REIT Disclosure Requirements When Acquiring Or Disposing Of Real Estate Operations – Real Estate

When a public REIT acquires or disposes of real estate, the
transaction may trigger financial disclosure requirements under SEC
rules and guidance. Specifically, Rule 3-14 of Regulation S-X
(“Rule 3-14”) sets forth the financial statement
requirements for the acquisition (or probable acquisition) of a
business that generates substantially all of its revenues through
the leasing of real property.¹ Additionally, Article 11
of Regulation S-X (“Article 11”) requires public REITs to
file pro forma financial information reflecting the effect of any
significant acquisition or disposition. These requirements can
apply to a number of different SEC filings and reports
traditionally filed by public REITs, including registration
statements, proxy statements and current reports on Form 8-K.

Given the recent pace of acquisitions and dispositions of real
estate operations in the REIT space, we wanted to take this
opportunity to remind public REITs and other reporting companies of
the requirements of Rule 3 14, Article 11 and other disclosure
obligations that may apply to them. This alert summarizes the
analytical framework for identifying and resolving financial
statement disclosure issues in connection with the acquisition and
disposition of real estate operations.

APPLICATION OF RULE 3-14

Basic Framework — Determining if Rule 3-14
Financial Statements are Required

The purpose of Rule 3-14 is to enable investors to assess the
financial impact on a public REIT of certain real estate
acquisitions such that they are able to make an informed investment
decision. Analyzing an acquisition or series of acquisitions under
Rule 3-14 requires answering a series of questions comprised, at
the most basic level, of the following:

• Are “real estate operations” being acquired?




• Have the acquisitions closed or are the acquisitions
  “probable?”




• Are the acquisitions “significant,” individually or
  in the aggregate?

We discuss the answers to each of these questions in further
detail below. Answering these questions will determine the Rule
3-14 financial statement requirements, if any, associated with the
acquisition or series of acquisitions, and will also guide the
corresponding filing obligations associated with those financial
statements.

However, correctly navigating the SEC’s rules, forms and
related guidance requires careful, nuanced analysis and we urge you
to consult with your Goodwin contact, as well as your public
accounting firm, to ensure that you’ve reached the right
conclusions and are in full compliance with the SEC’s rules and
guidance. Failure to timely file the required Rule 3-14 financial
statements can have serious consequences for a public REIT.

Rule 3-05 vs. Rule 3-14: Defining “Real Estate
Operations”

Rule 3-14 applies to acquisitions of significant real estate
operations, while Rule 3-05 applies to acquisitions of significant
business operations. Rule 3-14 is typically the more relevant of
these rules for public REITs, though it is also possible for REIT
transactions to implicate Rule 3-05 in certain circumstances.

Under 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,” which is
intended to address the fact that the acquisition of a “real
estate operation” may either be the acquisition of an entity
holding real property or a direct interest in the real
property.

However, the condition that the acquired business must generate
“substantially all” of its revenues through the leasing
of real property is not meant to be a bright line test and its
application will depend on specific facts and circumstances. For
instance, based on current SEC guidance, certain asset classes
(e.g., office, apartment and industrial buildings, as well as
shopping centers and malls) are generally considered to generate
substantially all of their revenues through leasing of real
property. Conversely, certain other asset classes (e.g., nursing
homes, hotels, golf courses, auto dealerships and equipment rental
operations) are generally not considered to generate substantially
all of their revenues through leasing of real property, because
these operations are more susceptible to variations in revenues and
costs due to market and managerial factors.

As a result, all potential revenue streams of an acquisition
must be carefully assessed to determine whether the Rule 3-14 or,
alternatively, the Rule 3 05 financial statement requirements may
apply. The financial statement requirements under the two rules
differ, with the requirements of Rule 3 05 generally being more
extensive and more burdensome.

It should also be noted that the SEC staff has provided guidance
that it is not necessary to provide Rule 3-14 financial statements
for a property that has less than three months of rental history
such as newly constructed properties or owner-occupied properties.
This would include sale-leaseback transactions where a REIT
acquires the real estate assets of previously owner-occupied
facilities and leases them back to either the prior owner or a new
operator. Also, if a registrant acquires an operating property that
it will demolish and build a new rental property, the SEC staff has
noted it would not object to the omission of the Rule 3-14
financial statements of the acquired property if the prior rental
revenues and operating costs of the property are not representative
of the new property to be built. A registrant should explain the
basis for omission of the financial statements in the filing. In
other cases where the registrant believes the leasing history of a
property is not representative of future rental revenues and
operating costs, it may request relief from the Office of the Chief
Accountant for the SEC’s Division of Corporation Finance.

It is important to note that the existence of special
circumstances as described above where Rule 3-14 financial
statements may not be required does not automatically mean that pro
forma financial statements pursuant to Article 11 are also not
required. See discussion below under the heading “Determining
What Financial Statements are Required”.

Determining if an Acquisition is
“Probable”

Rule 3-14 does not define what makes an acquisition
“probable” and the SEC has not otherwise provided a
bright line test. Existing SEC guidance, however, provides that a
determination as to whether any given acquisition is
“probable” depends on an ad hoc facts-and-circumstances
analysis, including, for example, whether the parties have a
definitive written agreement or an agreement in principle, what
conditions or contingencies may apply to closing the acquisition
and other factors relating to the unique circumstances of such
acquisition. The SEC staff has cautioned that there is no
one-size-fits-all approach to the question of “probable”
and the specific norms in the specific industry and sector must
also be taken into account. The SEC staff has further noted that
where a registrant’s financial statements alone would not
provide adequate financial information about the registrant for an
investor to make an informed investment decision in light of a
pending or potential acquisition, the SEC would view an acquisition
as “probable.”

Determining if an Acquisition is Individually
“Significant”

An individual acquisition is significant if the REIT’s
investment in the real estate operations exceeds 20% of the
aggregate worldwide market value of the REIT’s voting and
non-voting common equity (also known as the investment test).
Unlike Rule 3 05, the asset and income tests do not have to be
considered. For purposes of this determination, “related”
real estate operations are evaluated as a single acquisition. Real
estate operations are considered to be related if they are under
common control or management, the acquisition of one real estate
operation is conditional on the acquisition of each other real
estate operation, or each acquisition is conditioned on a single
common event.

Aggregate worldwide market value of the REIT’s voting and
non-voting common equity is determined using the average of
aggregate worldwide market value calculated daily for the last five
trading days of the registrant’s most recently completed month
ending prior to the earlier of the REIT’s announcement date or
agreement date of the acquisition.

If a public REIT has no worldwide market value, such as a
non-traded REIT, the value is based on the total assets of the
registrant and its subsidiaries on a consolidated basis as of the
end of the most recently completed fiscal year (or in certain
circumstances based on more recent pro forma financial statements).
When the investment test is based on total assets of the
registrant, assumed debt secured by the real properties to be
acquired is to be included in determining the amount of the
investment in the acquired real estate operation.

Determining if a Series of Acquisitions is
“Significant” in the Aggregate

Rule 3-14 provides that separate financial statements are also
required in registration statements and proxy statements, as
applicable, when the aggregate impact of consummated and probable
acquisitions of real estate operations since the date of the most
recently filed audited balance sheet, for which financial
statements are either not required or not yet required, exceeds the
50% level.

This 50% significance level is measured based on common equity
market capitalization or total assets consistent with the tests
noted above for individually significant acquisitions.

In our view, if acquisitions occur at different points in time
since the date of the most recently filed audited balance sheet,
the 50% significance level should be based on different market
values throughout that period. While this point has not been
addressed explicitly by the SEC, Rule 3-14 ties the
registrant’s market value to the announcement date or agreement
date, and therefore significance would necessarily need to be
measured based on an aggregation of percentages with different
denominators.

If the acquisitions and probable acquisitions are in excess of
the 50% level, a registrant is required to provide (i) pro forma
financial statements pursuant to Article 11 reflecting the
aggregate effects of all such acquisitions (not just a mathematical
majority) in all material respects and (ii) separate historical
financial statements for consummated and probable acquisitions
whose individual significance exceeds 20% for which financials are
not yet otherwise required (i.e., consummated acquisitions that are
still in the 74-day grace period (discussed below) or individual
probable acquisitions that do not exceed 50% significance).

Determining What Financial Statements are
Required

If Rule 3-14 financial statements are required, they must show
historical financial information about the acquired operations as
well as the impact, on a pro forma basis, of the relevant
acquisitions either on an individual or an aggregate basis, as
determined by the significance tests described above.

For all acquisitions or series of acquisitions where financial
statements are required (including acquisitions from related
parties), Rule 3-14 provides that the financial statements must
present one year of audited financial statements plus the most
recent year to date interim period prior to the acquisition, or
such shorter period as the operation has been in existence.
However, Rule 3-06 will permit the filing of audited financial
statements covering a period of nine to 12 months to satisfy the
requirement for filing audited financial statements for a period of
one year for an acquired or to be acquired real estate operation.
The audited financial statements are subject to auditor
independence requirements. In the past, the SEC staff has provided
guidance that for the acquisition of a real estate operation with a
rental history of more than three months but less than nine months,
the financial statements may be presented on an unaudited
basis.

The financial statements to be presented include statements of
revenues and expenses, with additional disclosures required in the
notes to the financial statements regarding cash flows to the
extent available (e.g., the type of any omitted expenses; an
explanation of the impracticability of preparing financial
statements that include the omitted expenses; and a description of
how the financial statements presented are not indicative of the
financial condition or results of operations of the acquired
business going forward because of the omitted expenses).

When a public REIT is required to provide historical financial
statements under Rule 3-14, the historical financial statements
must also be accompanied by unaudited pro forma financial
information specified under Articled 11 reflecting the effect of
the relevant acquisition (or group of related acquisitions). These
pro formas typically are required to include a pro forma balance
sheet and pro forma income statements covering the same periods as
those presented in the historical financial statements.

Article 11 is not inextricably linked to Rule 3-14, however.
While a requirement to file Rule 3 14 financial statements
generally results in an corresponding requirement to provide
Article 11 pro forma financial statements, it is also possible for
a public REIT to be required to file pro forma financial statement
even if it is not required to provide Rule 3-14 financial
statements. The most common example of this is a significant
disposition, which does not implicate Rule 3-14 at all, but still
triggers the requirement to provide pro forma financial statements
under Article 11 within four business days of closing, as noted
below. Likewise, the SEC staff’s view is that even in instances
where a significant acquisition (or group of related acquisitions)
does not trigger Rule 3-14 (e.g., in the case of a
newly-constructed facility or a previously owners-occupied
property) the materiality of the transaction alone could trigger a
requirement for pro forma financial statements under the
“catch-all” clause of Rule 11-01(a)(8) (“other
transactions . . . for which disclosure of pro forma financial
information would be material to investors”). We urge public
REITs to consult with counsel prior to concluding that pro forma
financial information would not be required in the case of
significant acquisition or disposition transactions.

For purposes of any required pro forma financial statement, the
SEC’s rules limit adjustments to: (i) “Transaction
Accounting Adjustments,” that are simply to reflect the
application of the required accounting treatment of a significant
acquisition or disposition (ii) “Autonomous Entity
Adjustments” that are necessary to reflect the operations and
financial position of the registrant as a standalone, autonomous
entity if the registrant was previously part of another entity and
(iii) “Management’s Adjustments,” which are optional
adjustments, at management’s discretion, that may be presented
to enhance an understanding of the pro forma effects of the
transactions, provided that management has a reasonable basis for
the adjustments, they are appropriately limited in scope and they
are complete so as to present a fair statement of the pro forma
financial information (i.e., they present both the “synergies
and dis synergies” of the relevant transaction).

Transaction Accounting Adjustments and Autonomous Entity
Adjustments must be shown in separate columns in the pro forma
financial statements, and must also include explanatory notes
describing each adjustment, any material uncertainties, material
assumptions, calculations and such other information
“necessary to give a fair and balanced presentation of the pro
forma financial information.”

Management’s Adjustments, on the other hand, must be
presented in the explanatory footnotes to the pro forma financial
statements in the form of reconciliations. The SEC has noted that
this footnote presentation allows registrants the flexibility to
include forward-looking information pursuant to the applicable safe
harbor provisions for forward-looking statements.

When to File Rule 3-14 and Pro Forma Financial
Statements

Rule 3-14 historical financial statements and Article 11 pro
forma financial statements are generally required in one or more of
the following types of SEC filings by public REITs:

• Form 8-K




• Registration Statements under the Securities Act of 1933
  (including post-effective amendments)




• Proxy Statements

FORM 8-K

When to File. If an acquisition of a
real estate operation (or group of related real estate operations)
is significant under the aggregate market capitalization test (or
total asset test, if no market value) described above (i.e.,
greater than 20% significance), then a public REIT is required to
report the acquisition under Item 2.01 of Form 8-K by the fourth
business day after the date of acquisition. The REIT also must file
Rule 3 14 financial statements and accompanying Article 11 pro
forma financial information under Item 9.01 of Form 8-K by the 71st
calendar day (or next business day if it occurs on a weekend or
holiday) after the Item 2.01 due date.

Under General Instruction B.3. of Form 8-K, a registrant is not
required to file an Item 9.01 Form 8-K containing Rule 3-14
financial statements and pro forma financial information if such
registrant has already previously reported the information and the
information in the Form 8-K would be “substantially the
same” as what was previously presented. The SEC staff has
provided the following examples of when previously filed financial
statements will not be deemed “substantially the same”
pursuant to the instruction:

• the previously filed financial statements would not satisfy the
  required age of financial statements in the Form 8-K because
  operating results for two or more interim quarters are
  omitted;




• the previously filed financial statements are interim financial
  statements and the Form 8-K requires filing of updated audited
  annual financial statements; and




• the previously filed acquiree financial statements were
  prepared in accordance with the requirements for smaller reporting
  companies in Article 8 of Regulation S-X, but the registrant is not
  a smaller reporting company.

Examples of Transactions Requiring Nuanced
Analysis. The Form 8-K filing requirements and the
related application of Rule 3-14 may appear relatively
straightforward; however, there are a number of transactions where
the analysis can be very nuanced and draw on informal SEC staff
guidance. The following are a few examples of such transactions. It
should be noted that even if you have similar fact patterns arise,
you should consult with your Goodwin contact as each case is
subject to its specific facts and circumstances and further
interpretation by the SEC staff.

Joint Ventures

Acquisitions by REITs involving joint ventures implicate a
number of considerations such as where (i) a joint venture that is
consolidated by the REIT for financial reporting purposes acquires
a significant real estate operation, and (ii) a REIT’s
unconsolidated joint venture that is itself a significant real
estate operation becomes consolidated for financial reporting
purposes.

• In the first case, where a registrant’s consolidated joint
  venture acquires a significant real estate operation, in order to
  determine if an Item 2.01 Form 8-K and related financial statements
  under Item 9.01 of Form 8-K are required, such registrant would
  look to the total investment by the joint venture and not the
  registrant’s portion of the investment when testing for
  significance. For example, Company A, a public REIT, enters into a
  joint venture with Company B and Company A consolidates the joint
  venture for financial reporting purposes. If the joint venture
  acquires a real estate operation for $200 million (which is over
  the 20% significance test for Company A), with Company A
  contributing $150 million (which is under the 20% significance test
  for Company A) and Company B contributing the remaining $50
  million, an Item 2.01 Form 8-K and related Item 9.01 Form 8-K with
  3-14 financial statements and pro forma financial information would
  have to be filed by Company A for the acquisition because the total
  investment of the consolidated entity was greater than 20%
  significant.




• In the second case, where a formerly unconsolidated joint
  venture that itself meets the definition of a real estate operation
  is required to be consolidated by a registrant for financial
  reporting purposes, the question is whether the consolidation would
  only trigger an Item 2.01 Form 8-K and related Item 9.01 Form 8-K
  if the company’s investment in the joint venture that triggers
  the consolidation is 20% significant. For example, Company A, a
  public REIT, enters into a joint venture with Company B and
  initially Company A does not consolidate the joint venture for
  financial reporting purposes. The joint venture with Company B
  meets the definition of a real estate operation. At a later date,
  Company A makes an additional investment in the joint venture of
  $20 million (which is under the 20% significance test) and as a
  result of the additional investment Company A begins to consolidate
  the joint venture. Given that the additional investment was under
  20% significant, it can be argued that an Item 2.01 Form 8-K and
  related Item 9.01 Form 8-K would not be required, but we understand
  the SEC staff has not taken a firm position on this issue.

Multiple Closings

Another instance that requires careful consideration and
planning is where a company acquires a series of related
properties, each of which closes at different times. For instance
Company A, a public REIT, acquires a portfolio of two properties
from Company B, with the acquisition of (i) Property X at 21%
significance and closing on (t); and (ii) Property Y at 10%
significance and closing on (t) + 90 days. In this instance,
Company A would have four business days from the closing of the
Property X acquisition to file the 2.01 Form 8-K for Property X and
71 days from due date of the Item 2.01 Form 8-K to file the Item
9.01 Form 8-K with the Rule 3 14 financial statements for Property
X and the related pro forma financial information. Even though
Property Y is not individually significant, because it is a
“related” property and the combined significance is over
20% an Item 2.01 Form 8-K and related Item 9.01 Form 8-K would
still be required. Given that the Form 8-Ks for Property X will
already have been filed when Property Y closes, the question is
whether Company A would (A) only have four business days to file
the Item 2.01 and the Item 9.01 8-K with the Rule 3-14 financial
statements for Property Y and related pro forma financial
information, including both Property X and Y or (B) whether Company
A would have 71 days from the due date of the Item 2.01 Form 8-K to
file the Item 9.01 Form 8-K with the Rule 3-14 financial statements
for Property Y and the related pro forma financial information.
This point is open to interpretation and has not been clearly
addressed by the SEC staff.

Practice Point: While Rule 3-14 only applies to
acquisitions of real estate operations, Item 2.01 of Form 8-K
applies to both acquisitions and dispositions of real estate
operations, and a filing requirement may be triggered by not only a
significant acquisition under the investment test but also by a
significant disposition under the investment, asset and income
tests applicable to acquisitions of businesses more generally under
Rule 3-05. It should be noted that the Form 8-K 71-day grace period
for filing financial statements for significant acquisitions does
not apply to the pro forma financial statement requirement for
dispositions. Additionally, a registrant may acquire or dispose of
a property that does not meet the definition of a real estate
operation. In those instance, the determination of whether the
acquisition or disposition is significant (and therefore reportable
under Item 2.01 of Form 8-K) is based on whether the equity in the
net book value of the property or the amount paid or received for
the property upon the acquisition or disposition exceeded 10% of
the total assets of the registrant and its consolidated
subsidiaries.

REGISTRATION STATEMENTS AND PROXIES

If an acquisition of a real estate operation (or group of
related real estate operations) is significant under the aggregate
market capitalization test (or total asset test, if no market
value), then Rule 3-14 financial statements and the related pro
forma financial information are required to be included in
registration statements and proxy statements filed by the REIT. See
the “REIT Formation Transactions” section below for a
discussion on the Rule 3-14 financial statements and pro forma
financial information requirements in a registration statement
filed in connection with a REIT formation transaction.
Additionally, if a probable real estate operation acquisition (or
group of related real estate operations) is significant or if a
series of acquisitions is significant in the aggregate (i.e.,
greater than 50% significance), including probable acquisitions,
separate financial statements are also required in registration
statements and proxy statements. If the acquisitions and probable
acquisitions are in excess of the 50% level, a registrant is
required to provide pro forma financial statements reflecting the
aggregate effects of all such aggregate acquisitions in all
material respects and separate historical financial statements for
consummated and probable acquisitions whose individual significance
exceeds 20% for which financials are not yet otherwise required
(i.e., consummated acquisitions that are still in the 74 day grace
period (discussed below) or individual probable acquisitions that
do not exceed 50% significance).

However, Rule 3-14 financial statements of an acquired or to be
acquired real estate operation do not need to be included in a
registration statement or proxy statement if the acquisitions are
less than or equal to 50% significant in the aggregate, and either
(i) the consummation of the acquisition has not yet occurred; or
(ii) the date of the final prospectus or prospectus supplement
relating to an offering as filed with the SEC, or mailing date in
the case of a proxy statement, is no more than 74 days after
consummation of the acquisition of the real estate operation, and
the financial statements have not previously been filed by the
registrant.

Rule 3-14 financial statements in registration statements and
proxy statements are no longer required to be included once the
operating results if the acquired real estate operations have been
reflected in the audited financial statements of the registrant for
nine months.

It should be noted that the SEC staff will not take a
registration statement or post-effective amendment effective unless
that registration statement includes all required Rule 3-14
financial statements and pro forma financial information. Before
conducting an offering off of an effective shelf-registration
statement, a registrant should determine in connection with any
recent acquisitions or probable acquisitions of real estate
operations whether (i) Rule 3-14 financial statements and pro forma
financial information are required to be included in the
registration statement, through incorporation by reference or
otherwise, (ii) even if Rule 3-14 financial statements and pro
forma financial statements are not technically required, whether
the prospectus would contain a material omission without them, and
(iii) whether the acquisition represents a “fundamental
change” and therefore a post-effective amendment to the
registration statement would need to be filed. For any acquisition
of a real estate operation that is over 50% significant, Rule 3-14
financial statements and pro forma financial information should be
included, through incorporation by reference or otherwise, in an
effective shelf registration statement, before commencing a
takedown offering off of that shelf registration statement.

Practice Point: Only individually significant
consummated transactions trigger a Form 8-K filing requirement, but
transactions that are individually significant including probable
acquisitions, and a series of acquisitions and probable
acquisitions that are significant in the aggregate must both
generally be included in registration statements and proxy
statements.

Special Cases: Blind Pools, REIT Formation
Transactions and Triple Net Leases

BLIND POOLS

During the Industry Guide 5 distribution period for blind pool
offerings, significance for all acquisitions of real estate
operations, including properties that are triple net leased, is
computed by comparing the registrant’s investments in the real
estate operation to the sum of: (i) the registrant’s total
assets as of the date of the acquisition plus (ii) the proceeds
(net of commissions) in good faith expected to be raised in the
registered offering over the next 12 months.

After the distribution period ends, significance is determined
using the total assets as of the acquisition date until the
registrant files its next Form 10-K. After that next Form 10-K is
filed, the registrant can determine significance using total assets
as of the end of the most recently completed fiscal year included
in the Form 10 K.

REIT FORMATION TRANSACTIONS

Rule 3-14 does not formally address REIT formation transactions.
The SEC’s current guidance, however, recognizes that the
literal application of Rule 3-14 could result in a new REIT
providing financial statements of real estate operations that are
clearly insignificant to investors. In identifying the financial
statements required to be included in the initial registration
statement, the SEC has allowed new REITs to compute significance
using a denominator equal to the total cost of the real estate
operations acquired immediately prior to filing an initial
registration statement, real estate operations to be acquired upon
closing the initial public offering, and real estate operations
identified as probable future acquisitions.

Historically, the SEC has also provided that in computing
significance of any future real estate operation acquisition until
the time the registrant files its Form 10-K covering the year the
initial public offering is consummated, the registrant can use the
same base as was used in the initial registration statement. That
base would not be reduced for probable acquisitions for which
audited financial statements were included in the registration
statement and the acquisition remains probable. However, that base
would be reduced for any real estate operation not acquired or no
longer probable. It is unclear whether the SEC will still allow for
this alternate significance test where the REIT has a market
capitalization given that Rule 3-14 significance is now measured
based on aggregate market capitalization and not total assets.

TRIPLE NET LEASES

Rule 3-14 does not differentiate between acquisitions of
properties subject to triple net lease arrangements with a single
lessee and the acquisitions of all other real estate operations.
Moreover, for triple net leases, the Release guides registrants
away from the SEC’s prior guidance, pursuant to which, with
respect to time-of-acquisition reporting, public REITs have
historically provided full audited financial statements of the
lessee or guarantor instead of Rule 3-14 financial statements of
the real estate operation when the asset concentration was
significant. Despite the change, registrants should continue to
follow the SEC’s guidance regarding the ongoing requirement to
provide lessee or guarantor financial statements² in
periodic reports where there is significant asset concentration
(i.e., exceeds 20% of the registrant’s assets as of its most
recent balance sheet) with a single lessee for real estate
operations subject to a triple net lease. ³

* * * * *

As always, the Goodwin team is available to answer any questions
you have.

APPENDIX A

Summary of Rule 3-14 and Prior Rules and
Guidance

Subject Matter	Amended Rules	Prior Rules and Guidance
Applicability of Rule 3-14
General Applicability	Rule 3-14 applies to acquisitions, including probable acquisitions, of real estate operations that are significant
Definition of “Real Estate Operations”	Rule 3-14 defines a “Real Estate Operation” as “a business that generates substantially all of its revenues through the leasing of real property,” though this definition is not a bright line test	Not previously defined in Rule 3-14, but SEC guidance was generally consistent with the newly codified definition
Probable Acquisitions	Not defined by Rule 3-14. Determining whether an acquisition is probable depends on careful consideration of all facts and circumstances (e.g., is there a definitive agreement, what conditions and contingencies exist and other factors)
Acquisition Thresholds
Individual Significance	20% of aggregate market capitalization (or total assets, if no market value)	10% of total assets
Aggregate Significance	50% of aggregate market capitalization (or total assets, if no market value)	10% of total assets
Related Acquisitions	Real estate operations should be treated as a single acquisition if they are “related” (e.g., under common control or management, or conditioned upon acquisition of each other or a single common event)
Form and Content of Rule 3-14 Financial Statements
Significant Acquisitions
General	One year of audited financial statements, plus the most recent YTD period and interim statements showing the pro forma impact	Rule 3-14 did not previously include an express requirement to provide interim financial statements
Related Parties	Same as acquisitions from non related parties, described above	Three years of audited financial statements
Content of Financial Statements	Financial statements should include statements of revenues and expenses, with additional disclosure in the notes to the financial statements regarding cash flows, if available
Financial Statements Covering 9-12 Months (Rule 3-06)	Financial statements covering a period of 9-12 months satisfy the requirement that financial statements cover a one-year period	Accommodations of Rule 3-06 did not apply to Rule 3-14
Pro Forma Adjustments	Pro forma adjustments may only relate to: Transaction Accounting Adjustments (to reflect required accounting treatment) Autonomous Entity Adjustments (to reflect operation as a standalone entity) Management’s Adjustments (optional adjustments appropriately limited in scope)	Article 11 and Rule 11-02(a) provided a qualitative and less rigid framework that described the objectives of the pro forma preparation requirements
Preparation of Financial Statements	Rule 3-14 financial statements should be prepared and audited in accordance with Regulation S-X and be for the period that the real estate operation has been in existence, if shorter than the period explicitly required for the applicable financial statements, and will be subject to auditor independent standards
Smaller Reporting Companies (Rule 8 06)	Registrants are now directed to amended Rule 3-14 for financial statement requirements, with smaller reporting companies permitted to rely on the form and content for annual and interim financial statements provided in Rule 8-02 and 8-03	Rule 8-06 previously provided disclosure requirements for financial statements of real estate operations that were substantially similar to those set forth in Rule 3-14
Filing Requirements
Form 8-K Triggers	Consummated real estate operation (i) acquisitions that are individually significant (20% of aggregate market capitalization (or total assets, if no market value)), and (ii) dispositions that are individually significant at the 20% level under any of the investment, asset or income tests, trigger a Form 8-K filing requirement	Consummated acquisitions or dispositions that are individually significant at the 10% level under the investment test triggered a Form 8-K filing requirement
Financial Statements
Form 8-K	Rule 3-14 financial statements for significant acquisitions (not dispositions) must be filed within a 71-day grace period
Registration/Proxy Statements	Rule 3-14 financial statements are required in registration statements and proxy statements until reflected in the audited financial statements of the registrant for 9 months, unless less than or equal to 50% significance and either (i) not yet consummated or (ii) within the 74 day grace period and not previously filed	Accommodations relating to acquisitions at below 50% significance and 9-month sunset period for operations reflected in audited financial statements did not previously apply

Footnotes

1. Effective January 1, 2021, the SEC adopted amendments
to, among other things, the financial disclosure requirements in
Rule 3-05 of Regulation S-X (“Rule 3-05”) and Rule 3-14.
The amendments, adopted as part of the SEC’s Disclosure
Effectiveness Project, were aimed at improving the information that
investors receive regarding the acquisition and disposition of
businesses, including real estate operations, and to reduce the
complexity and associated compliance costs for registrants. For an
overview of Rule 3-14, including a side-by-side comparison of the
SEC’s prior rules and guidance against amended Rule 3-14, and
its related rules and forms please see Appendix A to this alert.
For a more detailed discussion of Rule 3-05, please see the link here. See SEC Release No. 33-10786; 34-88914
(May 21, 2020), available at https://www.sec.gov/rules/final/2020/33-10786.pdf
(the “Release”).

2. If the lessee/guarantor is a public company subject to
the periodic reporting obligations of the Securities Exchange Act
of 1934, the registrant may instead include in the filing a
statement referring investors to a publicly-available website with
the lessee’s/guarantor’s SEC filed financial
information.

3. Providing significant tenant financial information
(when applicable) under Section 2340 of the Division of Corporation
Finance’s Financial Reporting Manual is also still necessary
where Rule 3-14 financial statements are not required at all, for
example due to a lack of prior rental history. It should be noted
that in other instances the Financial Reporting Manual contains
outdated guidance based on Rule 3 14 before it was amended and we
would urge caution in relying on this guidance until the Division
of Corporation Finance updates the Financial Reporting Manual to
reflect the amendments.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.