United States: Changes In Reporting For Acquisitions By Non-Exchange Traded REITs

On December 9, 2008, the staff at the SEC (the "Staff") released their Financial Reporting Manual which includes the recent changes in reporting for acquisitions by blind pool non-exchange traded REITs summarized in our May 29, 2008 REIT Alert "SEC Seeks Improved Disclosure by Non-Exchange Traded REITs."¹ In short, the revised guidance requires non-exchange traded REITs to file financial statements that satisfy the requirements of Rule 3-14 for acquisitions made during the distribution period if these acquisitions represent 10% or more of their total assets as of the date of acquisition. Non-exchange traded REITs must file these financial statements no later than 71 calendar days after the date of the initial Form 8-K reporting the acquisition.² This Alert provides a summary of the revised guidance and highlights how it differs from the previous Staff interpretation.

Earlier this year, the Staff took steps to align the materiality and timing requirements for filing Rule 3-14 financial statements during the Industry Guide 5 distribution period with the existing Item 2.01 Form 8-K filing requirements for completed acquisitions.³ Under the new materiality threshold, Rule 3-14 financial statements for completed acquisitions are required to be included in the Guide 5 Item 20.D post-effective amendment only for properties that represent 10% or more of the REIT's total assets as of the date of acquisition.⁴ The old threshold required Rule 3-14 financial statements at the 5% or more of net proceeds significance level. The new interpretation thus modifies both the percentage (10% versus 5%) and the base (total assets versus net proceeds). It is important to note that this revised interpretation only applies during the initial distribution period of an offering by a non-exchange traded REIT. Once the net proceeds of the offering are completely invested, the standard measure of determining significance for purposes of filing an Item 2.01 Form 8-K (10% or more of the REIT's total assets as of its latest fiscal year end) will apply.

The revised interpretation also aligns the timing requirements for filing Rule 3-14 financial statements during the distribution period with the existing Item 2.01 Form 8-K filing requirements for completed acquisitions. Non-exchange traded REITs subject to the Item 20.D undertaking will not have to include Rule 3-14 financial statements in a post-effective amendment until the Rule 3-14 financial statements have been or are required to be filed via Form 8-K (i.e., up to 71 calendar days after the date that the initial report on Form 8-K disclosing the acquisition was filed).⁵ This will generally permit non-exchange traded REITs to satisfy the requirement to include these Rule 3-14 financial statements in post-effective amendments to their registration statements by incorporating the relevant Form 8-K by reference. Under the old interpretation, Rule 3-14 financial statements were required in the quarterly post-effective amendment even if the acquisition was completed one day before the post-effective amendment was due. Non-exchange traded REITs will still need to determine if a sticker supplement is required in connection with a material acquisition before the 71-day period if the prospectus would be materially misleading without such information.⁶

Footnotes

1. The Financial Reporting Manual updates and revises what was previously referred to as the Accounting Training Manual.

2. Topic 2325 of the Financial Reporting Manual. For purposes of this Alert, references to non-exchange traded REITs apply only to the period during which these REITs are subject to Industry Guide 5.

3. See the April 2008 amendments to Form S-11 allowing for historical incorporation by reference. Adopting Release No. 33-8909 (effective as of April 15, 2008). Also, refer to our January 8, 2008 REIT Alert "SEC Proposes to Revise Form S-11 to Permit Incorporation by Reference."

4. Topic 2325.3 of the Financial Reporting Manual.

5. Topic 2325.2.(b.) of the Financial Reporting Manual states that when filing a post-effective amendment during the distribution period to comply with the Item 20.D undertakings "[t]he post-effective amendment must include or incorporate by reference audited financial statements in the format described in S-X 3-14 that have been filed or are required to be filed on Form 8-K for all significant property acquisitions that have been consummated."

6. As discussed in our May 29, 2008 REIT Alert "SEC Seeks Improved Disclosure by Non-Exchange Traded REITs," the Staff now expects registrants to simply incorporate all Exchange Act reports filed during the preceding three-month period into the post-effective amendment required to be filed pursuant to Item 20.D. This would be in lieu of consolidating all of the previously filed sticker supplements into the post-effective amendment itself. Instead of a post-effective amendment consisting of an aggregation of property financial statements, the post-effective amendment would consist of the base prospectus and one sticker supplement that focuses on material business information.

Goodwin Procter LLP is one of the nation's leading law firms, with a team of 700 attorneys and offices in Boston, Los Angeles, New York, San Diego, San Francisco and Washington, D.C. The firm combines in-depth legal knowledge with practical business experience to deliver innovative solutions to complex legal problems. We provide litigation, corporate law and real estate services to clients ranging from start-up companies to Fortune 500 multinationals, with a focus on matters involving private equity, technology companies, real estate capital markets, financial services, intellectual property and products liability.

This article, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin Procter LLP or its attorneys. © 2009 Goodwin Procter LLP. All rights reserved.