Discussion Agenda
Topic
Discussion Leader
Introductions
John Baczewski, CPA, CRE,
President, REFS; REIS Board
Chair
What are the Real Estate
Information Standards?
John Baczewski
Valuation Standards
Richard Wincott, MAI, CRE;
Executive Vice President Altus
Timely Recognition of
Development Profit
Richard Wincott
Debt Valuation
Jeff Walker, MAI, CRE;
Managing Principal; US Realty
Consultants
Wrap-up
NCREIF
What are the Real Estate
Information Standards (REIS)?
Mission:
to establish and implement
information standards

for the real estate market 
to facilitate
informed
investment decision making. 
3
What does REIS do?
• Interpretation
• Consensus building
• Standard Setting
• Advocacy
• Partnering
GAAP, GIPS, USPAP
Task force action
REIS Vols. I and II
FASB
INREV, AREV
4
Who are REIS participants?
Sponsorship
Governance
Action
NCREIF
PREA
REIS Board
REIS Council
Volunteer Task Forces
5
REIS addresses the gaps!
GAAP
GIPS
USPAP
Interpretation
Fund
Managers
Reporting Standards
Investors
6
What are the benefits?
• To the industry
– Build industry consensus on reporting inconsistencies
– Fill reporting “gaps” by developing standards and
guidance
• For Investors/managers
– Performance comparability
– Reporting clarity and transparency
– Uniform accounting/valuation/performance reporting
7
NCREIF Mission
•
NCREIF is a not-for-profit trade association that serves its membership and the
academic and investment community’s need for improved commercial real
estate data, performance measurement, investment analysis, information
standards, education, and peer group interaction by:
– Collecting, processing and reporting data in a secure environment;
– Producing performance measurement indices;
– Encouraging academic and member use of NCREIF data for objective
research;
– Providing forums with strong educational content to address industry
issues;
– Publishing informed industry related articles and performance reports; and
– Contributing to the development of real estate information standards.
8
Introduction to NCREIF
NCREIF’s many contributions to the real estate investment
management business have included:
• Provide indices and benchmarks that serve as the
foundation for institutional investment in real estate and
actively support the industry's information infrastructure.
• Instrumental in the creation of the Real Estate Research
Institute (RERI).
• Created and continue to support, with PREA, the Real Estate
Information Standards that serve as the
backbone of consistent reporting within our industry.
• Actively represent our industry’s interests in dealing with
authors of FASB, GIPS and USPAP standards to be sure they
act in ways that reflect an informed perspective.
2
NCREIF
Product Evolution
NCREIF’s Flagship Index:
NCREIF Property Index (NPI)
Inception Date 4q1977
Apartment, Hotel, Industrial,
Office, Retail
Data Consists of:
Quarterly Returns by Property Type,
Subtype, Region, Division, State,
CBSA, Zip Code
Reports and Products Consist of:
“Glossy” Performance Report
Detail Hard Copy Report
Detail Spreadsheet Files
Online Query Tool
Operations Benchmarks
Cap Rate and Other Trends
8
Product Evolution
Fund Indices
Open End Diversified
Core Equity (ODCE)
Open End Equity
(OE)
Timberland Fund
and Separate
Accounts
NCREIF/Townsend
Closed End Indices
Under Development
NCREIF Closed End
Fund Indices
9
Global Fund Index
NCREIF Data Products
• NCREIF Property Index (NPI)
– Several Report and Spreadsheet products
• Fund Indices
– Open End Diversified Core Equity (NFI-ODCE)
– NCREIF Townsend Fund Indices
– NFI All Open End Fund Index
• NCREIF Farmland Index
• NCREIF Timberland Index
• Custom Data Products
– Website Query Tool
– Operating Database Query Tool
– Special Data Runs Specified by Members
12
NCREIF Membership
• Institutional Real Estate Investment Managers – 94
• Major Pension Funds – 44
• Service Providers (Appraisers, Accountants,
Consultants, Analysts) – 102
• Academics – Professors of Real Estate at major
universities – 40
13
PREA’s Mission
Founded in 1979, the Pension Real Estate Association (PREA) is a
non-profit trade association for the global institutional real
estate investment industry.
Its mission is to serve members engaged in institutional real
estate investment through the sponsorship of objective forums
for education, research initiatives, membership interaction and
the exchange of information.
PREA’s Membership
• PREA currently lists over 702 corporate member firms worldwide
representing public and corporate pension funds, endowments,
foundations, Taft-Hartley funds, insurance companies, investment
advisory firms, REITs, developers, real estate operating companies and
industry service providers
• Investor members hold more than $2.29 trillion in assets, of which $241
billion is invested in real estate related products
(according to respondents to PREA’s Investor Report, August 2012)
• PREA’s core constituency is its investor members who play a significant
role in leading the organization through the Institutional Investor Council
and its Executive Committee
PREA Education
PREA exists to serve and educate its members in the global institutional real
estate investment community
• PREA hosts four major educational forums each year, the Annual Spring
Conference, the CEO Leadership Forum, the PREA Institute and the Annual
Plan Sponsor Fall Conference
• PREA publishes the highly-regarded PREA Quarterly magazine with an
emphasis on quality content and publication standards
• PREA has augmented its traditional educational programs to include
webinars, industry news blasts, topic-focused affinity groups and regional
summits
• Many of PREA’s educational efforts are specifically tailored for the investor
community
PREA Education
Recognizing the importance of cultivating the next generation of real estate
leaders, PREA has long been a resource for students and those new to the
industry
• Since 1994, PREA’s scholarship fund has awarded over $550,000 to 192
students studying real estate and related academic fields
• Additionally, PREA provides an annual grant to the Robert A. Toigo
Foundation which provides support and services to minority students
pursuing business careers
• PREA launched the highly successful John W. Koza Leadership Fellows
Program to promote the engagement of young investors in the
organization and broader real estate community
PREA Research
The Research Department, strongly supported by the Research Committee, is
dedicated to providing the association’s members with timely, relevant and
reliable information as an authoritative source for industry and academic
research. Efforts include:
• Disseminating independent and objective real estate research
• Originating original research requested by members
• Conducting surveys to gather relevant and timely member data
• Creating white papers and publications of importance to members
• Collaborating with other industry and academic organizations on meaningful
industry projects and initiatives
PREA also recognizes those who contribute to the common body of knowledge
practical insight gained through significant research with the James A.
Graaskamp Award
PREA’s Industry Commitment
In fulfilling the association’s mission, PREA serves as a steward for the
industry, dedicated to seeking and promoting best practices, and standards of
prudence, professionalism and integrity
• In 1993 PREA joined forces with NAREIM and NCREIF to begin work on
Real Estate Information Standards which continue to advance the goal of
information standardization and transparency necessary to compare real
estate with other asset classes
• PREA and its co-sponsor NCREIF, maintain their long-standing commitment
to the Standards as they continue to evolve and reflect the industry in
which we operate
REIS standards
Valuation
Required: All accounts
VA.01: Valuation policy statement (Annually): In addition to the required disclosures under
GAAP for fair value measurements, the Account Report must contain a statement that the
Account’s real estate investments are valued in accordance with the REIS Property Valuation
Standards, stated below:
A written Valuation Policy, including methods and procedures, must be maintained and
consistently applied. Changes to this policy must be disclosed through the next annual
reporting period. The policy must include:
•
•
•
•
•
•
•
•
Internal hierarchy of appropriate management levels responsible for the valuation
process
Process by which external appraisals are conducted
Frequency of valuations
External valuer and/or investment manager selection process
Role of USPAP in the valuation process
Debt valuation procedures
Minimum scope and documentation requirements for both external and internal
valuations
Value acceptance and dispute resolution procedures
Direct real estate investment fair values must be reported on a quarterly basis. Quarterly
valuations can be completed either internally or externally and approved in writing. This
requirement supports quarterly production of the NCREIF Property Index.
a. External valuation requirements
i.
Each direct real estate investment must be valued by an independent, professionally
designated property valuer or appraiser at least once every 36 months. Beginning
January 1, 2012, the external valuation requirement is at least once every 12
months unless client contracts for a less frequent appraisal, but no less frequently
than every 36 months.
ii.
External appraisals completed by independent third-party appraisers must be
performed in accordance with USPAP for U.S. investments and either the
International Valuation Standards as set forth by the International Valuation
Standards Committee (IVSC) or the appropriate authoritative standard in the
country in which the property exists.
iii.
Material differences between external valuation and the valuation used in
reporting, and the reason for the differences, must be disclosed.
b. Internal valuation requirements
i.
Scope must be sufficient to demonstrate that the value of each property has
been appropriately determined. The scope should include, but not be limited, to
the following:
1.
2.
3.
4.
Use appropriate, established valuation techniques
Demonstrate independence of valuation process oversight, review, and
approval
Contain sufficient documentation for auditors to re-compute the
calculations during audit
Reconcile any significant variance from the previous external appraisal
Real Estate Information Standards (REIS) handbook 20
Timely Recognition
of Development
Profit:
A Fair Value Perspective
Timely Recognition of Development Profit
In the Open-end Fund world it is important
that the periodic pricing be accurate as of
the date of value. Participants buying in or
selling out of a fund should not be
advantaged or disadvantaged.
Assets under development should reflect the
current value of not only the capital
expended to date, but also recognize the
incremental entrepreneurial effort earned to
that point.
Timely Recognition of Development Profit
Primary Risk Factors:
Entitlement Risk
Construction Risk
Sales/Leasing Risk
Operating Expense Risk
Credit Risk
Partnership Risk
Capital Market Risk
Pricing Risk
Event Risk
Valuation Risk
Timely Recognition of Development Profit
Timely Recognition of Development Profit
Timely Recognition of Development Profit
Timely Recognition of Development Profit
Timely Recognition of Development Profit
• Risk profiles will vary from project to project
• The impact of each depends upon that
particular factors magnitude and duration
• “It ain’t over ‘til it’s over” (Yogi Berra)
• The unearned profit must not only be sufficient
to mitigate the remaining risk factors, but
provide enough incentive for the market
participant to finish the project
Debt Valuation Discussion
Appraisal Institute
July 23,2013
Why do we value debt?
How do we value debt?
I. HISTORY OF GUIDANCE
II. GROSS VS NET
III. THE NET APPROACH
HISTORY OF REIS DEBT GUIDANCE
In 2007, the FASB issued SFAS 157, Fair
Value Measurements and SFAS 159, Fair
Value Option For Financial Assets and
Liabilities, with effective dates for periods
beginning after 11/15/07.
Source: REIS Debt Task Force Survey
November, 2008
Source: REIS Debt Task Force Survey
November, 2008
GROSS VS. NET APPROACH
Holders of the gross view
o Take a rules based implementation approach to ASC Topic 820
o Argue that there are two units of account (one for the asset and one for the liability).
o Value the liability (obligation to make a stream of cash payments), assuming a
hypothetical transaction where the reporting entity pays a “credit equivalent” market
participant to assume the liability (the liability continues, it is not settled). The amount
paid in such a transfer is dependent upon changes in market conditions since the
issuance of the liability.
o Use different market proxies for the sale of assets and the transfer/issuance of
liabilities and these markets have different participants, requiring these elements to be
separate units of account
o Value the asset on a free and clear basis
Source: FASB ASC Topic 820 Implementation Guidance
October 20, 2009; and
REIS Handbook Volume II, January 2012
Holders of the net view:
o Take a principles based implementation approach to ASC Topic
820-a principles based standard
o Argue there is one unit of account
o Value the liability in the context of its impact on cash flows to
the net equity position
o Believe the market proxy is trades of equity positions in
levered investments.
Source: FASB ASC Topic 820 Implementation Guidance
October 20, 2009; and
REIS Handbook Volume II, January 2012
NET METHODOLOGY
Appendix 3
Market Participant Behavior-Net Method
Under the net view, the fundamental question asked by
a market participant when valuing an existing debt
instrument is, “How will the assumption of this loan
impact the projected return on my investment relative
to obtaining a new loan at current market terms?”
Source: FASB ASC Topic 820 Implementation Guidance
October 20, 2009; and
REIS Handbook Volume II, January 2012
Market Participant Behavior
=
Market Evidence
(Market Transaction Activity)
Leveraged Equity Analysis
Vs.
Cash Equivalency (Modified)
What is a Market Debt Rate?
Remaining Term, Original Term,
Market Term,
And Floors
Sample Comparable Leveraged Transaction
In August 2012, ABC Real Estate Partners purchased Tower Square,
a 120,000 Square foot Class A office building in Washington, D.C,
from XYZ Partners for $121,392,500. The property was built in
2006, and was 100% occupied with 34 total tenants at the time of
sale. The property was subject to $66 million in debt at 6.19%,
prepayable in November 2017. The property sold encumbered by the
debt, which the broker indicated was a negative influence for
potential buyers. The property sold at a 6.30% capitalization rate
after 150 days on the market. According to the broker involved, and
based upon alternate bids received, he believed the sale’s
capitalization rate was influenced by 25 bps due to the debt. At a 25
bps influence, the impact of the debt would be 54% of cash
equivalency.
MARKET DEBT CONCLUSION
Based upon the subject attributes and the LTV of the loan, a market rate of
approximately 190 to 250 basis points over the comparable term treasury is
appropriate as of the valuation date. The current comparable term treasury
stands at 0.55%. Therefore, the market debt rate for the subject would be
approximately 2.45% to 3.05%. However, given realistic lending floors, the
current market debt rate for the property is estimated to be 3.50%.
CASH EQUIVALENCY CALCULATION
The following chart presents our cash equivalency adjustment calculations. We have
added to the cash equivalency calculation the costs of a new loan only for
substantially above-market debt, as the assumption of existing debt would save the
buyer incurring this expense, which would lessen the negative impact of abovemarket debt. We have not, however, added these savings to positive cash equivalency
adjustments. We have assumed that if the current loan were replaced, it would be
interest-only for the remaining term.
Cash Equivalency Summary
Total Debt
Present Value of Payments
Present Value of Balloon
Cash Equivalency Difference
Plus Origination Fee
Less Loan Assumption Fee
Cash Equivalency Adjustment
$45,000,000
$10,999,428
$38,339,447
-4,338,875
$450,000
Not Calculated
-$3,888,875
MODIFIED CASH EQUIVALENCY
In the case of the subject, we estimate that the market would accept 50% of full cash
equivalency as an adjustment for subject debt.
The calculations are shown below.
Debt Adjustment Conclusion
Calculated Debt Adjustment
-$3,888,875
Market Adjustment Range
40% - 100%
Estimated Market Adjustment
50%
Indicated Debt Adjustment
-1,944,437
Rounded
-$1,900,000
LEVERAGED EQUITY ANALYSIS AS A TEST OF REASONABLENESS
Leveraged Equity Analysis
Ridge Apartments
Implied Unencumbered Value
Adjustment to Value for Debt
Less M ortgage Balance
Implied Equity Contribution
Year
1
2
3
4
5
6
7
8
9
10
Cash Flow
Available for
Debt Service and
Income Taxes
$3,883,783
$4,128,056
$4,244,451
$4,364,180
$4,487,336
$4,614,027
$4,744,349
$4,878,408
$5,016,312
$5,158,177
$78,900,000
-$1,900,000
$45,000,000
$32,000,000
Debt
Service
$2,601,000
$2,601,000
$2,601,000
$2,601,000
$46,517,250
$0
$0
$0
$0
$0
Cashflow
After
Debt Service
$1,282,783
$1,527,056
$1,643,451
$1,763,180
-$42,029,914
$4,614,027
$4,744,349
$4,878,408
$5,016,312
$5,158,177
Implied Total Reversion
Less M ortgage Balance at Reversion
$90,400,552
$0
Equity Proceeds from Reversion
$90,400,552
Indicated Leveraged IRR
7.9%
LEVERAGED EQUITY ANALYSIS AS A TEST OF REASONABLENESS
Leveraged Equity Analysis - At Market
Ridge Apartments
Implied Unencumbered Value
Adjustment to Value for Debt
Less M ortgage Balance
Implied Equity Contribution
Year
1
2
3
4
5
6
7
8
9
10
Cash Flow
Available for
Debt Service and
Income Taxes
$3,883,783
$4,128,056
$4,244,451
$4,364,180
$4,487,336
$4,614,027
$4,744,349
$4,878,408
$5,016,312
$5,158,177
$78,900,000
$0
$45,000,000
$33,900,000
Debt
Service
$1,575,000
$1,575,000
$1,575,000
$1,575,000
$45,918,750
$0
$0
$0
$0
$0
Cashflow
After
Debt Service
$2,308,783
$2,553,056
$2,669,451
$2,789,180
-$41,431,414
$4,614,027
$4,744,349
$4,878,408
$5,016,312
$5,158,177
Implied Total Reversion
Less M ortgage Balance at Reversion
$90,400,552
$0
Equity Proceeds from Reversion
$90,400,552
Indicated Leveraged IRR
8.4%
LEVERAGED EQUITY ANALYSIS AS A TEST OF REASONABLENESS
Summary of Implied IRRs
Unleveraged Implied IRR
Leveraged IRR with Existing Debt
Leveraged IRR with Market Debt
6.8%
7.9%
8.4%
CONCLUSION
Based upon the previous analysis, we estimate the market value impact of the
existing encumbering debt on the subject, after rounding, as of September 30, 2012,
to be:
NEGATIVE ONE MILLION NINE HUNDRED THOUSAND DOLLARS
-$1,900,000
Cash Equivalency Transaction
What was the true impact of this
debt on the comparable
transfer?
Questions, Comments, Data?
Jeffrey Walker, MAI, CRE
jwalker@usrc.com