From: J.L. Holmes [holmes@holmesdev.com] Sent: Friday, July 19, 2002 12:32 PM To: rule-comments@sec.gov Subject: File No. S7-16-02 JOHN L. HOLMES 4250 East Camelback Road, Suite K-116 Phoenix, Arizona 85018 July 18, 2002 Jonathan G. Katz, Secretary U.S. Securities and Exchange Commission 450 Fifth Street, NW Washington, DC 20549-0609 Subject: File No. S7-16-02 Dear Mr. Katz: My name is John L. Holmes, a resident of Phoenix, Arizona. I am a shopping center developer, manager and investor and a member of the International Council of Shopping Centers (ICSC) and the Institute of Electrical and Electronic Engineers (IEEE). Here is my comment on your proposed rulemaking "Disclosure in Management's Discussion and Analysis about the Application of Critical Accounting Policies" [Release Nos. 33-8098; 34-45907 International Series Release No. 1258 File No. S7-16-02]. My comments are limited to publicly traded real estate investment trusts (REITs), in particular to REITs that are in the commercial or industrial group of capital asset based income producing investments in sectors such as retail, industrial and multi-family. Presently disclosure requirements of this group of REITs is limited and non-transparent from an investor's point of view. There are no Generally Accepted Accounting Policy (GAAP) rules specifically for REITs. REIT disclosures to the SEC and investors are primarily made using archaic Cost Accounting methodology which has little relationship to the fair value of the reporting company's portfolio. The SEC disclosure regulations Article 5 for Commercial and Industrial Companies, Application of §§ 210.501 to 210.504, devote only one page to REITs in Selected Sections of SEC Regulation S-X, Special Provisions for REITs Reg. §210.3-15. This is hardly enough to give investors transparency. The Financial Accounting Standards Board (FASB) has informed me that they have no jurisdiction over REITs. Who does watch the REIT store for meaningful disclosure from an investor's point of view? The American Institute of Certified Public Accountants (AICPA)? The industry supported National Association of Real Estate Investment Trusts (NAREIT)? The auditors? With this background, I submit the following partial listing of comments for your consideration. These financial and accounting disclosures which would materially enhance the ability of a REIT equity income investor and other users of these reports to make a more informed investment or credit decision: 1. Dividend Policy. All REITs should release an annual statement, prominently captioned, to the shareholders and SEC of their dividend policy. While forward-looking statements are frowned upon by most company attorneys, it is not unreasonable for the investor to be informed of the REIT's long term policy, subject to real estate market conditions. At such time as the company materially or substantially changes its dividend policy, shareholders should be given, by direct mail, at least 30 days written notice prior to the effective date of the policy change. This should be supplemented by a public press release. SEC filing is not sufficient in itself to reasonably inform investors of an imminent modification of shareholders' planned incomes. 2. Total Fair Asset Value Statement. a. All properties will be individually appraised, totaled and reported in the REIT's annual report to shareholders and SEC filings; or in the alternative, b. Private market capitalization of the net operating income of the REIT will be reported at a certain capitalization rate or range thereof at the then prevailing rate of comparable sales or financing of properties in the same sector of REITs (i.e. shopping center, office, etc.) (Reference: Salomon Smith Barney Equity Research: United States, Net Asset Value Takes Center Stage: A REIT Report Card, July 24, 2000). 3. Net Asset Value ("NAV"). (i.e. true economic net worth, not the cost accounting depreciated value shown on the REIT's books) This is defined as "Total Fair Asset Value" (see item #1 above) less total liabilities (no exceptions of any liabilities). Total liabilities should include all liabilities as defined under Generally Accepted Accounting Principles ("GAAP") and also should include preferred stock and all off-balance sheet liabilities such as commitments to officers, directors, shareholders and other investors. Total NAV from operations should be added to non-income producing assets such as cash, and equivalents, receivables, land held for development, loans to affiliates, loans to officers and directors, etc. 4. Statement of Premium/Discount. Every quarter a REIT should compare the stock market price of its shares as a premium or discount to the actual NAV for the period. 5. Capitalization. All investor equity including, but not limited to outstanding common shares, operating partnership units ("OP units"), convertible securities and employee options shall be used in reporting the capitalization of a REIT. 6. Dividends and Distributions. Sources of cash used for dividends and distributions to investors shall be reported and prominently captioned in the report and Financial Highlights section, such as: A. Dividends 1. Ordinary taxable earnings 2. Capital gains 3. Earnings (ordinary or capital gains) earned but not distributed in previous years. B. Other distributions 1. Return of capital 2. Loans Finally, annual reports to shareholders should be released not more than 15 days after the 10K filing with the SEC. Concurrently, a proxy statement calling for the annual shareholders meeting, to be held within thirty days thereafter, should also be released. Some REITs with a 12/31 year-end do not hold their annual meetings until the following June or July, long after the 10K information can be considered timely. Also, REIT shareholders should have fifteen days after the mailing of the proxy, and before the annual meeting, to address the company in writing with questions, grievances or comments. This input would be made public in writing at the annual meeting. I strongly urge you to consider REITs as a special class of investment requiring unique accounting disclosures for its industry, an industry that is so important for the retirement community. Sincerely, John L. Holmes