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
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
Renewals where no option exists for the
tenant; the potential costs of business interruption,
relocation, cost abandonment and relation to market
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
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
Cash basis versus FASB reporting
responsibility as to rents, incentives, improvements and
Benchmarking and identification of
extraordinary material disclosure issues.
3. Real Estate Owned
Valuations of tenancies and cost
Accuracy of current costs and
forecasted taxes and operating costs including fuel consumption
Impacts of any current or latent
Construction obsolescence or necessary
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
"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