CNSREIT-AR-2024 Final - Flipbook - Page 111
The estimated fair value of acquired in-place leases will be the costs we would have incurred to lease the properties to
the occupancy level of the properties at the date of acquisition. Such estimates include the fair value of leasing
commissions, legal costs and other direct costs that would be incurred to lease the properties to such occupancy levels.
Additionally, we will evaluate the time period over which such occupancy levels would be achieved. Such evaluation will
include an estimate of the net market-based rental revenues and net operating costs (primarily consisting of real estate
taxes, insurance and utilities) that would be incurred during the lease-up period. Acquired in-place leases as of the date of
acquisition will be amortized over the remaining lease terms.
Acquired above- and below-market lease values will be recorded based on the present value (using an interest rate that
reflects the risks associated with the lease acquired) of the difference between the contractual amounts to be paid pursuant
to the in-place leases and management9s estimate of fair market value lease rates for the corresponding in-place leases. The
capitalized above- and below-market lease values will be amortized as adjustments to rental revenue over the remaining
terms of the respective leases. Should a tenant terminate its lease, the unamortized portion of the in-place lease value will
be charged to amortization expense and the unamortized portion of above- or below-market lease value will be charged to
rental revenue.
Impairments of Real Estate
We will review our real estate portfolio to ascertain if there are any indicators of impairment in the value of any of our
real estate assets, including deferred costs and intangibles, in order to determine if there is any need for an impairment
charge. In reviewing the portfolio, we will examine the type of asset, the economic situation in the area in which the asset
is located, the economic situation in the industry in which the tenant is involved and the timeliness of the payments made
by the tenant under its lease, as well as any current correspondence that may have been had with the tenant, including
property inspection reports. For each real estate asset owned for which indicators of impairment exist, if the undiscounted
cash flow analysis yields an amount which is less than the asset9s carrying amount, an impairment loss will be recorded to
the extent that the estimated fair value is lower than the asset9s carrying amount. The estimated fair value will be
determined using a discounted cash flow model of the expected future cash flows with subjective assumptions such as
future occupancy, rental rates, capital requirements, capitalization rates and discount rates. Real estate assets that are
expected to be disposed of are valued at the lower of carrying amount or fair value less costs to sell on an individual asset
basis. Any impairment charge taken with respect to any part of our real estate portfolio will reduce our earnings and assets
to the extent of the amount of any impairment charge, but it will not affect our cash flow or our distributions until such
time as we dispose of the property.
Valuation of Real Estate-Related Securities
Our investment portfolio consists of common stock of publicly-listed REITs, real estate-related preferred securities,
and real estate-related debt securities. Each of these investment types requires determination of fair value, which represents
a critical accounting estimate due to the judgment involved in the valuation process. The fair value measurements directly
affect our financial results as changes in fair value are recorded in current period earnings and impact our realized and
unrealized gains or losses. The complexity of fair value determination varies by security type and market conditions.
Management must make ongoing judgments about the quality and reliability of available market data used in these
valuations, which can materially impact our consolidated statements of operations through both value changes and related
investment income recognition.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements in this Annual Report on Form 10-K for a discussion concerning
recent accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We may be exposed to interest rate changes primarily as a result of long-term debt used to maintain liquidity, fund
capital expenditures and expand our investment portfolio and operations. Market fluctuations in real estate financing may
affect the availability and cost of funds needed to expand our investment portfolio. In addition, restrictions upon the
availability of real estate financing or high interest rates for real estate loans could adversely affect our ability to dispose of
real estate in the future. We will seek to limit the impact of interest rate changes on earnings and cash flows and to lower
our overall borrowing costs. We may use derivative financial instruments to hedge exposures to changes in interest rates on
loans secured by our assets. Also, we will be exposed to both credit risk and market risk.
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