Daily pricing: an appraiser's dream?
As the landscape for institutional real estate investment evolves, capital sources are expanding. With the new capital sources come additional reporting requirements mandated by those sources and by government entities with oversight responsibilities, such as the US Securities and Exchange Commission. The newest source of investment funds is coming from defined contribution pension sponsors. One feature of many of these plans is that contributors can buy or sell shares of the plan on a daily basis. As such, the net asset value of the plan must be marked to market on a daily basis. Since the underlying value of the real property is established by the appraisal process, all real estate assets must also be priced on a daily basis.
It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.
A round the turn of the century, I recall sitting in a meeting of the NCREIF Valuation Committee discussing the new Real Estate Information Standards' (REIS) requirement that open-end commingled funds value their real estate assets annually and the recommendation that the assets be valued quarterly. As the discussion went on, an esteemed colleague of mine raised his hand and jokingly put forth the proposition, "I vote for daily values" Well, my friend, you have your wish.
Let's start with a brief historical background. The first REIS were issued in 1997, coming from a joint initiative of the National Council of Real Estate Investment Fiduciaries (NCREIF), the Pension Real Estate Association, and the National Association of Real Estate Investment Managers. Between 1997 and 2000, REIS became generally accepted by the industry for core real estate investments, but it was viewed as too structured and cumbersome for non-core investments. The standards in REIS followed the Global Investment Performance Standards' (GIPS) requirement of having external, independent appraisals at least every thirty-six months, (1) in compliance with the Uniform Standards of Professional Appraisal Practice (USPAP). In addition, REIS required quarterly valuation reporting for open-end commingled funds. This was intended to facilitate investors buying or selling shares of the funds on a quarterly basis, as well as to support the production of the quarterly NCREIF Property Index. (2) The 2005 version of REIS required quarterly valuation for each direct real estate investment. Most recently, the 2011 REIS Handbook, Volume I, was released. (3) This current version tightens the requirements around the quarterly valuation provision and provides more specific guidance on the process.
These standards revolve around not only quarterly reporting, but the requirement that investors can buy or sell shares of the various funds on a quarterly basis. Defined benefit pension plan sponsors constitute the largest investor base in this arena. Unit prices are established largely based on the net asset values (NAVs), which are determined through the appraisal process. The value estimates need to be as accurate as possible so as not to advantage or disadvantage either the buyers or the sellers. While appraisals are supposed to be independent, unbiased opinions of value, the final outcome is an estimate within a reasonable range of probable prices. In the lending industry, there is sometimes a bias toward the lower end of the range; the underwriters would rather be low than high because of the risk of potential loan default. Conversely, there may be a bias toward the high end to make the deal. In the fund world, conservatism or aggressiveness are not options. The numbers need to be as correct as possible.
Now let's take this premise to the next level. What about real estate funds that allow investors to buy or sell shares on a daily basis? This type of fund has existed for some time. For example, Principal Global Investors has had a daily marked fund since 1982 (Principal US Property Account), and TIAA has had a similar vehicle since 1995 (TIAA Core Property Fund). More recently, several new funds have been formed, or are in the process of forming, that also would allow investors to buy or sell shares on a daily basis. These funds typically derive their money from defined contribution pension accounts such as 401(k) plans. Since individual investors can often manage their own retirement portfolios, these funds have to establish a net asset value for the fund on a daily basis to facilitate the liquidity requirement. This is easy enough for the stock and heavily traded bond components of the fund, but it poses a more complicated problem with regard to direct investment in real estate.
Change in the Landscape
The primary reason for the growing popularity of daily traded funds is there has been a gradual shift in the pension system from defined benefit to deemed contribution pension plans. Factors such as increased mobility associated with workforces and industrial change are important drivers of the shift away from defined benefit plans. Mobile workers generally have less of a preference for defined benefit pensions because traditional benefit formulas are back loaded, favoring long-tenured employees, and because benefits from defined benefit plans are not portable from one employer to another. The trend away from defined benefit plans has also increased due to (1) pension underfunding and its persistence due to a decline in long-term interest rates; (2) the change to more market-based accounting; (3) increased regulatory burden and uncertainty; and (4) recognition of the effects of increased beneficiary longevity on plan costs.
Defined benefit funds currently have asset allocation to real estate equity of 5.1% of the plan's NAV. That amounts to approximately $237 billion out of total assets of $4.65 trillion just in the United Slates. (4) To date, the defined contribution world has largely been untapped with respect to direct investment into real estate. This is an additional $1.91 trillion universe that, because of the reasons noted previously, will be growing at a faster rate than the defined benefit funds. (5) Therefore, this potential new pool of investment funds has become the new darling of the real estate asset management firms.
In the past, the few funds in existence were set up as separate accounts in a life insurance company environment. The new generation of funds are being formed as non-traded real estate investment trusts (REITs), and therefore come under the purview of the US Securities and Exchange Commission (SEC). While the idea is spreading fast, and there are several advisors either in the process of getting approval or thinking about it, it is difficult process. Because the daily mark-to-market provisions are a new phenomenon for real estate, the SEC seems to be struggling with the concept. The SEC registration process has proven to be long and arduous. (6) Some of the most unsettled issues include:
* Liquidity--Does daily pricing correspond to daily liquidity since real estate by its nature is a nonliquid asset?
* Named Expert--Must valuation service providers fall within the named expert category (as defined in Rule 436 of the Securities Act of 1933), or can they even qualify considering the requirements under the definition?
* Sarbanes Oxley Act--Since the fund oversight is under the purview of the SEC, what are the applicable requirements under the Sarbanes Oxley Act pertaining to compliance with internal controls? (7) Many fund managers have not been subject to those compliance issues before, and regulatory compliance presents an additional layer of administrative overhead.
These are a few of the issues that are taking extended periods of time to resolve. In addition, because of the newness of the product, the guidance from the SEC as to these issues has not been consistent.
While the emergence of a number of these new funds is relatively recent, the daily valuation process has been around and evolving for a while. The daily valuation process's origins obviously come from the quarterly valuation process, which has been in existence for over thirty years. As the process has matured, it has become obvious that the differences between the quarterly valuation process and the daily valuation process are fairly distinct. The one commonality is that investors are relying on the value estimates to make investment decisions to buy or sell shares of the funds. The numbers cannot be aggressive or conservative--they need to be right.
The primary difference in the daily valuation process versus the quarterly process is any changes that occur at the asset level are reflected immediately versus cumulative adjustments made only four times per year. When investors can only transact at the end of a quarter, that premise is fine. However, when investors can buy or lock a sale price on a specific day, the timing of asset level changes takes on a whole new importance. As will be illustrated later in this article, reflecting changes at the asset level in a timely manner can impact pricing decisions.
Daily Valuation Methodology
To date, there are two basic approaches to the daily valuation methodology. One is an accrual basis model, and the other is a cash basis model. This is somewhat like the income capitalization approach, in that the direct capitalization analysis is an accrual-based model and the discounted cash flow analysis is a cash-based model. Either model will produce the correct indication of value and done correctly, the answers should be the same. Since the process is relatively new to the industry, new methodologies will surely evolve.
Both approaches involve a combination of internal and external valuation expertise. Because of the potential daily change in real estate asset values, the fund will typically have either third-party, independent oversight pf the process or a substantial internal valuation department. This is not to be confused with third-party external appraisers; rather, it is a consultant that can function in a number pf capacities but whose purpose is to assure independence of the overall process for the investors. This is an advisory and assistance type of role. Despite this third-party advisory involvement, the approval and ultimate ownership of the real estate asset values are the responsibility of the fund because of its contractual fiduciary responsibility. There are also other fund balance sheet adjustments that go into calculating the daily NAV. Those are generally the responsibility of the fund, and therefore out of the control of the valuation advisor.
Accrual Basis Methodology
The accrual-based approach is very similar to the traditional quarterly valuation process for open-end commingled funds. Typically, 25[degrees]/o of the portfolio would be appraised each quarter by an independent, third-party appraiser, and the remaining 75% would be appraised internally. The transition to daily mark-to-market valuation starts with the official valuation as of the inception date or the beginning quarter. Prospective change in day-to-day value comes from two primary sources: changes in lease structure/ property operations and changes in capital expenditures. To reflect those changes on a daily basis during the quarter, an accrual mechanism is established.
The cash flow models for the individual properties are used to calculate a prospective value for the end of the upcoming quarter simply by changing the beginning date of value in the discounted cash flow model. This takes into consideration the change in value resulting from projected property operations during the quarter. The difference between the current-quarter value and the prospective value gets amortized over the number of business days of the quarter. In periods of rapidly moving market shift, this process can also be done monthly for a little more timeliness. At the end of the quarter the properties are revalued, any difference between the new value estimate and the amount that had accrued gets more correctly matched or trued up, and the process is repeated for the next quarter.
The second part of the accrual process relates to capital expenditures. As capital is spent, it generally gets debited to the property, and this results in a direct increase in the asset value. Since the anticipated capital expenditures are also in the cash flow models and become part of the prospective value, there has to be an adjustment to avoid double counting in the NAV calculation. To offset the increase in value from the accounting entry, a corresponding adjustment has to be made to the cash flow model to keep them in sync. This will be discussed later in more detail.
While the accrual process reflects the anticipated changes at the asset level for the quarter in process, significant events will occur that were not anticipated. The definition of a significant event is an unanticipated change in property operations or capital markets that impacts the asset value above/below a stipulated threshold. That threshold is typically defined in the fund's policies and procedures, and will generally range from 3% to 5% of the property's current value, or 0.25% to a minimum dollar amount on a portfolio level. This can be a result of a single event or multiple cumulative events over the course of the quarter. For example, a large tenant may leave unexpectedly or file for bankruptcy. Conversely, a cash flow model may have anticipated a nine-month lease up period for 50% of a building, but the property gets leased in two weeks. Both of these events have an immediate impact on value. The assets are monitored by the asset managers, and potential significant events are reported to the internal or external appraisers. The potential impact is measured. If it qualifies as a significant event, the asset value is adjusted immediately, and the value change is reflected in the NAV as of that date. Also, the accrual for that asset is reviewed and adjusted for the remainder of the quarter to avoid an additional accrual adjustment at the end of the quarter.
At the close of the quarter, all assets are reappraised either internally or externally. A report is issued documenting the changes made during the quarter from significant events and any true up to those quarterly accruals that were made. A new basis is set for the ensuing quarter, and the process is repeated.
Cash Basis Methodology
The cash basis methodology is a very interactive approach between the appraiser and the fund. The appraiser basically becomes part of an overall property information team. Generally, one-twelfth of the portfolio is externally appraised every month. This ensures that there is an independent third-party appraisal of each individual asset at least once per year.
As these appraisals come in, any variance between the current carrying value gets marked to the appraised value. Also, other assets in the portfolio that are not being externally appraised are reviewed to make sure there is consistency across the portfolio. For the remainder of the portfolio, all assets are monitored in real time for changes in leasing, capital expenditures, capital markets and market assumptions, and other operational issues. Essentially, it is equivalent to running a trading floor where there is constant back and forth communication to facilitate the exchange of information. Only it is not minute to minute, but more like day to day and some days nothing happens. Literally, something could happen with an asset two days after the external appraised value is booked, and the value could change.
The major difference in the two methodologies is that in the cash basis methodology there is no accrual true up at the end of the quarter since all changes are made as they occur. Also, the definition of a significant event does not apply since all changes are made that impact value as soon as practical no matter what their individual magnitude may be. This is a very interactive process involving portfolio management, asset management, fund accounting, and the valuation consultant. The information technology infrastructure is also a key piece. The operation must allow for efficient flow of information, approval mechanisms, a master cash flow database, dispute resolution mechanisms, and a host of features to track, archive, and document the process.
In addition to the 250/0 of the portfolio that is externally appraised each quarter, for the internally valued properties a valuation reported in a restricted use format is completed summarizing any changes made during the quarter and estimating the market value as of the end of the quarter. At the end of each quarter all assets undergo a review for consistency. The valuation consultant will issue a report documenting the value changes during the quarter from both the external and internal appraisal processes.
Significant Issues in Building the Daily Valuation Process
Probably the most significant driver in creating a daily valuation process is the corporate culture of the fund itself. Each company is unique, and the role of portfolio and asset management will vary. Some funds internally run their property management while others outsource that function. Some funds have significant internal valuation capabilities, some just oversight, and some none at all. Whatever structure is designed, it must carefully take advantage of the individual company strengths and be cognizant of the weaknesses. The role of the valuation consultant is not only to provide oversight and independence, but also to help strengthen the areas where there are shortcomings.
Standardized Cash Flow Models
One of the important elements of maintaining consistency in the process is developing a master set of cash flow models. Establishing standard modeling conventions and charts of accounts facilitates an ease of monitoring controls over the change process. It also allows for efficient change of systemic market issues that may impact multiple property cash flows such that the end portfolio value result is consistent.
As will be discussed later, there are other significant management benefits that accrue from this exercise.
Periodic Value Adjustments
Quantifiable Operational Events
The most common periodic events impacting value are changes in lease structure. These events include new leases being signed, expirations, tenant abandonment, etc. Not only do these events change income, they can have a broader impact on value when the events have different timing than modeled in the cash flow or, more importantly, are unanticipated.
No matter what valuation approach is used, significant events must be dealt with as expediently as possible. Adjustments to the valuation models are required for a number of reasons. For example, in cash flow models the lease turnover is predominantly modeled based on a weighted stay/leave vacancy assumption. In actuality, the tenant either stays or leaves. That change needs to be adjusted upon occurrence.
Suppose a tenant was modeled with a 100% leave assumption, and the ensuing lease-up period is estimated to be nine months. Assuming a 50,000 sq. ft. lease, market rent of $55.00 per sq. fl. equals $1,512,500 in anticipated rent loss. But suppose an unexpected event happens, and the property is leased in one month. That event would cause an immediate $1,116,667 increase in rental income plus associated operating expense adjustments, causing the property value to increase significantly versus the value currently indicated by the existing cash flow model. On a hypothetical 100,000 sq. fi. building at those market-rent levels, typical expense levels, and an 8.5% overall capitalization rate approximates a stabilized property value of $265.00 per sq. fi., which equates to a 4% value change caused by that one event.
The other thing to be cognizant of is that in a larger portfolio a lot of small changes can add up. For example, four changes at the property level at 1.5% each during the quarter equal a 6% change prior to the end of the quarter.
True Up of Capital Expenditures and Value Adjustments
Since one of the more common value-oriented events is the booking of capital expenditures, it requires constant monitoring to avoid over counting. The technical part of the procedure is that when a capital expense gets booked by the accounting department, it acts as an immediate increase to the net asset value of the property. If that capital expense was anticipated and included in the cash flow model, there needs to be corresponding simultaneous value adjustments to the cash flow model to make the asset value in the model reflect the actual value change caused by the accrual balance sheet entry.
An example of this potential problem is the early leasing of a significant block of vacant space. Suppose the budget and cash flow model anticipated it would take nine months to lease 50% of a 500,000 sq. ft. office building with $40.00 per sq. ft. tenant improvements (TIs). In actuality, the property is leased two weeks into the quarter. Accounting immediately accrues the TI expense. If the true up in the cash flow models is not made until the end of the quarter, there will be two major discrepancies in the NAV. First, the accrued capital expense immediately increases the asset value in the accounting books by $10,000,000. If the cash flow model is not adjusted until the end of the quarter, and the daily NAV is calculated based on the appraised value, the NAV will be understated for ten weeks, and there will be a significant true-up adjustment at the end of the quarter. Secondly, the present value impact of the early disappearance of the downtime on value will not get fully recognized until ten weeks after it occurred.
The opposite situation can occur when there are "keep up with the Joneses" capital expenditures. These are capital dollars that are required to maintain an asset's competitive position among its peers. In other words, a dollar spent is not always a dollar earned. The expense does not necessarily immediately add to value, rather it will allow the building to continue to charge competing market rents to maintain its value. Here it is important for the valuation consultant to understand how the capital was used in the cash flow. If rental rate increases were modeled in anticipation of the capital expenditure, it may not necessarily immediately add to the value of the building until the rental rate increase is recognized.
Property versus Capital Market Issues
In addition to monitoring the specific changes that occur at the asset level, it is important that observed trends get extrapolated across the portfolio when appropriate. Such issues could include new leases indicating a shift in market rent levels, capitalization rate movement indicated by new sales activity, and new supply or demand shifts that would impact absorption assumptions. One deal may not be indicative of the overall market, but a similar change at multiple assets may indicate a trend. The bottom line is that individual asset events cannot be looked at in a vacuum, and the team needs to communicate.
A study of past real estate cycles indicates market reaction time has become faster. A significant cause of this phenomenon is the increased transparency and availability of data. Figure I reflects the amplitude and duration of the two previous major real estate cycles as indicated by the NCREIF Property Index (NPI).
As Figure 1 shows, in the downturn in the early 1990s (1st quarter 1990 through 4th quarter 1995), asset values declined 38.33% over the 24-quarter period. In the most recent downturn (2nd quarter 2008 through 1st quarter 2010), asset values declined 36.78% in a period of only 8 quarters. (8) Clearly there are real estate cycles, and they repeat themselves. But, their causes and effects are different. The one obvious factor is that the cycles seem to be moving faster than in the past. As these market shifts happen, there is an increasing need to recognize the trend and impound the effect on the portfolio value in the timeliest manner possible.
It is also important to understand what capital market changes actually impact value. For example, fluctuations in the ten-year Treasury-bill rates may have a direct impact on the debt mark-to-market, but do not immediately impact real property values.
In the daily arena, valuation of properties still in the development process is not that different from the process in the quarterly valuation arena. The main difference is the recognition of the timing of construction cost payments during the quarter rather than accounting for them in aggregate at the end of the quarter. A more significant issue is the recognition of developer profit during the construction period. In the past, it was typical for development assets to be carried at cost until construction was complete or they reached 80% occupancy; then the properties were appraised coinciding with the end of a quarter. Assuming the project was successful, this would usually result in a one-time value increase to reflect the recognition of any developer profit. The problem with that was there were actually incidences of investors who would monitor the progress of significant development projects. Then, in anticipation of the mark up, these investors would buy additional units before the end of the quarter and sell them as soon as the profit mark up was reflected in the NAV. This issue ultimately was addressed on a number of levels, most notably from guidance issued by NCREIF in 2005 through a position paper entitled "Timely Recognition of Entrepreneurial Profit (or Loss) for Development Assets." (9)
[FIGURE 1 OMITTED]
More than a Valuation Exercise
While the purpose of the valuation exercise is to facilitate a daily mark-to-market process, the discipline that is required to complete the valuation opens access to interesting new tools for management. One such tool is the master cash flow database. A current best practice is to create a master set of cash flow models. The process involves standardizing charts of account, with consistent modeling conventions for dealing with such things as expense reimbursements and treatment of capital expenditures. The process also controls editing of the models to preserve the integrity of the individual property models. With a stable base, the following are some benefits various funds have realized outside the periodic valuation process:
* An accurate starting point for asset managers to complete sensitivity models for prospective new leases.
* A mechanism to assist in annual budgeting and budget monitoring throughout the year.
* The testing of various capital expense programs to measure their impact on future values.
Another benefit has been the carryover of the market information to property management and strategic planning. As trends in market rates and capital market movement are being monitored as events happen, implications on other properties in the portfolio become more apparent. With more real-time information and use of new tools such as ARGUS Enterprise, standardized cash flows allow for portfolio sensitivity. When there is an acquisition accretive to portfolio returns or a strategic portfolio pruning, the allocation rebalancing now become an automated process rather than a labor-intensive exercise.
Impact on the Appraisal Industry Change in Mind-Set
With the change to a more real-time valuation approach comes the need to address the issue of reporting standardization. There are many examples of this trend in the real estate industry, but the appraisal industry has been one of the slower sectors to respond. The three areas of focus by investment managers and investors are standardized data-naming conventions, chart of accounts, and reporting formats. In the performance measurement world, creating a standard language across the real estate investment spectrum has been a goal for some time. (10) As little as thirty-five years ago, real estate was considered a cottage industry and not a viable institution investment class. It can now be acknowledged that real estate has arrived. But in order for it to be measured on an equal basis with equities, bonds, etc. there must be convergence in the communication, not only within the United States but on a global basis.
Data Naming Conventions
The Open Standards Consortium for Real Estate (OSCRE) is a nonprofit organization dedicated to the development of industry standards for data exchange. OSCRE has produced a number of XML data schemata for use in exchanging and sharing records and data. (11) The OSCRE standards are quickly being adopted by major real estate organizations around the globe and included as part of new releases to industry standard software such as the ARGUS line of products.
Standard Chart of Accounts
It is interesting to note that a standard chart of accounts for the hotel accounting and appraisal industry has been in place since 1926. (12) Other property types basically had no such structure until 2003 when the Mortgage Bankers Association (MBA) and the Commercial Real Estate Finance Council (CREFC) endorsed the adoption of the CREFC Investor Reporting Package by the commercial mortgage-backed securities (CMBS) industry. (13) This document sets forth a suggested standard chart of accounts for all major commercial property types.
While appraisals are an integral part of the CMBS underwriting process, the data from those appraisals typically has to be reformatted to be useful in the remainder of the mortgage investment process. It would be much easier if it were all to match from the beginning. This premise is quickly spreading to the general real estate investment community and is expected to be implemented in the future.
Standardized Reporting Formats
One of the things on the wish list of institutional real estate owners and managers and larger national banks is to receive appraisal reports in a standardized format so the review and data extraction processes would be less difficult. This desire can already be seen in the proliferation of standard, electronic executive summary formats accompanying appraisal engagement letters. There have been many initiatives in the past by the Appraisal Institute and various real estate software companies to create a standardized commercial appraisal report. Now, with increasing demand from buyers of appraisal services, it will only be a matter of time.
USPAP and Scope of Work
Although the daily mark-to-market process presents a wrinkle in the traditional appraisal process, the policies and procedures statements of most of the funds clearly state that both the external and internal valuations will be completed in accordance with USPAP. The change in USPAP over the past few versions to emphasize the importance of establishing the appropriate Scope of Work appears to have been crafted with this type of industry evolution in mind. It is very important that the appraiser clearly understands how to comply with Standards 1 and 2 in this new environment, and perform the scope of work necessary to develop credible assignment results.
Timely Market Data
As demonstrated by the NCREIF graph in Figure 1, increased market transparency and availability of data have had a direct impact on the market cycles. In the not so distant past, comparable sales data with closing dates six months or even one or two years earlier was acceptable. With values available quarterly or daily, clients do not want to see the same sales used quarter after quarter. Also, consider that by the time a sale closes and is confirmed in CoStar, the sale was negotiated six to nine months prior to that date. Clients are more interested in what the current bid/ask spreads are, what deals have gone into escrow but not closed yet, and what the current competition is. This puts a twist on the standards for market research. As was witnessed in the last cycle from 2005 through 2010, sales data even six months old can be useless. Appraisers need to know their markets. That means interacting with the brokerage community, and the disposition and acquisition staff not only of the client but of other competing institutions. It also means consulting data sources like Real Capital Analytics that publish information on the properties under contract as well as the recent closings. These are all great starting points for the appraiser to acquire leads to go out and get current confirmations on transactions on a timely basis.
As noted earlier, investors need to know what the value is today, not nine months ago. The institutional clients spend tens of thousands of dollars on market research. They are hiring appraisers as the experts. To meet these challenges appraisers need to spend more time and money on quality data research.
Clearly with the potential pension fund dollars being targeted by new investment vehicles, there are new opportunities for the appraisal industry. The increased reporting requirements provide the potential for an area of valuation services that did not previously exist. The challenge is adapting the traditional appraisal practices to the needs of this client group.
The valuation of institutional-grade real estate arguably reflects the risk-adjusted, present value of the contract lease portfolio purchased, plus the value of the right to get the building back empty. The lease portfolio consists of corporate obligations. The risk associated with the collection of the rent is similar to the risk associated with the repayment of corporate bonds. Therefore, leases can be considered the equivalent of amortized corporate bonds. The valuation of that portion of the investment can be addressed on a fairly traditional and straightforward basis.
The new challenge comes in addressing the market participants' perception of the value of the underlying real estate when it becomes free of the existing lease encumbrances. This is where the appraisal community must begin to employ more sophisticated and intense market analysis and research techniques to keep up with client expectations. Even though market value implies that the market exposure time has passed, the gap between transaction data traditionally used in appraisals and the data required to reflect the current value as of the date of valuation must be compressed significantly.
Internet resources suggested by the Y. T. and Louise Lee Lure Library
Commercial Real Estate Finance Council (CREFC)
National Association of Real Estate Investment Managers
National Council of Real Estate Investment Fiduciaries
Open Standards Consortium for Real Estate (OSCRE)
Pension Real Estate Association
US Securities and Exchange Commission--Laws that Govern the Securities Industry
(1.) Global Investment Performance Standards, Section II, 6.A. (CFA Institute, 2010).
(2.) NCREIF Property Index (NPI), available at http://www.ncreif.org/property-index-returns.aspx.
(3.) Available at http://www.reisus.org/files/REIS Handbook Volume_1.pdf.
(4.) Pensions and Investments, Top 1,000 Plan Sponsors, December 1, 2011.
(6.) US Securities and Exchange Commission Form S-11 is used to register securities issued by real estate investment trusts or other organizations acquiring and holding real estate or interests in other issuers whose business is primarily that of acquiring and holding real estate or interest in real estate for investment. See "General instructions for registration under the Securities Act of 1933 of securities of certain real estate companies," http://www.sec.gov/about/forms/forms-11.pdf.
(7.) Sarbanes-Oxley Section 404, "Assessment pf Internal Control," requires management and the external auditor to report on the adequacy pf the company's internal control on financial reporting. This is the most costly aspect of the legislation for companies to implement, as documentation and testing of the important manual and automated controls require enormous effort.
(8.) NPI Trends Report 2011 Q3, NCREIF, available at http://www.ncreif.org.
(9.) Brent A. Palmer and D. Richard Wincott, "Timely Recognition of Entrepreneurial Profit (or Loss) for Development Assets," position paper, National Council of Real Estate Investment Fiduciaries, November 21, 2005.
(10.) REIS Performance Measurement Resource Manual, NCREIF Performance Measurement Committee and REIS Council/Board, April 2010.
(11.) For more information, see http://www.oscre.org.
(12.) Uniform System of Accounts for the Lodging Industry, 10th ed. (Hospitality Financial and Technology Professionals, 2006).
(13.) CRE Financial Council Investor Reporting Package, Version 5.1, December 1, 2010, CRE Finance Council 2010, Master Coding Matrix, 80-83.
by D. Richard Wincott, MAI
D. Richard Wincott, MAI, CRE, FRICS, is a senior executive vice president at Research, Valuation and Advisory, Altus Group US, Inc. He has been active in the institutional valuation and counseling business for over thirty-five years. He has previously published articles in The Appraisal Journal and other prominent industry publications.