB project is to provide a standard that will direct the content and presentation of information in the financial statements to improve the usefulness for financial statement users. The FASB staff's draft proposal reflects the Boards' current tentative decisions after consideration of the comments received on their original preliminary views issued in October 2008. To read the FASB staff draft, CLICK HERE.

This staff draft is part of the Boards' outreach program to gain more information in the following areas: 1) the perceived benefits and costs of the proposals; and, 2) the implications of the proposals for financial reporting by financial services entities. In obtaining this information, the Boards' staff plan includes:
 

• asking users of financial statements to evaluate how the proposed changes to the organization of and information presented in financial statements would benefit their analysis and resource allocation decisions;
• asking preparers of financial statements to evaluate the effort and costs involved in adopting these proposed changes in their unique circumstances; and,
• gathering additional information about benefits and costs by doing more field work on the proposals in the staff draft, including additional field testing and/or experimental research.

Although this draft proposal is not a formal invitation to comment, the Boards welcome input from constituents. NAREIT and its REESA global partners intend to provide input to the Boards on their draft proposal. If you would like to participate on a task force to help develop views for the industry with respect to the staff proposal, as well as provide cost-benefit information, please contact George Yungmann at gyungmann@nareit.com.
 

2010 NAREIT Financial Standards Events
 

SFO/IRO Workshop

NAREIT's 2010 Senior Financial Officers/Investor Relations Officers Workshop will be held on September 20 and 21 at the Mandarin Oriental Hotel in Washington, DC. Attendance at this program is by invitation only. The workshop is specifically designed for NAREIT corporate members that are senior officers in the fields of accounting, financial reporting, capital markets, investor relations and risk management. The workshop focuses on the latest developments and trends impacting these areas of real estate companies.

This year's program directors are Steve Broadwater, Senior Vice President and CAO; Simon Property Group and Steve Riffee, Executive Vice President and CFO; Corporate Office Properties Trust. The topics being considered include: 1) a discussion of the current capital markets; 2) financial reporting hot topics (i.e., SEC comments and SEC reporting trends); 3) US GAAP and IFRS convergence projects including lease accounting, investment properties and revenue recognition, as well as NAREIT/REESA advocacy with respect to global convergence projects; 4) an economist's view of the impact of current and forecasted economic factors on the industry; and, 5) understanding the Boards' perspective and oversight of companies' Enterprise Risk Management programs.

Workshop registration materials have been distributed.

Internal Audit Forum

The 2010 Internal Audit Forum will be held on August 17 and 18 at the Ritz Carlton Hotel in Denver, CO. Attendance at this program is by invitation only. The event will be hosted by ProLogis and UDR, Inc. The Internal Audit Forum is designed exclusively for NAREIT corporate members that are internal audit directors or other senior level financial professionals responsible for a company's internal audit function.

This annual event has proven to be successful in providing useful information in improving the internal audit function. This year's program will include sector breakouts and cover topics, such as: 1) IT risk assessment; 2) REIT tax risks for internal audit; 3) real estate fraud and mitigating risk; 4) process definition and risk strategy mapping; and, 5) the latest developments in financial standards and reporting. The special guest speaker will be Walter Rakowich, CEO, ProLogis. For registration information for this event, please contact Sarah Anastas at sanastas@nareit.com or (202) 739-9433.

Retail Sector Operations Accounting Forum

The Retail Sector Operations Accounting Forum will not take place this year. NAREIT conducted a member survey that indicated a low level of interest for a 2010 event. NAREIT and representatives from retail sector member companies will reconsider this event for 2011.

Contact
 

For further information, please contact George Yungmann at gyungmann@nareit.com or Sally Glenn at sglenn@nareit.com.

HIGHLIGHTS

 

• HOUSE PASSES FIRPTA REFORM PROPOSAL
   
• DODD-FRANK WALL STREET REFORM SIGNED INTO LAW
   
• ENERGY LEGISLATION RECEIVING RENEWED ATTENTION
   
• RESOLUTION INTRODUCED TO RECOGNIZE 50th ANNIVERSARY OF REITS
   
• COALITION TO INSURE AGAINST TERRORISM PROVIDES RESPONDS TO REQUEST FOR INFORMATION ON TERRORISM RISK INSURANCE
   
• CARRIED INTEREST TAX INCREASE STILL ON THE TABLE
   
• MAIN STREET FAIRNESS ACT INTRODUCED IN THE HOUSE
   
• OMB REJECTS PROPOSED EPA QUESTIONNAIRE ON POST-CONSTRUCTION STORMWATER DISCHARGES
  
  

   

  HOUSE PASSES FIRPTA REFORM PROPOSAL

  On July 30, the House of Representatives passed H.R. 5901, the “Real Estate Jobs and Investment Act” by a vote of 402-11, under a procedure that requires a two-thirds vote for passage and is reserved for non-controversial measures. Introduced by Rep. Joseph Crowley (D-NY), this proposal represents an important step toward enactment for reforms to the Foreign Investment in Real Property Tax Act (FIRPTA) advocated by NAREIT and other real estate organizations. For more information on this broader effort, CLICK HERE.
  
  Specifically, H.R. 5901 would increase the current “portfolio investor” exception for sales of stock and capital gains dividends of listed REITs from 5 percent to 10 percent, including for investors of 10 percent or less in listed foreign entities entitled to pass-through treatment under applicable U.S. tax treaties. This change would be consistent with the definition of portfolio investor used in tax treaties and which is applicable to foreign investment in U.S. debt securities. REIT dividends paid to non-U.S. investors would remain subject to U.S. withholding (but not FIRPTA) tax. To read NAREIT’s letter of support for H.R. 5901, CLICK HERE. To read the floor debate on H.R. 5901, CLICK HERE, and to view the roll call vote results, CLICK HERE.
  
  NAREIT appreciates the leadership of Rep. Crowley, as well as House Ways and Mean Committee Chairman Sander Levin (D-MI), Ways and Means Committee Ranking Member Dave Camp (R-MI), and Rep. Pat Tiberi (R-OH) for their efforts in addressing the obstacles FIRPTA creates to foreign investment in U.S. real estate companies. We are hopeful that similar legislation will soon be introduced and considered in the Senate to enact this and other needed FIRPTA reforms.

  DODD-FRANK WALL STREET REFORM SIGNED INTO LAW

  On July 21, President Obama signed the "Dodd-Frank Wall Street Reform and Consumer Protection Act" (Pub. L. No. 111-203) into law. Attention now turns to the regulators who will write and implement rules in accordance with the new law. CLICK HERE to read the text of the final legislation.
  
  Regulators must now begin to implement rules based on the law's new requirements to provide new consumer protections, establish an orderly resolution authority for failed financial firms, create new registration and reporting requirements for private funds, and oversee the derivatives market, among other initiatives.
  
  NAREIT, under the guidance of its Derivatives Reform Task Force, and in coordination with the Coalition for Derivatives End-Users, advocated both for the creation of new transparency in the over-the-counter derivatives market and for clear protections for REITs and other "end-users" that utilize derivatives to manage business risks. CLICK HERE to read NAREIT's Policy Report summarizing the derivatives provisions of the new law and the challenges that remain during the rulemaking process, and CLICK HERE for additional information.
  
  Additionally, the Dodd-Frank Act preserves the federal preemption from state registration requirements of private placement offerings of securities, ensuring that companies can continue to raise capital and expand their enterprises through private placements pursuant to Rule 506 of Regulation D of the Securities Act of 1933. NAREIT joined a broad-ranging group of business organizations to advocate for this outcome. CLICK HERE for more information on this effort.

  ENERGY LEGISLATION RECEIVING RENEWED ATTENTION

  Due to the upcoming August Recess and the desire of lawmakers to be in their districts as much as possible prior to the November election, very little time remains on the legislative calendar for the 111th Congress. The shortened schedule calls into question the ability of Congress to move far-reaching energy or climate change legislation this year.
  
  Reflecting the evolving landscape for energy legislation, but also a continued interest in energy tax incentives, the House Ways and Means Committee unveiled on July 26 a new “discussion draft” of legislation, the “Domestic Manufacturing and Energy Jobs Act of 2010,” that would extend and, in some cases, modify energy related tax incentives. To read a Ways and Means staff summary of this proposal, CLICK HERE, and to read the draft bill text, CLICK HERE.
  
  Of particular interest for NAREIT members are provisions to extend a popular program, enacted as part of last year’s American Recovery and Reinvestment Act, that provides direct cash payments to offset the cost of investments in qualifying renewable energy technology, such as rooftop solar panels. Authored by Reps. Earl Blumenauer (D-OR) and Linda Sanchez (D-CA), these provisions would convert the existing grant program into a refundable tax credit for investments made through 2012 and make it available to REITs without regard to their dividends paid deduction. CLICK HERE for more information on the legislation championed by Reps. Blumenauer and Sanchez and strongly supported by NAREIT.
  
  The Ways and Means discussion draft also includes modifications to the section 179D energy efficient commercial building deduction. Specifically, the bill would include investments in energy efficient roofing as qualifying expenses and provide an enhanced deduction for efficiency investments in certified historic structures. NAREIT continues to engage with key staffers on the Ways and Means Committee to seek a technical change to address a mismatch in the treatment of this deduction for tax and earnings and profits purposes that prevents REITs from fully benefiting from this deduction.
  
  While the House of Representatives passed an ambitious “Cap and Trade” proposal in 2009, there has been little consensus in the Senate around proposals to limit carbon emissions. Instead, Senate Majority Leader Harry Reid (D-NV) released on July 27 a summary of the “Clean Energy Jobs and Oil Company Accountability Act,” legislation intended to address the BP oil spill in the Gulf of Mexico and make investments in other energy and environmental initiatives. This proposal does not include a package of tax incentives that may benefit REITs and other commercial real estate owners who pursue certain “green” efforts. To read a Senate staff summary of this proposal, CLICK HERE, and to read the draft bill text, CLICK HERE.
  
  NAREIT will continue to encourage policymakers to ensure that REITs can fully participate in incentives for energy efficiency and renewable energy production.

  RESOLUTION INTRODUCED TO RECOGNIZE 50th ANNIVERSARY OF REITS

  On Friday, July 30, Chairman Sander Levin (D-MI) and Ranking Member Dave Camp (R-MI), and 25 other members of the House Committee on Ways and Means introduced a Congressional Resolution recognizing the 50th Anniversary of the signing of the legislation that first enabled the creation of REITs. To read the text of H.Res.1595, which includes the list of original cosponsors, CLICK HERE.
  
  NAREIT appreciates the recognition these lawmakers are providing for REITs and the REIT approach to real estate investing, and we are hopeful that the full House of Representatives will take up and pass this resolution on or about September 14, which is the 50th anniversary of REITs.

  COALITION TO INSURE AGAINST TERRORISM PROVIDES RESPONDS TO REQUEST FOR INFORMATION ON TERRORISM RISK INSURANCE

  On August 2, the Coalition to Insure Against Terrorism (CIAT) responded to a Request for Comments on the Terrorism Risk Insurance Act (TRIA) issued by the President's Working Group (PWG) on Financial Markets as it prepares to submit a report to Congress on the long-term availability and affordability of terrorism insurance. NAREIT and The Real Estate Roundtable are founding members of CIAT, a broad coalition of commercial insurance consumers that came together immediately after 9/11 to ensure that American businesses could obtain comprehensive and affordable terrorism insurance.
  
  CIAT’s formal comments make clear that TRIA has successfully promoted the availability of terrorism risk insurance and has established a mechanism for public-private sector cooperation following an act of terrorism – and at limited cost to the federal government. The submission also notes that TRIA has been improved since its enactment in 2002 and that all evidence strongly points to the need to continue the TRIA program beyond its current 2014 authorization. To review CIAT’s submission, CLICK HERE.

  CARRIED INTEREST TAX INCREASE STILL ON THE TABLE

  By a vote of 59-39, the Senate passed legislation on July 21 that would extend unemployment insurance through November 30, and retroactively restore the program for individuals whose benefits expired several weeks ago. The House passed this bill July 22 by a vote of 272-152 and President Obama signed it into law later that day.
  
  Of particular interest to the broader commercial real estate industry, this proposal was originally attached to provisions that would recharacterize, and therefore increase, the tax on the partnership interests attributable to investment-related services, known as “carried interests.” This tax increase has been tied to efforts that would extend popular tax incentives that expired at the end of 2009.
  
  Under significant political pressure to address the expiration of unemployment insurance, and the need to surpass the 60 vote threshold needed to move legislation in the Senate, the Senate dropped the “extenders” and the carried interest proposal from this bill. While these provisions were not included in the final version of this bill, it is likely that they will resurface in the fall.
  
  NAREIT will continue to monitor proposals to change the tax treatment of "carried interests" and will encourage lawmakers to maintain the technical fixes advocated by NAREIT, and included in recent proposals. Specifically, these provisions would prevent the immediate recognition of built-in carried interest gains during UPREIT “roll-ups,” and protect against the loss of REIT status due to the recharacterization of income as non-qualifying income or due to the possibility that REIT-owned partnerships could be considered to be corporations due to other provisions of the proposal.

  MAIN STREET FAIRNESS ACT INTRODUCED IN THE HOUSE

  On July 1, Representative Bill Delahunt (D-MA) introduced H.R. 5660, the "Main Street Fairness Act." NAREIT supports this legislation that would allow states that conform to Streamlined Sales and Use Tax system to enforce sales tax parity for retail sales that occur online and at physical locations.
  This legislation would ensure that online retailers will be subjected to the same tax requirements as traditional bricks and mortar retailers for sales in participating states, and it will allow those state governments to address unprecedented budget shortfalls by collecting taxes that they are already legally owed - all at little to no cost to the federal government. CLICK HERE for additional resources on the Main Street Fairness Act.
  
  NAREIT anticipates a companion to Rep. Delahunt’s bill to be introduced in the Senate in September, and NAREIT staff will continue to encourage lawmakers in the House and the Senate to support the Main Street Fairness Act.

  OMB REJECTS PROPOSED EPA QUESTIONNAIRE ON POST-CONSTRUCTION STORMWATER DISCHARGES

  In May, as part of its efforts to begin regulating post-construction stormwater discharges from developed property, the Environmental Protection Agency (EPA) circulated a draft questionnaire that would be used to collect information about current industry practices. On June 9, NAREIT and other real estate organizations, including The Real Estate Roundtable and the International Council of Shopping Centers, sent a letter to EPA asserting that the questionnaire was not only burdensome but violated the intent of the Clean Water Act. To read this letter, CLICK HERE.
  
  On July 26, the U.S. Office of Management and Budget (OMB) rejected the EPA’s questionnaire, stating that it has “continuing concerns about whether all of [EPA’s] questions have practical utility and minimize to the extent practical the burden on respondents, as required by the Paperwork Reduction Act and its implementing regulation.” This decision puts the questionnaire on hold for now, and will require EPA to make significant revisions before it resubmits a new draft to OMB for review.
  
  NAREIT will continue to work with its industry partners to monitor the development of this questionnaire and to question the EPA’s statutory authority to regulate post-development stormwater runoff.

  CONTACT

  For further information, please contact Kirk Freeman at kfreeman@nareit.com or Robert Dibblee at rdibblee@nareit.com.