Expert: Don Sadler - 2/29/2008

Question
I'm reading job functions for a staff accountant position at a fortune 500 realty company and have a question you may be able to answer.  It say, "prepares NOI statements for 314 Audits."  Am I correct to assume NOI statement is Net Operating Income statement?  Also, what is a 314 Audit?

Answer
You are correct in assuming that NOI means Net Operating Income.  A 314 audit is conducted pursuant to the Trust Indenture Act of 1939.  Basically, there is a provision under 314 (c) (3) that calls for a verification and opinion by an accountant as to certain representations.  [see http://www.sec.gov/about/laws/tia39.pdf]

Here is an extract of the table of contents.

Sec. 314. Reports by obligor; evidence of compliance with indenture provisions.
  (a) Periodic reports.
  (b) Evidence of recording of indenture.
  (c) Evidence of compliance with conditions precedent.
  (d) Certificates of fair value.
  (e) Recitals as to basis of certificate or opinion.
  (f) Parties may provide for additional evidence.

Here is a quote of section 314 (c): [section (3) (c) is the relevant portion]

(c) Evidence of compliance with conditions precedent. The obligor upon the indenture securities shall furnish to the indenture trustee evidence of compliance with the conditions precedent, if any, provided for in the indenture (including any covenants compliance with which constitutes a condition precedent) which relate to the authentication and delivery of the indenture securities, to the release or the release and substitution of property subject to the lien of the indenture, to the satisfaction and discharge of the indenture, or to any other action to be taken by the indenture trustee at the request or upon the application of such obligor. Such evidence shall consist of the following:

 (1) certificates or opinions made by officers of such obligor who are specified in the indenture, stating that such conditions precedent have been complied with;
 (2) an opinion of counsel (who may be of counsel for such obligor) stating that in his opinion such conditions precedent have been complied with; and
 (3) in the case of conditions precedent compliance with which is subject to verification by accountants (such as conditions with respect to the preservation of specified ratios, the amount of net quick assets, negative-pledge clauses, and other similar specific conditions), a certificate or opinion of an accountant, who, in the case of any such conditions precedent to the authentication and delivery of indenture securities, and not otherwise, shall be an independent public accountant selected or approved by the indenture trustee in the exercise of reasonable care, if the aggregate principal amount of such indenture securities and of other indenture securities authenticated and delivered since the commencement of the then current calendar year (other than those with respect to which a certificate or opinion of an accountant is not required, or with respect to which a certificate or opinion of an independent public accountant has previously been furnished) is 10 per centum or more of the aggregate amount of the indenture securities at the time outstanding; but no certificate or opinion need be made by any person other than an officer or employee of such obligor who is specified in the indenture, as to (A) dates or periods not covered by annual reports required to be filed by the obligor, in the case of conditions precedent which depend upon a state of facts as of a date or dates or for a period or periods different from that required to be covered by such annual reports, or (B) the amount and value of property additions, except as provided in paragraph (3) of subsection (d) of this section, or (C) the adequacy of depreciation, maintenance, or repairs.



It is a requirement of SEC Reporting Compliance in which Seller acknowledges that Purchaser has informed Seller that purchaser is an affiliate of a publicly traded real estate investment trust. Accordingly, to the extent an SEC Section 314 audit shall be required by applicable law in respect of Purchaser's acquisition of the Premises, Purchaser's obligations hereunder shall be conditioned on a satisfactory SEC Section 314 audit of the Premises by  (Purchaser's independent auditors or any successor) by the expiration of the Due Diligence Period. Seller agrees to 'cooperate with such auditors and to provide such information and certifications as are customarily required by the firm to complete an SEC Section 314 audit.

I hope this helps.