New Valuation Rules Complicate Mergers, Acquisitions
Ken Rogers quoted in article written by Donna Mitchell, as published by Shopping Centers Today, an ICSC publication, August 2005.

In 2001 the Financial Accounting Standards Board (FASB) issued rules FAS 141 through 144 to ensure more-consistent accounting methods for mergers, acquisitions and property purchases. These rules may have made balance sheets easier for investors to read, but they surely made life no easier for the companies themselves, REITs included.

Regency Centers Corp. found that out after buying 100 neighborhood and community centers in February from Washington, D.C.-based First Washington Realty and CalPERS. Instead of accounting for just the land, the buildings and any tenant improvements, as it would have under the old system, Jacksonville, Fla.-based Regency now had to analyze more than 2,000 leases to determine their market value, deferred leasing costs and other factors. Regency had to bring in specialists to cope with the extra work, says Michael Mas, the firm's vice president of joint ventures.

"Applying [FAS] 141 requires a much more narrow focus," Mas said. "Instead of looking at just 100 properties, we are forced to look at approximately 2,500 leases in addition to the acquired land, improvements and buildings."

The rules casue migraines on the sell side too, says Paul Wilke, director of ad valorem taxes at Houston-based Weingarten Realty Investors, which is currently selling off some properties. "I've talked to our controller, and basically this is making a lot more work for him," Wilke said.

Historically, companies have used two accounting methods for mergers and acquisitions, rendering very different results. Under the pooling-of-interests method, the acquirer would record both companies' assets and liabilities without having to adjust assets for current fair market value or reconciling them to the deal price. The purchase-accounting method, on the other hand, did require adjusting the value of assets to reflect fair market value. Understandably, this duality confused investors, says Kenneth J. Rogers, a director of real estate analysis at Fisk Kart Katz & Regan, a Chicago law firm.

Now a company acquiring a property or portfolio must break down the purchase price according to tangible assets: land, furniture, fixtures, tenant improvements and the value of the current leases. If the company paid more than fair market value, the surplus value beyond tangible assets is designated "goodwill." The new rules apply equally for mergers and property acquisitions.

Goodwill needs to be regularly evaluated on the balance sheet, as any other asset would be, says Scott Farb, a managing principal of the national real estate group at GumbinerSavett, a Santa Monica, Calif.-based accounting firm.

These rules, a whole new accounting paradigm, have caused quite a stir in the real estate industry, says Farb. "it is just taxing a lot of companies to comply with these rules. There are no more options to forget about it," Farb said. "They have to do it."

And yet the new rules could be less taxing for some - literally. By assigning dollar values to relationships with in-line tenants and anchors and to leases, the detailed information they require could be used when landlords appeal for lower property tax assessments.

"There is a very good liklihood that it will reduce our property tax bills," said Wilke. "Now that the SEC and FASB have weighed in, we can use the argument as more evidence as to why you [the landlord] were right."

For More information contact Kenneth J. Rogers.