For existing public Real Estate Investment Trusts (REITs) or REITs considering going public, acquisitions drive growth and shareholder value — but they also trigger complex Securities and Exchange Commission (SEC) audit requirements that can delay filings and capital raising if not properly managed. Failing to understand and prepare for these obligations can lead to costly disruptions in reporting, financing and strategic initiatives.
This comprehensive guide breaks down the critical audit requirements REIT executives, CFOs and compliance officers need to master to help ensure seamless SEC audit compliance and readiness.
Before diving into specific rules, it’s essential to understand the framework to which they belong. Regulation S-X governs the form and content of financial statements that must be included in SEC registration statements and periodic filings.
Rules S-X 3-14, S-X 3-05 and S-X 3-09 collectively determine when or what type of separate audited financial statements must be filed following acquisitions or investments. For REITs, these three rules are especially important when dealing with property acquisitions and significant equity holdings.
Rule S-X 3-14 is the most frequently encountered rule for REITs and is triggered when acquiring a “significant” real estate operation.
When It Applies: This rule applies to the acquisition of individual or multiple properties that constitute a real estate operation where activities are “substantially all” from leasing. A key distinction is that this rule applies to the acquisition of assets, not an entire business entity. If ancillary services, such as restaurants, hospitality or healthcare, generate more revenue than rent, the acquisition may instead fall under Rule S-X 3-05.
Significance and Requirements: An acquisition’s significance is determined by the Investment Test, which compares the REIT’s investment in the property to its total assets.
Read “What is an SEC S-X 3-14 Real Estate Operations Acquisition Audit” for more detail
While Rule S-X 3-14 deals with assets with real estate operations, Rule S-X 3-05 applies when a REIT acquires a business — for example, another REIT, property manager, hotel, or portfolio with integrated management and operations.
When It Applies: Determining whether an acquisition is a business or a real estate operation is a critical first step. The assessment hinges on whether the acquisition includes substantive processes and inputs, such as an in-place workforce and operational functions. The SEC has emphasized an entity is a business if there is continuity of operations before and after acquisition.
Significance and Requirements: Rule S-X 3-05 uses three tests, and the highest percentage reached determines the requirement:
Periods Required:
This rule addresses significant equity method investments, which are common in joint ventures where a REIT holds a substantial interest but lacks controlling power.
When It Applies: Rule S-X 3-09 applies when an investment in an unconsolidated entity (an “investee”) is significant, typically when accounted for under the equity method.
Requirements: If the investment’s significance exceeds 20% (based on the investment or income tests), the REIT must provide separate, audited financial statements for that investee in its own annual report (Form 10-K). This can pose challenges, as it requires coordination with third parties to obtain timely, PCAOB-compliant financial statements.
Proactive planning is the key to mastering these complex requirements. A last-minute scramble for historical data can derail the closing timeline. Below are best practices to be prepared:
Below are some key missteps to avoid when complying with SEC S-X rules:
Mastering SEC audit requirements under Rules S-X 3-14, S-X 3-05 and S-X 3-09 is more than a compliance exercise — it’s a strategic imperative. By embedding a deep understanding of these rules into your acquisition and investment processes, your REIT can move faster, transact with greater certainty and maintain investor trust.
Investors increasingly scrutinize audit timeliness and transparency, making proactive SEC compliance a differentiator in today’s competitive REIT marketplace. For REITs, mastering these rules isn’t just about regulatory compliance, it’s about enabling efficient capital deployment and strengthening confidence in your financial reporting.
Contact Nick Antonopoulos or a member of your service team to discuss this topic further.
In this blog Cohen & Co is not rendering legal, accounting, investment, tax or other professional advice. Rather, the information contained in this blog is for general informational purposes only. Any decisions or actions based on the general information contained in this blog should be made or taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.