6.3 Financial Services

6.3.1 Banking and Capital Markets

The SEC staff’s comments to registrants in the banking and capital markets industry have focused on (1) loans and related allowance for credit losses, specifically in connection with commercial real estate (CRE); (2) disclosures related to interest rate, liquidity, and market risk; and (3) deposits.

In addition, the SEC staff has continued to focus on disclosures related to non-GAAP measures and digital assets when performing reviews of registrants in this industry as well as in other industries. See Section 3.4 for a discussion of comment letter trends related to non-GAAP financial measures and key metrics and Section 3.11 for a discussion of comment letter trends related to digital assets.

6.3.1.1 Loans and Related Allowance for Credit Losses

Examples of SEC Comments

We note that the real estate — commercial mortgage portfolio represents [nearly half] and the non-owner occupied portfolio represents [nearly a third] of your total loans held for investment at [fiscal year-end]. Given the significance of these higher risk loan portfolios and the impact on trends and uncertainties that are reasonably likely to have a material effect on revenues or continuing operations, please revise future filings to further disaggregate the composition of these and other higher risk loans at each period end by collateral type (e.g., by office, hotel, multifamily, etc.), other relevant concentrations (geographic, property type for office loans, etc.) and other characteristics (e.g., current weighted-average loan-to-value ratios, occupancy rates, etc.) to the extent material to an investor’s understanding of credit risk in your higher risk portfolios.
Please revise future filings to expand the discussion of the commercial real estate portfolio to provide further disaggregation by owner and non-owner occupied and characteristics, such as loan-to-value ratios, where material.
We note your disclosure . . . indicating that your loans are geographically concentrated. Please revise your Management’s Discussion and Analysis in future filings . . . to address your geographic loan concentrations. Please also revise future filings to disclose any significant loan concentrations subject to higher credit risk and how you are managing the risk and exposure.
We note you charge-off loans at the earlier of 120 days past due or when deemed uncollectible. Please tell us the typical facts and circumstances when a loan is deemed uncollectible and charged-off prior to being 120 days past due and provide us an estimate of the magnitude of loans charged-off prior to 120 days past due. To the extent material, please revise future filings to disclose this information.
Considering your disclosure [that] there was a significant increase in charge-offs in [the fiscal year] primarily due to loans to new borrowers performing worse than expected due to macro-economic factors, please tell us and revise future filings to clarify and bridge the gap with your disclosure . . . that due to the short term nature of the loan portfolio, forecasted changes in macro-economic variables such as unemployment do not have a significant impact on loans outstanding at the end of a particular reporting period in estimating current expected credit losses.

In a June 2024 statement, then Division Director Erik Gerding discussed CRE as a disclosure priority for the SEC staff. Given this statement, we would expect to see a continuation of recent comment letter trends associated with CRE loans and related allowance for credit losses.

As shown in the comment examples above, the SEC staff may ask registrants to provide enhanced disclosures related to loans and allowance for credit loss balances. For loan balances, the staff may ask registrants to provide further disclosure on the nature of loan portfolios, especially when CRE loans constitute a significant component of the loan portfolio. Such disclosure may include more granular disclosure (i.e., sufficient disaggregation of the loan portfolios) about the types and concentrations of loans held and related supporting data. The staff may also request increased transparency related to a registrant’s risk management policies and procedures. Registrants should consider the various types of loans held and evaluate whether current disclosures are sufficient.

The SEC staff has continued to focus on disclosures about a registrant’s allowance for credit losses related to loans. The staff frequently asks registrants to enhance policy disclosures to better explain how their estimate is determined and how their policy is in accordance with the relevant accounting guidance, particularly when registrants note elevated risk, elevated exposure to loss, or both. As registrants evaluate for changes in market conditions, exposure to assets with increased risk, and updates to their policy, they should be cognizant of ensuring that their new disclosures align with the requirements of ASC 326 and provide adequate information to users of the financial statements.

For more information about disclosure considerations related to CRE, see Deloitte’s April 16, 2024, Financial Reporting Alert.

6.3.1.2 Interest Rate, Liquidity, and Market Risk Disclosures

Examples of SEC Comments

Please revise future filings to include a materially complete description of how you seek to manage risks due to changes in interest rates and other material impacts on your operational facts and circumstances, including any management or corporate governance controls or procedures for identifying and responding to rapid changes in interest rates due to or as a result of exogenous or unknown factors.
Please clarify the [asset-liability committee (ALCO)]-approved limits and, with a view to disclosure, advise us of the extent to which the ALCO has approved risk profiles that do not conform to management and Board risk tolerances. Clarify the extent to which such limits and other policies and controls have been changed due to the economic and other developments referenced elsewhere.
In future filings, please address the extent to which you have modified or adapted your risk management policies and procedures due to material changes in the size, complexity, or regulatory or supervisory treatment of your organization. We note your disclosure . . . that your risk committee has formed and designated a number of sub-committees to assist it in carrying out its responsibilities. Revise future filings to describe the roles and makeup of these sub-committees in more detail. In particular, discuss the board and management’s responsibilities in managing each key risk identified.
We note disclosure in separate sections of your filing regarding sources of liquidity (e.g., discussion of unused borrowing capacity . . . ). Please revise future filings, beginning with your [next] Form 10-Q, to further clarify your available sources of liquidity. Consider including tabular disclosure, separately by type of borrowing capacity and showing total borrowing capacity, less borrowings outstanding, to arrive at remaining capacity and then adding other sources of liquidity (i.e. cash and cash equivalents, securities) to arrive at total available liquidity. Please also discuss any parameters to access any borrowing capacity, as applicable. Please provide us with your proposed disclosures.
We note your disclosure that there have been no material changes to your quantitative and qualitative disclosures about market risk since [the end of fiscal year 1]. Given the recent banking industry issues, the current economic environment, and your continued net interest margin compression during the [second quarter and first half of fiscal year 2], please revise future filings, beginning with your [Form 10-Q for the third quarter of fiscal year 2], to provide material updates to your interest rate risk disclosures (i.e. Gap Analysis, Net Interest Income Simulations, Economic Value of Equity Calculations) similar to the disclosures provided in your Form 10-K for [fiscal year 1]. Please ensure that your revised disclosures include a discussion of the key assumptions (e.g., future balance sheet composition, loan and deposit repricing, assumptions related to the magnitude of asset prepayments, earlier than anticipated deposit withdrawals, etc.) for each of these interest rate risk disclosures and a discussion of any changes in these key assumptions from period to period along with the factors driving these changes. Refer to Item 305(a)(1)(ii)(B) of Regulation S-K.
Please revise your future periodic filings to clarify the specific risk management policies, procedures or other actions undertaken by management in response to the current CRE environment.

The SEC staff may ask registrants to provide additional qualitative disclosures related to how they will manage risks, including interest rate, liquidity, and market risks, in the current macroeconomic environment. In addition, the staff may request additional disclosures about the challenges facing registrants and management’s current plans to measure and mitigate those risks. The staff continues to challenge registrants who have not updated risk factors to reflect changes in circumstances from previous years. Registrants should consider whether they have disclosed a complete list of new or changed risk factors arising from the current economic environment to provide adequate information to users of the financial statements.

For more information about disclosure considerations related to risk factors in the current macroeconomic environment for registrants in the banking and capital markets industry, see Deloitte’s April 16, 2024, Financial Reporting Alert.

6.3.1.3 Deposits

Examples of SEC Comments

We note disclosure . . . regarding deposits and your disclosure . . . regarding changes in your deposit base and funding costs. To the extent material, please provide additional quantitative and qualitative disclosure regarding your deposit base to allow investors to understand the significance and potential duration of these changes and factors that are reasonably likely to result in your liquidity increasing or decreasing in a material way. Please refer to Item 303(b)(1)(i) of Regulation S-K. Examples of quantitative and qualitative disclosure that you should consider providing, if material, include:
- Disaggregation of deposit statistics and concentration of deposits along with additional information about their characteristics to help investors evaluate potential duration, such as average number of products held or average deposit “life” by type of depositor.
- How deposit pricing changes in response to higher interest rates, referred to as “deposit beta.”
- Changes in the types of deposits (e.g., increases in brokered or uninsured deposits, reductions in insured deposits, increase in higher yielding deposits) and factors driving the changes.
- The potential effects on liquidity and funding that the failure for brokered deposits to roll over and remain with the bank may have.
Please enhance your deposit disclosures in future filings to address the items below.
- Enhance your quantitative and qualitative disclosures regarding uninsured deposits, collateral amounts (if any), and collateral type and providers (you or external parties, and, if you, why you provide such collateral), if applicable.
- Include additional qualitative and quantitative information regarding the composition of your deposit base (e.g., significant depositor types, industries, etc.).
- Discuss, when appropriate, any material changes to your deposit base or deposit mix, including disclosures about change drivers and whether and how such changes result in material increase or decrease of liquidity or funding costs.
Please revise future filings . . . to identify and describe significant concentrations in deposits or advise us why you believe such disclosure is not important to an understanding of your liquidity and material events and uncertainties.
We note your disclosure regarding the composition and change in your deposits. In future filings, please revise to disclose:
- [Q]uantitative and qualitative detail regarding any brokered deposits outstanding at each period date, as well as any related trends or impacts regarding the usage of brokered deposits; and
- [I]f applicable, whether you have policies or internal limits regarding concentrations in uninsured and/or brokered deposits, in total or by type of depositor, and whether you have complied with any such internal requirements for the periods presented.
Please expand your disclosures, in future filings, to include a discussion of your deposit beta and/or cumulative deposit beta to the extent that it is monitored and used by management. In this regard, we note that you appear to include a slide addressing cumulative deposit in your earnings call presentation slides . . . . In addition, include a discussion of how the metric is used, how it has changed from period to period and how it is calculated.

Given the importance of deposits to banks as a funding source, in addition to the current economic environment, the SEC staff may ask registrants to provide additional quantitative and qualitative disclosures related to their deposit portfolios.

6.3.2 Investment Management

The SEC staff’s recent comments to registrants in the investment management industry have focused on (1) disclosures related to business segments (see Section 2.20 for information about segment reporting in general and examples of related SEC comments issued to registrants across industries) and (2) matters in MD&A such as disclosures about asset-based revenues.

6.3.2.1 Asset-Based Revenues

Example of an SEC Comment

We note your disclosures . . . indicating that your asset-based revenues are derived from fees charged as a percentage of platform assets, and attributing the increase in asset-based revenue during [the fiscal year] to higher incremental average assets although without addressing the effects associated with changes in prices.

Please expand your disclosures to report the extent to which changes in your asset-based revenues are attributable to changes in prices and separately to changes in volumes, to comply with Item 303(b)(2)(iii) of Regulation S-K.

For example, this may involve quantifying the extent to which the variances in asset-based revenues are attributable to (i) changes in the weighted average fees charged as a percentage of platform assets, (ii) changes in the average platform assets and, if applicable, (iii) changes in other factors such as product mix.

The SEC staff may continue to place importance on providing adequate disclosure in MD&A about asset-based revenues to allow financial statement users to better assess the financial health of an investment manager.

6.3.3 Real Estate

In recent years, the macroeconomic environment has created challenges and uncertainty within the real estate industry. Many CRE entities have encountered impacts to their operations, including increased costs of capital; reductions in the volume of real estate transactions; and evolving demands and preferences related to the way people work, live, and shop. Certain challenges and uncertainties remain ongoing, the impact of which will vary depending on asset type, the quality of the assets, and the specific subsector of the real estate industry. Entities should continually monitor, evaluate, and update their accounting and reporting as necessary on the basis of the impact of these events and conditions and expected future impacts. For more information, see Deloitte’s April 16, 2024, Financial Reporting Alert.

The SEC staff’s recent comments to registrants in the real estate industry continue to focus on non-GAAP financial measures and operating metrics. While such registrants have seen a decline in the number of comments issued on other topics, they should be aware of continued comments related to matters such as (1) fair value disclosures; (2) whether, for U.S. GAAP purposes, real estate acquisitions represent business combinations or asset acquisitions and whether, for SEC reporting purposes, a registrant has acquired a business or real estate operations; (3) capitalization of real estate development, construction, and leasing costs; (4) MD&A considerations, including liquidity and capital resources; (5) consolidation; and (6) early-warning disclosures related to impairments and leasing activities, especially in light of any macroeconomic risk factors.

In addition, the SEC staff continues to focus on registrants’ Schedule III disclosures and compliance with the requirements of Regulation S-X, Rule 12-28. The staff has asked registrants for clarification and disclosure of certain adjustments in Schedule III, as well as amendments to Schedule III to include previously omitted reconciliations required under Rule 12-28.

6.3.3.1 Non-GAAP Financial Measures and Operating Metrics

Examples of SEC Comments

Please tell us how your definition of [funds from operations (FFO)] is consistent with the [National Association of Real Estate Investment Trusts (NAREIT)] definition of FFO. Specifically, tell us how you have determined it was appropriate to exclude financing expense in connection with [Company A] from your definition of FFO.
Please tell us and disclose in future filings the reasons why management believes that the presentation of Core FFO, a discrete non-GAAP measure in addition to FFO and [Adjusted FFO], provides useful information to investors regarding the registrant’s financial condition and results of operations. Also disclose any additional purposes for which management uses Core FFO, to the extent material. Refer to Item 10(e)(i)(C-D) of Regulation S-K.
We note your adjustment for certain items to arrive at Adjusted EBITDA. We further note this adjustment includes $[X] million of [the Property A acquisition- and integration-related] costs for [year 3] and $[Y] million of [Property A acquisition-related] costs for [year 2]. In addition, we note that you adjust for $[Z] million of [Property A integration-related] costs to arrive at Adjusted EBITDA for the nine months ended September 30, [year 4]. Given that the [Property A] acquisition occurred in September [year 1], please clarify for us the nature of these costs. In addition, please tell us if you consider such costs to be normal, recurring, cash operating expenses and how you made that determination. In your response, please address if these expense[s] occur repeatedly or occasionally. Please refer to Question 100.01 of our Compliance & Disclosure Interpretations on Non-GAAP Financial Measures.
We note you have added transaction expenses back to GAAP Net income within your calculation of Earnings available for distribution. Please clarify for us the nature of these expenses. In addition, please tell us, and revise your filing to disclose, why management believes the exclusion of these expenses provides useful information to investors. Refer to Item 10(e) of Regulation S-K.
We note your adjustment of $[X million] labeled Other to arrive at [adjusted funds from operations (AFFO)] attributable to [Y] stockholders and to arrive at AFFO attributable to [Y] stockholders and [Z] unitholders. Please tell us and enhance your disclosure to clarify the nature of the items in the adjustment.
We note you have excluded non-core property expenses to arrive at [net operating income (NOI)] attributable to [X] stockholders. Please address the following:
- Please tell us and revise your filing to clarify the nature of these expenses.
- Tell us and revise your filing to clarify how you determined the exclusion of these expenses is useful to investors.
- Please clarify for us if these expenses are normal, recurring, cash operating expenses necessary to operate your business.
Please refer to Item 10(e) of Regulation S-K and Question 100.01 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations.
We note that your disclosure . . . references [a] reconciliation . . . , which appears to be in the form of a full non-GAAP income statement. In future periodic filings, to avoid a non-GAAP prominence issue, please include a reconciliation that begins with the most directly comparable GAAP measure, which appears to be Net income, and reconciles down to NOI. Refer to Question 102.10 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations.
We note that you adjust your non-GAAP pro rata balance sheet and income statement for your proportionate economic ownership of each asset in your portfolio that [is] not wholly-owned which substitutes an individually tailored accounting principle for the one in GAAP. Please describe the changes you expect to make to your presentation in light of . . . Question 100.04 of the updated Non-GAAP Compliance and Disclosure Interpretations issued on May 17, 2016.
In arriving at FFO, you start with net income attributable to [Company A] and make adjustments for redeemable non-controlling interests and preferred stock dividends. As a result, it appears FFO, and ultimately Company FFO, are attributable to common shareholders and redeemable non-controlling interest holders. Please clarify and/or revise the labeling of your non-GAAP financial measures in future filings to adequately reflect what is being presented.
We note your presentation of undepreciated book value and undepreciated book value per share as non-GAAP financial measures. In regards to your presentation please address the following[:]
- Revise your disclosure regarding the definition of undepreciated book value as it does not appear to address all the items that are being adjusted from the most directly comparable GAAP measure, which appears to be stockholders’ equity excluding noncontrolling interests in investment entities. Specifically, your definition does not appear to discuss non-GAAP impairment of real estate as an adjustment; and
- Expand your disclosure to indicate that the non-GAAP impairment adjustment is itself a non-GAAP financial measure, provide a reconciliation to its most directly comparable GAAP measure and expand your disclosure to discuss the usefulness of such measure.
Refer to Item 10(e) of Regulation S-K.

As noted above, the SEC staff has continued to focus on non-GAAP financial measures in its recent comments to registrants in the real estate industry. Issues addressed in such comments have included (1) the presentation of non-GAAP financial measures more prominently than GAAP measures, (2) pro rata consolidation adjustments, (3) clearer labeling, (4) the reconciliation of non-GAAP per-share measures to the most directly comparable GAAP measures, (5) the use of misleading adjustments and application of tailored accounting principles, and (6) clear disclosure of how the presentation of chosen non-GAAP measures provides useful information to investors. In recent years, the SEC staff has heightened its focus on adjustments that remove normal, recurring cash operating expenses from non-GAAP measures. See Section 3.4 for additional information.

Registrants in the real estate industry should also be aware of Questions 102.01 and 102.02 of the C&DIs on non-GAAP financial measures, which indicate that FFO as defined by NAREIT as of May 17, 2016,1 as well as FFO per share, will continue to be accepted as a performance measure. The presentation of any FFO measure in a manner that departs from NAREIT’s 2016 definition (e.g., adjusted FFO, core FFO), or as a per-share amount based on such a modified measure, is subject to the prohibitions in Regulation S-K, Item 10(e), and should be treated as a performance measure or a liquidity measure. If modified FFO is considered a performance measure, it may be presented on a per-share basis; if a modified FFO per share is, in substance, a liquidity measure, presentation on a per-share basis is prohibited. Acceptability of FFO per-share measures, or modified FFO per share, does not override the prohibition against the presentation of cash flow per-share data and other per-share measures of liquidity.

FFO may be reported gross or net of noncontrolling interest adjustments. When the FFO calculation takes into account noncontrolling interest adjustments, the registrant should clearly label the measure to reflect “FFO attributable to common stockholders” or “FFO attributable to the company.”

Registrants in the real estate industry should consider the SEC staff’s most recent C&DIs, issued in December 2022, on how the staff evaluates non-GAAP measures. The guidance in these C&DIs provides greater insight into, and examples of, misleading measures and the use of tailored accounting principles. It also further clarifies when a non-GAAP measure is considered to be more prominent than a GAAP measure. For more information, see Section 3.4 and Deloitte’s December 18, 2022, Heads Up.

In addition, registrants in the real estate industry should be aware of the additional segment disclosure requirements introduced in ASU 2023-07, specifically those related to the disclosure of non-GAAP financial measures as the chosen measures of a segment’s profit or loss. When a company internally uses multiple segment performance measures, at least one of the reported segment profit or loss measures should be the measure that is most consistent with the measurement principles under GAAP. For more information, see Deloitte’s Roadmap Segment Reporting and August 28, 2024, Heads Up.

6.3.3.2 Fair Value Disclosures

Examples of SEC Comments

We note you calculated the fair value for certain long-lived assets utilizing projected future discounted cash flows. Please tell us how you determined it was not necessary to provide quantitative information about the significant unobservable inputs used in the fair value measurement of these assets. Please refer to ASC 820-10-50-2(bbb).
We note that following the initial measurement of loans secured by real estate, the Company will determine fair value by utilizing or reviewing market yield data, discounted cash flow modeling, collateral asset performance, local or macro real estate performance, capital market conditions, debt yield or loan-to-value ratios, and borrower financial condition and performance. Given this policy, please tell us why the level 3 investments in real estate debt have been valued at cost, as adjusted for changes in foreign currency.
Please tell us and expand your disclosure [of estimated net asset value (NAV) per share for each class of shares] to explain in further detail how total NAV is allocated to each class of [shares] in your calculation of estimated NAV per share for each class. In your explanation, please include discussion of how proceeds from the sale of [Class A] shares that are used to pay organization and offering expenses of [Class B] Shares, [Class C] Shares and [Class D] Shares [impact] your calculation of estimated NAV for each class of [shares]. Lastly, explain to us how the company is reimbursed for organization and offering expenses of [Class B] Shares, [Class C] Shares and [Class D] Shares sold in the offering.
Please consider expanding future disclosures of net asset value to provide a quantitative illustration of the sensitivity of your valuation to changes in key assumptions.
Please address the following with respect to your net asset value disclosure:
- Expand your disclosure to include a discussion of the methodologies used to calculate net asset value.
- Tell us whether your calculation of property fair value includes any other material assumptions (e.g. revenue or expense growth rates) and tell us what consideration you gave to providing disclosure about these assumptions (including sensitivity analyses).

The SEC staff has focused on various disclosures related to fair value. Specifically, it has issued comments on disclosures required under ASC 820, including comments on (1) the need to provide quantitative information about inputs to fair value measurement of assets and (2) the appropriateness of classifying fair value measurements as Level 1, 2, or 3 in the footnotes to the financial statements. Registrants should ensure consistency of disclosures about the fair value of assets in their portfolios.

In its comments to registrants in the real estate industry on fair value disclosures, the SEC staff has also focused on disclosures about NAV. The staff has asked registrants that disclose NAV to expand their disclosures to include further discussion of the methods and inputs used in their calculations, as well as quantitative disclosure of the sensitivity of valuations to changes in these key assumptions. When registrants have disclosed qualitative information elsewhere in filings or in other filings, the staff has asked for such information to be included in the financial statements. In addition, the staff has issued comments addressing the allocation of NAV to different classes of shares.

6.3.3.3 Real Estate Acquisitions

Examples of SEC Comments

We note you acquired [Entity A] during [the fiscal year] for cash consideration of approximately $[X] billion. Please tell us how you considered the requirements to provide audited financial statements of the acquired business in accordance with Rule 3-05 of Regulation S-X, and unaudited pro forma financial information related to this transaction in accordance with Article 11 of Regulation S-X.
We note your initial consolidation of certain joint venture entities during [fiscal year 1] and the first quarter of [fiscal year 2]. Please tell us what consideration you gave to providing audited financial statements of the acquired entities and unaudited pro forma financial information. Reference is made to Rule 3-14 of Regulation S-X and Article 11 of Regulation S-X.
[We] note your disclosure relating to your acquisition of complete ownership of [Portfolio A]. Please tell us how you considered the requirements of Items 2.01 and 9.01(a)–(b) of Form 8-K with respect to this acquisition.
We note that your acquisition of [Property A] was recorded as an asset acquisition. We further [note] your disclosure . . . that acquisitions of properties with in-place leases are accounted for as a business combination. Please tell us how recording the [Property A] acquisition as an asset acquisition complies with your policy.
Please provide us with your significance test for the [Facility A in Location B] acquired on [Date X]. As part of your response, tell us how you considered the need to present audited historical financial statements and unaudited pro forma information for this acquisition in accordance with Rule 3-14 of Regulation S-X.
Please explain to us how you arrived at the conclusion that your acquisition of [Property A] should be accounted for as an asset acquisition.
We note . . . that [Acquiree A] terminated its employees immediately preceding the acquisition and you did not acquire an assembled workforce. . . . To the extent employees of [Acquiree A] were hired by your external manager at the time of acquisition, please address the following:
- Tell us if [your external manager] hired the employees responsible for leasing, tenant management, and managing and supervising your operational processes.
- Tell us if the employees are considered critical to the creation of outputs.

An acquisition by a registrant is treated as either an asset or a business for SEC reporting purposes. The definition of a business in Regulation S-X, Rule 11-01(d), for SEC reporting purposes differs from that in ASC 805 for accounting purposes. If an acquiree meets the definition of a business in Rule 11-01(d), the acquiree would be within the scope of Regulation S-X, Rule 3-05 or Rule 3-14. Rule 3-05 requires a registrant to provide full financial statements (and pro forma financial information) for significant acquired or to be acquired businesses. However, Rule 3-14 requires a registrant to file only abbreviated income statements (and pro forma financial information) for significant acquired or to be acquired real estate operations that meet certain requirements. Because the requirements of Rules 3-05 and 3-14 are different, it is important for a registrant to determine whether it acquired a real estate operation (which is subject to Rule 3-14). As a result, from an SEC reporting standpoint, the SEC staff may ask a registrant to provide an analysis supporting its conclusion that its acquisitions are real estate operations under Rule 3-14. When a registrant has not provided financial statements for an acquired or to be acquired real estate operation under Rule 3-14, the staff may ask the registrant to provide an analysis in support of its conclusion that the acquisition or potential acquisition did not trigger the Rule 3-14 significance test requirement to file the related financial statements.

In addition, from an accounting standpoint, the SEC staff has asked registrants with material acquisitions to elaborate on their process and policies for determining whether the acquired assets, including acquired real estate that is subject to a lease, qualify as a business or an asset acquisition under U.S. GAAP (ASC 805). This determination is important, especially in the real estate industry, because the accounting for an asset acquisition differs from the accounting for a business combination and can require management to use judgment, especially when assessing the screen under ASC 805, to determine whether substantially all of the fair value of the acquired assets is concentrated in a single asset or asset group. In acquisitions accounted for as business combinations, all transaction costs must be expensed as incurred. In asset acquisitions, however, direct and incremental transaction costs are capitalized as part of the purchase price. The SEC staff has asked registrants to enhance their disclosures to discuss the accounting policies they apply to property acquisitions when distinguishing between business acquisitions and asset acquisitions, including policies for allocating value to identified intangible assets and for recognizing acquisition-related costs.

For more information, see Chapter 3 of Deloitte’s Roadmap SEC Reporting Considerations for Business Acquisitions and Deloitte’s Roadmap Business Combinations.

6.3.3.4 Capitalization of Real Estate Development, Construction, and Leasing Costs

Examples of SEC Comments

We note your disclosure . . . that one office property is being partially converted into multifamily use, that your Unconsolidated Joint Ventures contain one multifamily site currently under development, and that you have several other properties to be developed, potentially into multifamily. Please tell us and revise future filings to disclose the anticipated completion date, scope of development, costs incurred to date and budgeted costs for any sites currently under development.
We note that you capitalize indirect costs clearly related to the construction and improvements of investment properties and that for the fiscal year . . . invested approximately $[X] million in development properties as well as approximately $[X] million in capital expenditures and tenant improvements. Please disaggregate the amounts between development, redevelopment and leasing of real estate and tell us the amount of indirect costs capitalized by segment for each year presented or tell us why you believe such disclosure is not beneficial for investors.
We note your disclosure that direct and indirect leasing costs associated with the acquisition of tenants are capitalized. Please tell us how [you] determined it was appropriate to capitalize indirect costs. Reference is made to ASC Topic 842-10-30-9 through 10; and ASC Topic 842-30-25-10. In your response, tell us the amount of indirect costs capitalized in each period presented in your financial statements.
We note that you capitalized development costs of $[X] million, $[Y] million and $[Z] million in [year 4], [year 3] and [year 2], respectively. Given the temporary suspension of repositioning work due to Covid-19, your disclosures which highlight the continued [development in City A] which has been ongoing since [year 1] and the conversion of the office tower in [City B] which has been ongoing since [year 2], please tell us more about the factors that led to the significant increase in capitalized development costs during fiscal [year 4]. Please ensure that MD&A disclosures fully address the facts and circumstances that drove the change and whether disproportionate fluctuations in trends are expected to recur. See Item 303(b)(2)(i) and (ii) of Regulation S-K.
We note that you capitalize and depreciate tenant improvements when you are considered to be the owner of such improvements over the estimated useful lives of the improvements, not to exceed 40 years. Please expand your disclosure to explain how you determine whether you or the tenant is the owner of the improvements, citing relevant accounting literature. In addition, please tell us how you considered ASC 842-10-35-6 in determining the amortization period of tenant improvements.

The SEC staff may ask registrants to enhance their disclosures about the capitalization of real estate development, construction, and leasing costs (including their accounting for these costs). For example, the staff has asked registrants to clarify their accounting policy for capitalizing or deferring costs in accordance with ASC 835-20, ASC 842-10, and ASC 970-10. It has also requested quantitative disclosures of certain expenses that are being capitalized, such as soft costs (e.g., interest and payroll).

In addition, the SEC staff has asked registrants to expand their disclosures about capital expenditures (either on the face of the statement of cash flows or in MD&A) to disclose expenditures related to new properties (e.g., acquisitions, new development) separately from expenditures related to existing properties (e.g., redevelopment, improvements, construction-in-progress). Registrants should ensure consistency of disclosures about capital expenditures in all of their communications, including earnings calls, press releases, supplementals, periodic filings, and any other broader company communications. The SEC staff may ask registrants to consider whether certain expenses should be classified as operating expenses. Registrants should consider Regulation S-X, Rule 5-03, in determining the appropriate classification of expenses.

The SEC staff has also asked registrants to enhance their disclosures about the capitalization of tenant improvements. Specifically, the staff has asked registrants how they determined (1) whether the lessee or the lessor is the owner of the improvements and (2) whether the improvements are capitalizable or should be accounted for as lease incentives. Registrants should consider the definition of lease incentives in ASC 842-10-55-30.

6.3.3.5 MD&A, Including Liquidity and Capital Resources

Examples of SEC Comments

We note you have identified multiple factors that impact your operating results but it does not appear that you have separately quantified each factor. For example purposes only, we note your disclosure that the increase in depreciation and amortization can be attributed to real estate and intangible assets acquired, accelerated amortization of lease intangibles in connection with an early lease termination in the [X] portfolio, and that the increase was offset by accelerated amortization recognized in the first quarter of [the fiscal year] on a trade name intangible in anticipation of the Company’s name change . . . and a decrease in amortization expense on lease intangibles following the expiration of short term leases in your colocation data center business. When there are multiple factors impacting your operating results, please revise your disclosures to separately quantify the impact from each factor.
We note from your fourth quarter earnings call that you were unable to complete a planned disposition of an underleased portfolio due to the buyer’s inability to obtain third-party financing. We also note that this appears to be a specific example of the type of risk you highlighted in your risk factor related to increasing interest rates . . . . Please tell us what consideration you gave to discussing this transaction, the reasons it was not successful, and the potential implications, with your MD&A.
Since February [of last year], we note that earnings calls have emphasized that current market conditions have adversely impacted commercial real estate net lease markets and caused significant declines in transaction levels. We also note that in the first quarter of [the current fiscal year], you have sold [X] assets within [Portfolio A] and intend to sell [Type A, Type B, and Type C] properties, which [have] not always fit well within the traditional net lease framework, so that you can focus more intently on [another type of commercial real estate] and your other core investment verticals . . . . Please tell us and revise future disclosures to provide more robust discussion related to known trends or uncertainties that are reasonably likely to have a material impact on your cash flows, liquidity, capital resources, cash requirements, financial position, or results of operations related to conditions in the market or your specific strategies within your Management’s Discussion and Analysis of Financial Condition and Results of Operations. Reference is made to Item 303 of Regulation S-K.
We note that your Revolving Facility is scheduled to mature in [the next to last month of the current fiscal year], and your statement . . . that you do not expect to have generated sufficient cash from operations to repay the principal outstanding under the Revolving Facility, which was $[X] million as of [the end of the last completed fiscal year], on its scheduled maturity date. We also note your statement that you are in preliminary discussions to potentially amend the facility in a manner that would result in an extension of the facility and a reduction in the amount of required unencumbered asset value. In future Exchange Act periodic reports, please update this risk factor to expand your disclosure to discuss the current covenant requirement, and your unencumbered asset value as of a recent date.
We note the references in this section and in your MD&A to your properties being stabilized. In future Exchange Act periodic reports, please tell us what management considers in determining whether a property is not yet stabilized.
We note your disclosure . . . that to maintain the Company’s status as a [real estate investment trust (REIT)], payment-in-kind interest, a non-cash source of income, must be paid out to stockholders in the form of dividends for the year earned, even though the Company has not yet collected the cash. We further note your dividends paid to stockholders exceeded the net cash provided by operating activities. To the extent your dividends were not paid out of operating cash flows, please tell us what consideration you gave to disclosing the source of your dividend payments.
We note your goal of maintaining a portfolio of newer and more efficient properties and that your portfolio consists primarily of lifestyle office buildings. Please clarify what you mean by newer and more efficient properties and lifestyle office buildings. Please tell us, and in future filings, please clarify, if the type of property or office building is impacting your ability to renew leases, or obtain new tenants, and the impact on leasing costs associated with renewing or re-letting a particular space.
We note your disclosure throughout your filing about rising interest rates and inflation. Please disclose any known trends or uncertainties that have had or are reasonably likely to have a material impact on your cash flows, liquidity, capital resources, cash requirements, financial position, or results of operations arising from, related to, or caused by the rising interest rates and inflation. Trends or uncertainties may include the impact of interest rates and inflation . . . as well as decrease in demand . . . and increase in default and delinquency rates.
We note your disclosure that you “have limited to no exposure to the more challenged sectors, including commodity office.” We note that you own [a number of] office properties and invest in commercial mortgage-backed securities. Please tell us and, if material, revise future Exchange Act periodic reports to address the impact these investments have had on your operations.
We note your disclosure . . . that the weighted average net effective rent per square foot, representing base rent excluding operating expense reimbursements and leasing costs, for new or renewed non-amenity leases with terms greater than one year signed [last year], was $[X] per square foot. In future Exchange Act periodic reports, please discuss leasing results for the prior period, including the amount of leases that were new leases compared to renewal leases, and the amount of leases that were not renewed. Additionally, this disclosure should include a discussion of tenant improvement costs, leasing commissions, and tenant concessions. Further, please quantitatively discuss the relationship between expiring rents and current market rents.
We note your updated disclosures within Use of Estimates . . . and your Cautionary Note Regarding Forward-Looking Statements . . . which highlight some potential risks related to the adverse impact of economic conditions including, among other things, impacts from rising interest rates. Please revise your discussion to specifically describe how increased interest rates impact your results of operations, including:
- Expected changes to your product mix, including specific challenges or opportunities a rising interest rate environment presents in the near-term . . . and the impact ongoing supply chain challenges or disruptions may have on your ability to make these changes; . . .
- Adjustments to your planned capital expenditures;
- Expected impacts to your short-term funding costs; and
- The impact on liquidity resulting from your variable-rate debt outstanding.

From registrants in the real estate industry, the SEC staff frequently requests disclosures that investors can use to evaluate the registrant’s ability to maintain or increase its historical distribution yield, especially in light of the macroeconomic conditions. When GAAP cash flow from operations is insufficient to cover the total distributions paid during a particular period, the staff may inquire about the cash resources used to cover the shortfall, such as borrowings or offering proceeds. Registrants should adequately disclose the risks associated with paying distributions in excess of GAAP cash flow from operations. In addition, the staff may request disclosures that compare earnings (or FFO) with paid distributions, including amounts reinvested through a distribution reinvestment plan. The staff asks registrants to disclose these items on a current as well as a cumulative basis so that financial statement users can better understand the relationship between earnings (or FFO) and distributions.

Given the recent macroeconomic conditions, including fluctuations in interest rates and inflationary impacts, the SEC staff has requested expanded disclosures about the impact of these conditions on the registrant, with a renewed emphasis on CRE and the office sector. Specifically, the staff has requested disclosures of known trends or uncertainties that affect the registrant’s cash flows, financial position, and results of operations. These include disclosures related to default risk, liquidity issues, debt maturity, and mitigating efforts, as well as leasing and impairment considerations discussed in Section 6.3.3.7. Registrants in the real estate industry are also expected to provide more granular disclosure related to their exposure to specific CRE risks. Such risks include heightened vacancy rates, changing interest rates, extended loan maturities, loan delinquencies, breach of covenants, concentrations, loan-to-value ratios, loan modifications, lease term schedules, trends in lease renewals, major tenant rollovers, financial viability of tenants, property dispositions, asset impairments, and tenant receivables. See the CRE section of then Division Director Erik Gerding’s June 2024 statement on the state of the SEC staff’s disclosure review, in which Mr. Gerding encouraged registrants to provide more granular information in their disclosures to improve investors’ understanding of the material risks inherent in the registrants’ CRE portfolios. The SEC staff is expected to continue to focus on the CRE industry in the presence of ongoing macroeconomic risk factors.

From banking and mortgage REIT companies, the SEC staff has also requested (1) expanded disclosures about the composition of loan portfolio by borrower type (e.g., office, hotel, multifamily, owner-occupied, non-owner-occupied) and geographic concentration, (2) enhanced discussion of changes in provisions and allowances for credit losses, and (3) more disaggregated disclosure related to maturities for higher-risk loan portfolios. Further, the staff has emphasized increased disclosure of risk management policies in response to the current macroeconomic conditions.

6.3.3.6 Consolidation

Examples of SEC Comments

Your disclosure describes your interest in Partnership X as unconsolidated. Please tell us how you considered whether you obtained a controlling financial interest now that you own [an X]% equity interest in Partnership X as a result of purchasing an additional [Y]% equity interest [at fiscal year-end]. Please cite the applicable accounting guidance in your response.
We note that you have [an X percent] interest in [Entity A]. Please provide to us an analysis discussing your basis in accounting for the joint venture investment using the equity method, and cite the accounting literature [relied] upon. In your response, elaborate how [Entity A Investee]’s ability to participate in major decisions equates to shared decision making ability, detailing the characteristics of [its] participation rights and how such rights are substantive. Further, clarify what happens in situations where the parties do not agree and whether contractually one party has the ability to break any deadlock.
Please disclose the name of, and your percentage ownership in, the common stock of each unconsolidated entity in accordance with ASC 323-10-50-3. To the extent that you have an investment in excess of 50% of the common stock of the entity, describe the rights of the joint venture partner that preclude you from consolidating the entity.
We note that you have consolidated [joint ventures (JVs)] for which you are the primary beneficiary. Please tell us how you have met the disclosure requirements of ASC 810-10-50-5A or revise accordingly in future filings.
We note that you consolidate certain VIEs as a result of being the primary beneficiary. We further note . . . that you acquired an additional [X]% equity in [Fund A], resulting in consolidation of that JV. Please tell us your consideration of presenting the assets and liabilities of consolidated VIEs separately on the face of the consolidated balance sheets in accordance with ASC 810-10-45-25.
Your consolidated financial statements include the accounts of various legal entities and your significant accounting policies [indicate] that you consolidate variable interest entities when you are the primary beneficiary. Please expand your disclosures to clarify whether any of the entities that are consolidated are considered variable interest entities under ASC 810-10-15-14. If so, please provide the disclosures required by ASC 810-10-50-2AA and tell us how you considered the presentation guidance under ASC 810-10-45-25.
Your disclosure indicates you acquired ownership interests in . . . consolidated ventures which have noncontrolling interests of $[X] as of [the fiscal year-end]. Please address the following:
- Tell us to what the balance of $[X] million Investments in real estate membership interests as of [the fiscal year-end] relates. If this represents your interest in unconsolidated entities, tell us how you considered the requirements to provide financial information for significant equity method investees that constitute over 20 percent of your consolidated assets pursuant to Rule 8-03(b)(3) of Regulation S-X;
- If such amount is your interest in consolidated entities, tell us how you determined that you should consolidate such investments given your ownership interests for each joint venture is less than 50%. Additionally given that you have not reflected a balance in noncontrolling interests as of [the fiscal year-end], tell us how you have accounted for such consolidated investments and presented interests in such joint ventures which you consolidate but do not own.
We note that . . . you completed the acquisition of an 80% noncontrolling ownership interest in [Company A] and that you are accounting for such acquisition using the equity method of accounting. In order to better understand the Company’s accounting for this transaction please further tell us the following:
- How the Company considered the variable interest guidance in ASC 810-10-15-14 and whether the acquisition resulted in an acquired VIE; and
- If the acquisition did not result in the acquisition of a VIE, how the Company considered the guidance under ASC 810-10-15-8, ASC 810-10-15-8A and ASC 810-10-15-10a such that it resulted in the Company owning 80% of the [A] group but not consolidating the [A] group.

The SEC staff has commonly focused on registrants’ involvements with VIEs and joint ventures and has inquired about consolidation assessments. This focus includes inquiries about the rights of joint venture partners when an entity holds a majority ownership percentage but does not consolidate the joint venture entity.

The SEC staff may also ask for additional information and disclosures about non-VIE joint ventures, particularly when (1) a registrant uses the equity method of accounting and either has a majority ownership interest or is the general partner or managing member or (2) the qualitative disclosures about such arrangements are not robust. Disclosures about these arrangements should include a discussion of the ownership structure as well as the governance provisions that led the registrant to conclude that it does not have a controlling financial interest in the joint venture. In addition, the staff routinely asks for clearer qualitative disclosures when there are amendments to management agreements or changes in ownership structure or percentages that do not result in a change to a registrant’s consolidation conclusion.

For additional discussion of consolidation, see Section 2.2.

6.3.3.7 Early-Warning Disclosures — Impairments and Leasing Activities

Examples of SEC Comments

We note that one of your centers has an estimated fair value less than its recorded carrying value of approximately $[X] million and that you are monitoring for circumstances and events in future periods that could affect inputs such as the expected holding period, operating cash flow forecasts and capitalization rates utilized to determine whether an impairment charge is necessary. Please tell us, and consider disclosing in future filings:
- [T]he identity of the center in question[.]
- [H]ow you applied the guidance in ASC 360-10-35-29 to 35 and the Interpretative Response to Question 3 of ASC 360-10-S99-2 in your impairment analysis[.]
- [H]ow you determined that the carrying value of the center is recoverable[.]
- [H]ow you considered the disclosure guidance in Item 303(b)(3) of Regulation S-K.
For each impaired property in [years 2, 3, and 4], tell us the holding period assumed for the property in your impairment analysis performed in [year 1] and the rationale behind that holding period given your repositioning strategy.
We note your disclosure that in light of the impairment of the . . . segment goodwill of approximately $[X] billion, the Company conducted a review during the fourth quarter . . . , including analysis of both market-level and segment-level information, and determined there was no impairment of its . . . segment long-lived assets. In performing your impairment testing, please tell us how you considered the guidance in ASC 350-20-35-31 in performing your recoverability test for your long-lived assets prior to your goodwill impairment test and how that may have impacted such analysis, if any.
We note that you have recorded impairment expenses for each of the three years presented. Please expand your disclosure to better describe the impaired properties, the factors that led to impairment and whether or not you believe these impairments to represent a trend, to the extent this remains a significant expense line item.
Please address the following with respect to tenant bankruptcies and other store closings. Please provide the information requested separately for tenant bankruptcies and other store closings:
- Please tell us the gross number of tenant bankruptcies and store closings during [year 1], [year 2] and year to date [year 3] and the gross number of stores affected.
- Please tell us the gross leasable area of stores affected by tenant bankruptcy and store closings.
- Please provide us with an analysis of the gross amount of lost rent as a result of tenant bankruptcies and store closings from the date of lease termination or bankruptcy through the original lease termination date for each future annual period impacted.
We note the disclosure . . . regarding how you recognize revenue when the lease provides the tenant with an extension or early termination option. Please tell us and revise future filings to clarify the percentage of your occupied properties that have tenants with early termination provisions and discuss the impact to you from tenants exercising such provisions, including the number of tenants that have exercised that provision over the past two years and the amount of impacted square footage.
We note your agreement established on [date X, year 1] and amended in [month Y, year 2] to sell [A properties] for an aggregate sales price of $[X] million. . . . We further note you recorded an impairment charge of $[Y] million related to the [A properties] during the quarterly period ended March 31, [year 2]. Please tell us how you determined it was unnecessary to record an impairment charge for the [A properties] during the year ended December 31, [year 1].

The SEC staff has frequently asked registrants in the real estate industry to enhance their disclosures about the inputs used in their asset recoverability tests and the valuation techniques used to develop nonrecurring measurements of fair value. The staff has also asked such registrants to clarify the timing of impairment charges when their filings indicate that the carrying value of an asset will not be recovered. SEC comments on this topic are consistent with those discussed in Section 2.11.

Also, over the past few years, as circumstances in certain real estate subsectors have deteriorated and as macroeconomic conditions continue to evolve, the SEC staff has asked registrants in the real estate industry that lease property to entities in certain subsectors to enhance their disclosures related to rental performance, leasing activities, and the impact of tenants’ financial difficulties and market conditions on the registrants’ current and future operations. The trend of tenants’ financial difficulties has affected all sectors of the real estate industry given the macroeconomic effects of inflationary conditions, worldwide conflicts, changes in tenant workplace preferences, and supply-chain disruptions. The staff continues to request early-warning disclosures that alert investors to the underlying conditions and risks that a registrant faces before a material charge or decline in performance is reported. In addition, when issuing comments on the timing of impairments, the staff may use hindsight, after an impairment or charge is reported, to inquire why the registrant did not include any early-warning disclosures in prior periods leading up to the period in which the impairment was recorded. The staff expects registrants to clearly disclose emerging risks related to impairments and other macroeconomic events in all relevant sections of their SEC filings, including the risk factors section, MD&A, the business section, legal proceedings, DC&P, ICFR, and financial statements. The staff has recommended that registrants discuss how management and the board of directors manage these emerging risks. In MD&A, registrants should address material known trends, including the actual impact of these emerging risks as well as potential future impacts. The staff expects a registrant’s disclosure of these emerging risks and related trends to evolve and become more company-specific as more information becomes known to the registrant.

See Section 3.1 for additional information on early-warning disclosures.

Footnotes

In December 2018, NAREIT issued an updated definition of FFO that did not alter the fundamental definition of FFO. Although the SEC has not updated its C&DIs to include the restated definition of FFO, registrants may continue to use NAREIT’s definition of FFO that is in effect at the time of the filing of the financial statements as long as the adjustments are consistent with the updates made by NAREIT. Nevertheless, registrants should exercise caution when using an update to the definition originally issued by NAREIT in May 2016.