Accounting & Tax

Sun Communities Receives Wells Notice

Improper accounting for the company's SunChamp business made its losses appear smaller than they were, says the SEC; chief financial officer and fo...
Stephen TaubJuly 19, 2005

Sun Communities Inc. disclosed that the company and two of its finance executives have received a Wells notice from the Securities and Exchange Commission regarding Sun’s accounting for its SunChamp LLC investment.

Sun, a real estate investment trust that owns and operates 136 manufactured-housing communities in 18 states, added that the notice applies to chief financial officer Jeffrey P. Jorissen as well as a former controller who transferred to another position within the company prior to the inquiry.

Under SEC procedures, a Wells notice indicates that the staff has made a preliminary decision to recommend that the commission bring a civil action; recipients have the opportunity to respond to the SEC staff before a formal recommendation is finalized. The company noted that it continues to cooperate with the SEC’s requests for information.

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SunChamp was formed in late 1999 by Sun and Champion Enterprises Inc. for the acquisition and development of 11 manufactured-home communities. During the fourth quarter of 2002, Sun acquired all of Champion’s interest in the entity, and the SunChamp properties were subsequently consolidated into Sun’s financial statements. The SEC staff’s concerns, according to Sun, relate to the company’s accounting for SunChamp from 2000 through 2002.

According to Sun’s press release, the SEC differs with the company’s decision to account for its interest in SunChamp using the cost method, rather than the equity method, during most of 2000 and 2001. The commission also differs with the company’s application of the equity method in 2002.

In addition, the SEC believes that the company should have applied Statement of Financial Accounting Standards No. 66, Accounting for Sales of Real Estate, which “would require the company to disregard entirely the sales of its interests to outside investors for purposes of accounting for losses from SunChamp,” according to Sun’s reading of the SEC position.

These investors paid Sun $13.2 million in cash and long-term, non-recourse notes for the SunChamp interests they acquired, asserted the company, adding that it believes the sales to investors were bona fide, arms-length transactions.

Sun warned that if it were required to disregard the sales to investors for accounting purposes, it would have to report its proportionate share of SunChamp’s losses during the periods in question, and that share “would be a significantly larger percentage of those losses than that recorded by the company.”

The SEC staffs other grounds for alleging improper accounting, added Sun, “would not result in quantitatively material differences” from the results already reported in the company’s financials.