Real Estate

Run the sequence: is the entity a VIE (insufficient equity at risk, or equity holders lacking the power/economics characteristics, common where the GP has power with a thin interest), and if so, who is the primary beneficiary: the party with power over the activities that most significantly impact economics and potentially significant economics through its interests. A sponsor GP with a promote and management role typically consolidates unless the LPs hold substantive kick-out or participating rights, single-investor kick-out rights exercisable without cause are the classic feature that moves control. Voting-model entities run the limited partnership analog of the same test. Non-consolidating parties land in the equity method, and the disclosure load for involvement with VIEs applies either way. We write the consolidation memo per venture at formation and refresh it when agreements amend, because a waterfall amendment can flip the answer.

What we do: We write the consolidation memo per venture at formation and review the kick-out and participating rights while they are still negotiable.

Apply the screen: when substantially all the fair value sits in a single asset or group of similar assets, the land-and-building purchase with in-place leases typically qualifies, the deal is an asset acquisition: transaction costs capitalize into basis, no goodwill arises, and the cost allocates on relative fair values. Allocate among land, building, site improvements, and the lease intangibles: in-place lease value (the cost avoided of an empty building), above- and below-market lease intangibles amortized against rental income over the lease terms (below-market amortization increases revenue, a modeling point buyers miss), and tenant relationships where supportable. Acquired operating platforms with workforce and processes can still be businesses, with purchase accounting and expensed deal costs. Assumed debt takes a fair value adjustment amortized as yield. The allocation memo with the appraisal support is the first-year audit’s anchor exhibit.

What we do: We run the screen, prepare the allocation with lease intangibles, and deliver the memo and appraisal support the first audit anchors on.

Recognize operating lease income straight-line over the lease term, building a deferred rent receivable through escalations, with lease incentives and free-rent periods folded into the single straight-line calculation from commencement. Collectibility is a switch, not a reserve: when collection of substantially all payments stops being probable, income drops to the cash received and the accumulated straight-line receivable reverses through revenue, tenant by tenant, with the assessment documented each period. CAM and services are non-lease components under ASC 606, but the lessor practical expedient permits combining them with the lease when patterns match, elected by class and disclosed; absent the election, CAM is variable consideration recognized as costs are incurred. Percentage rent recognizes when the sales threshold is met, not ratably. The lessor policy memo plus a tenant-level collectibility log is the package that keeps rental revenue clean through a downturn.

What we do: We set the lessor policy, run the tenant-level collectibility log, and document the CAM expedient election by class.

Capitalize project costs under ASC 970 once acquisition and development activities begin: direct construction, directly identifiable soft costs (design, legal, permits, project-dedicated personnel), and real estate taxes and insurance during construction, with general overhead staying expensed. Interest capitalizes under ASC 835-20 while activities necessary to ready the asset are in progress, computed on average accumulated expenditures at the project borrowing rate then the weighted portfolio rate, and it stops when activities stop: at substantial completion (parcel by parcel for phased projects), and during extended delays when development is suspended. Pre-acquisition and pursuit costs capitalize only when acquisition is probable, expensed when a deal dies, and abandoned project costs write off when the project does, not when convenient. The capitalization policy with start/stop triggers documented per project, plus a quarterly review of stalled projects, is what auditors test and downturns expose.

What we do: We write the capitalization policy with start and stop triggers per project and run the quarterly stalled-project review.

On a trigger, sustained NOI decline, major tenant loss, market deterioration, a shortened hold period, test recoverability on undiscounted cash flows over the intended holding period plus terminal value, at the individual property (the usual asset group). Probability-weight scenarios where intent is genuinely uncertain: a sell-soon scenario with a market-value terminal often fails the test a hold-to-recovery scenario passes, so the intent documentation is the accounting. Failures write down to fair value, appraisal or DCF supported. Held-for-sale classification requires the six criteria including active marketing at a reasonable price and probable sale within a year; it moves the property to lower of carrying amount or fair value less costs to sell and stops depreciation. For non-recourse situations, impairment of the property and the debt’s resolution are separate accounting events on their own timelines. A standing trigger-monitoring memo by property beats a year-end scramble every time.

What we do: We maintain the trigger-monitoring memo by property and build the recoverability models when one fires, intent documentation included.

Fee streams run through ASC 606: asset and property management fees recognize over time as the series of services; development fees recognize over the project on a measure of progress; acquisition and financing fees at the point the service completes, all evaluated for whether the sponsor is principal (and for capitalization on the venture’s side). The promote is variable consideration when it is a performance fee within a customer contract, constrained until the hurdle outcome is no longer subject to significant reversal, which for realization-based waterfalls typically means recognition at the liquidity events; promotes embedded in the sponsor’s equity interest instead flow through the equity-method pickup. For that pickup, where the waterfall departs from stated ownership, use HLBV: measure the sponsor’s claim on the venture’s book value at each date as if it liquidated at book, and recognize the change as equity earnings, which is the only method that tracks disproportionate structures faithfully. Consolidated ventures present the investor side as noncontrolling interests with the waterfall reflected in attributions.

What we do: We document the fee and promote recognition positions and build the HLBV model where the waterfall departs from ownership.