Erika Morphy is co-editor of Debt and Equity Journal, from which this article is excerpted.

Norwalk, CT—For the first time, a REIT that holds assets in a JV can elect to value those assets at a "fair value" accounting standard. The rule is effective with an entity's first fiscal year that begins after Nov. 15, 2007, according to the Financial Accounting Standard Board's recent statement on the Fair Value Option for Financial Assets and Financial Liabilities, better known as FASB 159. In certain circumstances, the standard could be adopted even earlier.

Anecdotal observations, though, suggest few REITs plan to take FASB up on the offer in the near future. In theory, the presumption is that fair value exceeds book value, so a REIT's borrowing power would increase with fair value accounting. "It's one possible route for REITs to increase leverage," says Steven Marks, managing director and REIT group head for Fitch Ratings.

As Fitch explains in a recent alert, although equity interests in JVs are generally viewed as a leverageable asset class, it is recognized that covenants in standard REIT unsecured bond indentures allow REITs to borrow based on the aggregate accounting value of most assets in their portfolios, including equity interests."Therefore, REITs opting to report equity investments at fair value could experience a widening gap between borrowing capacity before and after the change in accounting measurement from 'at equity' to fair value," the rating agency concludes.