Focus on the Investment Conditions: Back to the Future for Real Estate in New Tax and Accounting Rules

By Reiss, Dale Anne | Real Estate Issues, Summer 2003 | Go to article overview

Focus on the Investment Conditions: Back to the Future for Real Estate in New Tax and Accounting Rules


Reiss, Dale Anne, Real Estate Issues


A stream of events over the last 12 months from passage of the Sarbanes-Oxley Act to President Bush's tax cut package to a wave of recently enacted accounting rules has hit the industry and corporate America. So much is new that it will take some time for real estate companies--and companies generally--to sort out all the ramifications for their businesses and the economy. This much is clear: governance, accounting and tax issues are front and center for the foreseeable future, and real estate companies will have to give them close attention, for they could have far-reaching effects on companies' financial statements and operations. In plain terms, the risk management profile for companies in the real estate sector just became much tougher.

Here are some of the changes that are particularly important for the real estate sector.

REITs

Real estate investment trusts may represent only 10 percent of the entire commercial real estate universe but they are a tremendously important and visible minority within the sector. The cumulative effect of Sarbanes Oxley, new tax reforms and various accounting changes, has hit REITs particularly hard. It still remains to be seen exactly how REITs will fare in the capital markets as a result of the removal of the dividend tax on corporate dividends. The dividend tax excludes from the taxable income of individual investors the dividends they receive each year from corporations, but only to the extent that the company pays taxes on this distributed income. This clearly creates an incentive for corporations to raise dividends, a fact that may make REIT dividends less attractive to some investors. REITs would not receive the same benefit because they already make tax-free distributions, and this could cause a possible loss of REIT share values. In fact, REIT prices already have fallen. The good news? Tax-exempt investors like pension funds, IRAs, and 401K investors could see improved yields from REIT investments.

The Sarbanes-Oxley Act required the SEC to issue rules about the disclosure of pro forma financial information in any report filed with the SEC, or in any public disclosures or releases. Regulation G, as it became known when adopted in January 2003, went beyond the requirements of the Act by restricting the presentation of non-GAAP financial information in SEC filings. Funds From Operations or FFO is considered a non-GAAP financial measure and REITs would have to defend its use as a key measurement of company performance.

Reg G requires that when a company presents non GAAP financial measures, a numerical reconciliation of the non GAAP financial measure must be made to the most directly comparable measurement calculated using GAAP (generally either Earnings per share (EPS) or operating cash flow.) If a REIT elects not to present FFO, it would have to use Earnings Per Share as the measuring tool, in which case depreciation would become a key issue for analysts and investors. For FFO calculations, depreciation is an add-back, so investors paid little attention to the useful life of an asset. By contrast, depreciation expense reduces EPS, and the useful lives of assets would be a key focus of investors if the SEC proposal were adopted.

It has been estimated that the overall impact of Sarbanes Oxley and increased corporate governance requirements on REITs could be anywhere from two to five cents per share on an earnings per share basis. There has been an expectation for some time within the industry that there is another major wave of consolidation coming in the REIT sector. Given the new playing field and it's heightened cost of doing business, this wave of mergers and acquisitions may be even closer at hand and there's also the strong possibility that some REITs will abandon the public arena once and for all and return to private status. Some REITs with weak share prices and portfolios of underperforming assets might improve shareholder returns by merging with larger, stronger REITs by converting to private companies or partnerships, or simply by liquidating assets and passing the proceeds along to investors.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Focus on the Investment Conditions: Back to the Future for Real Estate in New Tax and Accounting Rules
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.