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"SARBANES-OXLEY AND THE CORPORATE REAL ESTATE PERSPECTIVE"

October 28, 2004

By Joel S. Brudner CPA
President, Corporate Real Estate Services, Inc. (CRS)

The Sarbanes-Oxley Act ("SOX") has had major implications on corporate management in many financial and operational areas. SOX was adopted in direct response to the improprieties of several corporations in the past few years in order to protect investors by enhancing the reliability and accuracy of financial disclosures in conjunction with securities law. This accountability is expressly improved by holding senior executives personally liable for compliance and accuracy.

Corporate real estate executives are forced to understand and facilitate programs to comply with the financial disclosures in three distinct areas:

1.  Financial risks relating to leased real estate.
2.  Real estate cost information required to be certified by their CEO and CFO
3.  Valuation and risks relating to owned real estate assets and their corresponding liabilities.

 To further illustrate the responsibility of corporate reporting under SOX, there is a provision that corporations may be called upon for additional information for investors "on a rapid and current basis". As such, real estate portfolio information must be accurately tracked and up-to-date with the immediate ability to be gathered into data. Without question, this refers to electronic data format rather than historical paper files. These constraints, coupled with the reliance on independent real estate expertise, point toward the importance of an outsourced real estate services provider as assurance for compliance.

With respect to specific areas of concern for adequate financial disclosure, the following highlights some of the topics that warrant consideration.

     1. Leased Real Estate

  • Renewals where no option exists for the tenant; the potential costs of business interruption, relocation, cost abandonment and relation to market alternatives.

  • Renewals of lease terms relating to increase of rent, operating expenses and building services.

  • Vacant or abandoned space with respect to loss recognition of improvements and sublease issues.

     2. Real Estate Cost Information

  • Overall impact of "rapid and current" provisions for the portfolio data.

  • Accuracy of current data and reliability of forecasted rents and expense escalations.

  • Tenant improvement and construction cost values.

  • Cash basis versus FASB reporting responsibility as to rents, incentives, improvements and facility costs.

  • Benchmarking and identification of extraordinary material disclosure issues.

     3. Real Estate Owned

  • Valuations of tenancies and cost issues.

  • Accuracy of current costs and forecasted taxes and operating costs including fuel consumption and escalations.

  • Impacts of any current or latent environmental issues.

  • Construction obsolescence or necessary improvement costs.

  • Valuation issues - book versus market.

  • Related debt obligation, including maturities and interest risk issues.

It is obvious from the review of the sample of topics illustrated here that Sarbanes-Oxley is becoming a major proponent for a stronger focus on management practices pertaining to corporate real estate. The focus on SOX compliance must now be included with risk management decisions that in the past were mainly driven by corporate budgeting on an economic payback mentality.

For many diligent service providers, SOX has simply brought into a necessary perspective what they have been preaching and seeking since the early 1990's. Real estate costs, representing one of the most material items on most companies' financial statements, require similar resources in the areas of systems and professionals that have been previously reserved for only profit centers. Companies not in the business of real estate are being forced to realize this impact and will need to work with their real estate executives to achieve cost efficiencies and compliance assurance.

"Joel S. Brudner, president and founder of CRS Lease Specialists, is a CPA with over 20 years of expertise in the areas of real estate finance, management and accounting."