Dirk Hrobsky, vice president of Trammell Crow Co. New York City, warns that making synthetic-lease transactions into a tangible asset through disclosure may wreak havoc on company performance. "Forcing off-balance sheet financing into public documents limits the liquidity a business can have, and in the end limits the competitive advantage they can have over each other." Under the act, off-balance-sheet transaction disclosures must be included with reports by Jan. 26, 2003.

This decrease in financial flexibility lowers the level of adaptability a company has, and may eventually decrease a businesses' ability to meet the consumer needs it was designed to protect, Hrobsky tells GlobeSt.com. "At some point, you run the risk of actually dumbing down the corporate culture, because public corporations will realize they can't remain effective in that type of market," he says.

Grubb & Ellis president and CEO Barry Barovick agrees that the new off-balance-sheet regulations will prompt a financial restructuring. "A revision within off-balance-sheet financing, such as synthetic leases, will probably come about," says Barovick. Such a change is not necessarily a detriment. "As a result of the bill, we're also going to see a more focused effort towards communication with shareholders in the public sector."

Several recent attempts to curb off-balance-sheet transactions have drawn forceful criticism from lobbying groups. In March, the Real Estate Roundtable sent a letter to the Financial Accounting Standards Board, protesting the FASB's attempt to legislate synthetic lease transactions back onto the balance sheet of the parent company. The Roundtable warned balance sheet consolidation foreshadowed a "real possibility of serious harm to the real estate industry, the capital markets and the overall economy." Long-time FASB chairman Edmund L. Jenkins responded to objections against that group's draft, assuring that the FASB proposal was still in its formative stages.

Another complaint is that the act may simply be redundant. A common sentiment among those interviewed was that the industry was intrinsically resistant to accounting malfeasance prior to the bill. "The physical assets of a real estate company increase its accountability to begin with, if for no other reason than because it's a tangible asset," Barry Hersch, associate director of the Newman real estate institute at Baruch College in New York, tells GlobeSt.com. "There is a higher degree of perceived transparency in companies like REITs now."

Bruce Mosler, president of US operations at Cushman & Wakefield feels real estate governance is already well-regulated. "If you agree with the standpoint that this industry is no different than any other," he tells GlobeSt.com, "I would tell you that our industry on balance is adequately managed in that regard.

"The very nature of corporate balance-sheet accounting is moving as we speak," says Mosler. "That's what's causing some of the business shift." He predicts the "settling in period" of the act to come to pass within the real estate industry by the end of this year. A recent GlobeSt.com story reports that 30% of corporate real estate executives are already either stopping the use of synthetic leases or reconsidering their use.

Several facets of the act should be more painlessly adopted. Sarbanes-Oxley stipulates that a company executive code of ethics be included with SEC filings by Jan. 26, 2003. "Insignia/ESG has had a code of ethics for many years," says a spokesperson for the firm. "To the extent that the SEC mandates any modifications to that code, we will comply with the new requirements."

"In broadening the range of those statutes that were already in place, this act marks a healthy move for real estate companies," Tom Corcoran, president and CEO of Dallas-based FelCor Lodging Trust Inc. tells GlobeSt.com. "Any time a scandal like the situation with Martha Stewart happens, it helps to calm investors when you legislate backstopping efforts like this and publicly tighten up the regulatory process."

Sarbanes-Oxley is, of course, more substantive than a simple play to restore consumer confidence. Its stipulations make CEO/CFOs personally liable to fines of $5 million and 20 years in jail if found willingly attesting to false findings in their company's mandatory SEC filings.

An additional consensus appears to be that a general lack of federal guidelines elsewhere in the industry has literally become quite costly. As reported here and here on GlobeSt.com, the Mortgage Bankers Association of America has estimated that a lack of terrorism insurance has cost commercial real estate in excess of $8 billion this year, much to the chagrin of several lobbyists in Washington.

As one lobbyist source notes, "any new declines in corporate real estate demand arising from the wave of accounting scandals could not be coming at a worse time for real estate."