Real Estate Investment Funds Project

1
Real Estate Investment Funds Project

• Education Session
• Jeffrey J. Kiley Alan R. Latshaw
• AICPA Accounting Standards Executive Committee
• April 20, 2005

2
Overview of Session

• Discuss the NCREIF organization and its role in
  the Institutional Real Estate Investment Industry
• Provide information regarding the nature and size
  of investment in real estate funds
• Explain existing industry accounting practices
• Describe key issues and goals to be considered in
  the project

3
The NCREIF Organization

• National Council of Real Estate Investment
  Fiduciaries
• Formed 1982
• NCREIF Property Index - Established1978
• NCREIF Property Index - 145 Billion
• Total Properties in Index - 4152
• Number and types of Members
• Data Contributors 105
• Professionals 72
• Academics 26
• Membership listing is provided in Appendix A.

4
NCREIFs Role in the Industry

• Serves Institutional Real Estate Investment
  Industry
• Non-partisan databank
• Primarily defined benefit pension plan investment
• Calculates and Publishes
• Real estate performance indices
• Other statistical risk return measures
• Actively Promotes and Sponsors
• Independent research using NCREIF data
• Training through education
• Provides Industry Leadership Technical
  Expertise
• Established committee structure
• Resolution of technical industry issues

5
NCREIF Committees

• Standing Committees
• Accounting
• Database Indices
• Information Management
• Performance Measurement
• Portfolio Management
• Research
• Valuation
• Special Committees
• Index Oversight
• Fund Database
• Real Estate Information Standards (REIS)

6
Real Estate Information Standards

• Purpose to establish and promote a single set
  of standards for consistent reporting of real
  estate information in the institutional
  investment community
• Real Estate Standards are dependent on Global
  Investment Performance (formerly AIMR) Standards,
  USPAP Valuation Standards, and GAAP Accounting
  Standards
• Consistent with standards initiative undertaken
  by AIMR
• AIMR Standards published in 1993, largely
  accepted today
• Non-AIMR compliant investment managers
  disadvantaged
• REIS published 1995, accepted by industry today
• Non-REIS compliant investment managers
  disadvantaged

7
Institutional Investment Portfolio

• Plans Able to Provide Asset Class Distribution (
  Billions)
• Stocks 2,761 55.9
• Bonds 1,432 29.0
• RE Private Equity 167 3.4
• VC Private Equity 119 2.4
• All Other 459 9.3
• Totals 4,939 100.0
• Source Pension Real Estate Association March
  2003, Thomson Financial Nelson Standard Poor's
  Money Market Directories

8
Plan Investment in Real Estate Private Equity

• Plans Able to Provide Asset Class Distribution (
  Billions)
• Governmental 97 58.3
• Corporate 37 22.0
• Endowment 12 6.9
• Foundation 3 1.6
• Union 15 8.9
• Other 4 2.2
• Source Pension Real Estate Association March
  2003, Thomson Financial Nelson Standard Poor's
  Money Market Directories

9
Pension Investment in Real Estate Private Equity

• Pension Investment ( Billions)
• Open-end funds 50 25.0
• Closed-end funds 45 22.5
• Direct Investment 105 52.5
• Total 200 100.0
• Non-pension investment is estimated to be 200
  billion
• Source NCREIF estimates

10
Current Industry Practice

• Since industrys inception, the requirement to
  provide fair value information by real estate
  funds was clear but application of accounting
  standards was unclear.
• Pension plan investment lead the industry to FAS
  35.
• Direct investment arrangements also considered
  the Employee Benefit Plans Guide.
• While commingled funds considered the Investment
  Companies Guide, its applicability to real estate
  funds was unclear, due in part to the perceived
  real estate scope exclusion.
• Because of significant historical diversity in
  practice, the industry sought consistency through
  NCREIF standards.

11
Three Primary Practices Today

• Fair Value Consolidation Method - Fund Reflects
  Assets, Liabilities, Revenue, Expense for
  Controlled Investments
• Fair Value Equity Method - Fund Reflects its
  share of Accrual Earnings and Appreciation from
  Investments
• Fair Value Cost Method - Funds Records
  Investments at Fair Value with Income Recognized
  when Received

12
Real Estate Private Equity Practices
13
Scope Project Impact

• Scope project brings clarity to applicability of
  IC Guide to real estate funds
• Results in need to address key implementation
  issues
• Significant portion of pension investment in
  commingled vehicles expected to qualify to use IC
  Guide
• Direct investment accounts by pension funds would
  look to Employee Benefit Plans Guide

14
Summary of Key Issues

• Use of Consolidation or Equity Method Accounting
  for Investments
• Recognition of net investment income
• Accounting for notes payable
• Disclosure of investment information

15
Use of Consolidation or Equity Method Accounting
for Investments

• Paragraph 7.04 of the IC Guide indicates that
  consolidation or use of the equity method of
  accounting by an investment company of a
  non-investment company investee is not
  appropriate
• Some have indicated consolidation of a real
  estate investment would be an option if a real
  estate fund chose to own property directly rather
  than through a separate legal entity

16
Recognition of Net Investment Income

• References in the IC guide discuss interest and
  dividends
• Paragraph 7.04 is clear with respect to the
  prohibited use of consolidation or the equity
  method of accounting
• A dividend income recognition principle would
  appear to be the only acceptable accounting
• Some have indicated investment income recognition
  would be different if a real estate fund chose to
  own property directly

17
Accounting for Notes Payable

• The IC Guide requires investment companies to
  report their investments at fair value, which
  represents a current exchange price principle
• Par 7.04 appears to prohibit consolidation and to
  require investments to be reported net of debt
• Accordingly, any impact on a current exchange
  price resulting from the value of debt
  liabilities would appear to be required to be
  considered in the net valuation of investments
• Par 7.25 requires notes payable to banks (i.e.
  fund level notes) to be stated at amounts
  payable, net of unamortized premium or discount
• This would appear to prohibit an investment
  company from carrying fund level debt at fair
  value and may impact reporting of investment
  results for directly owned property

18
Disclosure of Investment Information

• Adequate disclosure of investment information
  would appear to be critical for a meaningful
  presentation of real estate fund results
• Considerations include disclosure of amount and
  type of leverage used within investments
• Consistency of schedule of investments
  information
• Also investment information such as gross assets,
  liabilities, revenue, expense

19
Example Financial Statements

• See attached example financial statements that
  illustrate current industry practice based on a
  fair value consolidation presentation
• An objective of this project may also be to
  develop illustrative financial statements for
  Real Estate Private Equity Funds

20
Key Goals of Project

• Ensure project does not change any level B
  requirements contained in the IC Guide.
• Meaningful income and appreciation reporting
• Adequate disclosure of important investment
  information
• Guidance for real estate funds in the IC Guide
  and direct investments of employee benefit plans
• Accounting guidance that results in consistent
  reporting of equivalent investment substance
• Implementation guidance in time for the effective
  date of scope project

21
Appendix ANCREIF Membership
22
Data Contributing Members

• ABP Investments US, Inc.AEW Capital Management
  L.P.AFL CIO Building Investment TrustAlaska
  State Pension Investment BoardAMB Investment
  ManagementAmerican Ventures Realty
  InvestorsATT Investment Management
  Corp.Blackrock, Inc.CalPERSCalSTRSCampbell
  GroupCB Richard Ellis Investors
• CIGNA Realty InvestorsCitigroup
• Commonfund Realty, Inc.CommonWealth Partners,
  LLCCornerstone AdvisorsCornerstone Real Estate
  Advisors, Inc.Cozad/Westchester Agricultural
  Asset ManagementDRA Advisors, Inc.Draper
  Kramer Realty AdvisorsEquity Office Properties
  TrustFidelity Management and Research Co.
• First Washington Realty, Inc

• Florida State Board of AdministrationForest
  Investment AssociatesForest Systems, LLCFremont
  Realty CapitalGE Asset ManagementGeneral
  Investment Development Co.General Motors
  Investment Management
• Global Forest Partners LPGranite Properties,
  Inc.Great Point Investors, LLCHampshire
  CompaniesHancock Agricultural Investment
  GroupHancock Timber Resource GroupHart
  Advisers, Inc.Heitman Capital ManagementHenderso
  n Global InvestorsHines National Office Partners
• ING Clarion PartnersINVESCO Realty Advisors,
  Inc.J.P. Morgan Investment Management, Inc.John
  Buck CompanyKansas Public Employees Retirement
  SystemKennedy Associates R.E. Counsel,
  Inc.Kensington Realty AdvisorsLB Real Estate
  CounselLACERA

23
Data Contributing Members

• Landmark PartnersLaSalle Investment Management,
  Inc.Legacy PartnersLegg Mason Real Estate
  ServicesLend Lease Real Estate Investment
  ManagementLincoln Advisory Group, Ltd.Lowe
  Enterprises Investment ManagementLucent Asset
  ManagementMacFarlane PartnersMassachusetts
  PRIMMetLifeMIG Realty Advisors, Inc.Miller
  Capital AdvisoryMissouri State Employees
  Retirement SystemMorgan Stanley Real Estate
  FundNational Electric Benefit Fund
  InvestmentsNew York State Local Retirement
  SystemsNew York State Teachers Retirement
  SystemPrincipal Global InvestorsProLogis
• Prudential Agricultural InvestmentsPrudential
  Real Estate InvestorsPrudential Timber
  Investments, Inc.Public Employees Retirement
  Association of COPublic Employees Retirement
  System of OH
• Real Estate Capital Partners

• Regency Centers AdvisorsRockwood Capital
  CorporationRREEFSarofim Realty AdvisorsSchool
  Employees Retirement System of OHSentinel Real
  Estate CorporationSHP Asset ManagementSoros
  Real Estate InvestorsSSR Realty AdvisorsState
  of Michigan Retirement SystemsState Teachers
  Retirement System of OHTA Associates RealtyTGM
  Associates, L.P.Thomas Properties
  GroupTIAA-CREFTishman Speyer PropertiesTranswes
  tern Investment CompanyUBS AgriVest LLCUBS
  Realty Investors LLCUMWA Health Retirement
  FundsVirginia Retirement SystemWachovia
  Timberland Investment Mgmt.Washington Capital
  Management, Inc.

24
Professional Members

• Amerian Appraisal Associates, Inc.Atlantic
  Hospitality AdvisorsBailard, Biehl Kaiser,
  Inc.Berkshire Capital CorporationCallan
  Associates, Inc.Centre Street Enterprises
• Chadwick Saylor Co.Courtland Partners,
  Ltd.Credit Suisse First BostonCrosson Dannis,
  Inc.Cushman Wakefield, Inc.Deloitte.Delta
  AssociatesEagle Realty GroupEnnis, Knupp
  AssociatesEquity Office Properties TrustErnst
  YoungFarmers Insurance Group Holding Co.First
  American Title Insurance Co.GMAC Institutional
  AdvisorsGuggenheim GroupHein Associates, LLP

• Institutional Property ConsultantsIntegra
  Realty ResourcesJD EdwardsJohn Hancock Real
  Estate Investment GroupJohn McCracken
  Associates, Inc.Kirkland CompanyKPMG LLPKTR
  Newmark Real Estate ServicesMaginnis, Knechtel
  McIntyreManagement Reports, Inc.Manufacturers
  Life Insurance CompanyMarshMarshall Stevens,
  Inc.McColgan Company, Inc.Moodys Investors
  ServiceNAREITNational Multi Housing
  CouncilNOMURA Securities InternationalPension
  Consulting Alliance, Inc.PNC Bank Corp.Prebon
  Yamane (USA) Inc.PriceWaterhouseCoopers LLP

25
Professional Members

• Property Portfolio Research, Inc.Ratcliffe,
  Call, Duffy, Hughes CompanyReal Estate
  InsightsReal Estate Investment Advisors
• Real Estate Research CorporationRealm Business
  SolutionsRiggs CompanyRussell Real Estate
  AdvisorsSnedeker Consulting, Inc.Sockler
  Mignogna DiLello Realty Group, Inc.St. Paul Fire
  and Marine Insurance CompanyStandard
  Poor'sState Street Global AdvisorsStrategic
  Investment GroupTerzo Bologna, Inc.The
  Nicholson Group Ltd.The Townsend GroupThoreen
  HaleTulsa Commercial Property Services LLCUS
  Realty Consultants, Inc.USAA Real Estate
  CompanyW.P. Carey Co, LLCWalden-Marling,
  Inc.Weiser Realty AdvisorsWitten Advisors
  LLCYardi Systems

26
Academic Members

• William B. Brueggeman - Southern Methodist
  UNMike Clutter - University of GA, Warnell
  School of Forest ResourcesJim DeLisle -
  Universit of Washington - Runstad Center for Real
  EstateJan deRoos - Cornell UniversityDavid
  Downs - Virginia Commonwealth UniversityRobert
  H. Edelstein - University of California,
  BerkeleyJeff Fisher - Indiana UniversityGeorge
  W. Gau - University of Texas at AustinDavid
  Geltner - MIT Center for Real EstateJoseph
  Gyourko - Univ. of Penn., The Wharton
  SchoolWilliam G. Hardin III - Mississippi State
  UniversityDavid Hartzell - UN of NC, Chapel
  HillRobert Jarrow - Cornell UniversityHerve
  Kevenides - New York UniversityDavid C. Ling -
  University of FloridaPeter Linneman - Univ. of
  Penn., The Wharton SchoolCrocker Liu - New York
  UniversityGilad Livne - London Business
  SchoolSteven Ott - University of North
  CarolinaJoseph Pagliari - Northwestern
  UniversityTimothy Riddiough - University of
  WisconsinKenneth T. Rosen - University of
  California, BerkeleyC.F. Sirmans - University of
  ConnecticutLinda Stoller - Babson CollegeRon
  Throupe - University of WashingtonJames R. Webb
  - Cleveland State UniversityLawrence White - New
  York University

27
Appendix B Example Financial Statements