"Implemented in 2002 to address corporate scandal, the Sarbanes-Oxley Act is now creating a win-win situation for corporations, investors and real estate service providers."

The mention of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) has the power to elicit some wide-ranging reactions from fear and apprehension to boredom and indifference. No matter what the reaction, Sarbanes-Oxley is having a tangible effect on corporate America's approach to real estate services today.

The Sarbanes-Oxley Act was implemented to address a rash of corporate scandals that rocked the business world, such as those involving Enron, WorldCom and Adelphia. Although the act applies generally only to public corporations, its impact is being felt throughout the business community. Firms with merger aspirations or IPO plans must be cognizant of the requirements. Shareholders in private firms find the reporting and disclosure requirements comforting and are demanding similar type requirements of their management teams. In general, the term 'Sarbanes-Oxley' is becoming a catch phrase for better internal controls and procedures.

The trend toward better internal controls and procedures is a win-win situation for corporations, investors and the real estate community. The benefits to the investors and corporations are obvious: better management, more predictability, less risk and good public relations for those who are compliant. However, the benefits to the real estate community are less clear.

Under Section 409 of the Sarbanes-Oxley Act, corporations are required to disclose at a rapid or near “real time” basis changes in the financial condition or operations of the company. Since real estate expenses are a large component of corporate budgets, many corporations are interpreting this language to apply to real estate. Corporations need quick and accurate access to book values, tax and operating information as well as future rental obligations that could impact the corporate financials. Additionally, the Act requires more openness regarding environmentally contaminated real estate sites. Corporations are increasingly relying on real estate service providers to help them get a handle on these issues. Consequently, real estate service providers are being called upon to implement real time electronic real estate portfolio databases, environmental remediation programs or even complete outsourcing of the real estate function. Companies benefit by implementing professional management, proven controls and processes. Newer technologies enable companies to comply with the “real time” requirement should they be required to do so. Most importantly, real estate providers are stepping up to the role as strategic partners. They earn more fees and enjoy better client control than with an “order taker” type relationship.

Sections 201 and 206, though specifically directed at audit firms have had a profound impact on all firms. These sections, among other things, are targeted at preventing conflicts of interest. At first glance the large audit firms appear to be hampered by the legislation, which prohibits an audit firm from providing non-audit services to the same company. However, Sarbanes-Oxley provides for exceptions that soften the restrictions. Additionally, it breaks down the competitive walls and allows audit firms to gain a foothold in other corporations previously in the exclusive control of their competition.

Although the Act singles out conflicts of interest in the audit area, corporations are seizing upon the conflict question and have expanded this concern to other areas outside of audit. Real Estate providers who focus on tenant representation are finding a receptive ear with CFO’s attuned to Sarbanes-Oxley. “Heightened concern about the transparency of real estate transactions is evident,” said William Dybas, Director of Lease Audit Services at Equis Corporation. “In a recent independent research study of corporate real estate executives, 75% said that scrutiny of potential conflicts of interest would play an increasing role in their selection of real estate providers. But you don’t need a research study to recognize the trend. Two years ago, only a quarter of prospective clients asked about dual representation in request for proposals. By the end of last year, more than 50% of prospects were asking about conflict, and in the last quarter, the percentage increased to 80%.” These issues have been around for many years but an up-tick in their frequency may be attributed to a change in attitude spawned by Sarbanes-Oxley.

Law firms are attracting renewed interest from corporations trying to come to grips with the Act. Lawyers in each state must comply with the ethical cannons of their respective bar associations. These ethical requirements make law firms a natural resource for corporations looking to comply with the Sarbanes-Oxley Act or even conform to the spirit of the Act. As such, corporations are leaning on attorneys for leadership and seeking to boost the reality and perception that they are indeed, responsible, ethical contributors to society.

A cottage industry has developed recently to provide compliance solutions for corporations. A simple Google search on Sarbanes-Oxley Compliance Consulting yields over 120 hits. Consultants, software products in addition to law firms are emerging to help advise corporations on compliance issues. For example, the Act is forcing corporations to un-wind many of the “off balance sheet” financing vehicles, like Synthetic Leases, which were in vogue prior to Sarbanes-Oxley. The ramifications are clear. The unwinding of these “old transactions” creates “new transactions” requiring additional legal work, additional consulting and a cautious approach to deal structuring. I.T. consulting is experiencing a boost due to the Act’s emphasis on internal controls. Technology is being used to help provide the checks and balances necessary to comply with the Act. Consequently a wide variety of firms are offering services targeted at Sarbanes compliance.

No corporation wants to pay more fees. For some, the Sarbanes-Oxley Act is nothing but additional cost. But, when CEOs and CFOs can be held criminally liable for violations of the provisions of this Act, it is no wonder corporations are willing to increase spending to become compliant. Additionally, shareholders, investors and the general public find comfort in the Act’s attempt to impose better internal controls on corporate America.

As Sarbanes-Oxley becomes the catch phrase for better internal controls and procedures, corporations, investors and real estate service providers are increasingly experiencing the benefits of this legislation. First, corporations act more responsibly. Investors invest with more security and comfort. Real estate service providers have more opportunities to offer a wider variety of services to clients and more opportunity to interact with corporations in meaningful and strategic ways. Lawyers, consultants and other service providers have more opportunities to interact with corporations and could benefit from a wider client base. For these reasons, Sarbanes-Oxley is here to stay and will only grow in influence over time.

George Relias is an attorney with Fisk Kart Katz and Regan in Chicago.