In response to a variety of new accounting standards and continued calls for increased reporting transparency, Los Angeles-based CB Richard Ellis has launched a Financial and Tax Reporting Services practice. Part of the brokerage giant’s Valuation and Advisory Services Group, the new practice is led by managing director Kyle Redfearn based in Dallas.
“The ever-increasing scrutiny around financial and tax reporting transparency requires professionals who are well versed in valuation trends and issues as well as the regulatory reporting environment,” says Thomas McDonnell, president of CB Richard Ellis’ Valuation and Advisory Services Group. Among CBRE’s new services are valuations required for financial and tax accounting and reporting that follow guidance set forth by the Financial Accounting Standards Board (FASB), International Accounting Standards Board (IASB) and the Internal Revenue Service (IRS).
Redfearn brings with him more than 17 years of real estate valuation and consulting experience encompassing all major property types throughout the U.S. and internationally. Prior to joining CBRE, he headed up the real estate valuation group in the Tax and Financial Reporting practice at Houlihan Lokey Howard & Zukin. Before that, he was a senior manager at Deloitte & Touche, where he focused on financial and tax reporting valuations and assisted the firm’s audit teams as a valuation review specialist.
Redfearn’s services come at a time when the regulatory environment is increasingly complex. For example, FASB has created a new rule, known as Financial Accounting Statement (FAS) 157, which requires institutional investors to value their commercial real estate holdings based on the expected sale price rather than the purchase price. Parts of the rule were originally set to take effect in the first quarter of 2008, but FASB recently delayed implementation until early 2009, giving companies more time to study the rule.
FAS 157 is intended to create a more universal method of measuring and reporting asset valuations beyond the internal models most institutions use. “In developing this statement, the board considered the need for increased value consistency and comparability in fair value measurements and for expanded disclosures about fair value measurements,” according to a recent FASB statement.
For now, institutional investors and their accounting firms remain mum about the true extent of the rule’s impact, but many feel the industry will suffer no ill effects. “I’ve got questions about it that haven’t been resolved yet,” says Redfearn, “but it’s not going to change my approach since I already focus on market-oriented valuations.”
According to George Yungmann, senior vice president of financial standards for the National Association of Real Estate Investment Trusts (NAREIT), publicly traded REITs will not be affected by FAS 157. “For me, it is a non-issue with relationship to investment properties. Our companies are already using those standards. It was delayed for technical reasons rather than for its potential impact on the industry.”
For many, though, the rule comes at an inconvenient time for the industry as commercial real estate values continue to fall. Earlier this year, a Goldman Sachs analyst predicted that commercial real estate values through 2009 could drop by as much as 26% from peak to trough.
Values have already been dropping for months. According to the latest Moody’s/REAL Commercial Property Index, values for commercial real estate holdings by institutions fell for the third month in a row, by 0.6% in January. The index is now 2.4% below its high achieved in October 2007.
At the same time, capitalization rates are on the rise, which is leading to lower earnings expectations because the properties on their books are falling in value. A majority of institutional investors in a recent Korpacz Real Estate Investor survey expect overall cap rates to increase by an average of 35.5 basis points over the next six months.
“As 2008 gets underway, we can expect capitalization rates to continue to increase,” says Kenneth Riggs, president and CEO of Chicago-based Real Estate Research Corp. “We may see these rates increase more quickly on a regional level, as they seem to be doing in the Midwest and East regions, although the West and South regions are seeing a little less movement.”
Many institutional investors are also voicing a preference for cash over commercial real estate, stocks or bonds on a risk-adjusted basis, according to a fourth-quarter survey by Real Estate Research. These investors also are expecting lower rental growth and higher expenses among most property types in the first quarter of 2008.