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WHEN IS ASSET NOT AN ASSET? WHEN VALUE RISES, RULE SAYS

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The retail real estate industry is still trying to figure out whether it was tricked or treated this Halloween.

Following complaints from REITs and accounting firms, the Financial Accounting Standards Board pulled back indefinitely on implementing a rule that turned out to have strange implications for REIT balance sheets and earnings. Only two days later, however, FASB proposed some changes to another of its policies. And that

proposal, some say, could pitch yet another curveball at the leasing market.

Retail real estate developers were puzzled over certain provisions in FASB Statement No. 150 (SFAS 150) that attempted to clarify accounting procedures for financial instruments that have the characteristics of debt and equity.

In previous years, when companies accounted for such items on their balance sheets, they did so in the “mezzanine” section, which falls between liabilities and equities. SFAS 150 tries to determine whether these arrangements fall on the equities or liabilities side.

SFAS 150 stipulates that if a venture agreement contains a termination date, assets have to be bought back and must therefore be viewed as a liability for whichever party does the buying. In addition, REITs need to record whether the value of retail real estate assets in such a venture increases or decreases. That’s all well and good, says Lisa Palmer, a spokeswoman for Regency Centers, a Jacksonville, Fla.-based REIT involved in several joint ventures. But in practice, the provision takes a bizarre twist: If the value of the assets increases, it counts as an interest expense and negatively affects earnings, whereas if it decreases, it counts as interest income, and the REIT sees positive earnings, she says.

SFAS 150 went into effect on July 1, which meant REITs had to make adjustments accordingly in reporting their third-quarter earnings. And that’s when the quirks became evident. Regency Centers’ net income would have been reduced by about $9.5 million against the previous quarter as a result of the new stipulations.

The National Association of Real Estate Investment Trusts and the Institute of Management Accountants expressed concern that the provision would continue to create these balance-sheet oddities. In October they prevailed upon FASB to hold off on SFAS 150 in the interest of re-examining its impact.

“The fact that they are reconsidering it shows a reason why it was deferred,” said Palmer. “The way that [SFAS 150] impacted joint ventures was a distortion to earnings.”

Now Regency Centers’ third-quarter earnings will not be influenced by SFAS 150. The company reported that net income for common stock holders was $29.8 million.

Likewise, New Hyde Park, N.Y.-based Kimco Realty Corp. revised its third-quarter results in mid-November to discard the effects from SFAS 150. It reported net income of $91.5 million, instead of the previously reported $89.5 million.

While SFAS 150 sets out to explain how joint ventures should be accounted for, FIN (Financial Interpretation No.) 46, aims to specify which partner’s balance sheet should record the data.

Traditionally, if a REIT in a joint venture owned more than 50 percent of the assets, it would have to account for all of the assets and liabilities of the partnership on its own balance sheet. Now the partners need to assess which of them carries the greatest amount of economic risk and reward in the enterprise. Then that party, the primary beneficiary, has to account for 100 percent of the venture’s assets and liabilities on its balance sheet. The other partner would simply list the venture as an asset.

But here’s the “trick,” some say: On Oct. 31 FASB proposed deleting the section of FIN 46 that provides examples of contracts, ownerships and other monetary interests that qualify as “variable interests” within a larger entity. Without context, though, market players found the section too confusing, says Ann McIntosh, FASB’s acting project manager for FIN 46. So FASB proposed dealing with the issue in a separate document. But industry professionals worry that this could lead to new definitions — and new restrictions — on such retail property tools as synthetic, credit-tenant and other long-term leases.

“The staff here is trying to develop guidance on the same topic,” said McIntosh. “It is not intended to leave people high and dry.”

The industry expects the clarifications to FIN 46 to be effective for reporting periods after Dec. 15.

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