Chapter 3 — Real Estate Operations Acquired or to Be Acquired

3.3 Measuring the Significance of Real Estate Operations

This Roadmap does not reflect updates to the FRM made after May 2025. See Preface for details.

The requirements of Rule 3-14 and Rule 3-05 differ with respect to significance tests as well as the form and content of the financial statements presented. In terms of significance tests, for example, Rule 3-14 addresses only one of the significance tests described in Rule 1-02(w) (i.e., the investment test) and also does not have a tiered threshold for disclosure requirements (i.e., a single 20 percent threshold results in one year of audited statements).

3.3.1 Modified Investment Test

To determine the significance of real estate operations, a registrant only needs to perform the investment test described in Rule 1-02(w)(1)(i) as modified by Rule 3-14(b)(2)(ii). The asset and income tests are not applicable. The registrant applies the modified investment test as follows on the basis of whether it has an AWMV:

Registrant has AWMV — The registrant’s investment in the real estate operation is compared with the registrant’s AWMV:
- Investment in the real estate operation — This amount is determined on the basis of the “consideration transferred,” which is measured in accordance with the applicable accounting standards. The investment should exclude any debt secured by the real properties that is assumed by the registrant. Contingent consideration should be included on the basis of either (1) fair value (if the applicable accounting standards require contingent consideration to be recognized at fair value) or (2) the maximum amount (unless the likelihood of payment is remote) if recognition at fair value is not required under the applicable accounting standards.
- AWMV — This amount is determined on the basis of the average of the last five trading days of the registrant’s most recently completed month-end before the earlier of the date on which the registrant announced the acquisition or agreed to it.
Registrant does not have AWMV — This may be the case when a registrant is undertaking its IPO or it is not traded. In these instances, the investment test is based on the registrant’s consolidated total assets as of the end of most recently completed fiscal year before acquisition. When performing the investment test, the registrant compares the “consideration transferred,” which includes any assumed debt secured by the real properties, with its consolidated total preacquisition assets. This treatment of debt secured by the property differs from the treatment of acquired debt when a registrant has an AWMV.

A real estate operation is significant when the investment is greater than 20 percent of the registrant’s AWMV or total assets, as discussed above. When acquired or to be acquired real estate operations are related to one another (see Section 3.3.3), a registrant must use the aggregate investment in these operations when performing the significance test. The registrant should also be aware of the considerations related to aggregating individually insignificant acquired or to be acquired real estate operations (see Section 3.4.2.3).

Example 3-4

Case A — Registrant Has AWMV

Registrant A’s fiscal year-end is December 31. It announced the acquisition of Real Estate Operation E on November 5, 20X8, and completed the acquisition on November 15, 20X8. On the basis of the average of the last five trading days of October 20X8, A’s AWMV is $70 million.

On December 31, 20X7, A had total consolidated assets of $100 million. Its total investment in E was $30 million, which includes assumed mortgage debt of $5 million. The investment test calculation is performed as follows:

Case B — Registrant Does Not Have AWMV

Assume the same facts as Case A, except that Registrant A does not have an AWMV (i.e., its shares are not traded). The investment test calculation is performed as follows:

3.3.2 Special Circumstances

The sections below discuss additional considerations that may apply in certain circumstances.

3.3.2.1 “Blind-Pool” Offerings

Certain registrants that conduct continuous offerings over an extended period do not initially own any real estate assets, and the specific intended use of the proceeds raised from investors is not initially identified because such registrants have not yet selected any assets for their portfolios. Such “blind-pool” offerings are subject to the guidance in Industry Guide 5 and therefore have specific reporting and significance measurement requirements. The distribution period is the period during which the registrant is conducting a continuous Securities Act registered offering through a registration statement to which Industry Guide 5 applies.

In accordance with Rule 11-01(b)(4), when a registrant conducts a blind-pool offering, only the investment test (modified for blind-pool offerings) applies — not the income test or the asset test. The guidance on such offerings applies to acquisitions subject to the requirements of either Rule 3-05 or Rule 3-14. For acquisitions subject to Rule 3-05 (i.e., acquisitions of a business), the investment, income, and asset tests apply. For acquisitions subject to Rule 3-14 (i.e., acquisitions of real estate operations), only the modified investment test applies. Under the investment test, the registrant’s and its other subsidiaries’ investments in the real estate operation are compared with the registrant’s total assets and those of its subsidiaries consolidated. For the investment test as modified for blind-pool offerings, total assets are determined as follows:

During the distribution period — Total assets as of the acquisition date, excluding the acquired real estate operation plus the proceeds (net of commissions) in good faith that are expected to be raised over the next 12 months.
After the distribution period but before the filing of the next Form 10-K — Total assets as of the acquisition date, excluding the acquired real estate operation.
After the distribution period and filing of the next Form 10-K — Total assets in accordance with the registrant's most recent annual consolidated financial statements included in the Form 10-K (in a manner consistent with the non-blind-pool general Rule 3-14 significance test).

3.3.2.2 Real Estate Operations Acquired Shortly After the Registrant’s Most Recently Completed Fiscal Year

A registrant may acquire a real estate operation shortly after its year-end but before filing its Form 10-K for that year. If the registrant does not have an AWMV, the investment test for such an acquisition will be based on the consolidated total assets of the registrant included in its prior-year Form 10-K to assess significance when determining its initial Form 8-K filing requirements. In certain situations, the registrant may reevaluate significance by using its total assets for the most recent fiscal year reported in the Form 10-K filed after the initial Form 8-K filing but before the due date of the amended Form 8-K. See Section 2.3.1.1 for further discussion and an example.

3.3.2.3 Real Estate Operations Acquired Before Completion of the Registrant’s First Fiscal Year

If a registrant other than a newly formed REIT (e.g., a master limited partnership) has not completed its first fiscal year, the total assets in the most recent audited balance sheet filed with the SEC will be used in the significance test. Typically, this will be the audited balance sheet included in the registrant’s initial registration statement.

A registrant that is a newly formed REIT with no significant operations may calculate significance by using a denominator that includes acquired and to be acquired properties. In such situations, registrants should consider consultation with their auditors and SEC legal counsel.

3.3.2.4 Use of Pro Forma Financial Information in the Significance Test

A registrant may acquire (or it may be probable that it will acquire) a real estate operation after a previously reported individually significant acquisition or disposal of real estate operations for which the registrant had provided pro forma financial information in a Form 8-K, Item 2.01, or registration statement. In this situation, Rule 3-14 permits the registrant to perform the significance test by using the pro forma financial information that was included in a previous Form 8-K or registration statement reporting the acquisition or disposition of significant real estate operations rather than historical preacquisition financial statements. The pro forma effects of any other transaction should be excluded. A registrant that elects to use pro forma financial information to evaluate significance should apply this approach consistently for all subsequent acquisitions and dispositions until it files its next annual report on Form 10-K. See Section 2.3.1.2 for further discussion and an example.

3.3.2.5 Real Estate Operations Acquired or to Be Acquired by the Registrant’s Subsidiary

If the subsidiary is not itself a registrant, significance should be measured by comparing the investment in the acquiree with the registrant’s preacquisition consolidated total assets or AWMV (if available). However, if the subsidiary is also a registrant, the parent and the subsidiary must each measure whether the acquiree is significant. See Section 2.3.1.3 for further discussion and an example.

3.3.2.6 Plans to Dispose of Certain Acquired or to Be Acquired Assets

If a registrant acquires a group of properties and plans to dispose of certain of them, the assets to be disposed of should not be excluded from the significance calculation. That is, the amount of the investment must include all acquired real estate operations even if the registrant plans to dispose of one or more of them. See Section 2.3.1.4 for further discussion.

3.3.2.7 Previously Issued Financial Statements That Are Retrospectively Adjusted

In certain circumstances, a registrant may be required to file updated financial statements that reflect the retrospective adjustments for periods before adoption of the change. In some cases, such changes may affect the significance calculations. See Section 2.3.1.5 for further discussion and an example.

3.3.3 Measuring the Significance of Related Acquired or to Be Acquired Real Estate Operations

Rule 3-14(a)(3) states that acquired or to be acquired real estate operations are related to one another 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 “[e]ach acquisition is conditional on a single common event.”

When a registrant performs the significance test upon its acquisition or probable acquisition of real estate operations that are related to one another, it must treat the group of related real estate operations as a single operation. Therefore, the registrant must compare its aggregate investment in the related real estate operations with either its AWMV or its total assets. The related real estate operations are significant when the aggregate investment exceeds 20 percent of the registrant’s preacquisition total assets.

If the significance of the group of related real estate operations exceeds 20 percent, the registrant must present statements of revenues and expenses for all the related real estate operations, even if a related real estate operation is individually insignificant (i.e., its significance is less than or equal to 20 percent on an individual basis). In addition, a registrant may present combined abbreviated income statements if the real estate operations are under common control or management and they meet the criteria in ASC 810-10-55-1B for presentation on a combined basis. However, the SEC staff may require the combined financial statements of acquired related real estate operations to be presented separately from the combined financial statements of related real estate operations that are to be acquired.

Example 3-5

Registrant A consummated the acquisitions of Real Estate Operations B and C on July 31, 20X9. The acquisitions were announced on July 5, 20X9, and A, B, and C have a December 31 year-end.

Real Estate Operations B and C are related because they were under common control since January 1, 20X2. The table below summarizes A’s investments in B and C as well as the calculation of the combined significance of B and C.

The acquisitions of B and C should be treated as a single acquisition since B and C are related to one another. Therefore, to perform the significance test, A must aggregate its investments in B and C. On the basis of the significance test results, B and C are 30 percent significant in the aggregate. Registrant A must present the abbreviated income statements of both B and C even though C would not have been significant by itself. Because B and C have been under common control and the criteria in ASC 810-10-55-1B for presentation on a combined basis were met, A may present separate or combined abbreviated income statements for B and C.

If a registrant acquires a group of individually insignificant related real estate operations, it should apply the guidance discussed above before applying the guidance on the acquisition of individually insignificant real estate operations.

3.3.4 Performing the Significance Test and Determining the Financial Statements Required Upon and After a REIT’s IPO

To determine the financial statements required upon its IPO, a newly formed REIT with no significant operations (referred to herein as a “newly formed REIT”) performs the significance test on its acquired or to be acquired real estate operations. To do so, it uses the total cost of the following as the denominator:

Properties acquired immediately before an initial registration statement is filed.
Properties to be acquired upon closing the IPO.
Properties identified as probable future acquisitions.

That is, a newly formed REIT compares (1) its investment in the acquired or to be acquired properties with (2) the denominator.

In the initial registration statement, the newly formed REIT must include abbreviated income statements for acquired or to be acquired properties whose significance is individually greater than 20 percent along with pro forma financial information.

Further, if there are acquired or to be acquired properties whose significance individually is less than or equal to 20 percent but in the aggregate exceeds 50 percent, the newly formed REIT must provide pro forma financial information depicting the aggregate effects of all such individually insignificant real estate operations. However, the newly formed REIT is not required to provide separate financial statements for any individually insignificant real estate acquiree.

Example 3-6

Registrant A, a newly formed REIT, is planning to file a registration statement for its IPO. Immediately after its formation, A acquired Real Estate Operations B, C, D, and E. In addition, it is probable that A will acquire Real Estate Operations F, G, and H immediately after the IPO.

The table below lists the cost and significance of each of the real estate operations acquired or to be acquired (assuming all such acquisitions occur within the same year).

Registrant A is permitted to compute the significance of the real estate operations by using a denominator equal to the cost of all acquired and to be acquired real estate operations ($14,500). Because C and G are individually more than 20 percent significant, A will present their audited abbreviated income statements in the registration statement along with pro forma financial information. Real Estate Operations B, D, E, F, and H are individually insignificant. However, in the aggregate, their significance is 52 percent (3% + 12% + 7% + 16% + 14%). Therefore, A must provide pro forma financial information depicting the aggregate effects of B, D, E, F, and H.

For acquisitions or probable acquisitions after the IPO but before the initial Form 10-K is filed, the newly formed REIT can use the same denominator discussed above to calculate significance. However, the denominator should not include properties whose acquisition was probable at the time of the IPO but that were not ultimately acquired, unless audited financial statements of the property were included in the initial registration statement and the acquisition remains probable. Thus, the denominator should be reduced for any property not acquired or whose acquisition is no longer probable. The purpose of this restriction is to prevent registrants from using a denominator for significance that is artificially large because of probable acquisitions that will not ultimately occur.

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