The Auditor You Call: Stephanie Urbanski of Ernst & Young
Gus Delaporte March 5, 2013, 11 a.m.
Stephanie Urbanski is the global real estate sector resident and assurance senior manager at Ernst & Young. Boasting a decade of experience at the Big Four firm, Ms. Urbanski is a lead member of the real estate accounting team. She spoke with The Commercial Observer last week about financial accounting issues impacting the commercial real estate industry, potential future changes to financial reporting practices and the risks of another bubble in the market.
The Commercial Observer: What is your role at Ernst & Young?
Ms. Urbanski: First and foremost, I am a senior manager in the assurance practice, and I’ve been with Ernst & Young since 2003. I also serve a dual role as our global real estate sector resident, and in that role I am officially part of the Global Real Estate Center, and that group oversees the real estate process globally for Ernst & Young and drives initiatives from a global level. My particular role is channel one sector resident, which is essentially our assurance audit practice. So I’m the go-to person in terms of technical accounting areas, on a global level.
As we approach tax season, are there any particular challenges for the commercial real estate industry?
For financial reporting purposes, the main change for 2012 was additional fair value disclosure requirements. Now, that would only impact a U.S. historical GAP reporter if they were recording real estate at fair value, either because it was impaired or it was held for sale. For funds, that’s been a much more challenging exercise, because they have more assets at fair value.
Essentially, the fair value disclosure requirements require you to disclose more fair value process information—so, the actual process you took to come up with the fair values embedded in your financial statements for assets that are recorded based on unobservable inputs, and real estate assets are usually considered those types.
So companies that have real estate assets recorded at fair value in their financial statements, they would be required to disclose more detail about the actual valuation process—who prepared the valuations, what kind of support they obtained to support the values they are coming up with, and what’s probably the most challenging is disclosing quantitative information about significant, unobservable input. Specifically, disclosing things such as capitalization rates and discount rates.
So companies are now required, if they are recording real estate at fair value under U.S. GAP, for one reason or another, to disclose the inputs they are using in those valuations.
That’s been the largest change specifically impacting real estate for 2012, and most companies are still in the process of wrapping up their 2012 financial statements.
Will there be any changes to the process for 2013?
There is nothing effective in 2013 that I would say drastically changes anything for most real estate companies. There are some changes on the horizon that could significantly impact real estate companies.
Such as the convergence project in terms of moving toward a converged international accounting standard.
That would impact how these companies are conducting general accounting practices?
Correct. The largest project that would impact real estate companies is the accounting for leases. Landlords, in most cases, would not see a significant change in the underlying accounting, but the tenants—how they’re recording their leasing with the landlords—would change, in most cases, under this proposed guidance. But this is all proposed. Nothing is formally finalized or approved. It’s still in draft form, but it is something companies are monitoring based on the significant impact it could have on the industry.
Can you speak about any particular challenges for 2013 that real estate companies are facing based on damages from Sandy?
For example, a lot of the hotels in New York City and restaurants and businesses that were Downtown were impacted by decreases in revenues. Hotels, specifically, have seen some pickup through FEMA contracts, which have allowed them to get in additional occupancy subsequent to the decrease in revenues which occurred directly after the storm. That’s one impact.
Tourism was obviously impacted here. Disruption in offices Downtown; I know some companies had to relocate employees. Some were working from home; some were relocated to other buildings.
In terms of damage, obviously depending on the damage and the insurance, that may have had some financial impact in terms of recording that expense.
Is there are stark difference between how a private company is required to record and disclose financial information versus how a public company is required to disclose?
In general, regardless of real estate or non-real estate, the level of expectation for public companies and amount of disclosure is obviously much more robust and significant and time-consuming to prepare.
For private companies, it will depend on what basis of accounting they are reporting on. Some may not prepare GAP-basis financial statements, because they don’t have a requirement to do so, and may prepare tax-basis financial statements for internal purposes, which I think is more common, because a lot of times privately held companies have a partnership structure. But if they have a mortgage loan, maybe they are required to issue GAP-basis financial statements. But, if they are issuing GAP-basis financial statements, unless something is specifically required by the SEC, there’s not too much of a difference in how they’re recording their information.
With low interest rates on offer, is there the risk of a bubble?
I think it’s definitely something that should be monitored. Unemployment and underemployment are still very high. Household income has not made significant gains, and much of the increase in real estate prices we are seeing can probably be attributed to the leverage produced by the lower interest rates. It’s not completely unreasonable to believe that rates could lead to another real estate bubble, especially in markets which have seen a pickup in the last year or so, and that’s in both commercial and residential.
Which markets have seen particularly impressive growth?
Obviously, in New York we have seen a lot of growth, and San Francisco, Miami—a lot of the more urban markets, where we have seen more transactions in high-quality assets in those markets.