NCREIF Conference. Overview of Current FASB Initiatives that will Impact the Real Estate Industry July 14, 2011

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1 NCREIF Conference Overview of Current FASB Initiatives that will Impact the Real Estate Industry July 14, 2011

2 Presenters Neal Armstrong RREEF Jeff Kiley PricewaterhouseCoopers Jim Strezewski LaSalle Investment Management

3 Agenda Lease Exposure Draft Activities Update Investment Property Entity Exposure Draft Investment Company Exposure Draft Potential Accounting, Business, and Operational Issues Exposure Draft Process

4 Lease Exposure Draft Activities Update

5 Lease Accounting Effect Finance model front load lease rent/expense Lessee - decided Lessor - undecided Amortization component Right to use asset Obligation to provide space Face of income statement will change 2,200 2,000 1,800 Proposed: Performance Obligation Method Current: Fair Value Accounting Revenue 1,600 1,400 Current Historical Cost (Straight-line) 1,200 1, Year

6 Lease Exposure Draft Activities Update NCREIF Webinar - October 2010 FASB at fall 2010 NCREIF conference NCREIF panel discussion at fall 2010 conference NCREIF/REIS comment letter to FASB December 2010 Nearly 800 comment letters received by FASB NCREIF CEO participates in round table discussion with FASB & IASB Board members January 2011 FASB holds a total of 7 round table discussions, preparer workshops, working group meetings, and other outreach activities from December through February, 2011

7 Lease Exposure Draft Activities Update FASB and IASB tentatively decide to revise proposed lease accounting February through June, 2011 Reduce the optional periods to be included in the lease term Loosen reassessment requirements Reduce the amount of the variable lease payments to be included in the lessee s s lease liability and lessor s s lease receivable For short-term term leases a lessee need not recognize lease assets or lease liabilities Clarify the accounting for termination penalties and residual value guarantees The Boards continue to discuss lessor accounting and have not made any final decisions Amendments to ED to be exposed for comment and final guidance by end of 2011

8 Lease Exposure Draft Activities Update What this currently means for us Fair Value Reporters out It appears Investment Property Entities would be scoped out of the t proposed lease accounting Reduces the likelihood of lessees negotiating shorter lease terms Reduces incremental costs associated with implementation NCREIF will submit comment letter on re-exposed exposed amendments Lessor accounting treatment is still undefined (non-investment property entities)

9 Investment Property Entity Exposure Draft

10 Investment Property ED Background IASB has investment property (IAS 40) at fair value Optional Was no direct guidance in U.S. GAAP for similar entities FASB Last summer: Convergence - guidance similar to IAS 40 Required not optional FASB Today: Scope is entity based, not asset based Investment Property Entities own investment property Modeled off the current definition of an investment company

11 Investment Property Exposure Draft - NCREIF Activities Update October meet with the FASB Group of five January meeting with FASB FASB Deliberations FASB Deliberations - back FASB Deliberations - forth On-going as of June Change of Guard IASB push Silence

12 Scope Entity Definition Tentative definition of an investment property entity Business Activities - The entity s s primary business activities relate to investing in real estate properties. Business Purpose - The express business purpose of the entity is to invest in real estate properties for total return including an objective to realize capital appreciation, for example, through disposal of its real estate properties. Unit Ownership* - Ownership in the entity is represented by units of investments, such as shares or partnerships interests Pooling of Funds* - The funds of the entity's investors are pooled to avail the investors of professional investment management. Reporting Entity - The entity can be a legal entity, but not necessarily * Notwithstanding the conditions noted above, entities that have only one investor that accounts for its investments at fair value pursuant to a requirement or an option under US GAAP AP are not subject to the unit ownership and pooling of funds requirements.

13 Measurement Real estate investment property measured at fair value with all changes in fair value recognized in net income Noninvestment properties measured in accordance with other U.S. GAAP No practicability exception to fair value for investment properties under construction Rental revenue on investment properties recognized on a straight-line basis Controlling interests in investment property entities would be subject to ASC Consolidations (FIN 46R)

14 Presentation An investment property entity would present the following items separately for investment property investments: Rental income Rental expenses Fair value of investment properties Debt Gross or net line items?

15 Investment Company Exposure Draft

16 Fair Value History - Compared Existing GAAP SOP 07-1 Investment Properties Investment ASC 946 (Deferred) Project Companies Project Investment activity Express Business Purpose Nature of the Business Activities Business Activities Unit ownership Investment activity Express Business Business Purpose Purpose Pooling of funds Multiple Substantive Unit ownership Unit ownership Investments Reporting entity Exit Strategies Pooling of funds Pooling of funds Not for Strategic Operating Purposes Reporting entity Fair Value Management Reporting entity

17 Interaction with Investment Property Entities Tentative decisions: A entity that is both and investment company and investment property entity must apply investment property accounting to the entire entity An investment company with investments in real estate property (not an investment property entity) must apply investment property accounting to the investment property held The FASB believes that similar disclosure requirements will minimize the tension regarding the overlap between the two standards Non-operating operating model no longer appropriate reporting model for certain funds Where will opportunity funds fall?

18 The Issues We Face

19 Broad Spectrum of Issues Scope Accounting Net Asset Value Performance Appraisals Valuation of Investments Valuation of Debt Transition Related Implementation Cost

20 Scope Issues Single Investor Account pooling exemption? Pension funds, Endowment funds Wholly owned by an investment company If non-investment property operations significant, your are not an Investment Property Entity IAS 40 may dictate some treatment Owners of hotels and healthcare properties IAS 40 not considered investment property Scoping may be difficult Default to other GAAP Historical Cost

21 Accounting Issues Amortization and Depreciation? Straight-line rent Held for sale accounting Currently none Possible consolidation of results Default to other GAAP Maybe historical cost Hotels and healthcare properties

22 Other Issues Measurement of NAV GAAP + Standards Non-GAAP Measure FFO, INREV NAV Current differences get worse Performance measurement Component returns vs. total NPI more uniform not more comparable historically Appraisals Public REIT requirements Debt valuation services

23 Other Issues (cont) Investment / Fund Valuation Trading NAV vs. GAAP NAV Debt Valuation Defined by GAAP Par = value? No more optionality Transition Financial reporting vs. supplemental reporting Joint ventures agreements

24 Other Issues (cont) Cost Increased audit NAV new measures = new audits Debt at value Investment Companies going forward Do they still exist as we know them? Details not available

25 Exposure Draft Process

26 Exposure Draft Process Fatal Flaw Document Mid to late July Issuance of both ED s s expected during Q3, 2011 Potentially short response period 75 days Multi-disciplinary NCREIF Task Force needed Work with other industry groups to strengthen lobbying efforts Please consider responding as an organization

27 Multi-disciplinary Task Force Performance Measurement Perspective on how investments are evaluated Valuation Perspective on valuation methodology Portfolio Management Perspective on what investors want Accounting Hey, we are Accounting, enough said! Practitioners of Operating and Non-operating operating models

28 Questions?

Investment Companies and Investment Property Entities

Investment Companies and Investment Property Entities FASB Project Update November 2011 NCRIEF Conference The views expressed in this presentation are those of the presenter. Official positions of the