We conservatively estimate that Sarbanes-Oxley – and related issues not contained in the Act but being pushed by the SEC and other regulators – ultimately may cost REITs from one- to three-cents per share in earnings. Collectively, that equates to billions in lost earnings and huge ground for any REIT to make up, but is most damaging smaller REITs who are likely to find their costs mounting at the upper end of that range. Can this ground be made up?The temptation of going private may attract more REITs and REOCs in 2003 despite the fact the process is complex. Privatization may exempt companies from some aspects of Sarbanes-Oxley but the proposition becomes potentially very costly, so it’s a path few but the most resolute will take. Nevertheless, more boards – already feeling undervalued by Wall Street – are likely to weigh the pros and cons this year as they position for the next upturn, a period during which access to capital and the ability to move quickly will be critical for future business development and growth.Potential changes in the treatment of dividend taxation, proposed in several economic stimulus packages, will most likely raise the after-tax yields of non-REIT dividends and result in increased dividend payouts. Such legislation, if passed, comes at a very bad time for the REIT industry because REIT dividends have thinned, while still attractive versus corporate dividends. The proposed legislation won’t close the gap completely, REIT dividend payouts are still going to remain superior, but the psychological effect on investors could draw capital that was slated for REITs into general corporate stocks. This year (2003) could be the year Funds From Operation (FFO) finally dies. The SEC’s push for greater transparency and standardization among public company reporting might mean that Earnings Per Share or some other generally accepted accounting principle replaces FFO, the current measure of REIT performance. Will this hurt REIT stocks? Maybe. Real estate owners operate differently to widget manufacturers and their major asset – bricks and mortar – depreciates over time. It’s the depreciation issue that is central to the debate over the true value of those assets. One likely impact: REITs may begin to calculate depreciation much more specifically on an asset by asset, fixture by fixture basis, rather than the carte blanche method they’ve used in the past. A more exhaustive depreciation process would provide REITs with significant benefits – Green Street Advisors earlier this year lauded Ernst & Young’s work in this regard for AIMCO which was able to cut depreciation expense by $100 million across the portfolio as a result of a detailed “useful life cost analysis.”This information was supplied by Ernst & Young (www.ey.com) and excerpted from the companies’ Annual State of the Real Estate, Hospitality, and Construction Industries 2003 Report.