Accounting Standard Updates

SSAP 40R – Wholly Owned Single Real Estate Property

On December 12, 2014 the NAIC adopted Issue Paper No. 149, Wholly-Owned Single Real Estate Property in an LLC which makes substantive revisions to both SSAP No. 40—Real Estate Investments and SSAP No. 48—Joint Ventures, Partnerships and Limited Liability Companies.  The NAIC also adopted SSAP No. 40R—Real Estate Investments-Revised.  Revisions to SSAP No. 48 are expected to be exposed and adopted in the near future In essence, the changes require insurers, as the sole member of a limited liability company (Single Member LLC) which is “utilized only for the ownership and management of a single real estate investment exclusively for the reporting entity” to treat the investment in LLC as a real estate investment and report the investment on Schedule A. Previously, such investments were accounted for under the provisions of SSAP No. 48.

Additional criteria for reporting investments in LLC as real estate include:

  1. The property is properly supported by an appraisal.
  2. Sole control of the property exists as if it was directly-owned real estate.
  3. Single member (referred to as the reporting entity) possesses all the risks and rewards of ownership.
  4. There is no apportionment of the LLC costs to any other entity (i.e. general or separate accounts).

SSAP 40 is also amended to describe what constitutes a single real estate property, which surprisingly “can include multiple parcels of land and more-than-one structure” as long as they are located contiguously and managed together as a single unit (see SSAP 40R 4.b. for particulars).

Reporting wise, the amendments to SSAP 40 are effective as of January 1, 2015, and if previously holding the asset as accounted for under SSAP No. 48, then the reporting entity “shall recognize a cumulative effect of a change in accounting principle as if the entity had followed this Statement since acquisition of the real estate investment property”.

What this means for you…                                                 

Many clients have asked us if they should place their real estate investments into an LLC. The answer is clear that if you do:

  • you can only place one managed property or group of contiguously located properties into your LLC
  • make sure you get the property properly appraised

For those with properties in LLCs already meeting the criteria, you will also have to contend with the change in accounting principal which is a cumulative change as if this had always been accounted for under the new guidelines changed in SSAP No. 40.