A year ago in this column, I predicted that the Sarbanes-Oxley corporate governance act (SOX) would be a big story for the REIT world and beyond in 2004. The evidence suggests that I was correct. The spirit of SOX is to hold executives accountable for their corporate financial statements and to provide investors with greater transparency. Specifically, SOX establishes new standards for corporate boards and audit committees. Section 404 of the act requires publicly traded companies to establish internal controls for financial reporting and to assess their effectiveness at the end of each fiscal year as part of an “internal control report.”

Such controls may be reassuring to investors, but for corporate executives the money and time invested is substantial. It's difficult to quantify the cost because it can vary so much from one company to the next. Real Estate Portfolio, a publication produced by the National Association of Real Estate Investment Trusts (NAREIT), estimates that costs can range from $150,000 to $500,000 for smaller companies.

Newspaper headlines reflect the growing frustration among business executives over SOX: “Tech companies struggle with Sarbanes-Oxley,” wrote the USA Today in its Dec. 9 edition. Accustomed to being entrepreneurial, many tech firms are frustrated about the escalating costs stemming from the extra accountants and consultants needed to comply with the law, according to the article. One tech company even claimed that it had scrapped a business project just so that it could focus on compliance

Closer to home, publicly traded REITs are no less immune to SOX. When Camden Property Trust, an apartment REIT, announced its acquisition of luxury apartment developer and owner Summit Properties in October, one of the underlying factors cited by the president of Summit was SOX.

“I think the concern is that there is only a finite amount of time your CEO or CFO has,” says Dale Anne Reiss of Ernst & Young, “and to the extent that their heavily enmeshed in dealing with these issues, they are not dealing with other aspects of the company, like strategic growth.”

Reiss, who is the global and Americas director of real estate, hospitality, gaming and construction for Ernst & Young, has lived and breathed SOX. In some cases, the giant accounting firm serves as a Section 404 advisor, and in other instances it is the auditor. The challenge for the board of directors and executives, Reiss emphasizes, “is to find a balance that recognizes that they have to do what's necessary to be a compliant company, but still recognize they are in business to drive shareholder value.”

The current wave of M&A activity across the commercial real estate industry is no coincidence. “I'm not trying to imply that Sarbanes-Oxley is the sole motivator,” says Reiss. “But what I am saying is what the president of Summit said, which is that when you add it all together one incremental motivator is Sarbanes-Oxley and the cost of being a public company in today's environment.”

Will compliance ever get any easier? In a word, yes. “I think five years from now it will all be institutionalized and codified,” says Reiss. “It's painful right now because we are going through a change. Hopefully it will make the data and the companies better.”

The irony is that I'm not sure the bigger problem has been resolved. There is still a great need for earnings reports to be clearer and more concise, and include useful tables, so investors can easily track company performance. Let's move that housekeeping chore to the top of the priority list and call it “Reporting 101.”

— ranging from the Blackstone Group's purchase of Boca Resorts to Simon Property Group's acquisition of Chelsea Property Group to General Growth's purchase of Rouse —