Have Debt Maturing in 2023? 5 Considerations for Real Estate Entities and Their Auditors

The current real estate climate has presented challenges across many asset classes. It is reported that there are a significant amount of commercial loans maturing in 2023 amidst declining property values. Access to capital and the ability to meet debt service is likely at the forefront of the minds of any real estate business owner, operator, or investor of the following:

  • A commercial office building that has a significant concentration in tenancy, such as a WeWork
  • A multi-family residential portfolio that is repositioning its properties
  • A power center or shopping mall that has had difficulties re-tenanting larger spaces
  • A hotel in a secondary or tertiary market that has not yet recovered from the pandemic

As auditors of these entities, it is likely on your mind as well.

For companies that re-evaluate their financing options with financial institutions or other lenders, debt that is currently recorded on the balance sheet may be considered an amendment.

As auditors begin their audit planning, below are 5 questions you might want to consider:

  1.  Is your real estate client facing financial difficulties (i.e., through bankruptcy, delinquencies in payments of debt service, or having trouble meeting financial or non-financial covenants)?
  2. Has the lender of your real estate client granted a concession (i.e., waiving or modifying terms) as a result of the client’s inability to pay its debt service?
  3. Did your real estate client enter into a new debt agreement or modify the terms (i.e., cash flows, interest rate) that might appear to be more than a nominal change?
  4. If your real estate client entered into a new debt agreement, was this agreement with the same lender as the previous debt?
  5. Is this the second time your real estate client has modified its debt or attempted to modify its debt within the last 12 months?

If you answered YES to any of the above questions, it is likely the treatment for this accounting event will either be accounted for as a modification, extinguishment, or possibly a troubled debt restructuring (TDR), each of which has its own impact to financial statements prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP).

Although the analysis may appear straightforward, complexities often arise, especially in navigating through the finer details of lender arrangements. Accordingly, sometimes these analyses may be more than management can perform themselves, and this is one way that Centri can help.

How Centri Can Help

We’ve helped many companies navigate the complexities behind the accounting treatment by:

  • Serving as the central point of contact for the working group, ensuring that responsibilities are clearly defined and critical deadlines are met;
  • Preparing memorandum(s) outlining key terms and accounting analysis and conclusions, including illustrative disclosures;
  • Estimating the fair value of the debt based on the revised or modified terms;
  • Determining whether or not the criteria of a TDR has been met and determining the appropriate amounts to record in the income statement, if applicable;
  • Performing the significance test to determine if the debt was extinguished or modified; and/or
  • Providing prospective accounting treatment for the new debt, including calculation of the new effective interest rate for recognition of interest expense and modification considerations related to reference rate reform.

At Centri, our experts serve as the extension for management when they might not be aware of an accounting impact for one of these circumstances. We work alongside you and your clients so that you receive a package that is not just comprehensive but satisfies the requirements you need to fulfill your professional responsibility as an auditor. Contact us to learn how our experts can help.

Michael Mastruzzo

Managing Director | Real Estate Practice Leader | CPA

Michael is a Managing Director at Centri Business Consulting and the leader of the firm’s Real Estate Practice. He joined Centri in June 2022 and assists in practice development across the firm’s service lines. View Michael Mastruzzo's Full Bio

About Centri Business Consulting, LLC

Centri Business Consulting provides the highest quality advisory consulting services to its clients by being reliable and responsive to their needs. Centri provides companies with the expertise they need to meet their reporting demands. Centri specializes in financial reportinginternal controlstechnical accounting researchvaluationmergers & acquisitions, and tax, CFO and HR advisory services for companies of various sizes and industries. From complex technical accounting transactions to monthly financial reporting, our professionals can offer any organization the specialized expertise and multilayered skillsets to ensure the project is completed timely and accurately.

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06/21/2023

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