Robust Properties is planning to go public by creating a REIT that will offer 1 million shares of stock. It is currently trying to develop a pro forma set of financial statements. Robust is faced with a number of questions about its handling of some accounting and financial disclosure issues.

Robust Properties
I. Major Financial Information:
a. Assets€”properties (actual cost) ............................................ $100,000,000
b. Depreciable basis€”buildings only .......................................... $80,000,000
c. Useful life .......................................................................................... 40 years
d. Operating expenses ................................................................. 38% of rents
e. Management expenses€”3rd parties ....................................... 5% of rents
f. General and administrative expenses ...................................... 3% of rents
g. Mortgage @ 8% interest only, 10 yrs. .....................................  $30,000,000
h. Financing fees ................................................................................  $900,000
II. Lease Information:
a. Average lease term ........................................................................... 5 years
b. Leasable space .........................................................................  1,000,000sf.
c. Base rents (year 1) ...........................................................................  $15 psf.
d. Escalation factor€”rents per year ........................................................... 5%
e. Lease commissions .............................................................. 4% of yr 1 rent
f. Tenant improvements ...................................................................... $10 psf.

The management of Robust Properties has asked you to prepare preliminary pro forma financials for the next three years. Specifically, you should have

(1) A beginning balance sheet,

(2) Operating statements for each of the next three years, and

(3) All relevant financial ratios for year 1 results only. Robust will pay all financing fees, tenant improvements, and lease commissions upon commencing operations. It would like to pay a minimum dividend of $4.00 per share.

In preparing your pro forma operating statements, Robust wants you to consider the effects of reporting in the following two ways:

a. What would EPS, FFO, and ROC be under both approaches? How should Robust think about its accounting policy?

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Approach Lease commissions Finance fees Tenant improvements Buildings (1) Amortize, 5 years Amortize, 10 years Depreciate, 40 years Depreciate, 40 years (2) Expense in year 1 Expense in year 1 Depr. over 5-year lease term Depr., 40 years