Citibank 2008 Annual Report Download - page 202

Commercial Real Estate Exposure
Citigroup reports a number of different exposures linked to commercial real
estate at fair value with changes in fair value reported in earnings, including
securities, loans and investments in entities that hold commercial real estate
loans or commercial real estate directly. The Company also reports securities
backed by commercial real estate as Available-for-sale investments, which
are carried at fair value with changes in fair-value reported in AOCI.
Similar to the valuation methodologies used for other trading securities
and trading loans, the Company generally determines the fair value of
securities and loans linked to commercial real estate utilizing internal
valuation techniques. Fair-value estimates from internal valuation
techniques are verified, where possible, to prices obtained from independent
vendors. Vendors compile prices from various sources. Where available, the
Company may also make use of quoted prices for recent trading activity in
securities or loans with the same or similar characteristics to that being
valued. Securities and loans linked to commercial real estate valued using
these methodologies are generally classified as Level 3 as a result of the
reduced liquidity currently in the market for such exposures.
The fair value of investments in entities that hold commercial real estate
loans or commercial real estate directly is determined using a similar
methodology to that used for other non-public investments in real estate
held by the S&B business. The Company uses an established process for
determining the fair value of such securities, using commonly accepted
valuation techniques, including the use of earnings multiples based on
comparable public securities, industry-specific non-earnings-based multiples
and discounted cash flow models. In determining the fair value of such
investments, the Company also considers events, such as a proposed sale of
the investee company, initial public offerings, equity issuances, or other
observable transactions. Such investments are generally classified in Level 3
of the fair-value hierarchy.
Highly Leveraged Financing Commitments
The Company reports a number of highly leveraged loans as held for sale,
which are measured on a LOCOM basis. The fair value of such exposures is
determined, where possible, using quoted secondary-market prices and
classified in Level 2 of the fair-value hierarchy if there is a sufficient level of
activity in the market and quotes or traded prices are available with suitable
frequency.
However, due to the dislocation of the credit markets and the reduced
market interest in higher risk/higher yield instruments since the latter half
of 2007, liquidity in the market for highly leveraged financings has been
limited. Therefore, a majority of such exposures are classified in Level 3 as
quoted secondary market prices do not generally exist. The fair value for
such exposures is determined using quoted prices for a similar asset or assets,
adjusted for the specific attributes of the loan being valued.
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