Financial Statements of Acquired Real Estate Operations: A Snapshot
This guide provides a high-level summary of the SEC’s financial statement requirements for significant acquisitions of real estate operations and reflects the SEC’s amendments to Rule 3-14 that became effective on January 1, 2021.
Where to Start:
When evaluating the financial reporting ramifications for an acquisition, registrants should begin by answering the two following questions:
- Is the registrant acquiring a “real estate operation,” as defined by Regulation S-X?
- What is the significance of the acquired real estate operation to the registrant?
The answers to these questions will ultimately drive the financial statements to be filed in Form 8-K and any subsequently filed registration statements.
Is the Acquisition a "Real Estate Operation"?
Regulation S-X Rule 3-14
A real estate operation is defined as “a business that generates substantially all of its revenues through the leasing of real property.” An interest accounted for under the equity method or the fair value option also qualifies as a real estate operation.
Is the Acquired Real Estate Operation "Significant"?
Regulation S-X Rules 3-14 and 1-02(w)
The significance of an acquired real estate operation (“target”) to the registrant (“acquiror”) is based on the investment test, and that investment test percentage dictates the financial reporting requirements.
| Investment Test | Fair value of the acquiror’s investment in the real estate operation (i.e., GAAP purchase price), excluding any assumed debt secured by the real estate, compared to the acquiror’s aggregate worldwide market value (“WWMV”), if available, otherwise use total assets from the most recently audited balance sheet and include assumed debt secured by the real estate as part of the acquiror’s investment in the real estate operation |
| Blind Pool Offerings | See discussion of adapted significance calculations for blind pool offerings below |
A group of related real estate operations are treated as a single acquisition for significance purposes. Real estate operations are related if they are under common control or management, one acquisition is contingent upon the acquisition of each other real estate operations or on a single common event, such as an IPO. Financial statements of related real estate operations may be presented on a combined basis for any period under common control or management.
Additionally, a registrant is permitted to use pro forma financial information to measure significance for acquisitions completed after the latest fiscal year end if the registrant has filed:
- The required financial statements of the acquired real estate operation, and
- The required Article 11 pro forma financial information for any such acquired real estate operation.
When to Report a Significant Acquired Real Estate Operation:
| Step 1 | Step 2 | Step 3 | |
| Action | Sign the Purchase Agreement | Close the Acquisition | File the Required Financial Statements |
| When & what to file | Within 4 business days, File Item 1.01 Form 8-K | Within 4 business days, file Item 2.01 Form 8-K | Within 71 calendar days after Step 2, file Item 9.01 Form 8-K |
If the acquired real estate operation financial statements are required in connection with a registration statement (as discussed below), they may be included in the registration statement or incorporated by reference from a Form 8-K filing.
Financial Statements of an Acquired, or Probable to Be Acquired, Real Estate Operation:
The historical financial statement requirements for an acquired real estate operation to be filed in Form 8-K or in a registration statement are based on the bright-line significance threshold set forth in S-X Rule 3-14 as follows:
| Significance | Required Financial Statements of Acquired Real Estate |
| Less than 20% | No financial statements |
| Greater than 20%1 | Abbreviated income statement excluding items not comparable to proposed future operations of the property, for most recent audited annual* and unaudited interim periods (no prior year annual or interim information is required) |
| Blind Pool Offerings | See discussion of adapted significance calculations for blind pool offerings below |
* Financial statements for a period of 9 to 12 months satisfy the annual financial statement requirement for the acquired real estate operation.
In a registration statement, a registrant must apply the same significance calculation and financial statement requirements to “probable to be acquired” real estate operations.
Registrants also need to consider the aggregate effect of all real estate acquisitions that have been completed or are probable of acquisition since the date of the most recently filed audited balance sheet filed by the registrant. If the aggregate effect of such acquisitions exceeds 50% significance for the investment test, registrants are required to file:
- Pre-acquisition historical audited financial statements for any acquired real estate operation whose individual significance exceeds 20%; and
- Pro forma financial information depicting the aggregate effects of all such “individually insignificant” real estate acquisitions.
Financial statements of an acquired real estate operation are no longer required in a registration statement once the acquisition has been reflected in the registrant’s audited financial statements for nine months.
Age of Financial Statements of an Acquired, or Probable to Be Acquired, Real Estate Operation:
The ages of the annual and interim financial statements of the acquired (and probable to be acquired for registration statements only) real estate operation to be included in Form 8-K or in a registration statement are based on the following:
| Form 8-K | Registration Statement | |
| Age is determined by reference to: | The due date of Step 2 Form 8-K | The effective date of the registration statement |
| Annual financial statements | Required when Step 2 Form 8-K is due 90 days or more after real estate operation’s fiscal year end | Required when filing is effective after 89th day after real estate operation’s fiscal year end -OR- May be required if filing is effective after 45 days but not more than 89 days after real estate operation’s fiscal year end depending on the registrant’s eligibility for relief under S-X Rule 3-01(c) |
| Interim financial statements | Latest interim period must be within 135 days of the Step 2 Form 8-K due date, except that the 3rd quarter is considered timely through the 90th day after the real estate operation’s fiscal year end | Latest interim period must be within 135 days of the effective date |
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