1.  NCREIF Accounting Update June 2007 Anthony Wallace Manager, PricewaterhouseCoopers LLP

2. Topics Today Accounting Issues/Trends International Convergence Continuing trend toward fair value accounting SFAS 157 – Fair Value Measurements SFAS 159 - Fair Value Option Scope Project – Update FSP FIN 46(R)-7 Proposed legislation for SEC registration by RE advisors Joint IASB / FASB Lease Accounting Project

3. PricewaterhouseCoopers June 2007 Slide 3 NCREIF Presentation International Convergence an Accelerating Trend In the summer of 2006, the FASB and IASB both approved a “Memorandum of Understanding”, which represents the “Roadmap” for convergence between IFRS and US GAAP over a targeted period of 2006-2008 Movement in this direction includes: Efforts to resolve existing differences Delays in issuance in new standards as differences are resolved so that no “new differences” are created by currently proposed standards, and Increasing number of “Joint Projects” Recently the SEC has agreed to accept IFRS reporting without complex reconciliations to U.S. GAAP by Foreign Issuers Recently the SEC has reportedly been considering allowing all registrants to utilize IFRS. While likely years off, this has been viewed by some as the potential indicator that U.S. GAAP will eventually cease to exist over the long- term. However, by then, given all the convergence activity, will it really matter?

4. PricewaterhouseCoopers June 2007 Slide 4 NCREIF Presentation Continuing trend toward fair value accounting Recently, FASB issued SFAS No. 157, Fair Value Measurements and SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities. Both statements are effective for fiscal years beginning after 11/15/07 unless early adoption elected At first glance, the guidance provided by FAS 157 may not seem like it will significantly impact companies' financial statements, because the standard's provisions are definitional and disclosure oriented. However, after a closer look, it becomes apparent that the effect of adopting FAS 157 will be extensive given the pervasiveness of fair value measures throughout accounting standards. This is demonstrated in part by the number of accounting standards amended by FAS 157.

5. PricewaterhouseCoopers June 2007 Slide 5 NCREIF Presentation SFAS 157 – Fair Value Measurements FAS 157 defines fair value as "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date." Market Participants: Market participants are buyers and sellers in the principal (or the most advantageous) market for the asset or liability. These market participants are (1) unrelated (as that term is used in FASB Statement No. 57, Related Party Disclosures); (2) knowledgeable about factors relevant to the asset or liability and the transaction; (3) able to transact (i.e., have the legal and financial ability to do so); and (4) willing to transact (i.e., motivated but not forced or otherwise compelled to transact).

6. PricewaterhouseCoopers June 2007 Slide 6 NCREIF Presentation IASB - Discussion Paper “Fair Value Measurements” In November 2006, the IASB issued Part 1: Invitation to Comment on relevant IFRS guidance Key Issues for discussion: 1. For liabilities, the definition of fair value in SFAS 157 rests on the notion that the liability is transferred (the liability to the counterparty continues; it is not settled). The definition in IFRS refers to the amount at which a liability could be settled in an arm’s length transaction. 2. Are transaction costs to sell an asset or transfer a liability an attribute of the transaction and not of the asset or liability

7. PricewaterhouseCoopers June 2007 Slide 7 NCREIF Presentation FAS 157 on Transaction/Transportation Costs Transaction costs are NOT included in the fair value estimate. They are incremental costs to sell an asset and not an attribute of the asset. Transportation costs should be considered in fair value if location is an attribute of the asset or liability (e.g. commodities). Concept: If the cost can be directly transferred to a 3 rd party, it should be included in FV.

8. PricewaterhouseCoopers June 2007 Slide 8 NCREIF Presentation Fair Value Option (SFAS 159) SFAS 159 allows optional fair value application for financial assets and liabilities Option is an irrevocable election to initially and subsequently measure certain assets and liabilities at fair value Companies that early adopt the provisions of FAS 159 must also early adopt FAS 157

9. PricewaterhouseCoopers June 2007 Slide 9 NCREIF Presentation Adoption of the FVO Upon election and adoption of the FVO, the difference between the instrument's fair value and its carrying value is recorded as a component of the cumulative effect adjustment to beginning retained earnings. The SEC staff has expressed concern about a strategy under which a company would apply the transition provisions of FAS 159 that allow unrecognized losses to be taken directly to retained earnings, when the company does not intend to apply FAS 159's fair value provisions to financial instruments going forward.

10. PricewaterhouseCoopers June 2007 Slide 10 NCREIF Presentation Accounting Impact of Electing the FVO on Upfront Fees and Costs FAS 159 requires that upfront costs and fees related to items for which the FVO is elected must be recognized in current earnings and not be deferred.

11. PricewaterhouseCoopers June 2007 Slide 11 NCREIF Presentation Required Recurring Disclosures Key disclosure objectives include: Discuss the extent to which the FVO is used Discuss the impact of the FV changes on current earnings Specific required disclosures: Reasons for electing only a portion of similar items for the FVO Line item disclosures of those items under the FVO election and the related impact on earnings

12. PricewaterhouseCoopers June 2007 Slide 12 NCREIF Presentation Scope SOP Update FASB cleared the Statement of Position on September 13, 2006 Issuance of FSP FIN 46(R)-7 on May 11, 2007, Application of FASB Interpretation No. 46(R) to Investment Companies. AcSEC expects to issue in mid June 2007 SOP 07-1, Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies The SOP will be effective for fiscal years beginning on or after December 15, 2007, with earlier application encouraged

13. PricewaterhouseCoopers June 2007 Slide 13 NCREIF Presentation FSP No. FIN 46(R)-7, Application of FASB Interpretation No. 46(R) to Investment Companies This FASB Staff Position (FSP) addresses the application of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, by an entity that accounts for its investments in accordance with the specialized accounting guidance in the AICPA Audit and Accounting Guide, Investment Companies.

14. PricewaterhouseCoopers June 2007 Slide 14 NCREIF Presentation FSP No. FIN 46(R)-7, Application of FASB Interpretation No. 46(R) to Investment Companies Paragraph 4(e) of Interpretation 46(R) is amended as follows: Investments accounted for at fair value in accordance with the specialized accounting guidance in the AICPA Audit and Accounting Guide, Investment Companies, are not subject to consolidation according to the requirements of this Interpretation

15. PricewaterhouseCoopers June 2007 Slide 15 NCREIF Presentation FSP No. FIN 46(R)-7, Application of FASB Interpretation No. 46(R) to Investment Companies If initial application of this FSP and SOP 07-01 requires consolidation of an entity that was not previously consolidated, or requires an entity that had previously been consolidating an investment under Interpretation 46(R) to apply the specialized accounting in the Guide, the entity shall follow the transition guidance in paragraph 57 of SOP 07-01 applicable to the related circumstance.

16. PricewaterhouseCoopers June 2007 Slide 16 NCREIF Presentation Proposed legislation for SEC registration by RE advisors On May 15, 2007, new legislation was introduced in the United States Senate which would require investment advisers of most hedge funds and other private investment funds to register with the Securities and Exchange Commission ("SEC") under the Investment Advisers Act of 1940 (the "Advisers Act") and would subject such advisers to regulation under the Advisers Act.

17. PricewaterhouseCoopers June 2007 Slide 17 NCREIF Presentation Proposed legislation for SEC registration by RE advisors Under current law, fund advisers may count the fund as a single client, without "looking through" to count as clients the underlying fund investors The proposed legislation, would change this by mandating a look-through to the fund's investors in most cases. The current SEC rule had included an exception in the case of funds that had at least a two-year "lock-up" period preventing investor withdrawal during such period. Thus, traditional closed- end real estate (and private equity) fund managers were spared.

18. PricewaterhouseCoopers June 2007 Slide 18 NCREIF Presentation Proposed legislation for SEC registration by RE advisors The newly proposed legislation, however, includes no such exception. As a consequence, if the legislation is adopted in its current form, many real estate fund managers could find themselves required to register under the Advisers Act and subject to its terms. True "dirt" real estate funds may be excluded because the Advisers Act pertains to advice with regard to securities, however many funds make investments in real estate-related assets that would be considered securities for purposes of the Advisers Act.

19. PricewaterhouseCoopers June 2007 Slide 19 NCREIF Presentation Joint Lease Project Announcement On July 19, 2006, the FASB and IASB both agreed to add a joint project on lease accounting to their accounting project agendas. The first phase of the project would primarily involve: researching the project and developing ideas through discussion of lease accounting issues with a working group of leasing experts and financial statements users; identifying and analyzing the conceptual and practical issues involved in further developing the ideas in the 1999/2000 G4+1 Special Report, Leases: Implementation of a New Approach; developing a lease accounting model that is consistent with the current conceptual frameworks of the IASB and FASB.

20. PricewaterhouseCoopers June 2007 Slide 20 NCREIF Presentation History SFAS 13 Accounting For Leases was issued in November 1976. SFAS 13 provided a form driven approach which classified leases generally into two categories: Finance Leases – situations where “substantially” all the risks and rewards of ownership have been transferred to the lessee. Should be accounted for as the acquisition of the asset and incurrence of a liability by the lessee and a sale or financing by the lessor. Operating Leases – where substantially all the benefits and risks of ownership have not been transferred.

21. PricewaterhouseCoopers June 2007 Slide 21 NCREIF Presentation Joint Lease Project Considerations While it is not possible to ascertain definitively the direction this project may ultimately take, the reference to these special reports and other statements by the standard setters imply that the direction recommended in the special report is considered preferable to the existing lease accounting model. The model described for consideration in the Special Report includes the following: Advocates a more substance vs form approach Eliminates the “arbitrary” bright lines including eliminating the distinction between capital and operating lease Substantially all leases would be capital reflected on books using PV based methodology Potentially will provide some relief for short term leases – i.e., those with original durations of less than 1 year (acknowledgement that goal is to deal with large dollar impact) General expectation of symmetrical accounting between lessee and lessor

22. PricewaterhouseCoopers June 2007 Slide 22 NCREIF Presentation Tentative Project Time Table 2008/2009Issue final statement 2009/2010New statement adoption date Tentative DateProject Events Early 2008“Preliminary views” document for public comment 2007 (Initial meeting was Feb 15) Working group activities and Board deliberations December 2006 Organization of joint FASB/IASB working group – this group would report to both FASB and IASB boards

23. PricewaterhouseCoopers June 2007 Slide 23 NCREIF Presentation Focus and Goals Need for symmetrical accounting as a requirement (potential exists to decouple lessee and lessor accounting models and to phase the project into two parts) The goal of the project is to ensure that investors and other users of the financial statements are provided useful, transparent and complete information about leasing transactions in the financial statements.

24. PricewaterhouseCoopers June 2007 Slide 24 NCREIF Presentation Potential Impacts on Real Estate Companies With respect to real estate companies, such a project would not only have a direct accounting impact but also could adversely impact their business activities. This may occur much sooner than the adoption date as lessees anticipate adoption. Potential impacts: Potential tenants may change how they evaluate “lease vs buy” decisions. Some tenants may want to renegotiate existing long dated lease terms to reduce impact (potential lease modification/termination payments may arise). Impact on tenant credit mix may be adverse as better credit tenants may be more likely to purchase property. Impact on lease term and roll over risk may be adverse as statement may provide pressure on lessee to have shorter term leases. Impact will vary by property type – some not affected at all and others more so. Retail property and sale/leaseback or triple net lease property types most affected.

25. PricewaterhouseCoopers June 2007 Slide 25 NCREIF Presentation Questions?