TB0049Copyright © 2008 Thunderbird School of Global Manage.docx

TB0049
Copyright © 2008 Thunderbird School of Global Management.
All rights reserved. This case was prepared by Professor
Michael
H. Moffett, Jason McLeod MBA’08, Jerry Rose, MBA’08, and
Colin T. Williams, MBA’08, for the purpose of classroom
discussion
only, and not to indicate either effective or ineffective
management.
Michael H. Moffett
Nodal Logistics and Custo Brasil
“Land of Promise,” April 12, 2007.
Just when John Penman thought Nodal Logistics Corporation
(NLC or “Nodal”) was ready to move into Brazil,
a new hurdle was thrown in his path. Only a few days ago—on
December 19, 2007—he had finally obtained
approval from the U.S.-based company’s executive board to
invest $45 million in an 800,000 square foot indus-
trial property project in São Paulo, Brazil. Although Nodal had
extensive experience investing around the world,
this would mark Nodal’s first major investment in the South
American industrial real estate market. Nodal had
admittedly been slow to move into emerging markets, and this
Brazilian opportunity was sure to strengthen the
company’s long-term competitive position globally. If all went
well, the deal could be signed as early as January
of 2008.

But that was before yesterday’s phone call from the legal
department. Nodal’s legal staff had received con-
firmation from their São Paulo-based associate that under
Brazilian law, commercial real estate contracts must
be denominated in Brazilian reais. One of Nodal’s basic
operating practices which had been so important to its
international success had been to write all industrial real estate
agreements in U.S. dollars. This posed a serious
problem, as most industrial leases ranged from as short as five
years to more than 12, and that was a very long
time to be exposed to the Brazilian currency. John now had to
delve into the multitude of strategies and deriva-
tives that might allow the company to manage the currency risk;
otherwise, the deal was dead.
Nodal Logistics Facilities: A REIT
Nodal Logistics Corporation is a New York City-based Real
Estate Investment Trust (REIT) that focuses on indus-
trial warehousing and logistics property acquisition and
development in high density markets in North America,
Europe, and Asia. REITs invest in and own properties, offering
investors a highly liquid method of investing in
real estate in much the same way mutual funds offer investors
the opportunity to own equities. Most REITs earn
the majority of their revenues from property rents and leases.
They also operate under a unique tax structure: As
long as more than 75% of their profits arise from rents from real
estate property, and they distribute at least 90%
of their current-period profits as dividends to their
shareholders, they do not pay corporate income taxes.
November 15, 2008
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([email protected]). Copying or posting is an infringement of

copyright. Please contact [email protected] or
800-988-0886 for additional copies.
2 TB0049
Nodal’s target properties were located near airports, sea ports
and other major transportation nodes to
meet the movement and storage needs of their clients. These
clients were typically third-party logistics providers
(3PL), freight forwarders, and other businesses. These
companies either relied on time-sensitive inventory and
shipments, or needed efficient distribution facilities in areas
where space was limited and therefore priced at a
premium. With operations in 15 countries, Nodal’s property
portfolio was in excess of 140 million square feet
and served more than 3,000 customers worldwide.
The company’s core competency was its deep expertise in
operations and distribution facilities. In high
density markets, storage space is expensive, and both producers
and end-users wanted their products out of costly
storage facilities and en route to their final destination as
quickly as possible. Nodal served this sector by acquir-
ing, constructing, and renovating industrial facilities to allow
their clients to expedite inventory flow-through.
Older, inefficient warehouses could often be converted to
modern distribution facilities by simply streamlining
warehouse space to accommodate loading docks that allowed
direct truck-to-truck loading.
The São Paulo metropolitan area had approximately 250 million
square feet of industrial space (including
smaller warehouses of less than 10,000 square feet), most of
which was obsolete. The 60 miles between São Paulo

and Campinas (Northeast of São Paulo) contained some superior
quality industrial space in terms of quality and
specifications. It was here that Nodal found its target property.
Brazil and Currency Risk
Brazil had both the largest economy and largest population
(2007 estimate of 184 million) in Latin America,
and the fifth largest population in the world. Key to Nodal’s
interests, Brazil possessed a high population density
along its Southeast coastline, which included Rio de Janeiro and
São Paulo. More than 20 million people lived
in the São Paulo metropolitan area alone. As noted by the
opening quotation from the Economist, the port of
Santos near São Paulo was a trade and commercial hub. A
senior executive of one of the region’s largest multi-
national companies, Dell Computer, had recently noted that São
Paulo was not just the largest market in Brazil,
but the largest market of the entire Mercosul trading block,
which included Argentina, Paraguay, Uruguay, and
Venezuela. Such a massive economic concentration made São
Paulo an ideal target market for Nodal.
But the Brazilian economy and its currency, the real, were
synonymous with risk. Decades of inflationary
tendencies and sporadic periods of hyper-inflation had resulted
in a succession of currencies—the cruzeiro, the
new cruzeiro, the cruzado, the new cruzado, and finally the real.
Since its inception in 1994, the real (international
computer code BRL, officially the cruzeiro real, reais in plural)
had seen a number of very different lives. The
original Real Plan (Plano Real in Portuguese) was based on a
prescribed and predictable daily devaluation of the
currency over time against the dollar. This daily devaluation
had been successful in providing a short period of
calm over the 1996 to 1998 period, only to end in a massive
currency collapse the second week of January 1999.

Over a series of weeks, the value of the real plummeted from
BRL1.21/$ to more than BRL1.70/$.
The value of the real in the following years had been something
of a roller-coaster ride. Between January
1999 and November 2002, its value had plummeted, peaking at
more than BRL3.75/$ (see Exhibit 1). But, to
much of the world’s surprise, the many economic reforms in the
following years resulted in growing economic
stability, controlled inflation, and an appreciating real. By late
2007, the real was once again trading around
BRL1.75/$, a value it had not seen since mid-2000. Through a
number of difficult years of change and sacrifice,
the country had successfully retired most of its debt obligations
to the International Monetary Fund (IMF), and
was now, finally, a creditor country. The Brazilian
government’s legislative changes now prevented state govern-
ments from defaulting on their own debt and passing it on to the
Federal government (which triggered the crisis
in 1999). Brazil now held more than US$100 billion in foreign
exchange reserves.
TB0049 3
Nodal Logistics Brazil
The many years of economic turmoil in Brazil had, in some
ways, helped create Nodal’s business opportunity.
Historically, most of the build-to-suit properties tended to be
highly standardized to reduce risk of rental. This

now left a huge hole in the target industrial real estate market in
Brazil, as the economy now boomed. Nodal’s
practice of funding all of its properties itself, mostly in cash
(equity), also eliminated the funding and high inter-
est rate issues which plagued much of Brazilian industry.
Nodal’s risks, however, extended far beyond just currency.
First, the company was subject to significant
operating exposure. Committing fixed assets in a foreign
country subjects the firm to host-country economic
conditions. Real estate cannot be moved, only sold.
Furthermore, the company faced financial exposure to for-
eign exchange fluctuations. Rents earned in a foreign currency
like the Brazilian real had to be converted back
to U.S. dollars each and every period to meet REIT
requirements for profit distributions. In order to mitigate
this risk, Nodal wrote its leases (from which the company
generated its cash flows) in U.S. dollar terms and, as
such, financial hedging instruments were not necessary.
The Brazilian facility was expected to take a total of $45
million to purchase and develop. The total capi-
tal outlay, all to be incurred within 2008, included all land
acquisition and site preparation costs, construction
of facilities and infrastructure, insurance and development fees,
construction supervision, and marketing and
promotion expenses incurred prior to operational start-up. The
warehousing facility would be 816,119 square
feet, or 75,820 square meters. All facility development costs are
detailed in Appendix 2.
If Nodal were to take ownership on January 1, 2008, it would
take roughly one year to begin operations.
Construction could not begin until the Hold/Permitting,
earthworks, and site improvements were completed—
approximately five months. At this point, construction of the

facility could begin, which would take an additional
six to seven months. From completion, it was estimated that it
would take another five months to reach 60%
to 65% lease-up. As illustrated in Exhibit 2, John estimated that
the Brazilian facilities could begin generating
a net operating income (before tax) of BRL 5 million in 2009
(roughly $2.8 million at BRL1.7950/$). Once
operating, the Brazilian business would be taxed at an effective
rate of 24%.1
1 The corporate income tax rate in Brazil, the Imposto de Renda
de Pessoa Jurídica (IRPJ), was 15%. This rose to 25% on
income above BRL24,000,000. All companies also paid a Social
Contribution on Net Income, Contribuição Social sobre o
Lucro Líquid (CSLL), an additional 9% of taxable profit.
Exhibit 1. Brazilian Reais per U.S. Dollar (BRL/$) 1999-2007
1.6
1.8
2.0
2.2
2.4
2.6
2.8
3.0
3.2
3.4
3.6
3.8
Q
1 1
99
9

Q
3 1
99
9
Q
1 2
00
0
Q
3 2
00
0
Q
1 2
00
1
Q
3 2
00
1
Q
1 2
00
2

Q
3 2
00
2
Q
1 2
00
3
Q
3 2
00
3
Q
1 2
00
4
Q
3 2
00
4
Q
1 2
00
5

Q
3 2
00
5
Q
1 2
00
6
Q
3 2
00
6
Q
2 2
00
7
Q
4 2
00
7
The real is floated
following the collapse
of the Real Plan in
January 1999

The real peaks in value against the dollar
at BRL 3.80/$ in October 2002
BRL/$
The real closes 2007 at the strongest rate
against the dollar in more than 7 years
1.6
1.8
2.0
2.2
2.4
2.6
2.8
3.0
3.2
3.4
3.6
3.8
Q
1 1
99
9
Q
3 1
99
9
Q
1 2

00
0
Q
3 2
00
0
Q
1 2
00
1
Q
3 2
00
1
Q
1 2
00
2
Q
3 2
00
2
Q
1 2

00
3
Q
3 2
00
3
Q
1 2
00
4
Q
3 2
00
4
Q
1 2
00
5
Q
3 2
00
5
Q
1 2

00
6
Q
3 2
00
6
Q
2 2
00
7
Q
4 2
00
7
The real is floated
following the collapse
of the Real Plan in
January 1999
The real peaks in value against the dollar
at BRL 3.80/$ in October 2002
BRL/$
The real closes 2007 at the strongest rate
against the dollar in more than 7 years
Source: International Financial Statistics, International
Monetary Fund, quarterly.

4 TB0049
Remitting funds out of Brazil was an additional hurdle. A
foreign company investing in Brazil must register
with the Central Bank of Brazil in order to apply for the right to
remit funds to a non-Brazilian parent in the
form of dividends and fees. Brazil currently charged no
withholding taxes on dividend earnings by foreign resi-
dents. Although foreign residents and companies could own
land and buildings without restriction, there were
stipulations regarding land within 150 miles of a border area, or
directly on the Atlantic Coast. While all port
terminals had been privatized, the sensitive nature of ports in
regards to foreign ownership of commercial real
estate and national security law required joint ventures with
local (resident) partners. Nodal had been well aware
of this stipulation in its analysis of the Brazilian market, and as
a result had intentionally chosen the Campinas
inland site rather than a port facility area around Santos.
Exhibit 2 also illustrates one of the more unique characteristic
of REITS—the very high profit rate of the
business. Logistics facilities like those developed and operated
by Nodal were large up-front capital investments
with little actual ongoing operating expenses. As a result of
their nontaxable status in the United States, deprecia-
tion was not ordinarily an applicable line item; with no tax
liabilities there was little need for accounting based

noncash expense deductions like depreciation.2
Because there were no tax benefits to using debt, the company
also typically financed new facility invest-
ments like that proposed in Brazil with all equity. Hence, the
interest expense line item was also effectively zero.
The result was a net income item which was estimated at 86% of
revenues. Although on the surface this appeared
to be an extraordinary rate of profitability, this was only a 6.2%
return on invested capital.
2 The U.S. REIT industry believed that traditional accounting
practices, like depreciation, needed correction. Historical cost
accounting for real estate assets under U.S. GAAP implicitly
assumed that the value of real estate assets diminish predictably
over time. However, since real estate values have historically
risen or fallen with a variety of market and economic
conditions,
many industry experts believed that historical cost accounting
was insufficient in some cases.
Exhibit 2. Projected Income Statement, 2009-2013 (Brazilian
Reais, BRL)
Project Year 0 1 2 3 4 5 6
Calendar Year 2007 2008 2009 2010 2011 2012 2013
Facility capacity (SM) 75,820 75,820 75,820 75,820 75,820
Lease rate (BRL/SM) 112.70 112.70 112.70 112.70 112.70
Lease utilization rate (%) 65% 90% 95% 95% 95%
Gross rental revenue 5,554,194 7,690,423 8,117,668 8,117,668
8,117,668
Gross rental revenue 5,554,194 7,690,423 8,117,668 8,117,668
8,117,668
Operating expense recovery 5.9% 327,697 453,735 478,942
478,942 478,942

Management fee collected - - - - -
Total Revenues 5,881,892 8,144,158 8,596,611 8,596,611
8,596,611
Less vacancy costs 5.3% (294,372) (407,592) (430,236)
(430,236) (430,236)
Management fee expense 3.0% (166,626) (230,713) (243,530)
(243,530) (243,530)
Operating expenses 5.6% (329,386) (456,073) (481,410)
(481,410) (481,410)
Non-reimbursable expense 0.6% (35,291) (48,865) (51,580)
(51,580) (51,580)
Total Costs (825,675) (1,143,243) (1,206,756) (1,206,756)
(1,206,756)
Net operating income (EBITDA) 5,056,216 7,000,915 7,389,854
7,389,854 7,389,854
Less depreciation 25 years (949,360) (949,360) (949,360)
(949,360) (949,360)
EBIT 4,106,856 6,051,555 6,440,494 6,440,494 6,440,494
Less interest expenses - - - - -
Less corporate taxes 24.0% (985,645) (1,452,373) (1,545,719)
(1,545,719) (1,545,719)
Net income 3,121,211 4,599,182 4,894,776 4,894,776 4,894,776
Notes. This preliminary income statement assumes an all-equity
investment by the parent company. Depreciation charges assume
a
25-year straight line depreciable life on an initial capital
investment of $23,734,000.

TB0049 5
Currency Hedging Alternatives
John wanted to consider the full gamut of currency hedging
alternatives. Because the company did not usually
incur currency risk (most lease agreements were in U.S.
dollars), he had little experience in the area.
First, Nodal could certainly choose to simply take the currency
risk—“self insure”—as one of its bankers
termed it. As illustrated earlier in Exhibit 1, the Brazilian real
had consistently appreciated against the dollar over
the past three years. The dollar was trading at record lows
against most major currencies, and many currency
analysts inside and outside the United States were now arguing
that it might still fall further. In the view of some
analysts, the real’s prospects were, however, continuing to rise.
As one analyst observed:
One of the key drivers for this new-found faith in Brazil was
that the country appeared to have finally
gotten a grip on the inflation which had plagued it for 30 years.
Although there had been periods of stability,
changes in governments and leadership had often resulted in a
backsliding into the inflationary tendencies of
the past. But no more.
One indication of the country’s renewal was that inflation rates
and interest rates had consistently fallen
over time. Exhibit 3 shows how continued efforts had
successfully reduced overnight lending rates (the SELIC
rate in Brazilian reais) as quoted by the Banco Central do

Brasil. The SELIC rate had been above 45% as recently
as 1999, but had fallen to relatively stable rates since. Now, in
the last weeks of 2007, the rate had fallen to 10%.
Many analysts noted that this had been accomplished despite a
number of changes in the Brazilian political
environment, giving support to the argument that Brazil was
increasingly resilient to political change.
3 Currency Outlook, HSBC Global Research, Macro Currency
Strategy, September 2007, p. 35.
Exhibit 3. Brazilian Interest Rates, 1995-2007
Source: Interest rate represents annualized Serviço Especial de
Liquidaçao e Custódia
(SELIC), the overnight lending rates, as quoted by Banco
Central do Brasil, LatinFocus,
December 17, 2007, www.latin-
focus.com/latinfocus/countries/brazil/brainter.htm.
6 TB0049
Yet other currency forecasts, for example that of the Economist
Intelligence Unit (EIU), were projecting a
long and gradual depreciation of the real against the dollar over
the coming five-year period:
-

The EIU was forecasting the real to fall to BRL 2.13/$ in 2008,
2.32 in 2009, 2.38 in 2010, 2.44 in 2011,
and 2.50 in 2012. With these opposing views on the future of
the real, John turned to the multitude of deriva-
tives and strategies which both his bankers and his in-house
advisors had come up with.
Forward contracts. John’s New York bank had first
recommended forward contracts, which would allow Nodal
to lock in future exchange rates at no cost (the bank would
charge no up-front fees for the forward contracts
because Nodal had a prearranged line of credit). Given the
relatively high level of predictability on the amounts
to be hedged, the Brazilian facility’s prospective income, this
was a very promising solution.
All that changed, however, when Nodal’s
bank provided some current spot and forward
quotes on the real (shown in Exhibit 4). John
had been shocked. With a current spot rate of
about BRL1.7950/$, the forward rates quoted
indicated a weaker and weaker future real ex-
change value to the dollar. The five-year forward
rate, for example, had the real at more than 2.4
to the dollar, considerably weaker than the cur-
rent 1.7950. The banker had explained that the
one-to-five-year forward rates were all “selling
the real forward at a discount” as a result of the higher interest
rates in Brazil. Unfortunately, as John noted:
“That does us exactly zero good when we are selling real, not
buying real! ”
Currency options. Put options would be another alternative to
protect the dollar value of the company’s real
profits. Options would not commit Nodal to convert at the strike

rate, but instead give them an assured mini-
mum rate of exchange if things went badly, while preserving the
flexibility to earn greater dollar proceeds if the
exchange rate were to move in Nodal’s favor.
The problem with options, of course, was that John would have
to determine a strike rate up front for
Brazilian reais income of the new facility. As opposed to
forward contracts, the put option would be a worst
case result, the minimum proceeds, and if the did indeed
continue to strengthen against the dollar (or
John decided—at least for the initial analysis—to use a series of
strike rates which were Forward At-The-
Money (FATM); strike rates equivalent to the forward rates he
had been quoted (see Exhibit 5). John quickly
concluded that the put option solution, depending on the
notional principal needed (the number of Brazilian
per year in the option contract), would certainly constitute a
sizeable outlay of capital up front.
Currency clauses. Nodal’s legal department had also suggested
the possibility of using a Currency Adjustment
Clause (CAC), a common agreement used in ocean shipping for
many years. The idea was to have the customer
share in the currency risk on both the upside and downside of
any exchange rate changes. The problem, how-
4 Factsheet Brazil, Economist Intelligence Unit, September 25,
2007, p. 2.
Exhibit 4. Brazilian Reais Spot and Forward Quotes
(BRL/$) Bid Ask Mid-Rate

Spot 1.7880 1.8020 1.7950
Forward—1 year 1.9020 1.9240 1.9130
Forward—2 years 1.9879 2.0141 2.0010
Forward—3 years 2.1227 2.1436 2.1332
Forward—4 years 2.2652 2.2979 2.2816
Forward—5 years 2.4080 2.4526 2.4303
TB0049 7
ever, was that it was common to international trade transactions,
but was not common to domestic commercial
activity, and definitely not traditionally used in real estate and
warehousing contracts.
A CAC could be as simple or as complex as the company
wanted to make it. The idea was simply that
the price or charge for a product or service was based on a
currency-specific price, and if the market exchange
rate moved away from the specified base rate, the parties would
agree to a predetermined automatic adjustment
to the price paid in local currency. For example, John had
sketched out a very simple one based on the current
spot rate of BRL1.7950/$ and a BRL112.70 per square meter
(SM) warehousing rate, an implied price in U.S.
dollars of $62.78/SM:
$62.78/SM
1.7950/$BRL

112.70/SMBRL
US$ in Rate
Although actual leasing and invoicing would be made at the
Brazilian real price and currency, in the event
that the exchange rate moved appreciably from 1.7950 (as it
most certainly would over time), the BRL ware-
housing rate would automatically adjust to preserve the
$62.78/SM rate. The actual form of the CAC usually
followed one of two approaches.
One type of agreement stated that unless the currency moved
beyond some stated boundary, for example 5%
from the central rate of 1.7950, the warehousing rate in real
would remain the same. This type of structure
provided some stability for the customer, yet protected the
service provider. If the exchange rate exceeded the
5% boundary, the agreement called for the price in local
currency to change using the mid-point between
the ending rate and the boundary in the price calculation (or
some similar structure).
The second type of CAC employed in many longer-term
commercial agreements was for the effective price
to simply be restated each and every period—say, over a
quarter—based on the average exchange rate for the
period. This was truly an equal share agreement in which each
party shared in both exchange rate gains and
losses over time relative to some specific starting point.
John, however, worried that the introduction of such an
agreement in a market still largely domestic in
content might result in a higher facility vacancy rate, as some
tenants might be reluctant to sign such a lease.
Nodal did estimate that perhaps as much as 50% of the

warehouse leasing space would be taken by global
clients—companies which Nodal had worked with all over the
world. They would at least understand the use of
currency clauses, but that was not the same thing as being
willing to sign them. Lastly, Nodal’s legal department
was still researching any precedents of the Brazilian
government accepting such a clause in the real estate sector.
Brazil’s government had been trying to eliminate what it called
“institutionalized inflationary forces” for years,
and currency clauses could easily fall victim to that
classification.
Local currency debt financing. The final alternative on John’s
radar screen was the possibility of using local
currency debt—reais-denominated—as a partial hedge of the
exchange rate exposure. When the proposal had
Exhibit 5. Put Options on the Brazilian Reais (Forward ATM
Strike Rates)
Component Rate 1-Year 2-Year 3-Year 4-Year 5-Year 6-Year
Spot rate (BRL/$) 1.7950
Forward rate (BRL/$) 1.9240 2.0141 2.1436 2.2979 2.4526
2.5000
Strike rate—FATM (BRL/$) 1.9240 2.0141 2.1436 2.2979
2.4526 2.5000
Maturity (days) 360 720 1,080 1,440 1,800 2,160
U.S. dollar interest 3.220% 3.210% 3.220% 3.380% 3.540%
3.660%
Brazilian real interest 12.020% 12.650% 12.900% 13.000%
13.090% 13.200%
Option volatility 11.760% 11.520% 11.400% 11.230% 11.000%
10.900%
Put option premium ($/BRL) $0.0283 $0.0486 $0.0591 $0.0620
$0.0636 $0.0764

Brazilian real interest rates are Brazilian government bond
yields as quoted by Bloomberg, December 12, 2007.
U.S. dollar Treasury yields for December 13, 2007 ,as quoted by
the Federal Reserve (4-year maturity is estimated).
Option volatilities for the BRL/$ cross rate are taken from
RatesFX.com as quoted on December 14, 2007.
8 TB0049
first been presented by one of Nodal’s treasury staff members,
John had quickly responded that the company
was already highly leveraged, and was not really looking to
increase debt loads even more. But the staff member
had nodded knowingly, and quickly explained what he was
thinking more precisely.
-
John understood the staff member’s suggestion, but wondered if
the actual operating cash flows which the
facility would produce could really service that much debt. And
rates were ugly to say the least. Nodal had already
been quoted a rate of 15% for a five-year fixed rate Brazilian
real-denominated loan.
John had also taken a cursory look at cross-currency swaps. The
strategy which his corporate treasury staff
had suggested was to have the parent company enter into a
cross-currency swap to pay Brazilian reais and receive

U.S. dollars. Since the U.S. unit would be receiving a relatively
predictable amount of reais over time, it might
be possible for the U.S. parent to enter into a cross-currency
swap on some of its existing U.S. dollar debt (and
it had a considerable amount of debt). The idea was to “de-
sensitize” the parent company to any movement in
the value of the real; it would be protected regardless of
whether the real appreciated or depreciated against the
U.S. dollar. John didn’t really see how this was any different
than borrowing reais.
Nodal’s primary New York bank, the same one providing the
forward rates, provided two different medi-
um-term swap quotes: A five-year cross-currency swap to pay
reais (12.92%) and receive dollars (4.39%), and
a seven-year swap (13.58% and 4.61%, respectively). The bank
explained that both swap quotes were based on
the respective currency yield curves, and were priced
independent of credit risk.
The Choice
John was feeling fairly overwhelmed when he returned to his
office from his morning staff meeting. The
number of hedging choices seemed long, but none of them had
struck him as being affordable solutions. As he
sat down to start working up the numbers one more item caught
his eye on the news screen.
“Martin Feldstein: The Danger Ahead,” December 17, 2007, p.
21.
The common Brazilian lament echoed through John’s head once
again—the custo Brasil. For Nodal, he
wondered what that cost would be.

TB0049 9
Appendix 1. REIT Rules
In order for a company to qualify as a REIT, it must comply
with certain provisions within the Internal Revenue Code.
As required by the Tax Code, a REIT must:
property
Source: Invest in REITS: Frequently Asked Questions
10 TB0049
Appendix 2. Brazilian Logistics Facility Development Costs
NRA square feet (SM) 810,000
Total Per SM Notes
Acquisition Costs Land 9,400,000 11.60 62.0 per m2
Closing costs 560,000 0.69 6.0%

Earthwork 4,100,000 5.06 27.3 per m2 gross
Commissions 235,000 0.29 2.5%
Subtotal Acquisition Costs $ 14,295,000 17.65
Hard Costs
Base building construction 19,900,000 24.57
Hard shell 24,000 0.03
Inlationon vertical 710,000 0.88
Tenant improvements 2,040,000 2.52
Infrastructure 1,060,000 1.31
Subtotal Hard Costs $ 23,734,000 29.30
Soft Costs
A&E survey, soils engineering 238,901 0.29
Impact fees 303,180 0.37
Land infrastructure & rights 303,180 0.37
Insurance 138,552 0.17
Property tax 231,300 0.29
Project costs 399,219 0.49
Development fee 1,027,128 1.27
Legal 27,799 0.03
Construction supervision 438,123 0.54
Marketing & promotion 75,910 0.09
Leasing commissions 1,198,111 1.48
Subtotal Soft Costs $ 4,381,403 5.41
Finance costs
Equity carry 1,610,000 1.99
Land carry 1,075,000 1.33
Sub-total Finance Costs $ 2,685,000 3.31
Total Development Costs $ 45,095,403 55.67

TB0049 11
Appendix 3. International Operations
The U.S. dollar is the functional currency for the Company’s
subsidiaries operating in the United States and Mexico. The
functional currency for the company’s subsidiaries operating
outside the United States is generally the local currency of
the country in which the entity is located, mitigating the effect
of currency exchange gains and losses. The Company’s
subsidiaries whose functional currency is not the U.S. dollar
translate their financial statements into U.S. dollars. Assets
and liabilities are translated at the exchange rate in effect as of
the financial statement date. The Company translated
income statement accounts using the average exchange rate for
the period and significant nonrecurring transactions us-
ing the rate on the transaction date. For the years ended
December 31, 2006, 2005, and 2004, losses resulting from the
translation were $0.2 million, $1.8 million, and $0.4 million,
respectively. These losses are included in the accumulated
other comprehensive income (loss) as a separate component of
stockholders’ equity.
The Company’s international subsidiaries may have transactions
denominated in currencies other than their
functional currency. In these instances, non-monetary assets and
liabilities are reflected at the historical exchange rate,
monetary assets and liabilities are remeasured at the exchange
rate in effect at the end of the period, and income state-
ment accounts are remeasured at the average exchange rate for
the period. Gains from remeasurement were $0.8 million,
$0.6 million, and $0.5 million for the years ended 2006, 2005,
and 2004, respectively. These gains are included in the

consolidated statements of operations.
The Company also records gains or losses in the income
statement when a transaction with a third party, denomi-
nated in a currency other than the entity’s functional currency,
is settled and the functional currency cash flows realized
are more or less than expected based upon the exchange rate in
effect when the transaction was initiated. These gains and
losses have been immaterial over the past three years.
Source: Nodal Logistics Corporation, 2006 Annual Report, pp.
55-56.
Computer Project INTERMEDIATE I – SUMMER 2015
As a recently hired accountant for a small business, SMC, Inc.,
you are provided with last year’s balance sheet,
income statement, and post-closing trial balance to familiarize
yourself with the business.
SMC, Inc.
Balance Sheet
December 31, 2014

Assets
Cash
........................................................................................ .......
.......... $34,500
Accounts receivable
................................................................................ 25,000
Inventory
...............................................................................................
... 10,000
Supplies
...............................................................................................
.... 200
Total
assets......................................................................................
........ $69,700
Liabilities and Stockholders’ Equity
Liabilities:

SMC, Inc.
Income Statement
For the Year Ended December 31, 2014
Sales revenue
..........................................................................................
$110,000
Rent revenue
...........................................................................................
1,000
Total revenues
.........................................................................................
$111,000
Less cost of goods
sold...........................................................................
60,000
Gross margin
........................................................................................... $
51,000
Less operating expenses:
Supplies expense
.............................................................................
$ 400
Salaries expense
.............................................................................. 22,000

Miscellaneous expense
................................................................... 4,100 26,500
Income before
taxes................................................................................ $
24,500
Less income
taxes...................................................................................
3,675
Net
income....................................................................................
........... $ 20,825
Earnings per share ( $20,825 / 10,000 shares) $ 2.08
Accounts payable
............................................................................. $12,000
Salaries payable
............................................................................... 1,000
Income taxes payable
...................................................................... 3,675
Total
liabilities................................................................................
.......... $16,675
Stockholders’equity:
Capital stock (10,000 shares
outstanding).................................... $25,000
Retained earnings
............................................................................ 28,025
Total stockholders’ equity
....................................................................... 53,025

Total liabilities and stockholders’
equity................................................ $69,700
SMC, Inc.
Post-Closing Trial Balance
December 31, 2014
Debits Credits
Cash
...............................................................................................
.......... $34,500
Accounts Receivable
............................................................................... 25,000
Inventory
...............................................................................................
... 10,000
Supplies
...............................................................................................
....
Accounts Payable
....................................................................................
200
$12,000
Salaries Payable

......................................................................................
1,000
Income Taxes
Payable.............................................................................
3,675
Common
Stock......................................................................................
...... 25,000
Retained Earnings
...................................................................................
28,025
Totals.....................................................................................
................... $69,700 $69,700
You are also given the following information that summarizes
the business activity for the current year, 2015
a. Issued 10,000 additional shares of common stock for $25,000
cash on January 1st.
b. Borrowed $10,000 on March 1, 2015, from Downtown Bank
as a long-term loan. The interest rate on
the loan is 5% and Interest for the year is payable on January 1,
2016.
c. Paid $9,000 cash on April1 to lease a building for one year.
d. Received $4,800 on May 1 from a tenant for one year’s rent.
e. Paid $3,600 on June 1 for a one-year insurance policy.
f. Purchased $2,200 of supplies for cash on June 15th.
g. Purchased inventory for $100,000 on account on July 1.
h. August 1, sold inventory for $170,000 on account; cost of the
merchandise sold was $90,000.
i. Collected $110,000 cash from customers’ accounts receivable

on August 20th.
j. September 1, Paid $85,000 cash for inventories purchased
earlier during the year.
k. September 20th, paid $31,000 for sales reps’ salaries,
including $1,000 owed at the beginning of 2015.
l. Dividends for $9,500 were paid on October 20th.
m. The income taxes payable at the beginning of 2015 were paid
on November 15th.
n. For adjusting entries, all prepaid expenses are initially
recorded as assets, and all unearned revenues are
initially recorded as liabilities (this is just informational).
o. At year-end, $850 worth of supplies are on hand.
p. At year-end, an additional $6,500 of sales salaries are owed,
but have not yet been paid.
q. Prepare an adjusting entry to recognize the taxes owed for
2015. The corporate tax rate is 25% of the
income before income taxes.
You are asked to do the following on an excel spreadsheet:
1. Journalize the transactions for the current year, 2015, using
the accounts listed on the financial
statements and other appropriate accounts.
2. Set up T-accounts and enter the beginning balances from the
December 31, 2014, post-closing trial
balance for SMC. Post all current year journal entries to the T-
accounts.
3. Journalize and post any necessary adjusting entries at the end
of 2015. (Hint: Items b, c, d, e, o, p, and q

require adjustment.)
4. After the adjusting entries are posted, prepare an adjusted
trial balance, an income statement,
statement of retained earnings and a balance sheet for 2015.
(Hint: Income before income taxes
should equal xxxx). The format of your statements should
mirror those prepared by the company in
2014.
5. Journalize and post-closing entries for 2015 and prepare a
post-closing trial balance.
6. Compute the Current Ratio and Debt to Total Equity Ratio for
2014 and 2015
7. Interpretive Question: What is your overall assessment of the
financial health of SMC, Inc.?
CHART OF ACCOUNTSSMC, INCCHART OF
ACCOUNTSCHART OF ACCOUNTSCASHACCOUNTS
RECEIVABLEINVENTORY SUPPLIESPREPAID
INSURANCEPREPAID RENTACCOUNTS
PAYABLESALARIES PAYABLEINTEREST
PAYABLEINCOME TAX PAYABLEUNEARNED RENT
REVENUENOTES PAYABLECOMMON STOCKRETAINED
EARNINGSDIVIDENDSINCOME SUMMARYSALES
REVENUERENT REVENUECOST OF GOODS SOLDRENT
EXPENSESUPPLIES EXPENSESALARIES
EXPENSEINTEREST EXPENSEINSURANCE
EXPENSEINCOME TAX EXPENSE
JOURNAL
ENTRIESPostDateDescriptionRef.DebitCredit20151/13/14/15/1
6/16/157/18/18/209/19/2010/2011/15END
&14GENERAL JOURNAL page______

T ACCOUNTSCASHACCTS RECINVENTORYSUPPLIESYou
should use all 25 t-accountsafter recording your adjusting
entriesPREPAID INSURANCEPREPAID RENTNOTES
PAYABLEACCTS PAYABLEUNEARNED RENTSALARIES
PAYABLEINC TAXES PAYABLEINTEREST
PAYABLECOMMON STOCKRETAINED
EARNINGSDIVIDENDSSALES REVENUERENT
REVENUEINCOME SUMMARYSALARIES
EXPENSESUPPLIES EXPENSECOSTOFGOODSSOLDRENT
EXPENSEINSURANCE EXPINCOME TAX EXPINTEREST
EXPENSE
#3
ADJUSTING
ENTRIESPostDateDescriptionRef.DebitCredit12/31/15ADJUST
ING ENTRIESBCDEOPQ
ADJ TRIAL BALANCESMC, INCADJUSTED TRIAL
BALANCE12/31/15ACCOUNT
NAMEDEBITCREDITTOTALS00END.
INCOME STATEMENTSMC, INCINCOME STATEMENT FOR
THE YEAR ENDED DECEMBER 31, 2015END.
STMT OF RETAINED EARNINGSSMC, INCSTATEMENT OF
RETAINED EARNINGSFOR THE YEAR ENDED DECEMBER
31, 2015END.
BALANCE SHEETSMC, INCBALANCE SHEETDECEMBER
31,2015.
CLOSING
ENTRIESPostDateDescriptionRef.DebitCreditCLOSING
ENTRIESEND
POST CLOSING TRIAL BALANCE SMC, INCPOST CLOSING
TRIAL BALANCE12/31/15ACCOUNT

NAMEDEBITCREDITTOTALS00END.
RATIOS20142015CURRENT RATIODEBT TO TOTAL
EQUITY RATIO
OVERALL ASSESSMENT1What is your overall assessment of
the company ?Response:

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