SEC Publishes Interpretive Guidance on Real Estate Acquisitions and REIT Disclosures

The Securities and Exchange Commission (“SEC”) published guidance on July 16, 2013 related to revisions to the financial reporting rules for real estate acquisitions and further interpretive guidance to REIT disclosures. This guidance is effective immediately.

The revisions to the rules relating to real estate acquisitions, specifically Rule 3-14 and Rule 3-05, are highlighted in the SEC’s Division of Corporation Finance Financial Reporting Manual.  A summary of the significant revisions include:

  • Further guidance on the application of Rule 3-14 financials, Rule 3-05 financial and net lease/significant tenant financials resulting from an acquisition transaction; 
  • Expanded guidance on the definition of “related” properties;
  • Ability to now measure the significance of an acquisition for purposes of Rule 3-14 using pro forma assets, in certain situations;
  • Revised scope for measuring the significance of individually insignificant acquisitions to no longer include properties acquired during the most recently completed fiscal year, but only using properties acquired subsequent to the end of the most recently completed fiscal year; 
  • Further clarification and changes relating to Rule 3-14 for a public, non-traded REIT conducting a blind pool offering subject to Industry Guide 5; and 
  • Expanded guidance on the disclosure requirements of financial information relating to properties subject to triple net leases that meet the significance requirement.

For the exception of the potential enhanced disclosures relating to properties subject to triple net leases and the expanded requirements for measuring significance and requirements for audited financial statements, most of the revisions stated above primarily added clarification to further assist the registrant in determining the requirements under the financial reporting rules.

In addition to the above-stated changes, there is one additional revision affecting required financial statements for acquired properties. Previously, a registrant could request relief from providing audited financial statements if the acquired rental property had a rental history of less than one year. The revisions now state that for any acquired rental property with a rental history of more than three months but less than nine months, the financial statements may be presented on an unaudited basis. The revisions also now state that for any acquired rental property with a rental or leasing history of less than three months, financial statements of the property are not required.

The SEC also issued guidance on disclosures relating to public, non-traded REITs, as outlined in CF Disclosure Guidance, Topic No. 6: Staff Observations Regarding Disclosures of Non-Traded Real Estate Investment Trusts. This guidance includes the following disclosure topics:

  • Distributions
  • Dilution
  • Redemptions
  • Estimated value per share or net asset value
  • Supplemental information
  • Industry Guide 5 disclosures
  • Prior performance
  • Readability of disclosures

The changes to the disclosures outlined above may require more time and resources of the registrant if this information was not previously disclosed. However, these enhanced disclosures may be more meaningful to investors and users of the financial statements. The investors and users of the financial statements should now be able to better identify how the registrant is currently using cash and plans to use cash in the future relative to distributions, as well as the basis of how they determine their net asset value. Ultimately, these enhanced disclosures should make the financial statements more comparable for investors and users.

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