Financial Statements of Acquired Real Estate Operations: A Snapshot

September 2020

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This guide provides a high-level summary of the SEC’s financial statement requirements for significant acquisitions of real estate operations and is based on the SEC’s latest rule amendments that become effective on January 1, 2021, but may be voluntarily applied earlier.
 

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.

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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:

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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:

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* 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:

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Blind Pool Offerings 

Regulation S-X Rules 3-14 and 11-01(b)

Registrants sell securities in a blind pool offering to purchase real estate operations.These real estate operations are not identified at the effective date of the registration statement and the significance test is as follows:

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Pro Forma Financial Information

Regulation S-X Article 11

When a real estate operation’s abbreviated historical financial statements are required to be presented, pro forma financial information must also be presented that includes:
  • A pro forma condensed balance sheet as of the end of the most recent period for which a balance sheet is required;
  • Pro forma condensed statements of income from continuing operations for the last completed fiscal year and year-to-date interim period; and
  • Accompanying explanatory notes. 
Pro forma adjustments are required to give effect to the accounting for the acquisition.  If the aggregate effect of such acquisitions exceeds 50% significance for the investment test, the aggregate effects of all other “individually insignificant” real estate acquisitions are also reflected in the pro forma financial information. 

Additional management adjustments to reflect synergies and dis-synergies of the acquisition are optional and may be presented in the explanatory notes. 


 
[1] When the effective date of the registration statement is no more than 74 days after completion of the acquisition, financial statements may not be required if significance is at least 20%, but less than 50%.  However, financial statements for 50% significant completed and probable acquisitions must be included.