As filed with the Securities and Exchange Commission on November ___, 1996
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT No. 1
Form S-11
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
UNITED MORTGAGE TRUST
(Exact Name of Registrant as Specified in its Governing Instruments)
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1701 N. Greenville, Suite 403
Richardson, Texas 75081
(address of Principal Executive offices)
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Christine A. "Cricket" Griffin
United Mortgage Trust
1701 N. Greenville, Suite 403
Richardson, Texas 75081
(Name and Address of Agent for Service)
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Copy to:
Robert A. Hudson, Esq.
Berry, Moorman, King & Hudson, P.C.
600 Woodbridge Place
Detroit, Michigan 48226
(313) 567-1000
Approximate date of commencement of proposed sale to the public: At
any time and from time to time after the effective date of this Registration
Statement.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check box: /X/
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. / /
<PAGE>
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission acting
pursuant to said Section 8(a), may determine.
<PAGE>
Cross Reference Sheet Showing Location in Prospectus
or Registration Statement of Information
Required by Item 501(b) of Regulation S-K
Form S-11 Caption in Prospectus
Item Number and Caption Or Page Reference
- ----------------------- ---------------------
1. Forepart of the Registration Forepart of Registration Statement
Statement and Outside Front Outside Front Cover Page of
Cover Page of Prospectus Prospectus
2. Inside Front and Outside Back Cover Inside Front Cover Page of
Pages of Prospectus Prospectus; Outside Back Cover Page
3. Summary Information, Risk Factors Cover Page of Prospectus; Summary
and Ratio of Earnings to Fixed of Offering; Risk Factors
Changes
4. Determination of Offering Price *
5. Dilution *
6. Selling Security Holders *
7. Plan of Distribution Plan of Distribution
8. Use of Proceeds Estimated Use of Proceeds;
Investment Objectives and Policies
9. Selected Financial Data *
10. Management's Discussion and Management's Discussion and
Analysis of Financial Condition Analysis of Financial Condition
and Results of Operations of the Company
11. General Information as to Cover Page of Prospectus; Summary of
Registrant the Offering; Management; Summary of
Declaration of Trust
12. Policy with Respect to Certain Investment Objectives and Policies;
Activities Summary of Declaration of Trust
13. Investment Policies of Registrant Investment Objectives and Policies;
Summary of Declaration of Trust
14. Description of Real Estate *
15. Operating Data *
16. Tax Treatment of Registrant and Risk Factors; Federal Income
its Security Holders Tax Considerations;
ERISA Considerations
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* Not Applicable
<PAGE>
Form S-11 Caption in Prospectus
Items Number and Caption Or Page Reference
- ----------------------- ---------------------
17. Market Price of and Dividends on *
the Registrant's Common Equity and
Related Stockholder Matters
18. Description of Registrant's Plan of Distribution; Summary of
Securities Declaration of Trust
19. Legal Proceedings *
20. Security Ownership of Certain Management; Conflicts of Interest
Beneficial Owners and Management Financial Information and Balance
Sheet
21. Directors and Executive Officers The Company; Management
22. Executive Compensation The Company; Management Compensation
23. Certain Relationships and Related Risk Factors; Management; Conflicts
Transactions of Interest
24. Selection, Management and Custody Risk Factors; Investment Objectives
of Registrant's Investments and Policies; Management
25. Policies with Respect to Certain Risk Factors; Investment Objectives
Transactions and Policies; Management; Summary of
Declaration of Trust
26. Limitations of Liability Fiduciary Responsibilities of
Trustees; Risk Factors; Summary of
Declaration of Trust
27. Financial Statements and Financial Information and Financial
Information Statements
28. Interests of Named Experts and *
Counsel
29. Disclosure of Commission Position Fiduciary Responsibility of Trustees
on Indemnification for Securities
Act Liabilities
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* Not Applicable
<PAGE>
Subject to Completion, Dated , 1996
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UNITED MORTGAGE TRUST
125,000 Shares
(Minimum Offering)
$20 Per Share
Minimum Investment Per Investor - 250 Shares ($5,000)
(50 Shares ($1,000) for an Individual Retirement Account or Keogh Plan)
--------------
United Mortgage Trust (the "Company") is a Maryland real estate
investment trust which intends to qualify as a real estate investment trust (a
"REIT") under federal income tax laws. The Company will invest exclusively in
first lien, fixed rate mortgages secured by single family residential property
throughout the United States. Such loans will be originated by others to the
Company's specifications or to specifications approved by the Company. Most,
if not all, of such loans will not be insured or guaranteed by a federally
owned or guaranteed mortgage agency and will be made to borrowers who do not
satisfy the income ratios, credit record criteria, loan-to-value ratios,
employment history and liquidity requirements of traditional mortgage
financing. See "Investment Objectives and Policies - Investment Policy". The
Advisor to the Company is Mortgage Trust Advisors, Inc., a Texas corporation.
Capitalized terms used in this Prospectus are defined in the Glossary.
See "Risk Factors" commencing on page 6 for information concerning
risks associated with an investment in the Company that should be considered
by prospective investors. These risks include:
o The ability of an investor to liquidate its investment will be limited
because no public market currently exists for the Shares and the
Company has no plan to liquidate and distribute proceeds to its
Shareholders.
o Although the Company intends to have the Shares listed on NASDAQ or an
exchange after the sale of all of the Shares offered hereby, there can
be no assurance that a public trading market for the Shares will ever
develop.
o Most, if not all, of the Company's portfolio will be comprised of
loans made to borrowers who do not satisfy the underwriting
requirements for traditional mortgage financing. As a result, the
Company may experience a higher incidence of loan defaults and
foreclosures which will adversely affect the Company.
o The Company will be subject to various conflicts of interest arising
out of its relationship with its officers, the Advisor and their
Affiliates, including the payment of fees which are not based upon the
Company's profitability.
o The Company has not yet identified the Mortgage Investments it will
purchase with the proceeds of this offering.
<PAGE>
o If only the minimum number of Shares are sold, there may be limited
diversity in the Company's portfolio of Mortgage Investments.
o The investment objectives and policies of the Company described in
this Prospectus may be modified or waived by the Board of Trustees,
subject in certain cases to approval by a majority of the Independent
trustees, without shareholder consent.
o There are tax risks associated with this offering. If the Company
fails to obtain and maintain its qualification as a REIT, the Company
will be subject to federal income tax as a regular corporation.
A minimum of 125,000 Shares of beneficial interest, par value $.01 per
share (the "Shares") and a maximum of 2,500,000 Shares are being offered on a
"best efforts" basis, which means that no one is guaranteeing that any minimum
number of Shares will be sold. The Shares are being distributed by First
Financial United Investments, Ltd. (the "Selling Group Manager") and other
broker-dealer firms that are members of the National Association of Securities
Dealers, Inc. ("NASD") and selected by the Selling Group Manager. There is a
minimum investment per investor of 250 Shares ($5,000) or 50 Shares ($1,000)
if the investor is an IRA or Keogh Plan. Subscription payments by investors
will be held in an escrow account at Texas Commerce Bank National Association
(the "Escrow Agent") until the earlier of: (a) one year from the date of this
Prospectus; or (b) the sale of at least 125,000 Shares to a minimum of 100
investors independent of the Company and of each other. If a minimum of
125,000 Shares are not sold within 12 months from the date of this Prospectus,
then all payments received from investors will be promptly refunded in full
together with all interest earned thereon. If at least 125,000 Shares are
sold, the offering will continue until the earlier of: (x) the sale of the
maximum of 2,500,000 Shares or (y) two years from the date of this Prospectus,
unless the Company terminates the offering earlier. See "Terms of the
Offering" and "Plan of Distribution".
If the minimum of 125,000 Shares is sold hereunder, approximately 20%
of the proceeds will be used for Organization and Offering Expenses and
Acquisition Fees payable to the Advisor and the balance of approximately 80%
will be invested in or reserved for the Company's activities. If the maximum
of 2,500,000 Shares is sold hereunder, approximately 13.5% of the proceeds
will be used for Organization and Offering Expenses and Acquisition Fees
payable to the Advisor and the balance of approximately 86.5% will be invested
in or reserved for the Company's activities. See "Estimated Use of Proceeds"
and "Management Compensation".
<TABLE>
<CAPTION>
Price to Selling Proceeds to
Public (1) Commissions (1) Company (2)
---------- --------------- -----------
<S> <C> <C> <C>
Per Share $20 $2.10 $17.90
Total Minimum (125,000 Shares) (3) $2,500,000 $262,500 $2,237,700
Total Maximum (2,500,000 Shares) $50,000,000 $5,250,000 $44,750,000
(footnotes to this table appear on the next page)
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
<PAGE>
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE USE OF FORECASTS IN THIS OFFERING IS PROHIBITED. ANY
REPRESENTATIONS TO THE CONTRARY AND ANY PREDICTIONS, WRITTEN OR ORAL, AS TO
THE AMOUNT OR CERTAINTY OF ANY PRESENT OR FUTURE CASH BENEFIT OR TAX
CONSEQUENCE WHICH MAY FLOW FROM AN INVESTMENT IN THIS PROGRAM IS NOT
PERMITTED.
FIRST FINANCIAL UNITED INVESTMENTS, LTD.
16801 Greenspoint Park Drive, Suite 155
Houston, Texas 77060
The date of this Prospectus is , 1996
--------------------------------
<PAGE>
(1) The Shares are being distributed by First Financial United
Investments, Ltd. (the "Selling Group Manager"), a registered broker-dealer
and member of the National Association of Securities Dealers, Inc. ("NASD"),
on a "best efforts" basis through participating NASD member firms ("Selected
Dealers") that are selected by the Selling Group Manager. There is no
assurance as to the number of Shares that will be sold, if any. The Selling
Group Manager will receive a commission of 10% of the Gross Offering Proceeds
(subject to any volume discounts for Institutional Investors), plus 0.5% of
the Gross Offering Proceeds as a due diligence fee. The Selling Group Manager
may, in its sole discretion, provide volume discounts of up to 2% on a
negotiated basis to Institutional Investors who purchase at least 50,000
Shares. The application of any volume discounts will reduce the amount of
commissions that would be paid to the Selling Group Manager but will not
change the Net Offering Proceeds to the Company. The Selling Group Manager
will pay to Selected Dealers a commission equal to 4% of the offering price of
Shares sold through them unless a higher commission (up to, but not exceeding,
8%) is designated by the Selling Group Manager. The Selling Group Manager will
also receive, for nominal consideration, Shares (the "SGM Shares") equal to
0.5% of all Shares sold (12,500 Shares if all Shares offered hereunder are
sold). The Selling Group Manager may allocate all or a portion of the SGM
Shares to Selected Dealers and registered representatives of the Selling Group
Manager. The Company has agreed to indemnify the Selling Group Manager with
respect to certain liabilities, including liabilities under the Securities Act
of 1933. See "Plan of Distribution".
(2) Before deducting expenses of this offering (other than selling
commissions and due diligence fees described in note (1) above), including,
but not limited to, legal, accounting, and escrow fees, printing costs, filing
and registration fees, and disbursements and reimbursements to the Company and
Affiliates in connection with the sale and distribution of Shares, estimated
at $175,000 if all Shares offered are sold. The Advisor will bear all expenses
with respect to organization of the Company and the offering of Shares to the
extent those expenses excluding selling commissions, any applicable volume
discounts and due diligence fees, exceed $175,000. See "Estimated Use of
Proceeds".
(3) All funds received from subscribers will be held in an escrow
account with Texas Commerce Bank National Association (the "Escrow Agent").
See "Plan of Distribution - Escrow Arrangements". If a minimum of 125,000
Shares are not sold to a minimum of 100 investors independent of the Company
and of each other within 12 months from the date of this Prospectus, then all
payments received will be promptly refunded in full together with all interest
to the extent earned on the subscription proceeds. If 125,000 or more Shares
are sold, the offering will continue and interest to the extent earned on
subscriber's funds while held in the escrow account will be payable to all
subscribers. Interest paid to subscribers may be subject to backup
withholding. The Company has established certain suitability standards for the
purchase of Shares. See "Who May Invest". The Company reserves the right to
reject subscriptions in its sole discretion.
<PAGE>
TABLE OF CONTENTS
Page
----
Summary of the Offering.................................................. 1
Risk Factors............................................................. 6
The Company.............................................................. 15
Management's Discussion and Analysis of
Financial Conditions of the Company.................................... 15
Investment Objectives and Policies....................................... 16
Who May Invest........................................................... 20
Terms of the Offering.................................................... 21
Dividend Policy and Distributions........................................ 22
Estimated Use of Proceeds................................................ 23
Management Compensation.................................................. 25
Conflicts of Interest.................................................... 28
Fiduciary Responsibility of Trustees..................................... 32
Management............................................................... 33
Certain Federal Income Tax Considerations ............................... 39
ERISA Considerations..................................................... 45
Summary of Declaration of Trust.......................................... 47
Certain Legal Aspects of Mortgage Loans.................................. 56
Plan of Distribution..................................................... 64
Sales Material........................................................... 66
Legal Matters ........................................................... 67
Reports to Investors..................................................... 67
Experts.................................................................. 67
Further Information...................................................... 68
Glossary................................................................. 68
Financial Statements..................................................... F-1
Subscription Agreement................................................... A-1
<PAGE>
SUMMARY OF THE OFFERING
The following summary is qualified in its entirety by the more
detailed information and financial statements and notes thereto appearing
elsewhere in this Prospectus and should be read in conjunction therewith. See
the Glossary located at page 68 for the definition of certain terms that are
capitalized in this Prospectus.
The Company: The Company is a Maryland real estate investment trust
formed on July 12, 1996. The Declaration of Trust provides for the Company to
have perpetual life. See "Summary of Declaration of Trust". The Trustees of
the Company will manage and control the affairs of the Company. There are four
Trustees: Christine "Cricket" Griffin, Paul R. Guernsey, Douglas R. Evans and
Richard D. O'Connor, Jr. Christine "Cricket" Griffin is the Chairman of the
Board of Trustees and President of the Company. The other three Trustees are
Independent Trustees. See "Management".
Investment Policy: The Company will invest exclusively in first lien,
fixed rate mortgages secured by single family residential property throughout
the United States. Such loans will be originated by others to the Company's
specifications or to specifications approved by the Company. Most, if not all,
of such loans will not be insured or guaranteed by a federally owned or
guaranteed mortgage agency and will be made to borrowers who do not satisfy
the income ratios, credit record criteria, loan-to-value ratios, employment
history and liquidity requirements of conventional mortgage financing. See
"Investment Objectives and Policies - Investment Policy".
Administrator: The Company will be self-administered with the
Company's President acting as Administrator. The Administrator will manage the
day-to-day operations of the Company, subject to the supervision of the
Company's Board of Trustees. See "Management - The Administrator".
Advisor: The Advisor to the Company is Mortgage Trust Advisors, Inc.,
a Texas corporation formed on June 11, 1996. The Advisor is majority owned and
controlled by Todd F. Etter, Dan H. Hill, James P. Hollis and Timothy J.
Kopacka. Messrs. Hill and Hollis are Affiliates of the Selling Group Manager.
The address of the Company and the Advisor is 1701 N. Greenville, Suite 403,
Richardson, Texas 75081 and their telephone number is (972) 705-9805 or (800)
955-7917 and their facsimile number is (972) 705-9304. See "Management" - The
Advisor".
Mortgage Servicers: The Company will utilize the services of
Affiliates of the Advisor and nonaffiliated third parties to service the
mortgages acquired by the Company. All servicing fees paid to Affiliates of
the Advisor will be at competitive rates that are no higher than the rates
charged by unaffiliated third parties. See "Management Compensation". The
servicing of the mortgages includes the collection of monthly payments from
the borrower, the distribution of all principal and interest to the Company,
the payment of all real estate taxes and insurance to be paid out of escrow,
regular distribution of information regarding the application of all funds
received and enforcement of collection for all delinquent accounts, including
foreclosure of such account when and as necessary.
The Offering: A minimum of 125,000 Shares of beneficial interest, par
value $.01 per share (the "Shares") and a maximum of 2,500,000 Shares are
being offered on a "best efforts" basis, which means that no one is
guaranteeing that any minimum number of Shares will be sold. The Shares are
being distributed by the Selling Group Manager and other NASD member
broker-dealer firms that are selected by the Selling Group Manager. There is a
minimum investment per investor of 250 Shares ($5,000) or 50 Shares ($1,000)
if the investor is an IRA or Keogh Plan. Subscription payments by investors
will be
1
<PAGE>
held in an escrow account at Texas Commerce Bank National Association (the
"Escrow Agent") until the earlier of: (a) one year from the date of this
Prospectus; or (b) the sale of at least 125,000 Shares to a minimum of 100
investors independent of the Company and of each other. If a minimum of
125,000 Shares are not sold within 12 months from the date of this Prospectus,
then all payments received from investors will be promptly refunded in full
together with all interest earned thereon. If at least 125,000 Shares are
sold, the offering will continue until the earlier of: (x) the sale of the
maximum of 2,500,000 shares or (y) two years from the date of this Prospectus,
unless the Company terminates the offering earlier. See "Terms of the
Offering" and "Plan of Distribution".
Amounts Available for Acquisitions of Mortgage Investments: If the
minimum of 125,000 Shares is sold hereunder, approximately 20% of the proceeds
will be used for Organization and Offering Expenses and Acquisition Fees
payable to the Advisor and the balance of approximately 80% of the proceeds
will be invested in or reserved for the Company's activities. If the maximum
of 2,500,000 Shares is sold hereunder, approximately 13.5% of the proceeds
will be used for Organization and Offering Expenses and Acquisition Fees
payable to the Advisor and the balance of approximately 86.5% of the proceeds
will be invested in or reserved for the Company's activities. See "Estimated
Use of Proceeds" and "Management Compensation".
Selling Group Manager: Although the principals of the Selling Group
Manager have a strong background in the sale of financial products and
financial services, the acquisition and management of mortgage assets,
mortgage funds and asset/liability management and have previously worked
closely with Mr. Todd Etter, president of the Advisor, the Selling Group
Manager is a newly formed broker-dealer that has not previously participated
as a broker-dealer in a public offering of securities. The Selling Group
Manager therefore has no track record in selling publicly offered securities
itself or in recruiting Selected Dealers to assist in the sale of publicly
offered securities and has no experience in helping to establish and support a
public trading market for securities after the those securities are sold. "See
Management - The Advisor" and "Management - Trustees and Officers of the
Company".
Compensation to Affiliates: The Advisor and Affiliates of the Company
will receive substantial fees and compensation in connection with the
organization of the Company, investment of the proceeds and the management of
the investments of the Company. See "Management Compensation".
Company Objectives: The Company's principal investment objectives are
to:
(1) produce net interest income on its mortgage portfolio;
(2) provide monthly Distributions from net income earned on
its Mortgage Investments (if it is not economically
feasible to make monthly Distributions, then the Company
intends to make quarterly Distributions); and
(3) reinvest payments of principal and proceeds of
prepayments, sales and insurance net of expenses.
There is no assurance that these objectives will be attained. See
"Investment Objectives and Policies" and "Risk Factors".
Risk Factors: An investment in Shares will be subject to various risk
factors, including the following:
2
<PAGE>
o The ability of an investor to liquidate its investment will be
limited because no public market currently exists for the
Shares and the Company has no plan to liquidate and distribute
proceeds to its Shareholders.
o Although the Company intends to have the Shares listed on
NASDAQ or an exchange after the sale of all of the Shares
offered hereby, there can be no assurance that a public trading
market for the Shares will ever develop.
o Most, if not all, of the Company's portfolio will be comprised
of loans made to borrowers who do not satisfy the underwriting
requirements for traditional mortgage financing. As a result,
the Company may experience a higher incidence of loan defaults
and foreclosures which will adversely affect the Company.
o The Company will be subject to various conflicts of interest
arising out of its relationship with its officers, the Advisor
and their Affiliates, including the payment of fees which are
not based upon the Company's profitability.
o The Company has not yet identified the Mortgage Investments it
will purchase with the proceeds of this offering.
o If only the minimum number of Shares are sold, there may be
limited diversity in the Company's portfolio of Mortgage
Investments.
o The investment objectives and policies of the Company described
in this Prospectus may be modified or waived by the Board of
Trustees, subject in certain cases to approval by a majority of
the Independent Trustees, without shareholder consent.
o There are tax risks associated with this offering. If the
Company fails to obtain and maintain its qualification as a
REIT, the Company will be subject to federal income tax as a
regular corporation.
See "Risk Factors".
Conflicts of Interest: The affiliated Trustees, the Administrator, the
Advisor and their Affiliates will be subject to various conflicts of interest
in their business dealings with the Company due to the structure of their
compensation. In addressing these conflicts of interest, the Trustees, the
Administrator and the Advisor will be required to abide by their fiduciary
duties to the Company and the Shareholders. See "Conflicts of Interest" and
"Fiduciary Responsibilities of Trustees".
Capitalization: The Trust has an authorized capital of 100,000,000
Shares of beneficial interest, par value $.01 per Share. A minimum of 125,000
($2,500,000 in Shares) and a maximum of 2,500,000 ($50,000,000 in Shares) of
Shares will be sold pursuant to the offering. In addition, prior to the date
of this Prospectus the Advisor has purchased 10,000 Shares at an aggregate
purchase price of $200,000. If the minimum of 125,000 Shares are not sold to a
minimum of 100 investors independent of the Company and of each other within
one (1) year from the date of this Prospectus, then all payments received will
be promptly refunded in full together with all interest to the extent earned
on the subscription proceeds. See "Plan of Distribution - Escrow
Arrangements".
3
<PAGE>
Restriction on "Rollups" and Conversion Transactions: The Company is
prohibited from participating in a transaction involving the acquisition,
merger or consolidation of the Company, commonly known as "Rollups", which
affect certain Shareholder rights, as more fully described in "Summary of
Declaration of Trust - Restriction on Certain Conversion Transactions and
Rollups". With respect to permissible Rollups, the Company must first obtain
approval of the Shareholders by a majority vote. In addition, certain
conversion transactions require the prior approval of 80% of the Shareholders
and the unanimous approval of the Independent Trustees.
Mortgage Investments: The permanent investments (the "Mortgage
Investments") in which the Company intends to invest principally are first
lien mortgage notes originated on behalf of the Company by other lenders and
sold to the Company prior to the loans being fully funded (generally,
"Originated Mortgages") and existing Mortgages that it acquires (generally,
"Acquired Mortgages") on single-family residential property. Most, if not all,
of the Mortgages in which the Company will invest will not be insured by FHA,
nor guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac. See "Investment
Objectives and Policies" and "Federal Income Tax Considerations -
Qualification as a REIT".
Mortgage Investment Descriptions: The Company has not invested in or
committed to invest in any Mortgage Investments and has not committed to
originate or acquire any Mortgages. There may be a delay between the time
investors purchase Shares and the time the investment proceeds are invested in
Mortgage Investments. See "Investment Objectives and Policies - Use of Initial
Funds". Therefore, there may be a corresponding delay in the receipt by
Shareholders of Distributions relating to investment in Mortgage Investments
and in the achievement of the other Company objectives. See "Risk Factors".
Preliminary Investments: Until the Company's funds are invested in
Mortgage Investments, the Company will invest its funds in short-term
investments, including investments with various financial institutions
(meeting certain asset or net worth requirements) and in Interim Mortgage
Loans. See "Investment Objectives and Policies".
Sources of Distributions and Their Tax Treatment: Distributions will
be made monthly (or at least quarterly if monthly Distributions are not
economically feasible) to Shareholders of record as of a record date
determined by the Trustees, which may be as frequently as monthly, based on
Cash Flow from all sources and net of operating expenses of the Company,
depending upon the financial condition of the Company. The Company will begin
making Distributions, if available, within 60 days after the end of the
initial escrow period in which investors are accepted as Shareholders. A
Distribution may be made from Cash Flow and/or Disposition Proceeds; and may
constitute a return of capital to the Shareholders, ordinary income, capital
gain and/or items of tax preference. The Company will attempt to maintain
monthly Distributions at a specified level to be determined by the Trustees.
To the extent that some Mortgage Investments are sold in order to make
Distributions, such payments may reduce the amount available for investment.
If the Company qualifies as a REIT and elects to be taxed as such, it will pay
no tax on amounts distributed to Shareholders. Distributions to Shareholders
will generally be considered taxable dividends to Shareholders who are not
entities which are exempt from federal income taxation ("Tax-Exempt Entities")
to the extent they represent distributions of the Company's earnings and
profits and will be considered portfolio rather than passive income, thus
enabling a Shareholder to offset investment expense deductions but not passive
losses. Any Distributions in excess of the Company's earnings and profits will
reduce the Shareholder's basis in their Shares. Shareholders that are Tax-
Exempt Entities are not expected to have unrelated business taxable income
("UBTI") unless they borrow to acquire Shares. See "Federal Income Tax
Considerations - Taxation of Taxable Shareholders - Dividend Income" and
"Federal Income Tax Considerations - Taxation of Tax-Exempt Entities".
4
<PAGE>
Reinvestment and Distributions of Disposition Proceeds of Mortgage
Investments: The Company intends generally to reinvest principal payments on
Mortgage Investments and Disposition Proceeds received by the Company, net of
expenses, except to the extent those Disposition Proceeds represent capital
gains on loans purchased at a discount. Disposition Proceeds may also be held
as reserves or reinvested in Mortgage Investments to the extent deemed
advantageous. Since the reinvestment of Disposition Proceeds that represent
taxable income of the Company presents significant REIT qualification problems
in light of the requirement that 95% of the Company's income be distributed to
Shareholders, reinvestment of Disposition Proceeds may be limited to the
portion that represents a return of capital.
Limitation on Total Operating Expenses: The Company's goal is to limit
its annual Total Operating Expenses to 0.5% of the Average Invested Assets of
the Company. There is no assurance this goal will be met and it is unlikely
that this goal will be met unless the maximum number of Shares is sold.
However, the annual Total Operating Expenses of the Company shall not exceed
in any fiscal year the greater of (a) 2% of the Average Invested Assets of the
Company or (b) 25% of the Company's Net Income. Any Operating Expenses in
excess of those limitations will be borne by the Advisor. See "Summary of
Declaration of Trust - Limitation on Total Operating Expenses".
Restriction on Borrowings: The Company is permitted to borrow funds in
connection with the acquisition of Mortgage Investments under certain
circumstances. Subject to certain restrictions, those borrowings may not
exceed 50% of the Net Assets of the Company. See "Investment Objectives and
Policies", "Federal Income Tax Considerations - Qualification as a REIT -
Distributions to Shareholders" and "Summary of Declaration of Trust -
Restrictions on Borrowing".
Fiscal Year: The Company has adopted a fiscal year ending on
December 31 of each year.
Glossary: See the Glossary at the back of this Prospectus for
definitions of certain key terms used in this Prospectus.
5
<PAGE>
RISK FACTORS
The purchase of the Shares offered hereby involves a high degree of
risk and is suitable only for persons with the financial capability of making
and holding long-term investments that are not readily reducible to cash.
Prospective investors must, therefore, have adequate means of providing for
their current needs and personal contingencies. Prospective investors should
also consider the following factors:
A. Investment and Business Risks
1. Lack of Liquidity. There is currently no established trading market
for the Shares and the Company has no plans to liquidate and distribute the
proceeds to its Shareholders. Although the Company intends to seek to have the
Shares listed on NASDAQ or an exchange after the sale of all of the Shares
offered hereby, there can be no assurance that those efforts will be
successful or that an established trading market for the Shares will develop.
Accordingly, Shareholders may not be able to liquidate their investment in the
event of an emergency and Shares may not be readily accepted as collateral for
a loan. Furthermore, even if a market for the sale of Shares develops, a
Shareholder may only be able to sell its Shares at a substantial discount from
the public offering price. Consequently, the purchase of Shares should be
considered only as a long-term investment. See "Who May Invest".
2. Increased Risk of Default in Non-Conforming Loans. The Company is
in the business of lending money and, as such, takes the risk of defaults by
borrower. Most, if not all, of such loans will not be insured or guaranteed by
a federally owned or guaranteed mortgage agency and will be made to borrowers
who do not satisfy the income ratios, credit record criteria, loan-to-value
ratios, employment history and liquidity requirements of traditional mortgage
financing. See "Investment Objectives and Policies - Investment Policy".
Accordingly, the risk of default by the borrower in those "non-conforming
loans" is higher than the risk of default in loans made to persons who qualify
for traditional mortgage financing. If the borrower defaults, the Company may
be forced to purchase the property at a foreclosure sale. If the Company
cannot quickly sell or refinance such property, and the property does not
produce any significant income, the Company's profitability will be adversely
affected. See "Risk Factors - Risk of Loss on Non-Insured, Non-Guaranteed
Mortgage Loans" and "Risk Factors - Bankruptcy of Borrowers May Delay or
Prevent Recovery".
3. Conflicts of Interest of the Advisor and Affiliates. The affiliated
Trustees, the Administrator, the Advisor and their Affiliates will be subject
to various conflicts of interest, examples of which include: (1) the receipt
of commissions, fees and other compensation; (2) the purchase of Mortgage
Investments from Affiliates of the Advisor; (3) competition for the time and
services of their personnel; and (4) competition for the purchase of Mortgage
Investments. See "Conflicts of Interest" for a description of the nature of
the conflicts of interest. In addressing these conflicts of interest, the
Trustees, the Administration and the Advisor will be required to abide by
their fiduciary duties to the Company and the Shareholders. See "Fiduciary
Responsibilities of Trustees".
4. Fees Payable to the Advisor and Affiliates. The Advisor and its
Affiliates will receive substantial compensation from the proceeds of the
offering and the operations of the Company, including: (1) commissions, due
diligence fees and SGM Shares payable to the Selling Group Manager; (2)
Acquisition Fees payable to the Advisor equal to 3% of the principal amount of
each Mortgage Investment acquired by the Company; (3) loan servicing fees; (4)
real estate brokerage commissions; and (5) a Subordinated Incentive Fee. These
fees, other than the Subordinated Incentive Fee, will be payable
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even if the Company is not profitable. See "Management Compensation" for a
discussion of the fees payable to the Advisor and its Affiliates.
5. Unspecified Investment; Investors Cannot Assess Mortgage
Investments. The Company has made no commitments to invest in any specific
Mortgage Investments. Therefore, a prospective investor will not have an
opportunity to evaluate any of the Mortgage Investments in which the Company
will invest and must rely entirely on the judgement of Management in investing
the proceeds of this offering. See "Investment Objectives and Policies" and
"Management".
6. Lack of Diversification. The Company will be funded with the
proceeds of sale of not fewer than 125,000 Shares and not more than 2,500,000
Shares from this offering. The Company is entitled to terminate the offering
at any time in its sole discretion for any reason whatsoever. In the event the
Company receives only the minimum proceeds, the investment portfolio of the
Company would consist of fewer investments. As a result, the Company may have
an increased risk of loss in connection with a smaller number of investments,
and the returns on Shares sold will be reduced as a result of allocating all
Company expenses among such Shares. See "Estimated Use of Proceeds".
7. Risk of Future Revisions in Policies and Strategies by Board of
Trustees. The Board of Trustees has established the investment policies and
operating policies and strategies set forth in this Prospectus as the
investment policies and operating policies and strategies of the Company. See
"Investment Objectives and Policies". However, subject to certain
restrictions, the policies and strategies may be modified or waived by the
Board of Trustees, subject in certain cases to approval by a majority of the
Independent Trustees, without shareholder consent. See "Summary of Declaration
of Trust - Restriction on Investments". The ultimate effect of changes in these
policies and strategies may be positive or negative.
8. Selling Group Manager is Newly Formed. First Financial United
Investments, Ltd., the Selling Group Manager of the offering, is a newly
formed broker-dealer that has not previously participated as a broker-dealer
in a public offering of securities. As a result, the Selling Group Manager has
no track record in selling publicly offered securities itself or in recruiting
Selected Dealers to assist in the sale of publicly offered securities, which
may make it more difficult for the Company to sell the Shares offered hereby.
See "Risk Factors - Lack of Diversification". Furthermore, the Selling Group
Manager has no experience in helping to establish and support a public trading
market for securities after those securities are sold, which may make it more
difficult for a public trading market to develop for the Shares. See "Risk
Factors - Lack of Liquidity".
9. Selling Group Manager is an Affiliate of the Advisor. First
Financial United Investments, Ltd., the Selling Group Manager of the offering,
is an Affiliate of the Advisor. See "Management - the Advisor". As an
Affiliate of the Advisor, the Selling Group Manager may experience a conflict
in performing its obligations to exercise due diligence with respect to the
statements made in this Prospectus.
10. Delays in Investment Could Reduce Return to Investors. The Company
may be delayed in making Mortgage Investments due to delays in the completion
of the underwriting process, delays in obtaining the necessary purchase
documentation or other factors. During the time that Company funds are held
pending permanent investment, such funds will be invested in temporary
investments, including Interim Mortgage Loans. See "Investment Objectives and
Policies - Use of Initial Funds". Temporary investment of funds pending
investment in permanent investments may result in a lower rate of return.
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11. Shareholders Must Rely on Management. The Trustees will be
responsible for the management and control of the Company, but will employ the
Administrator to manage the Company's day to day affairs. The Trustees will
retain the Advisor to use its best efforts to seek out and present to the
Company, whether through its own efforts or those of third parties retained by
it, suitable and a sufficient number of investment opportunities which are
consistent with the investment policies and objectives of the Company and
consistent with such investment programs as the Trustees may adopt from time
to time in conformity with the Declaration of Trust. The Trustees have
initially delegated to the Advisor, subject to the supervision and review of
the Trustees and consistent with the provisions of the Company's Declaration
of Trust, the power and duty to: (i) develop underwriting criteria and a model
for the Company's investment portfolio; (ii) acquire, retain or sell Mortgage
Investments; (iii) seek out, present and recommend investment opportunities
consistent with the Company's investment policies and objectives, and
negotiate on behalf of the Company with respect to potential investments or
the disposition thereof; (iv) pay the debts and fulfill the obligations of the
Company, and handle, prosecute and settle any claims of the Company, including
foreclosing and otherwise enforcing mortgages and other liens securing
investments; (v) obtain for the Company such services as may be required for
mortgage brokerage and servicing and other activities relating to the
investment portfolio of the Company; (vi) evaluate, structure and negotiate
prepayments or sales of Mortgage Investments; (vii) from time to time, or as
requested by the Trustees, make reports to the Company as to its performance
of the foregoing services and (viii) to supervise other aspects of the
business of the Company. The success of the Company will, to a large extent,
depend on the quality of the management provided by the Advisor, particularly
as it relates to evaluating the merits of proposed investments. Although the
Shareholders elect the Trustees annually, Shareholders have no right or power
otherwise to take part in the management of the Company, except to the extent
permitted by the Declaration of Trust. Accordingly, no person should purchase
any of the Shares offered hereby unless he is willing to entrust all aspects
of the management and control of the business of the Company to the Trustees,
the Administrator and the Advisor. See "Management".
The Advisor was formed for the purpose of and is presently advising
the Company. The Trustees, the Administrator and the management team of the
Advisor have considerable expertise in the acquisition and management of
mortgage assets, mortgage finance, asset/liability management, public company
management and administration and the management of corporations in the real
estate lending business. Although the Trustees, the Administrator and the
officers, directors and shareholders of the Advisor have had substantial prior
experience in connection with the types of investments to be made by the
Company and the administration of such investments, they do not have any
experience in the management of a REIT. See "Management - The Advisor".
12. Limited Ability to Meet Fixed Expenses. Operating expenses of the
Company, including certain compensation to the Administrator, servicing and
administration expenses payable to an Affiliate and unaffiliated mortgage
servicers and the Independent Trustees, must be met regardless of the
Company's profitability. See "Management Compensation" and "Management". The
Company is also obligated to distribute 95% of its REIT Taxable Income (which
may under certain circumstances exceed its Cash Flow) in order to continue to
qualify as a REIT for federal income tax purposes. See "Federal Income Tax
Considerations - Qualification as a REIT". Accordingly, it is possible that
the Company may be required to borrow funds or liquidate a portion of its
investments in order to pay its expenses or to make the required cash
distributions to Shareholders. Although the Company generally may borrow
funds, there can be no assurance that such funds will be available to the
extent, and at the time, required by the Company. See "Summary of Declaration
of Trust - Restrictions on Borrowing".
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13. Investment Company Regulatory Considerations. The Company is not a
mutual fund or any other type of investment company subject to the
registration and regulatory provisions of the Investment Company Act of 1940
(the "Investment Company Act"). The Trustees will attempt to monitor the
proportion of the Company's portfolio which is placed in various investments
so that the Company does not come within the definition of an investment
company under the Investment Company Act. As a result, the Company may have to
forego certain investments which would produce a more favorable return to the
Company.
14. Anti-Takeover Considerations and Restrictions on Share
Accumulation. Provisions of the Maryland corporation law applicable to the
Company make business combinations with the Company more difficult and place
restrictions on persons acquiring more than 10% of the Company's outstanding
shares. Further, in order for the Company to qualify as a REIT, no more than
50% of the outstanding Shares may be owned, directly or indirectly, by five or
fewer individuals at any time during the last half of the Company's taxable
year. To ensure that the Company will not fail to qualify as a REIT under this
test, the Company's Declaration of Trust grants the Trustees the power to
place restrictions on the accumulation of Shares and provides that Shares held
by one shareholder in excess of 9.8% of the total Shares outstanding no longer
entitle the shareholder to vote or receive Distributions, as described in
"Summary of Declaration of Trust - Description of the Shares". While these
restrictions are designed to prevent any five individuals from owning more
than 50% of the Shares, they would also discourage a change of control of the
Company. The restrictions and provisions under law and these adopted by the
Company may also (i) deter individuals and entities from making tender offers
for Shares, which offers may be attractive to Shareholders or (ii) limit the
opportunity for Shareholders to receive a premium for their Shares in the
event an investor is making purchases of Shares in order to acquire a block of
Shares. See "Summary of Declaration of Trust".
15. Limited Liability Of Trustees And Officers. The Company's
Declaration of Trust provides that the Trustees and officers of the Company
shall have the fullest limitation on liability permitted by the laws of the
State of Maryland. Pursuant to the Maryland statute under which the Company
was formed, a Trustee of the Company is not personally liable for the
obligations of the Company except, if a Trustee otherwise would be liable,
that provision does not relieve the Trustee from any liability to the Company
or its Shareholders for any act that constitutes: (1) bad faith; (2) willful
misfeasance; (3) gross negligence; or (4) reckless disregard of the Trustee's
duties. However, as permitted by the Maryland statute, the Company's
Declaration of Trust further limits the liability of the Company's Trustees
and officers by providing that the Trustees and the officers shall be liable
to the Company or the Shareholders only (i) to the extent the Trustee or
officer actually received an improper benefit or profit in money, property or
services, in which case any such liability shall not exceed the amount of the
benefit or profit in money, property or services actually received; or (ii) to
the extent that a judgment or other final adjudication adverse to such Trustee
or officer is entered in a proceeding based on a finding in the proceeding
that such Trustee's or officer's action or failure to act was the result of
active and deliberate dishonesty and was material to the cause of action
adjudicated in the proceeding. In all situations in which the limitations of
liability contained therein apply, the remedies available to the Company or
its Shareholders shall be limited to equitable remedies, such as injunctive
relief or recision, and shall not include the right to recover money damages.
As a result of that limitation on liability, the Company and its Shareholders
may be limited in their ability to recover from the Trustees and officers of
the Company for any damages caused by a breach of the duties those persons owe
to the Company.
16. Majority Rule Prevails in the Company. Shareholders by a majority
vote may take certain actions, including termination of the Company or
approving amendments to the Company's Declaration
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of Trust, except for such actions and amendments that require supermajority
approval. See "Summary of Declaration of Trust - Termination," "- Amendment
of the Declaration of Trust," and "- Restrictions on Certain Conversion
Transactions and Rollups". Any such change, if approved by the holders of
the requisite number of Shares, would be binding on all nonconsenting
Shareholders. Certain of these provisions may discourage or make it more
difficult for a person to acquire control of the Company or to effect a
change in the operation of the Company.
17. Short Term Investments; Fixed Rate Trading Losses. Pending
acquisition of Mortgage Investments, the Company is authorized to invest its
funds in short term investments, including Interim Mortgage Loans. The Company
views short term investments as those with a maturity date which is less than
2 years. The Company expects to dispose of such short term investments in
order to acquire Mortgage Investments and may incur a loss upon such
disposition. Additionally, the Company will acquire fixed rate instruments for
both short term investments and Mortgage Investments. The Company may dispose
of these fixed rate instruments, for, among other purposes, acquiring other
Mortgage Investments, or liquidating its portfolio. See "Investment Objectives
and Policies - Use of Initial Funds".
18. Risk of Potential Future Offerings. The Company may in the future
increase its capital resources by making additional offerings of Shares on
terms deemed advisable by the Company's Trustees. Depending upon the terms
upon which any additional Shares might be offered, the effect of additional
equity offerings may be the dilution of the equity of stockholders of the
Company or the reduction of the price of the Company's Shares, or both. The
Company is unable to estimate the amount, timing or nature of additional
offerings as they will depend upon market conditions and other factors.
B. Operations Risks
19. Economic Risks. The results of the Company's operations are
affected by various factors, many of which are beyond the control of the
Company. The results of the Company's operations depend on, among other
things, the level of net interest income generated by the Company's Mortgage
Investments, the market value of such Mortgage Investments and the supply of
and demand for such Mortgage Investments. The Company's net interest income
varies primarily as a result of changes in short-term interest rates,
borrowing costs and prepayment rates, the behavior of which involve various
risks and uncertainties as set forth below. Interest rates, borrowing costs
and credit losses depend upon the nature and terms of the Mortgage
Investments, the geographic location of the properties securing the Mortgage
Investments, conditions in financial markets, the fiscal and monetary policies
of the United States government and the Board of Governors of the Federal
Reserve System, international economic and financial conditions, competition
and other factors, none of which can be predicted with any certainty. Because
changes in interest rates may significantly affect the Company's activities,
the operating results of the Company depend, in large part, upon the ability
of the Company effectively to manage its interest rate risks while maintaining
its status as a REIT. See "Risk Factors - Fluctuations in Interest Rates May
Affect Return on Investment".
20. Risk of Loss on Non-Insured, Non-Guaranteed Mortgage Loans. The
Company generally does not intend to obtain credit enhancements for its
single-family mortgage loans, because the majority, if not all, of such
mortgage loans will be "non-conforming" in that they will not meet all of the
underwriting criteria required for the sale of the mortgage loan to a
federally owned or guaranteed mortgage agency. Accordingly, during the time it
holds such mortgage loans for which third party insurance is not obtained, the
Company will be subject to the general risks of borrower defaults and
bankruptcies and special hazard losses that are not covered by standard hazard
insurance (such as those occurring from earthquakes or floods). In the event
of a default on any single-family mortgage loan held
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by the Company, including, without limitation, resulting from higher default
levels as a result of declining property values and worsening economic
conditions, among other factors, the Company would bear the risk of loss of
principal to the extent of any deficiency between the value of the related
mortgage property, and the amount owing on the mortgage loan. Defaulted
mortgage loans would also cease to be eligible collateral for borrowings and
would have to be financed by the Company out of other funds until ultimately
liquidated, resulting in increased financing costs and reduced net income or a
net loss. See "Certain Legal Aspects of Mortgage Loans".
21. Bankruptcy Of Borrowers May Delay Or Prevent Recovery. The
recovery of sums advanced by the Company in making Mortgage Investments and
protecting its security may be delayed or impaired by the operation of the
federal bankruptcy laws. Any borrower has the ability to delay a foreclosure
sale by the Company for a period ranging from several months to several years
or more by filing a petition in bankruptcy, which automatically stays any
actions to enforce the terms of the loan. The length of this delay and the
costs associated therewith will generally have an adverse impact on the
Company's profitability. See "Certain Legal Aspects of Mortgage Loans".
22. Ability to Acquire Mortgage Investments; Competition and Supply.
In acquiring Mortgage Investments, the Company will compete with other REITs,
investment banking firms, savings and loan associations, banks, mortgage
bankers, insurance companies, mutual funds, other lenders, Ginnie Mae, Fannie
Mae, Freddie Mac and other entities purchasing Mortgage Investments, most of
which will have greater financial resources than the Company. In addition,
there are several mortgage REITs similar to the Company, and others may be
organized in the future. Some of these entities can be expected to have
substantially greater experience in originating or acquiring Mortgage
Investments than the Advisor and the Company. The effect of the existence of
additional potential purchasers of Mortgage Investments may be to increase
competition for the available supply of Mortgage Investments suitable for
purchase by the Company. See also "Conflicts of Interest - Competition by the
Company with Affiliates for the Purchase and Sale of Mortgage Investments".
23. Environmental Liabilities. In the event that the Company is forced
to foreclose on a defaulted mortgage loan to recover its investment in such
mortgage loan, the Company may be subject to environmental liabilities in
connection with such real property as a result of which liabilities the value
of the real property may be diminished. While the Company intends to exercise
due diligence to discover potential environmental liabilities prior to the
acquisition of any property through foreclosure, hazardous substances or
wastes, contaminants, pollutants or sources thereof (as defined by state and
federal laws and regulations) may be discovered on properties during the
Company's ownership or after a sale thereof to a third party. If such
hazardous substances are discovered on a property, the Company may be required
to remove those substances or sources and clean up the property. There can be
no assurances that the Company would not incur full recourse liability for the
entire cost of any removal and clean up, that the cost of such removal and
clean up would not exceed the value of the property or that the Company could
recoup any of such costs form any third party. The Company may also be liable
to tenants and other users of neighboring properties. In addition, the Company
may find it difficult or impossible to sell the property prior to or following
any such clean up. See "Certain Legal Aspects of Mortgage Loans -
Environmental Risks".
24. Risk of Leverage. Subject to certain restrictions described in
"Summary of Declaration of Trust - Restrictions on Borrowing", including the
affirmative vote of the Independent Trustees, the Company would be allowed to
incur financing with respect to the acquisition of Mortgage Investments in an
aggregate amount not to exceed 50% of the Net Assets of the Company. The
effect of leveraging
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is to increase the risk of loss. The higher the rate of interest on the
financing, the more difficult it would be for the Company to meet its
obligations and the greater the chance of default. Such financing may be
secured by liens on the Company's interest in Mortgage Investments.
Accordingly, the Company could lose its investment in Mortgage Investments if
the Company defaults on the indebtedness. To the extent possible, such debt
will be of non-recourse type, meaning that neither the Shareholders nor the
Company will be liable for any deficiency between the proceeds of a sale or
other disposition of the Mortgage Investments and the amount of the debt. See
"Investment Objectives and Policies - Borrowing Policies".
25. Reliance On Appraisals Which May Not Be Accurate Or Which May Be
Affected By Subsequent Events. Since the Company is an "asset" rather than a
"credit" lender, the Company is relying primarily on the real property
securing the Mortgage Investments to protect its investment. Thus, the Company
will rely on appraisals and Broker Price Opinions ("BPO's"), to determine the
fair market value of real property used to secure Mortgage Investments made by
the Company. See "Investment Objectives and Policies - Underwriting Criteria".
No assurance can be given that such appraisals or BPO's will, in any or all
cases, be accurate. Moreover, since an appraisal or BPO is given with respect
to the value of real property at a given point in time, subsequent events
could adversely affect the value of real property used to secure a loan. Such
subsequent events may include general or local economic conditions,
neighborhood values, interest rates and new construction. Moreover, subsequent
changes in applicable governmental laws and regulations may have the effect of
severely limiting the permitted uses of the property, thereby drastically
reducing its value. Accordingly, if an appraisal is not accurate or subsequent
events adversely effect the value of the property, the Mortgage Investment
would not be as secure as anticipated, and, in the event of foreclosure, the
Company may not be able to recover its entire investment.
26. Fluctuations In Interest Rates May Affect Return On Investment.
Recent years have demonstrated that mortgage interest rates are subject to
abrupt and substantial fluctuations. If prevailing interest rates rise above
the average interest rate being earned by the Company's Mortgage Investments,
investors may be unable to quickly liquidate their investment in order to take
advantage of higher returns available from other investments. See "Risk
Factors - Lack of Liquidity". Furthermore, interest rate fluctuations may have
a particularly adverse effect on the Company if it used money borrowed at
variable rates to fund fixed rate Mortgage Investments. In that event, if
prevailing interest rates rise, the Company's cost of money could exceed the
income earned from that money, thus reducing the Company's profitability or
causing losses through liquidation of Mortgage Investments in order to repay
the debt on the borrowed money or default if the Company cannot cover the debt
on the borrowed money.
27. Mortgages May Be Considered Usurious. Most, if not all, of the
Mortgages the Company will purchase will not be exempt from state usury laws
and thus there exists some uncertainty with respect to mortgage loans in
states with restrictive usury laws. However, the Company anticipates that it
will only purchase mortgage loans if the mortgage agreements provide that the
amount of such interest charge therein will be reduced if, and to the extent
that, the interest or other charges would otherwise be usurious. See "Certain
Legal Aspects of Mortgage Loans - Applicability of Usury Laws".
28. Risks of Bankruptcy of Mortgage Servicer. The Company's Mortgages
will be serviced by an Affiliate of the Advisor or by other entities. Although
the Company intends to obtain fidelity bonds and directors and officers
indemnity insurance to lower risks of liability from the actions of such
entities, there may be additional risks in the event of the bankruptcy or
insolvency of any such entities
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or in the event of claims by their creditors, which would not be present if
the Company were qualified in all instances to service its Mortgage
Investments directly. For example, such entities will, from time to time,
receive on the Company's behalf, payments of principal, interest, prepayment
premiums and sales proceeds. In the event of bankruptcy or insolvency of the
entity in possession of the Company's assets, its creditors could seek to
attach such assets in satisfaction of their claims which could delay
remittances to the Company. If such entities hold these payments in segregated
accounts as they are contractually obligated to do, then the Advisor believes
any such claim should be resolved in favor of the Company as the beneficial
owner.
C. Tax Risks
29. Material Tax Risks Associated With Investment In Shares. An
investment in Shares involves material tax risks. Each prospective purchaser
of Shares is urged to consult his own tax adviser with respect to the federal
(as well as state and local) income tax consequences of such an investment.
For a more detailed description of the tax consequences of an investment in
Shares. See "Federal Income Tax Considerations".
30. Risk of Inability to Qualify as a REIT. The Company was organized
and intends to conduct its operations to enable it to qualify as a REIT under
the Internal Revenue Code (the "Code". To qualify as a REIT, and thereby avoid
the imposition of federal income tax on any income it distributes to the
Shareholders, the Company must continually satisfy three income tests, two
asset tests and one distribution test. See "Federal Income Tax Considerations
- - Qualification as a REIT". The Company has received an opinion of its legal
counsel that it is more likely than not that the Company will qualify as a
REIT. See "Risk Factors - Limitations on Opinion of Counsel as to Tax Matters"
and "Federal Income Tax Considerations - General".
Because at least 75% of the Company's assets must be qualifying real
estate assets at the end of each calendar quarter, the time at which the
Company would be entitled to elect to be taxed as a REIT may be delayed until
the Company acquires qualifying real estate assets such as Mortgages
(including certain temporary investments) which constitute 75% of the
Company's total assets.
If, in any taxable year, the Company should fail to distribute at
least 95% of its taxable income, it would be taxed as a corporation and
distributions to its Shareholders would not be deductible in computing its
taxable income for federal income tax purposes. Because of the possible
receipt of income without corresponding cash receipts due to timing
differences that may arise between the realization of taxable income and net
cash flow (e.g. by reason of the original issue discount rules) or the payment
by the Company of amounts which do not give rise to a current deduction (such
as principal payments on indebtedness) it is possible that the Company may not
have sufficient cash or liquid assets at a particular time to distribute 95%
of its taxable income. In such event, the Company could declare a consent
dividend or the Company could be required to borrow funds or liquidate a
portion of its investments in order to pay its expenses, make the required
Distributions to Shareholders, or satisfy its tax liabilities, including the
possible imposition of a 4 percent excise tax. There can be no assurance that
such funds will be available to the extent, and at the time, required by the
Company. In the event of any adjustment of deductions of gross income by the
IRS the Company could declare a deficiency dividend. See "Federal Income Tax
Considerations - Qualification as a REIT - Distributions to Shareholders".
If the Company is taxed as a corporation, the payment of tax by the
Company would substantially reduce the funds available for distribution to
Shareholders or for reinvestment and, to the extent that
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Distributions had been made in anticipation of the Company's qualification as
a REIT, the Company might be required to borrow additional funds or to
liquidate certain of its investments in order to pay the applicable tax.
Moreover, should the Company's election to be taxed as a REIT be terminated or
voluntarily revoked, the Company may not be able to elect to be treated as a
REIT for the following four year period. See "Federal Income Tax
Considerations - Qualification as a REIT".
31. Restrictions on Maximum Share Ownership. In order for the Company
to qualify as a REIT, no more than 50% of the outstanding Shares may be owned,
directly or indirectly, by five or fewer individuals at any time during the
last half of the Company's taxable year. To ensure that the Company will not
fail to qualify as a REIT under this test, the Company's Declaration of Trust
grants the Trustees the power to place restrictions on the accumulation of
Shares. These restrictions may (i) discourage a change of control of the
Company, (ii) deter individuals and entities from making tender offers for
Shares, which offers may be attractive to Shareholders or (iii) limit the
opportunity for Shareholders to receive a premium for their Shares in the
event an investor is making purchases of Shares in order to acquire a block of
Shares. See "Summary of Declaration of Trust - Restriction on Transfer of
Shares" and "Risk Factors - Anti-Takeover Considerations and Restrictions on
Share Accumulation".
32. Limitations on Opinion of Counsel as to Tax Matters. As set forth
more fully in "Federal Income Tax Considerations - General", Counsel to the
Company has expressed its opinion based on the facts described in this
Prospectus, on the Declaration of Trust, and on certain representations by the
Company and the Advisor, that it is more likely than not (a) that the Company
will qualify as a REIT; and (b) that Distributions to a Shareholder which is a
Tax-Exempt Entity will not constitute unrelated business taxable income
("UBTI"), provided that such Shareholder has not financed the acquisition of
its Shares with "acquisition indebtedness" within the meaning of the Code;
Counsel has not expressed its opinion as to certain other issues because of
the factual nature of such issues or the lack of clear authority in the law.
Accordingly, there may be a risk that the Company's treatment of certain tax
items could be challenged by the IRS and that the Company or Shareholders
could be adversely affected as a result. It should be noted, in any event,
that Counsel's opinions are based on existing laws, judicial decisions and
administrative regulations, rulings and practice, all of which are subject to
change, which may be retroactive, and, further, are not in all cases binding
on the IRS.
D. ERISA Risks
33. Risks Of Investment By Tax-exempt Investors. In considering an
investment in the Company of a portion of the assets of a trust of a pension
or profit-sharing plan qualified under Section 401(a) of the Code and exempt
from tax under Section 501(a), the plan fiduciary should consider (i) whether
the investment satisfies the diversification requirements of Section 404(a)(3)
of the Employee Retirement Income Security Act of 1974 ("ERISA"); (ii) whether
the investment is prudent, since Shares are not freely transferable and there
may not be a market created in which he can sell or otherwise dispose of the
Shares; (iii) whether interests in the Company or the underlying assets owned
by the Company constitute "plan assets" for purposes of Section 4975 of the
Code and (iv) whether the "prohibited transaction" rules of ERISA would apply
and prohibit certain of the contemplated transactions between the Company and
the Advisor or its Affiliates. ERISA requires that the assets of a plan be
valued at their fair market value as of the close of the plan year, and it may
not be possible to adequately value the Shares from year to year, since there
will not be a market for those Shares and the appreciation of any property may
not be shown in the value of the Shares until the Company sells or otherwise
disposes of its investments See "ERISA Considerations".
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<PAGE>
THE COMPANY
The Company is a Maryland real estate investment trust formed on July
12, 1996. It will invest in first lien mortgage notes financed by the proceeds
of this offering. The Company seeks to produce net interest income on its
mortgage portfolio while maintaining strict cost controls in order to generate
net income for monthly distribution to its shareholders. The Company intends
to operate in a manner that will permit it to qualify as a REIT for federal
income tax purposes. As a result of REIT status, the Company would be
permitted to deduct dividend distributions to shareholders, thereby
effectively eliminating the "double taxation" that generally results when a
corporation earns income and distributes that income to stockholders in the
form of dividends. See "Federal Income Tax Considerations - Taxation of
Taxable Shareholders". The principal executive offices of the Company are
located at 1701 N. Greenville, Suite 403, Richardson, Texas 75081, telephone
(972)705-9805 or (800)955-7917, facsimile (972)705-9304.
The Company will be self-administered with the Company's President
acting as Administrator. The Administrator will manage the day-to-day
operations of the Company, subject to the supervision of the Company's Board
of Trustees. The Advisor to the Company is Mortgage Trust Advisors, Inc. The
Advisor has been retained to use its best efforts to seek out and present to
the Company, whether through its own efforts or those of third parties
retained by it, suitable and a sufficient number of investment opportunities
which are consistent with the investment policies and objectives of the
Company and consistent with such investment programs as the Trustees may adopt
from time to time in conformity with the Declaration of Trust. See
"Management".
The Trustees, the Administrator and the management team of the Advisor
have considerable expertise in the acquisition and management of mortgage
assets, mortgage finance, asset/liability management, public company
management and administration and the management of corporations in the real
estate lending business.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION OF THE COMPANY
Capital Resources and Liquidity
As of the date of this Prospectus, the Company has been initially
capitalized with $200,000 from the sale of 10,000 Shares to the Advisor. See
"Financial Statements". The Company has not as yet had any operations and will
be dependent upon proceeds received from the public offering of Shares to
carry on any activity. See "Estimated Use of Proceeds". The Company intends to
utilize the Net Offering Proceeds of the offering primarily to make or invest
in Originated Mortgages and Acquired Mortgages. See "Investment Objectives and
Policies". To the extent that the Net Offering Proceeds of the offering are
less than the maximum amount, the Company may have less diversification of its
investments. See "Risk Factors".
As of the date of this Prospectus, the Company has no outstanding
commitments to make or acquire any investment.
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INVESTMENT OBJECTIVES AND POLICIES
Principal Investment Objectives
The Company's principal investment objectives are to invest the Net
Offering Proceeds in Mortgage Investments consisting of first lien Originated
Mortgages and existing Acquired Mortgages secured by single family residential
real estate, which investments are expected to:
(1) produce net interest income on its mortgage portfolio;
(2) provide monthly Distributions from, among other things,
interest on Mortgage Investments (if it is not economically
feasible to make monthly Distributions, then the Company
intends to make quarterly Distributions); and
(3) permit reinvestment of payments of principal and proceeds of
prepayments, sales and insurance net of expenses.
There is no assurance that these objectives will be attained. See
"Risk Factors".
Investment Policy
The primary investment policy of the Company is to purchase first lien
mortgage notes secured by single family homes. See "Certain Legal Aspects of
Mortgage Loans" for a discussion concerning mortgages, deeds of trust,
foreclosure and certain risks related to an investment in Mortgages. A
significant portion of the home buying public is unable to qualify for
government insured or guaranteed or conventional mortgage financing. Strict
income ratios, credit record criteria, loan-to-value ratios, employment
history and liquidity requirements serve to eliminate traditional financing
alternatives for many working class home buyers. A large market of what are
referred to as "B", "C", "D", and "DD" grade mortgage notes has been generated
through utilization of non-conforming underwriting criteria for those
borrowers who do not satisfy the underwriting requirements for government
insured or guaranteed or conventional mortgage financing. Although there is no
industry standard for the grading of those non-conforming loans, the grade is
primarily based on the credit worthiness of the borrower. The Company intends
to acquire what it considers to be "B", "C" and "D" grade mortgage loans.
Typically non-conforming notes bear interest at above market rates consistent
with the perceived increased risk of default. In practice, non-conforming
notes experience their highest percentage of default in the initial 12 months
of the loan. The Company intends to reduce the rate and expense of early
payment defaults through the adherence to investment policies that require the
seller of a note to the Company with a payment history of less than 12 months
to replace or repurchase any non-performing note and reimburse the Company for
any interest, escrows, foreclosure, eviction, and property maintenance costs.
Underwriting Criteria
The Company will not originate loans, except to facilitate the resale
of a foreclosed property. Funds awaiting investment in Mortgage Investments
will be invested in Interim Mortgage Loans, government securities, money
market accounts or other assets that are permitted investments for REITs. See
"Investment Objectives and Policies - Use of Initial Funds". The underwriting
criteria for purchase of Mortgages are as follows:
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<PAGE>
1. Priority of Lien. All notes purchased must be secured by a first
lien that is insured by a title insurance company. The Company will not
purchase second liens or other subordinate or junior liens. Purchase of "wrap
notes" will be permitted subject to loan to value ratios specified below. A
"wrap note" is a secured lien note that "wraps" around an existing first lien
and on which the holder has the right to service the first lien indebtedness.
2. Rate. The Advisor believes that it will be able to acquire Mortgage
Investments that will have an interest rate that will provide a 10% net yield
to the Company. However, because the Company has not yet purchased any
Mortgage Investments, there can be no assurance that target will be achieved.
Net yield is determined by the yield realized after payment of the note
servicing fee (1/2 of 1% of note balance, annually) and administrative costs
(estimated to be 1/2 of 1% of the Company's average invested capital). See
"Summary of Declaration of Trust - Limitation on Total Operating Expenses".
The servicing and administrative cost burden should approximate 1% of the
interest income. Assuming a 1% burden, the average note interest rate should
equal 11%. Actual rates will range from 8% to 12.5% but will not be limited to
that range. All rates will be fixed rates. The Company will not acquire
adjustable rate loans. Some notes will be bought at a discount to increase
their yield above the contractual rate. No notes will be purchased at a
premium above the outstanding principal balance. This investment policy allows
for acquisition of notes at various rates provided the average yield from
notes purchased approximates 11%.
3. Term and Amortization. There is no minimum term for the notes
acquired. Maximum term may not exceed 360 months. Amortization will vary from
0 (interest only on loans 12 months and less) to 360 months. Interim Mortgage
Loans may not exceed 12 months in term. Balloon notes are allowed,
amortization need not match term. No amortization may exceed 360 months.
4. Loan-to-Value Ratio. Except as set forth below, any loan purchased
may not exceed a 90% loan-to-value ratio ("LTV"). Exceptions will be made for:
(i) loans with LTV's in excess of 90% which may be purchased if discounted
sufficiently to bring the cost to value ratio to 90% or less (the LTV's will
be established by appraisal on unseasoned loans, and by broker price opinion
(BPO) or appraisals not more than 12 months old on seasoned notes) and (ii)
Interim Mortgage Loans (loans to real estate investors for purchase of homes
for resale) may be purchased if they will not exceed a 50% LTV and will have a
maturity of one year or less.
5. Seasoning. Loans must have a minimum of 12 months payment history
or will be required to have seller recourse through the twelfth payment.
Seller recourse agreements will require the seller of a note to the Company to
replace or repurchase any non-performing note and reimburse the Company for
any interest, escrows, foreclosure, eviction, and property maintenance costs.
A note will be considered non performing if any portion of the principal,
interest or escrow payment is 30 days past due.
6. Borrower, Loan and Property Information. A completed Uniform
Residential Loan Application (FNMC form 1003, FDMC form 65), or other form
acceptable to the Company must accompany each loan acquired. The Form must
include property address, year built, square footage, type of construction,
purchase price of the property, date of purchase, down payment and original
loan amount, rate, term and amortization, borrower and co-borrower name,
address, home and work telephone numbers, prior residence, prior mortgagee or
landlord, current employer and, if employed less than one year at current
employer, previous employer, monthly income and expense information, listing
of assets and liabilities and a listing of three references, with phone
numbers and addresses, including next of kin.
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<PAGE>
In addition, each loan file should include a Verification of Employment
(completed) and a Verification of Rent (completed), if applicable.
7. Appraisals and BPO's. Each unseasoned loan must have an appraisal
demonstrating a loan to value ratio of not more than 90%. The appraisals may
be limited in scope (not requiring interior inspection) but must be performed
by appraisers approved by the Company's Advisor. Each seasoned note must be
accompanied by a Broker Price Opinion (not more than 12 months old),
demonstrating a loan to value ratio not in excess of 90%, and photographs of
the property securing the loan.
8. Credit. Payment histories reflecting no late payments (30 days + )
for twelve consecutive months will be deemed a sufficient demonstration of
creditworthiness of the borrower for seasoned notes. For unseasoned notes, the
borrower must have the following:
- Current credit report with acceptable explanations for any
adverse ratings, no active bankruptcies, no prior foreclosures.
- Employment, verified, with current employer, or no lapse in
employment for the last 12 months.
- Income ratio, verified, indicating income at least 2.5 times the
monthly payment inclusive of escrows.
- Prior mortgage payment or rental history demonstrating 12
consecutive months pay history with no late pays (30 days past
due).
9. Escrow Requirement. All loans must have adequately funded tax and
insurance escrow accounts and a continuing obligation to fund 1/12th of the
annual insurance and tax amounts each month.
10. Estoppel Letters. Each loan purchased must be accompanied with
both a maker's and a payee's estoppel letter attesting to loan balances,
payment amount, rate, term, security, escrow balance, current status of
account, and next payment date. Estoppel letters must be no more than 30 days
old at time of loan acquisition.
11. Hazard Insurance. Each loan purchased must have, in effect, a
prepaid hazard insurance policy with a mortgagee's endorsement for the benefit
of the Company in an amount not less than the outstanding principal balance on
the loan. The Company reserves the right to review the credit rating of the
insurance issuer and, if deemed unsatisfactory, request replacement of the
policy by an acceptable issuer.
12. Geographical Boundaries. The Company may purchase loans in any of
the 48 contiguous United States. However, in states which provide redemption
rights after foreclosure, the maximum loan to value ratio will be 80%, or
alternatively the loan must provide mortgage insurance.
13. Mortgagees' Title Insurance. Each loan purchase must have a valid
mortgagees' title insurance policy insuring a first lien position in an amount
not less than the outstanding principal balance of the loan.
14. Guarantees, Recourse Agreements, and Mortgage Insurance. Loans
with loan-to-value ratios in excess of 90% and/or less than 12 months
seasoning will not be purchased without one or more of the following:
government guarantees, seller recourse agreement, mortgage insurance or
similar guarantees or insurances approved by the Board of Trustees.
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<PAGE>
15. Pricing. Mortgage Notes will be purchased at no minimum percentage
of the principal balance, but in no event in excess of the outstanding
principal balance. Prices paid for notes will vary with seasoning, interest
rate, credit, loan-to-value ratios, pay histories, guarantees or recourse
agreements, and average yield of the Company's loan portfolio among other
factors. The Company's objectives will be accomplished through purchase of
high rate loans, prepayment of notes purchased at a discount, reinvestment of
principal payments, interim home purchase loans and other short term
investment of cash reserves and, if utilized, leverage of capital to purchase
additional loans.
The principal amounts of Mortgages and the number of Mortgages in
which the Company invests will be affected by market availability and also
depends upon the amount of Net Offering Proceeds available to the Company from
the sale of its Shares. If less than the maximum Net Offering Proceeds are
obtained, the number of different Mortgages available for investment will be
reduced. There is no way to predict the composition of the Company's portfolio
since it will depend in part on the interest rate environment at the time of
investment.
Use of Initial Funds
The Company intends to use the Net Offering Proceeds, estimated to be
a minimum of $2,062,500 and a maximum of $44,575,000 after deducting payment
of underwriting commissions and offering expenses to acquire Mortgage
Investments.
There can be no assurance as to when the Company will be able to
invest the full amount of the Net Offering Proceeds in Mortgage Investments,
although the Company will use its best efforts to invest or commit for
investment the full amount of Net Offering Proceeds within 60 days of receipt.
The Company will temporarily invest any Net Offering Proceeds not immediately
invested in such Mortgage Investments or for the other purposes described
above, in Interim Mortgage Loans and in certain other short term investments
appropriate for a trust account or investments which yield "qualified
temporary investment income" within the meaning of Section 856(c)(6)(D) of the
Code or other investments which invest directly or indirectly in any of the
foregoing (such as repurchase agreements collateralized by any of the
foregoing types of securities) and/or such investments necessary for the
Company to maintain its REIT qualification or in short term highly liquid
investments such as in investments with banks having assets of at least
$50,000,000, savings accounts, bank money market accounts, certificates of
deposit, bankers' acceptances or commercial paper rated A-1 or better by
Moody's Investors Service, Inc., or securities issued, insured or guaranteed
by the United States government or government agencies, or in money market
funds having assets in excess of $50,000,000 which invest directly or
indirectly in any of the foregoing.
Other Policies
The Company will not: (a) issue senior securities; (b) invest in the
securities of other issuers for the purpose of exercising control; (c) invest
in securities of other issuers, other than in temporary investments as
described under "Investment Objectives and Policies - Use of Initial Funds";
(d) underwrite the securities of other issuers; or (e) offer securities in
exchange for property.
The Company may borrow funds to make Distributions to its Shareholders
or to acquire additional Mortgage Investments. The ability of the Company to
borrow funds is subject to certain limitations set forth in the Declaration of
Trust. See "Summary of Declaration of Trust - Restrictions on Borrowing".
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<PAGE>
Other than in connection with the purchase of Mortgage Investments,
which may be deemed to be a loan from the Company to the borrower, the Company
does not intend to loan funds to any person or entity. The Company's ability
to lend funds to the Advisor, a Trustee or Affiliates thereof is subject to
certain restrictions as described in "Summary of Declaration of Trust -
Restrictions on Transactions with Affiliates".
The Company shall not sell property to the Advisor, a Trustee or
Affiliates thereof at terms less favorable than could be obtained from a
non-affiliated party. See "Summary of Declaration of Trust - Restrictions on
Transactions With Affiliates".
Although the Company does not intend to invest in real property, to
the extent it does, a majority of the Trustees shall determine the
consideration paid for such real property, based on the fair market value of
the property. If a majority of the Independent Trustees determine, or if the
real property is acquired from the Advisor, as Trustee or Affiliates thereof,
such fair market value shall be determined by a qualified independent real
estate appraiser selected by the Independent Trustees.
The Company will use its best efforts to conduct its operations so as
not to be required to register as an investment company under the Investment
Company Act of 1940 and so as not to be deemed a "dealer" in mortgages for
federal income tax purposes. See "Federal Income Tax Considerations".
The Company will not engage in any transaction which would result in
the receipt by the Advisor or its Affiliates of any undisclosed "rebate" or
"give-up" or in any reciprocal business arrangement which results in the
circumvention of the restrictions contained in the Declaration of Trust and in
applicable state securities laws and regulations upon dealings between the
Company and the Advisor and its Affiliates.
The Advisor and its Affiliates, including companies, other
partnerships and entities controlled or managed by such Affiliates, may engage
in transactions described in this Prospectus, including acting as Advisor,
receiving Distributions and compensation from the Company and others, the
purchasing, warehousing, servicing and reselling of mortgage notes, property
and investments and engaging in other businesses or ventures that may be in
competition with the Company See "Conflicts of Interest", "Management
Compensation" and "Management".
Changes in Investment Objectives and Policies
The investment restrictions contained in the Declaration of Trust
and described under "Summary of Declaration of Trust - Restriction on
Investments" may only be changed by amending the Declaration of Trust with
the approval of the Shareholders. However, the various investment policies
enumerated above may be altered by a majority of the Independent Trustees
without approval of the Shareholders, if they determine that such change is in
the best interests of the Company and its Shareholders. Furthermore, the
methods for implementing the Company's investment policies may vary as new
investment techniques are developed.
WHO MAY INVEST
Except as otherwise provided, the minimum number of Shares which an
investor may purchase is 250 (50 for an IRA and Keogh plans).
The investment is suitable for persons who desire an investment
intended to provide income principally from first lien notes secured by
mortgages on single family residential real estate, which are not insured by
the FHA or guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac. Because no
public
20
<PAGE>
market is expected to develop for the Shares before the completion of this
offering, a purchase of the Shares is most suitable for persons who do not
have an immediate need for liquidity. The Company has established the
following suitability standards which must be met before subscription for the
purchase of Shares from any individual investor will be accepted:
A minimum gross income of $45,000 and a minimum net worth of $45,000
or a minimum net worth of $150,000.
In the case of sales to IRA's, qualified pension or profit sharing or
other retirement plans including KEOGH plans and trusts and to other fiduciary
accounts, the foregoing suitability standards must be met by the beneficiary,
the fiduciary account, or by the donor or grantor who directly or indirectly
supplies the funds to purchase the Shares if the donor or grantor is the
fiduciary.
The Company reserves the right to modify those suitability standards
for investors in states where the securities administrator has required higher
standards or agreed to lower standards.
TERMS OF THE OFFERING
The Company is offering a minimum of 125,000 and a maximum of
2,500,000 Shares at $20 each. The Shares are being offered on a "best efforts"
basis (which means that no broker-dealer participating in the offering will be
under any obligation to purchase any Shares from the Company and that each
broker-dealer has agreed to provide its best commercially reasonable efforts
to sell Shares to be issued by the Company) through First Financial United
Investments, Ltd. (the "Selling Group Manager") and broker-dealers selected by
the Selling Group Manager. Unless otherwise noted in this Prospectus, the
minimum subscription per investor is 250 Shares (50 Shares for Individual
Retirement Accounts or Keogh Plans) with payment due on transmittal of the
Subscription Agreement in the form at the back of this Prospectus. To prevent
a possible violation of REIT concentration of ownership standards, the Company
intends to limit Share ownership so that at no time will five or fewer
Shareholders own more than 50% of the outstanding Shares. See "Summary of
Declaration of Trust - Redemption and Restriction on Transfer of Shares".
Subscription payments will be deposited in a special escrow account at the
Escrow Agent. See "Plan of Distribution - Escrow Arrangements".
The offering will terminate two (2) years from the date of the
Prospectus, unless the Company terminates the offering earlier (which it is
entitled to do in its sole discretion for any reason whatsoever); provided,
however, that if a minimum of 125,000 Shares are not sold to a minimum of 100
investors independent of the Company and of each other within 12 months from
the date of this Prospectus, then all payments received will be promptly
refunded in full together with all interest to the extent earned on the
subscription proceeds. See "Plan of Distribution - Escrow Arrangements". The
Company, in its sole discretion, may terminate the offering at any time and
for any reason. If 125,000 or more Shares are sold, then interest to the
extent earned will be payable to all subscribers. Interest paid to subscribers
may be subject to backup withholding.
The Company has established certain suitability standards for the
purchase of Shares applicable to individual investors. See "Who May Invest".
The Company reserves the right to reject subscriptions in its sole discretion.
The Advisor purchased 10,000 Shares at an aggregate purchase price of
$200,000 ($20.00 per share) prior to this initial public offering. The Advisor
has represented that it will hold such Shares for
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investment and not with a view to the sale or distribution thereof within the
meaning of the Securities Act of 1933. The Declaration of Trust provides that
the Advisor may not withdraw its initial investment of $200,000 for a period
of one year following the completion of the public offering and may only sell
those 10,000 Shares through a market on which the Shares are formally traded.
At this time, the Advisor does not intend to sell any of these Shares after
the end of that one year period, even if the Shares are then traded on a
formal market.
Shares will be sold only to a person who makes a minimum purchase of
250 Shares ($5,000). Notwithstanding the foregoing, a minimum of 50 Shares
($1,000) may be purchased by an Individual Retirement Account ("IRA")
established under Section 408 of the Code, or a Keogh Plan established under
Section 401 of the Code. It should be noted, however, that an investment in
Shares, in and of itself, will not create an IRA or a Keogh Plan for any
investor and that in order to create an IRA or Keogh Plan, an investor must
comply with the provisions of the Code.
Depending upon the particular circumstances, and subject to the terms
of the governing plan instruments, the purchase of Shares may be a suitable
investment for IRAs and qualified pension, profit sharing or other retirement
plans (including Keogh plans) and trusts and bank commingled trust funds for
such plans (collectively, "Qualified Plans"). ERISA and the Code, however,
impose significant penalties for certain investments by Qualified Plans
(including IRAs). In order to ensure that any investment contemplated by a
Qualified Plan will not result in the imposition of such penalties, the
Company will not permit the purchase of Shares with assets of any Qualified
Plan (including Keogh Plans and IRAs) if the Company, the Advisor or any of
their Affiliates (i) has investment discretion with respect to the assets of
the Qualified Plan to be invested, (ii) regularly gives individualized
investment advice which serves as the primary basis for the investment
decisions made with respect to such assets, or (iii) is otherwise a fiduciary
with respect to such assets for purposes of the prohibited transaction
provisions of ERISA or the Code. See "ERISA Considerations".
DIVIDEND POLICY AND DISTRIBUTIONS
The Company intends to reinvest its Disposition Proceeds except to the
extent they represent capital gains on loans purchased at a discount. The
Company intends to distribute substantially all of its taxable income with
respect to each year (which does not ordinarily equal net income as calculated
in accordance with GAAP) to its shareholders so as to comply with the REIT
provisions of the Code. To the extent the Company has funds available, the
Company will declare regular monthly dividends (unless the Trustees determine
that monthly dividends are not feasible, in which case dividends would be paid
quarterly). Any taxable income remaining after the distribution of the final
regular monthly dividend each year will be distributed together with the first
regular monthly dividend payment of the following taxable year or in a special
dividend distributed prior thereto. The dividend policy is subject to revision
at the discretion of the Board of Trustees. All Distributions will be made by
the Company at the discretion of the Board of Trustees and will depend on the
taxable earnings of the Company, the financial condition of the Company,
maintenance of REIT status and such other factors as the Board of Trustees
deems relevant.
Distributions to shareholders will generally be subject to tax as
ordinary income, although a portion of such Distributions may be designated by
the Company as capital gain or may constitute a tax-free return of capital.
The Company does not intend to declare dividends that would result in a return
of capital. Any Distribution to Shareholders of income or capital assets of
the Company will be accompanied by a written statement disclosing the source
of the funds distributed. If, at the time of
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distribution, this information is not available, a written explanation of the
relevant circumstances will accompany the Distribution and the written
statement disclosing the source of the funds distributed will be sent to the
Shareholders not later than 60 days after the close of the fiscal year in
which the Distribution was made. In addition, the Company will annually
furnish to each of its stockholders a statement setting forth Distributions
paid during the preceding year and their characterization as ordinary income,
capital gains, or return of capital. For a discussion of the federal income
tax treatment of Distributions by the Company, see "Certain Federal Income Tax
Considerations - Taxation of Shareholders".
ESTIMATED USE OF PROCEEDS
The following table sets forth information concerning the estimated
use of proceeds of the offering of Shares being made assuming maximum
compensation. The Gross Offering Proceeds will be retained in trust for the
benefit of the investors and used only for the purposes set forth below and
under "Investment Objectives and Policies". Regardless of the particular level
of Gross Offering Proceeds that is raised by the offering of Shares, it is
estimated that not less than 80% of all Gross Offering Proceeds will be
invested in Mortgage Investments. Certain of the amounts set forth in the
table cannot be precisely calculated at this time and consequently could vary
from the amounts shown.
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<TABLE>
<CAPTION>
Minimum Offering Maximum Offering
(125,000 Shares)(1) (2,500,000 Shares)(1)
---------------------- ----------------------
Percentage Percentage
of Gross of Gross
Amount Proceeds Amount Proceeds
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Gross Offering Proceeds (1) $2,500,000 100.0% $50,000,000 100.0%
Less Public Offering Expenses:
Selling Commissions
and Due Diligence Fees (2) 262,500 10.5% 5,250,000 10.5%
Other Organization and
Offering Expenses (3) 175,000 7.0% 175,000 0.35%
Available for Investment,
Net of Offering Expenses
(Net Offering Proceeds) 2,062,500 82.5% 44,575,000 89.15%
Less Acquisition Fees and
Expenses:
Acquisition Fees (4) 61,875 2.47% 1,337,250 2.67%
Minimum Net Offering Proceeds
Available to Invest in
Mortgage Investments (5) 2,000,625 80.03% 43,237,750 86.48%
<FN>
- ---------
(1) The Gross Offering Proceeds are exclusive of: (i) the 10,000
Shares purchased by the Advisor at an aggregate purchase price of $200,000
prior to this initial public offering; (ii) the maximum of 12,500 SGM Shares
(1 SGM Share for each 200 Shares sold in this offering) to be sold to the
Selling Group Manager and/or designated Selected Dealers at a price of $.01
per Share ($125 if all SGM Shares are sold); (iii) Shares that may be issued
upon the exercise of options that may be granted to the Advisor if it earns a
Subordinated Incentive Fee (iv) up to 12,500 Shares that are issuable upon the
exercise of options that may be granted to the Administrator over a five year
period and (v) up to 37,500 Shares that are issuable upon the exercise of
options that may be granted to the three Independent Trustees over a five year
period. See "Management Compensation".
(2) The Company will pay to the Selling Group Manager selling
commissions and due diligence fees equal to 10.5% of the Gross Offering
Proceeds (subject to any volume discounts for Institutional Investors). The
Selling Group Manager will pay a portion of those selling commissions to
Selected Dealers. The Selling Group Manager may, in its sole discretion,
provide volume discounts of up to 2% on a negotiated basis to Institutional
Investors who purchase at least 50,000 Shares. The application of any volume
discounts will reduce the amount of commissions that would be paid to the
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<PAGE>
Selling Group Manager but will not change the Net Offering Proceeds to the
Company. See "Plan of Distribution".
(3) Represents costs, other than those described in footnote (2)
above, incurred for legal, accounting, filing fees, printing, marketing and
other expenses related to the preparation and filing of the registration
statement and the marketing of Shares offered hereby. The Advisor will bear
all expenses with respect to organization of the Company and the offering of
Shares to the extent they, excluding selling commissions, any applicable
volume discounts and due diligence fees described in footnote (2) above,
exceed $175,000.
(4) An Acquisition Fee equal to 3% of the principal amount of each
Mortgage Investment shall be paid to the Advisor upon the purchase of each
Mortgage Investment. If the Company borrows funds and acquires additional
Mortgage Investments with those borrowed funds, the amount of the Acquisition
Fees would increase. See "Summary of Declaration of Trust - Restrictions on
Borrowing".
(5) The Company does not presently intend to set aside any amounts as
initial reserves, but may do so at a later date.
</TABLE>
MANAGEMENT COMPENSATION
The following table summarizes all forms, estimated maximum amounts
and recipients of compensation anticipated to be paid to the Advisor and its
Affiliates. Other than as set forth in this Prospectus, no compensation is
anticipated to be paid to the Advisor and its Affiliates. These fees were not
determined by arm's length negotiations. See "Conflicts of Interest".
<TABLE>
<CAPTION>
Estimated Amount Assuming
Minimum Number (125,000)
Form and and Maximum Number
Entity Receiving Method of (2,500,000) of
Compensation Compensation Shares are Sold
- ------------ ------------ -------------------------
OFFERING AND ORGANIZATION STAGE
<S> <C> <C>
Selling Group
Manager Due Diligence Fees equal to $12,500/$250,000
0.5% of the Gross Offering
Proceeds.
Selling Group Selling Commissions equal to $250,000/$500,000
Manager or Selected 10% of the Gross Offering
Dealers Proceeds of all Shares sold
by them. (1)
Selling Group The "SGM Shares" to be issued
Manager to the Selling Group Manager.
The Selling Group Manager
will be entitled to purchase
25
<PAGE>
one SGM Share at a price of
$.01 per SGM Share for each
200 Shares that are sold
hereunder. (2) $12,494/$249,875
Advisor Acquisition Fee equal to 3.0% The maximum of such
of the principal amount of each Acquisition Fees payable to the
Mortgage Investment. (3) Advisor or an Affiliate may
approximate $62,875/$1,337,250
OPERATING STAGE (4)
Affiliates of Advisor Loan Servicing Fee equal to .5% of Approximately $10,003
the principal balance of all /$216,188 annually
mortgage loans.
Advisor, Trustees or Real Estate Brokerage Not determinable at this time
Affiliates Commissions (5)
Advisor Subordinated Incentive Fee Subject to Actual amounts depend
certain conditions described in foot- upon the results of the
note (6) below, the Advisor will Company's operations
receive a Subordinated Incentive Fee and are not determinable at
equal to 25% of the amount by which this time.
the Company's Net Income for a year
exceeds a 10% per annum non-compounded
cumulative return on its Adjusted
Contributions. For each year which it
receives a Subordinated Incentive Fee,
the Advisor shall also receive 5-year
options to purchase 10,000 Shares at
the initial offering price of share
(not to exceed 50,000 shares). See
"Management - Summary of Advisory
Agreement". (6)(7)
Advisor and Affiliates Reimbursement for costs of goods, Not determinable at this time.
materials and services used for and
by the Company obtained from
unaffiliated third parties except
for note servicing and for travel
expenses incurred in seeking any
investments or seeking the disposition
of any investments of the Company. (4)
Administrator Salary, Bonus & Options. As $60,000 per year plus
compensation for her services, any bonus and options
the Administrator will receive:
26
<PAGE>
(1) an annual salary of $60,000; (2) a
bonus equal to 25% of the amount by
which the Company's administrative
expenses fall below the approved
administrative budget, and (3) 5-year
options to purchase 2,500 shares at an
exercise price of $20 per share for
each year she serves as Administrator
(up to a maximum of options for 12,500
Shares). See "Management - The
Administrator".
Independent Trustees Fees and Options. Compensation at Up to $4,000 per
the greater of $1,000 per meeting or Independent Trustee per
$4,000 per year. For each year in year, plus options
which they serve, each Independent
Trustee shall also receive 5-year
options to purchase 2,500 Shares at
an exercise price of $20 per Share
(not to exceed 12,500 shares per
Trustee).
<FN>
(1) The Selling Group Manager may, in its sole discretion, provide
volume discounts of up to 2% on a negotiated basis to Institutional Investors
who purchase at least 50,000 Shares. The application of any volume discounts
will reduce the amount of commissions that would be paid to the Selling Group
Manager but will not change the Net Offering Proceeds to the Company. The
Selling Group Manager will pay to Selected Dealers a commission equal to 4% of
the offering price of the Shares sold by them unless a higher commission (up
to, but not exceeding 8%) is designated by the Selling Group Manager. See
"Plan of Distribution".
(2) The Selling Group Manager may allocate all or a portion of the SGM
Shares to Selected Dealers and registered representatives of the Selling Group
Manager. The SGM Shares are identical to the Shares. See "Plan of
Distribution".
(3) Acquisition Fees are payable to the Advisor or its Affiliates for
sourcing, evaluating, structuring and negotiating the acquisition terms of
Mortgage Investments. The estimated amount assumes all Net Offering Proceeds
are invested in Originated or Acquired Mortgages and the Company does not
borrow additional funds that are invested in Originated or Acquired Mortgages.
The actual amounts of the fees paid will depend on the amount of Net Offering
Proceeds and any borrowed funds that are invested. See "Summary of Declaration
of Trust - Restrictions on Borrowing".
(4) The Company currently anticipates that the annual Total Operating
Expenses of the Company, exclusive of the loan servicing fees, will initially
be approximately $189,000. Because the annual Total Operating Expenses will
not increase in proportion to increases in Average Invested Assets, the ratio
of annual Total Operating Expenses to Average Invested Assets will decrease as
the amount of Average Invested Assets increase. The Declaration of Trust
provides that the Total Operating Expenses may not exceed in any fiscal year
the greater of (a) 2% of the Average Invested Assets of the Company (defined
generally as the average book value of the Company's Mortgage Investments,
without regard
27
<PAGE>
for non-cash reserves) or (b) 25% of the Company's Net Income. The
Administrator will have the responsibility of preparing an annual budget and
submitting such budget to the Trustees. In the event the Total Operating
Expenses exceed the limitations described above, then within 60 days after the
end of the Company's fiscal year, the Advisor shall reimburse the Company the
amount by which the aggregate annual Total Operating Expenses paid or incurred
by the Company exceed the limitation.
(5) If the Company forecloses on a property securing a mortgage loan
and sells such property, the Company may pay real estate brokerage fees which
are reasonable, customary and competitive, taking into consideration the size,
type and location of the property (the "Competitive Commission"), which shall
not in the aggregate exceed 6% of the gross sales price of the property;
however, as to the Advisor, a Trustee, or an Affiliate thereof, such fees
shall be paid only if such person provides a substantial amount of services in
the sales effort, in which case such fees shall not exceed the lesser of (i) a
percentage of the gross sales price of a property equal to 50% of the
Competitive Commission, or (ii) 3 percent of the gross sales price of a
property.
(6) When the audited annual financial statements of the Company are
received each year, the Advisor shall determine if the following conditions
are satisfied:
(i) (A) the total of the Adjusted Contributions as of the end
of the most recent fiscal year and any undistributed cash as of that
date equals (B) the Gross Offering Proceeds as of that date less
cumulative Capital Distributions made through that date; and
(ii) for the year then ended, the Company's Net Income equals
or exceeds a 10% per annum non-compounded cumulative return on its
Adjusted Contributions. The determination of the Company's annual
non-compounded cumulative return on its Adjusted Contributions shall
be made by dividing the Company's total Net Income for that year by
the average of the month end Adjusted Contributions during that year.
If the Company's Trustees agree that both of those conditions are
satisfied, the Company will, subject to the restrictions set forth in footnote
(7) below, pay the Advisor the Subordinated Incentive Fee.
(7) In no event may the Subordinated Incentive Fee exceed the amount
permitted under Section IV.D. of the Statement of Policy on Real Estate
Investment Trusts adopted by the North American Securities Administrators
Association and in effect of the date of this Prospectus.
</TABLE>
CONFLICTS OF INTEREST
Although a majority of the Trustees will be Independent Trustees, the
relationships among the Company, the Trustees, the Administrator, the Advisor
and their Affiliates will result in various conflicts of interest. The
Advisor, the Trustees, the Administrator, and their respective Affiliates are
engaged in business activities involving real estate oriented investments and
anticipate engaging in additional business activities in the future which may
be competitive with the Company. The Advisor, although not currently engaged
in any competitive activities, may engage in the future in business activities
which will be competitive with the Company. With respect to the conflicts of
interest described in this Prospectus, the Trustees, the Administrator and the
Advisor will exercise their fiduciary duties to the Company and the
Shareholders in a manner which will preserve and protect the rights of the
Company and the Shareholders. See "Fiduciary Responsibility of Trustees".
28
<PAGE>
Certain conflicts of interest may arise in the management and
operation of the Company, including those described below.
1. Receipt of Commissions, Fees and Other Compensation by Affiliates
of the Advisor. Company transactions involving the purchase, origination,
servicing and sale of the Company's Mortgage Investments may result in the
immediate realization by the Advisor and its Affiliates of commissions, fees,
compensation and other income. Such compensation includes Acquisition Fees,
selling commissions for the sale of Shares and servicing fees. Subject to the
compliance with the Company's investment objectives and policies and the
supervision of the Board of Trustees, the Advisor will have absolute
discretion with respect to all investments made by the Company.
2. Purchase of Mortgage Notes from Affiliate. The Company intends to
acquire its Mortgage Investments from several sources, including South Central
Mortgage, Inc. ("SCM"), an Affiliate of the Advisor. SCM is a corporation that
is in the business of purchasing, selling and servicing mortgages. All
Mortgage Investments purchased from SCM will be at prices no higher than those
that would be paid to unaffiliated third parties for mortgages with comparable
terms, rates, credit risks and seasoning.
SCM has agreed that, in the event that the obligor on any Mortgage
sold by or through SCM or any of its Affiliates to the Company defaults in the
making of any payment or other obligation thereon during the period ending one
year after the acquisition of such Mortgage by the Company, then SCM shall
purchase or repurchase the Mortgage from the Company or the Company's assignee
at a price on the date of such purchase computed as the total unpaid principal
balance due thereon, plus accrued interest to the date of the purchase, plus
insurance premiums, taxes and any other amounts expended by the Company in the
maintenance, protection or defense of its interest therein or in the real
property, including reasonable attorneys' fees. SCM may satisfy its
obligations under the foregoing purchase or repurchase requirement by either:
(a) Assigning and transferring to the Company a replacement
Mortgage or Mortgages, provided: (i) the real property securing the
replacement Mortgage(s), the creditworthiness of the obligor on the
replacement Mortgage(s) and other general underwriting criteria are
reasonably acceptable to the Company; and (ii) the value of the
replacement Mortgage(s) at the date of transfer to the Company shall
be computed by the Company in accordance with its then applicable
pricing schedule for acquisition of such Mortgages, giving due regard
to principal balance, interest rate, term, amortization and other
general factors used by the Company for acquisition of such Mortgages
at such time; or
(b) Funding by SCM, on a month to month basis, to the Company
of all lost interest, tax and insurance escrow payments, as well as
any costs incurred by the Company related to curing the default or
obtaining title to and possession of the property securing the
defaulted obligation, including by not limited to foreclosure, deed in
lieu of foreclosure, bankruptcy claims or motions, evictions,
maintaining and/or securing the property and remarketing costs less
any additional down payments or settlements received by the Company.
3. Non-Arm's-Length Agreements. The agreements and arrangements
relating to compensation between the Company and the Advisor or its Affiliates
are not the result of arm's-length negotiations. The majority of the Trustees
are Independent Trustees and the Advisor may be removed for cause by a
majority of such Independent Trustees without ratification by the
Shareholders. See "Risk
29
<PAGE>
Factors - Shareholders Must Rely on Management", "Summary of Declaration of
Trust -Trustees" and "Management - Summary of the Advisory Agreement".
4. Competition for the Time and Services of Common Officers and
Trustees. The Trust will rely on the Advisor and its Affiliates for
supervision of the management of the operations of the Company. In the
performance of their duties, the officers, directors and employees of the
Advisor and its Affiliates may, for their own account or that of others,
originate mortgages and acquire investments similar to those made or acquired
by the Company. The Trustees also may act as trustees, directors or officers,
or engage in other capacities, in other REITs or limited partnerships, and may
acquire and originate similar Mortgage Investments for their own account or
that of others. Accordingly, conflicts of interest may arise in operating more
than one entity with respect to allocating time between such entities. The
Trustees, the Administrator and the Advisor will devote such time to the
affairs of the Company and to the other entities in which they are involved,
as they determine in their sole discretion, exercised in good faith and in
compliance with their fiduciary obligations to the Company, to be necessary
for the benefit of the Company and such other entities. See "Management".
The Advisor and its Affiliates believe they have sufficient staff
personnel to be fully capable of discharging their responsibility to the
Company and to all other entities to which they or their officers or
Affiliates are responsible.
5. Competition by the Company with Affiliates for the Purchase and
Sale of Mortgage Investments. Various REITs, partnerships or other entities
may in the future be formed by the Advisor or its Affiliates to engage in
businesses which may be competitive with the Company and which may have the
same management as the Company. To the extent that such other REITs,
partnerships or entities with similar investment objectives (or programs with
dissimilar objectives for which a particular Mortgage Investments may
nevertheless be suitable) (collectively "Affiliated Programs") have funds
available for investment at the same time as the Company and a potentially
suitable investment has been offered to the Company or an Affiliated Program,
conflicts of interest will arise as to which entity should acquire the
investment.
If any conflict arises between the Company and any of the other
Affiliated Programs, the Advisor will initially review the investment
portfolios of the Company and of each of such Affiliated Programs and will
determine whether or not such mortgage loan or other investment should be made
by the Company or such other Affiliated Programs based upon such factors as
the amount of funds available for investment, yield, portfolio
diversification, type and location of the property on which the mortgage loan
will be made, and proposed loan terms. The Trustees (including the Independent
Trustees) will be responsible for monitoring this allocation method (and that
described below with respect to new Affiliated Programs established in the
future) to be sure that each is applied fairly to the Company. See "Summary of
Declaration of Trust - Responsibility of Trustees".
If the Advisor or its Affiliates establish new Affiliated Programs
after the date of this Prospectus, and the making of a Mortgage Investment
appears equally appropriate for the Company and one or more of such
subsequently formed Affiliated Programs, the Mortgage Investment will be
allocated to one program on a basis of rotation with the initial order of
priority determined by the dates of formation of the programs.
Further, the Trustees and the officers, directors and employees of the
Advisor and its Affiliates may for their own account or that of others
originate and acquire Mortgages and Mortgage Investments
30
<PAGE>
similar to those made or acquired by the Company. The Trustees and the Advisor
are, however, subject to a fiduciary duty to the Company and the Shareholders.
See "Fiduciary Responsibility of Trustees". Each Trustee, on his own behalf,
and the Advisor, on behalf of itself, the officers and directors of the
Advisor, and all Persons controlled by the Advisor and its officers and
directors, has agreed to first present suitable investments to the Company
before recommending or presenting such opportunities to others or taking
advantage of such opportunities on their own behalf, except as otherwise
described with respect to Affiliated Programs. See "Management - Summary of
the Advisory Agreement". Except as described above, and subject to their
fiduciary duty to the Company and the Shareholders, neither the Trustees, the
Advisor nor its Affiliates will be obligated to present to the Company any
particular investment opportunity which comes to their attention, even if such
opportunity is of a character which might be suitable for investment by the
Company.
There may be conflicts of interest on the part of the Advisor between
the Company and any other Affiliates of the Advisor which have the same
investment objectives at such time as the Company attempts to sell Mortgage
Investments, as well as in other circumstances.
See "Investment Objectives and Policies - Other Policies" and "Summary
of Declaration of Trust".
6. Additional Conflicts with Affiliates. Although the Company does not
presently expect to do so, it is permitted to invest in mortgage loans on
properties owned by Affiliates if such transactions are approved by a majority
of the Trustees not otherwise interested in the transactions as being fair and
reasonable to the Company and on terms and conditions not less favorable to
the Company than those available from third parties.
7. Lack of Separate Representation. The Company and the Advisor are
not represented by separate counsel. The attorneys for the Company and various
experts who provide real property services for the Company also perform
services for the Advisor and its Affiliates. It is anticipated that such
multiple representation will continue in the future. However, should a dispute
arise between the Company and the Advisor, the Advisor will cause the Company
to retain separate counsel for such matters. Should there be a necessity in
the future to negotiate or prepare contracts and agreements between the
Company and the Advisor for services other than those existing or contemplated
on the effective date of this Prospectus, such transactions will require
approval by a majority of the Trustees, including a majority of the
Independent Trustees, as being fair and reasonable to the Company and on terms
and conditions not less favorable to the Company than those available from
unaffiliated third parties.
8. Rights of Trustees and Officers. Any trustee or officer may
acquire, own, hold and dispose of Shares for his individual account and may
exercise all rights of a Shareholder, except with respect to certain voting
rights, to the same extent and in the same manner as if he were not a Trustee
or officer. Any Affiliated Trustee or officer may be interested as trustee,
officer, director, stockholder, partner, member advisor or employee, or
otherwise have a direct or indirect interest in any person who may be engaged
to render advice or services to the Company, and may receive compensation from
such person as well as compensation as Trustee, officer or otherwise hereunder
and no such activities shall be deemed to conflict with his duties and powers
as Trustee or officer.
31
<PAGE>
FIDUCIARY RESPONSIBILITY OF TRUSTEES
Consistent with the duties and obligations of, and limitations on, the
Trustees as set forth in the Declaration of Trust of the Company, and under
the laws of the State of Maryland, the Trustees are accountable to the
Shareholders as fiduciaries and are required to perform their duties in good
faith and in a manner each Trustee believes to be in the best interest of the
Company and its Shareholders, with such care, including reasonable inquiry, as
a prudent person in a like position would use under similar circumstances. The
Trustees will review annually the budget for the Company that will be prepared
by the Administrator. In addition, the Independent Trustees must review the
relationship of the Company with the Advisor and the Advisor's performance of
its duties under the Advisory Agreement, and must determine that the
compensation paid to the Advisor is reasonable in relation to the nature and
quality of the services performed. The Advisor also has a fiduciary duty to
both the Shareholders and the Company.
Limitation on Liability of Trustees and Officers
The Declaration of Trust provides that Trustees and officers shall
have the fullest limitation on liability permitted under Maryland law.
Pursuant to such statutory provisions Trustees and officers have no liability
for breach of the duty of loyalty, unless such breach of duty results in an
improper personal benefit or was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding. In all situations in which the limitations of liability contained
apply, the remedies available to the Company or its shareholders are limited
to equitable remedies, such as injunctive relief or recision, and do not
include the right to recover money damages. The Trustees and other officers
are liable to the Company or the shareholders only (i) to the extent the
Trustee or officer actually received an improper benefit or profit in money,
property or services, in which case any such liability shall not exceed the
amount of the benefit or profit in money, property or services actually
received; or (ii) to the extent that a judgment or other final adjudication
adverse to such Trustee or officer is entered in a proceeding based on a
finding in the proceeding that such Trustee's or officer's action or failure
to act was the result of active and deliberate dishonesty and was material to
the cause of action adjudicated in the proceeding.
Indemnification of Trustees, Officers and Others
The Declaration of Trust provides that, to the fullest extent allowed
by Maryland law, the Company will indemnify the Trustees, the Advisor and
their Affiliates and employees of each against losses incurred by them arising
in connection with the business of the Company; provided that (i) the
Trustees, the Administrator, or the Advisor has determined, in good faith,
that the course and conduct which caused the loss or liability was in the best
interests of the Company, (ii) such liability or loss was not the result of
negligence or misconduct with respect to the affiliated Trustee, the
Administrator, the Advisor and its Affiliates or the result of bad faith,
willful misfeasance, gross negligence or reckless disregard of the Trustee's
duties, and (iii) such indemnification or agreement to hold harmless is
recoverable only out of the assets of the Company and not from the
Shareholders.
To the extent that the indemnification of the Trustees may apply to
the liabilities arising under the Securities Act of 1933, the Company has been
advised that, in the opinion of the Securities and Exchange Commission, such
indemnification is contrary to public policy and therefore unenforceable. In
the event that a claim for indemnification by the Company of expenses incurred
or paid by an indemnified party in the successful defense of any action, suit
or proceeding is asserted by such person
32
<PAGE>
in connection with the offering of the Shares, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification is against public policy as expressed in the Securities Act of
1933 and be governed by the final adjudication of such issue. In addition, no
Trustee, the Advisor or their Affiliates shall be indemnified by the Company
for liabilities arising under a violation of federal and state securities laws
associated with the offer and sale of Shares. The Company may indemnify a
Trustee, the Advisor and their Affiliates who are performing services on
behalf of the Company for settlements and related expenses incurred in
successfully defending such lawsuits, provided, that (a) a court either (i)
approves the settlement and finds that indemnification of the settlement and
related costs should be made or (ii) approves indemnification of litigation
costs if there has been a successful defense, or (b) there has been a
dismissal with prejudice on the merits (without a settlement). Any person
seeking indemnification shall apprise the court of the published position of
the Securities and Exchange Commission with respect to indemnification for
securities law violations before seeking court approval for indemnification.
Shareholders' Rights and Remedies
In addition to potential legal action against the Trustees, the
Declaration of Trust and laws of the State of Maryland provide each
Shareholder with certain legal rights and remedies, including the right, by a
majority vote of the outstanding shares entitled to vote, to remove the
Trustees, with or without cause, or to terminate the Company. See "Summary of
Declaration of Trust".
Defenses Available to Trustees and the Advisor
There are certain defenses under Maryland law and pursuant to the
Declaration of Trust available to the Trustees and the Advisor in the event of
a Shareholder action against them. One such defense is the "business judgment
rule". A Trustee or the Advisor can, under the "business judgment rule", argue
that he performed the action giving rise to the Shareholder's action in good
faith and in a manner he reasonably believed to be in the best interests of
the Company, and with such care as an ordinarily prudent person in a like
position would have used under similar circumstances. The Trustees and the
Advisor are also entitled to rely on information, opinions, reports or records
prepared by experts (including accountants, consultants, counsel, etc.) who
were selected with reasonable care. In the event a Shareholder challenges an
amendment to the Declaration of Trust made by Trustees without the
Shareholders' approval, the Trustees can defend by arguing that the
Declaration of Trust permits amendments to the Declaration of Trust absent
Shareholder vote in certain circumstances. The Trustees and the Advisor are
also indemnified by the Company pursuant to the Declaration of Trust, subject
to certain limitations.
MANAGEMENT
The Trustees will be responsible for the overall management and
control of the affairs of the Company. The Trustees will employ the
Administrator to manage the day-to-day operations of the Company, subject to
the supervision of the Company's Board of Trustees. The Company will be self-
administered with the Company's President acting as Administrator. See
"Management - The Administrator". The Advisor to the Company is Mortgage Trust
Advisors, Inc., a Texas corporation. The Advisor has been retained to use its
best efforts to seek out and present to the Company, whether through its own
efforts or those of third parties retained by it, suitable and a sufficient
number of investment opportunities which are consistent with the investment
policies and objectives of the Company and consistent with such investment
programs as the Trustees may adopt from time to time in conformity
33
<PAGE>
with the Declaration of Trust. See "Management - The Advisor" and "Management
- - Summary of the Advisory Agreement".
The Company will utilize the services of Affiliates of the Advisor and
nonaffiliated third parties to service the Mortgages acquired by the Company.
All servicing fees paid to Affiliates of the Advisor will be at competitive
rates that are no higher than the rates charged by unaffiliated third parties.
The servicing of the Mortgages includes the collection of monthly payments
from the borrower, the distribution of all principal and interest to the
Company, the payment of all real estate taxes and insurance to be paid out of
escrow, regular distribution of information regarding the application of all
funds received and enforcement of collection for all delinquent accounts,
including foreclosure of such account when and as necessary.
The Company's Declaration of Trust provides for not less than three
nor more than nine Trustees, a majority of whom must be Independent Trustees,
except for a period of 60 days after the death, removal or resignation of an
Independent Trustee. Each Trustee will serve for a one year term.
There are currently four Trustees of the Company, three of whom are
Independent Trustees. The Trustees shall establish written policies on
investments and borrowings and shall monitor the administrative procedures,
investment operations and performance of the Company, the Administrator and
the Advisor to assure that such policies are carried out. Until modified by
the Trustees, the Company shall follow the policies on investments and
borrowings set forth in this Prospectus. The Independent Trustees are
responsible for reviewing the investment policies of the Company not less
often than annually and with sufficient frequency to determine that the
policies being followed are in the best interests of the Shareholders.
A vacancy in the Board of Trustees created by the death, resignation,
or incapacity of a Trustee or by an increase in the number of Trustees (within
the limits referred to above) may be filled by the vote of a majority of the
remaining Trustees (with respect to a vacancy created by the death,
resignation, or incapacity of an Independent Trustee, the remaining
Independent Trustees shall nominate a replacement). Vacancies occurring as a
result of the removal of Trustees by Shareholders shall be filled by the
Shareholders. Any Trustee may resign at any time and may be removed by the
holders of at least a majority of the outstanding Shares (with or without
cause) or by a majority of the Trustees (only for cause).
Independent Trustees shall be entitled to receive compensation for
serving as Trustees at the rate of the greater of $1,000 per meeting or $4,000
per year. For each year in which they serve, each Independent Trustee will
also receive options that, during a period of five years after they are
granted, will enable them to purchase 2,500 Shares at an exercise price of $20
per Share (up to a maximum of options for 12,500 Shares for each Independent
Trustee).
The Trustees (including the Independent Trustees) shall periodically
monitor the allocation of Mortgage Investments among the Company and the
Affiliated Programs to insure that the allocation method described herein
under the caption "Conflicts of Interest - Competition by the Company with
Affiliates for the Purchase and Sale of Mortgage Investments" is being applied
fairly to the Company.
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<PAGE>
Trustees and Officers of the Company
The Trustees and officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Offices Held
- ---- --- ------------
<S> <C> <C>
Christine "Cricket" Griffin 43 Trustee, Chairman of the Board and
President
Paul R. Guernsey 45 Independent Trustee
Douglas R. Evans 51 Independent Trustee
Richard D. O'Connor, Jr. 42 Independent Trustee
</TABLE>
Christine "Cricket" Griffin is a 1978 graduate of George Mason
University, Virginia with a Bachelor of Arts degree, summa cum laude, in
Politics and Government. Since July, 1996, Ms. Griffin has been President of
the Company. From June, 1995 until July, 1996, Ms. Griffin served as Chief
Financial Officer of South Central Mortgage, Inc., a Dallas, Texas based
mortgage banking firm that is an Affiliate of the Advisor. Her
responsibilities at South Central Mortgage included day to day bookkeeping
through financial statement preparation, mortgage warehouse lines
administration, and investor communications and reporting. Additionally, Ms.
Griffin was responsible for researching and implementing a note servicing
system for South Central Mortgage and its subservicer. Before joining South
Central Mortgage, Inc., Ms. Griffin was Vice President of Woodbine Petroleum,
Inc., a publicly traded oil and gas company for 10 years, during which time
her responsibilities included regulatory reporting, shareholder relations, and
audit supervision.
Paul R. Guernsey graduated with a Bachelors Degree in Business
(Accounting) from Ferris State University, Michigan in 1973 and is a member of
the American Institute of CPA's and Texas Society of CPA's. Since 1993 Mr.
Guernsey has been a partner and chief financial officer of Organized Capital,
Inc. and United II Strategic Trading, Inc. and related companies. These
companies invest primarily in the financial markets, income and non-income
producing real estate development, and residential mortgage loans. From 1991
through 1993 Mr. Guernsey was chief financial officer of American Financial
Network, Inc. a public company which operated a computerized loan origination
network, seven residential mortgage brokerage companies, and a wholesale
mortgage brokerage operation. From 1987 through 1991 he was chief financial
officer and then vice president of operations for Discovery Learning Centers,
Inc., a chain of child care centers. From 1986 to 1987 he worked with James
Grant & Associates, a Dallas based merchant banking firm. From 1973 through
1985 he served in the audit, tax and management services departments of both a
regional CPA firm, and as a partner of a local firm in Michigan. Mr. Guernsey
is an Independent Trustee.
Douglas R. Evans received an MBA from Southern Methodist University in
1972 and a Bachelors of Arts degree from the University of North Carolina in
1967. Since February 1995, Mr. Evans has been a Principal of PetroCap, Inc., a
firm that provides investment and merchant banking services to a variety of
clients active in the oil and gas industry. From 1987 until February 1995 Mr.
Evans was President and Chief Executive Officer of Woodbine Petroleum, Inc.,
which was a publicly traded oil and gas company until it was taken private
through a merger in September, 1992. As part of his responsibilities at
Woodbine, Mr. Evans managed and negotiated the sale of the parent company's
REIT portfolio including mortgages and real property. Mr. Evans has been a
licensed real estate broker in Texas since 1979 and a licensed real estate
agent since 1976. Mr. Evans is an Independent Trustee.
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Richard D. O'Connor, Jr. received a Bachelor of Business
Administration degree from the University of Texas at Austin in 1976, and a
J.D. degree from the University of Houston in 1978. Since 1993, Mr. O'Connor
has practiced law as a sole practitioner specializing in the areas of real
estate, business and contract law. Between 1985 and 1993, Mr. O'Connor was a
partner with the Dallas law firm of Scoggins, O'Connor and Blanscet. Between
1989 and 1993, Mr. O'Connor was an attorney in the real estate department of
J.C. Penney Corporation. Mr. O'Connor has been Board Certified in Commercial
Real Estate law by the Texas Board of Legal Specialization since 1987.
The Administrator
The Administrator will manage the day-to-day operations of the
Company, subject to the supervision of the Company's Board of Trustees. The
Company will be self-administered with the Company's President acting as
Administrator. Christine "Cricket" Griffin is the President of the Company.
See "Management - Trustees and Officers of the Company". The Administrator has
a fiduciary duty to the Shareholders and the Company.
The Administrator has entered into an employment agreement with the
Company whereby she will serve as Trustee, President, Chief Operating Officer
and Administrator of the Company. That agreement is for a term of one year, to
be reviewed annually with the approval of a majority of Independent Trustees.
The agreement provides for the Administrator to receive: (1) an annual salary
of $60,000; (2) a bonus equal to 25% of the amount by which the Company's
administrative expenses for the year fall below the approved administrative
budget; and (3) for each year of service, 5-year stock options to purchase
2,500 Shares at an exercise price of $20 per Share (up to a maximum of options
for 12,500 Shares).
The Advisor
The Advisor is Mortgage Trust Advisors, Inc. The Advisor has been
retained to use its best efforts to seek out and present to the Company,
whether through its own efforts or those of third parties retained by it,
suitable and a sufficient number of investment opportunities which are
consistent with the investment policies and objectives of the Company and
consistent with such investment programs as the Trustees may adopt from time
to time in conformity with the Declaration of Trust. The services of the
Advisor include managing the Company's development of investment guidelines,
overseeing servicing, negotiating purchases of loans and overseeing the
acquisition or disposition of investments, and managing the assets of the
Company. The Advisor has a fiduciary duty to the Shareholders and the Company.
The directors and officers of the Advisor are set forth below. These
officers of the Advisor may also provide services to the Company on behalf of
the Advisor.
<TABLE>
<CAPTION>
Name Age Offices Held
- ---- --- ------------
<S> <C> <C>
Todd Etter 46 President
Timothy J. Kopacka 37 Vice President/Secretary
James P. Hollis 55 Vice President
Dan H. Hill 45 Vice President/Treasurer
</TABLE>
Todd Etter is a 1972 graduate of Michigan State University. Since 1992
Mr. Etter has been President of South Central Mortgage, Inc. ("SCM"), a Dallas
based mortgage banking firm that he
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founded. From 1980 through 1987, Mr. Etter was President of South Central
Securities, a NASD member firm Broker-Dealer that he founded. From 1972
through 1979 he was Vice President of Crawford, Etter and Associates, a
developer, builder and marketer of residential properties.
Timothy J. Kopacka, a Certified Public Accountant, received a
Bachelors of Arts degree in Accounting and Finance from Michigan State
University. He is a member of the Michigan Association of CPA's, the Hawaii
Association of Public Accountants and the American Institute of CPA's. Mr.
Kopacka is a registered securities representative and insurance agent. Since
1984 he has been President of Kopacka & Associates, Inc., dba Grosse Pointe
Financial, a financial advisory firm. From 1980 to 1983 he was employed with
Deloitte, Haskins & Sells, an international accounting and consulting firm.
From 1983 through 1986, Mr. Kopacka was Chief Financial Officer for Federal
Tax Workshops, Inc., an educational and consulting firm for CPA's. From 1987
to 1990 he served as Vice President of Marketing and Operations for Kemper
Financial Services in their retirement plans division.
James P. Hollis is a Chartered Life Underwriter (CLU) and a Fellow,
Life Management Institute (FLMI) in pension planning. Mr. Hollis has a
business degree from Chattanooga State College, Tennessee. Since 1995, he has
been Vice President of First Financial USA, Inc. ("FFUSA"), a financial
products marketing company with offices in Houston, Texas and Longwood,
Florida. Mr. Hollis is also Vice President of H&H Services, Inc., the general
partner of the Selling Group Manager. Mr. Hollis is also a Regional Director
for Surety Life Insurance Company, a member of the Allstate Insurance Group,
and Marketing General Agent for All American Life Insurance Company, a member
of the US Life Group since 1991.
Dan H. Hill has a Bachelor of Business Administration degree in
accounting. Mr. Hill currently maintains an insurance license, a securities
license and a real estate brokers license. Since 1995, Mr. Hill has been
President of First Financial USA, Inc., a national financial products
marketing company, in charge of financial operations. Mr. Hill is also
President of H&H Services, Inc., the general partner of the Selling Group
Manager. In 1994 he founded First Financial Management Group, a financial
planning firm specializing in tax planning for small businesses. Since 1978,
he has owned and operated D.H. Hill Financial Services, a diversified
financial services firm, involved in insurance, real estate and securities.
Prior to that he was the Project Accountant for the Brown & Root, Inc. North
Slope Project.
Summary of the Advisory Agreement
The Company with the approval of the Trustees, including all of the
Independent Trustees, has entered into a contract with the Advisor (the
"Advisory Agreement') under which the Advisor is obligated to use its best
efforts to develop and present to the Company, whether through its own efforts
or those of third parties retained by it, suitable and a sufficient number of
investment opportunities which are consistent with the investment policies and
objectives of the Company and consistent with such investment programs as the
Trustees may adopt from time to time in conformity with the Declaration of
Trust. Although the Trustees have continuing exclusive authority over the
management of the Company, the conduct of its affairs and the management and
disposition of the Company's assets, the Trustees have initially delegated to
the Advisor, subject to the supervision and review of the Trustees and
consistent with the provisions of the Company's Declaration of Trust, the
power and duty to: (i) develop underwriting criteria and a model for the
Company's investment portfolio; (ii) acquire, retain or sell Mortgage
Investments; (iii) seek out, present and recommend investment opportunities
consistent with the Company's investment policies and objectives, and
negotiate on behalf of the Company with respect to potential investments or
the disposition thereof; (iv) pay the debts and fulfill the obligations of the
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Company, and handle, prosecute and settle any claims of the Company, including
foreclosing and otherwise enforcing mortgages and other liens securing
investments; (v) obtain for the Company such services as may be required for
mortgage brokerage and servicing and other activities relating to the
investment portfolio of the Company; (vi) evaluate, structure and negotiate
prepayments or sales of Mortgage Investments; (vii) from time to time, or as
requested by the Trustees, make reports to the Company as to its performance
of the foregoing services and (viii) to supervise other aspects of the
business of the Company.
The original term of the Advisory Agreement will terminate one year
from the date on which the first closing on Shares sold pursuant to this
Prospectus occurs. Thereafter, the Advisory Agreement may be renewed annually
by the Company, subject to an evaluation of the performance of the Advisor by
the Trustees. The Advisory Agreement may be terminated (i) without cause by
the Advisor or (ii) with or without cause by a majority of the Independent
Trustees, each without penalty, and each upon 60 days' prior written notice to
the non-terminating party.
The Advisor may engage in other business activities related to real
estate, Mortgage Investments or other investments whether similar or
dissimilar to those made by the Company or act as advisor to any other person
or entity having investment policies whether similar or dissimilar to those of
the Company (including other REITs). See "Investment Objectives and Policies".
However, except for the allocation of investments between the Company and
other Affiliated Programs as described under the Company and other Affiliated
Programs as described under the caption "Conflicts of Interest - Competition
by the Company with Affiliates for the Purchase and Sale of Mortgage
Investments", before the Advisor, the officers and directors of the Advisor
and all persons controlled by the Advisor and its officers and directors may
take advantage of an opportunity for their own account or present or recommend
it to others, they are obligated to present an investment opportunity to the
Company if (i) such opportunity is of a character which could be taken by the
Company, (ii) such opportunity is compatible with the Company's investment
objectives and policies and (iii) the Company has the financial resources to
take advantage of such opportunity.
For a description of the compensation to be paid to the Advisor in
consideration of the services it will render to the Company, see "Management
Compensation".
The Declaration of Trust provides that the Independent Trustees are to
determine, at least annually, that the amount of compensation which the
Company contracts to pay the Advisor is reasonable in relation to the nature
and quality of the services performed, based on the factors set forth in the
Declaration of Trust and such other factors as they deem relevant, including
the size of the fee in relation to the size, composition and profitability of
the portfolio of the Company, the success of the Advisor in generating
opportunities that meet the investment objectives of the Company, the rates
charged to other REITs and to investors other than REITs by advisors
performing similar services, the amount of additional revenues realized by the
Advisor and its Affiliates for other services performed for the Company, the
quality and extent of service and advice furnished by the Advisor, the
performance of the investment portfolio of the Company and the quality of the
portfolio of the Company in relationship to the investments generated by the
Advisor for its own account.
The Company shall reimburse the Advisor for: (i) the actual costs to
the Advisor or its Affiliates of goods, materials and services used for and by
the Company obtained from unaffiliated parties except for note servicing,
which shall be performed by an Affiliate of the Advisor and unaffiliated third
parties on terms no less favorable than those that would be paid to
independent third parties for comparable
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services; (ii) administrative services, if any, necessary to the operation of
the Company (other than the costs of the Advisor's personnel and other expense
items generally falling under the category of the Advisor's overhead directly
related to performance of services for which it is otherwise receiving fees
hereunder, which costs will be borne by the Advisor) and (iii) the costs of
certain personnel employed by the Company and directly involved in the
organization and business of the Company (including persons who may also be
employees or officers of the Advisor and its Affiliates) and for legal,
accounting, transfer agent, reinvestment and redemption plan administration,
data processing, duplicating and investor communications services performed by
employees or officers of the Advisor and its Affiliates which could be
performed directly for the Company by independent parties. The amounts charged
to the Company for services performed pursuant to clause (ii) above will not
exceed the lesser of (a) the actual cost of such services, or (b) the amount
which the Company would be required to pay to independent parties for
comparable services. No reimbursement will be allowed to the Advisor for
services performed pursuant to clause (ii) above unless the Advisor or its
personnel or Affiliates have the appropriate experience and expertise to
perform such services. The Company will reimburse the Advisor for any travel
expenses incurred in connection with the services provided hereunder and for
advertising expenses incurred by it in seeking any investments or seeking the
disposition of any investments held by the Company.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes material Federal income tax
considerations to the Company and the purchasers of the Shares. This
discussion is based on existing Federal income tax law, which is subject to
change, possibly retroactively. This discussion does not discuss all aspects
of Federal income taxation which may be relevant to a particular investor in
light of its personal investment circumstances or to certain types of
investors subject to special treatment under the Federal income tax laws
(including financial institutions, insurance companies, broker dealers and,
except to the extent discussed below, tax exempt entities and foreign
taxpayers) and it does not discuss any aspects of state, local or foreign tax
law. This discussion assumes that investors will hold their Shares as "capital
assets" (generally, property held for investment) under the Code. Prospective
investors are advised to consult their tax advisors as to the specific tax
consequences of purchasing, holding and disposing of the Shares, including the
application and effect of Federal, state, local and foreign income and other
tax laws.
General
The Company will elect to become subject to tax as a REIT, for Federal
income tax purposes, commencing with the taxable year ending December 31,
1996. The Board of Trustees of the Company currently expects that the Company
will operate in a manner that will permit the Company to qualify a REIT for
the taxable year ending December 31, 1996, and in each taxable year
thereafter. This treatment will permit the Company to deduct dividend
distributions to its stockholders for Federal income tax purposes, thus
effectively eliminating the "double taxation" that generally results when a
corporation earns income and distributes that income to its stockholders in
the form of dividends.
The Company has obtained an opinion of Berry, Moorman, King & Hudson,
P.C. ("Counsel") concerning the likely outcome on the merits of the material
federal income tax issues. In particular, it is Counsel's opinion that it is
more likely than not that (i) the Company has been organized in conformity
with the requirements for qualification as a REIT, and its proposed method of
operation described in this Prospectus and in the Declaration of Trust will
meet the requirements for taxation as a REIT under the Code for any taxable
year with respect to which the Company makes the necessary election; and (ii)
Distributions to a Shareholder which is a Tax-Exempt Entity will not
constitute UBTI, provided such Shareholder has not financed the acquisition of
its Shares with "acquisition indebtedness" within the
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<PAGE>
meaning of the Code. In rendering this opinion, Counsel has assumed that the
share ownership requirements (discussed below in "Qualification as a REIT")
will be met after the first taxable year of the Company and has also based its
opinion upon information and undertakings supplied by the Company and the
Advisor, and the facts contained in the Prospectus concerning the organization
and proposed operation of the Company. Any alteration of the foregoing may
adversely affect the validity of the opinions rendered.
Each prospective investor should note that the opinions described
herein represent only Counsel's best legal judgment as to the most likely
outcome of an issue if the matter were litigated. Opinions of counsel have no
binding effect or official status of any kind, and in the absence of a ruling
from the IRS, there can be no assurance that the IRS will not challenge the
conclusion or propriety of any of Counsel's opinions. The Company does not
intend to apply for a ruling from the IRS that it qualifies as a REIT.
Qualification as a REIT
Under the Code, a trust, corporation or unincorporated association
meeting certain requirements (set forth below) may elect to be treated as a
REIT for purposes of federal income taxation. If a valid election is made,
then, subject to certain conditions, the Company's income which is distributed
to its Shareholders will be taxed to such Shareholders without being subject
to tax at the Company level. The Company will be taxed on any of its income
that is not distributed to the Shareholders. Once made, the REIT election
continues in effect until voluntarily revoked or automatically terminated by
the Company's failure to qualify as a REIT for a taxable year. If the
Company's election to be treated as a REIT is terminated automatically, the
Company will not be eligible to elect REIT status until the fifth taxable year
after the year for which the Company's election was terminated. However, this
prohibition on a subsequent election to be taxed as a REIT is not applicable
if (i) the Company did not willfully fail to file a timely return with respect
to the termination taxable year, (ii) inclusion of incorrect information in
such return was not due to fraud with intent to evade tax, and (iii) the
Company establishes that failure to meet the requirements was due to
reasonable cause and not to wilful neglect. While the Company has no intention
of voluntarily revoking its REIT election, if it does so, it will be
prohibited from electing REIT status for the year to which such revocation
relates and for the next four taxable years.
There can be no assurance, however, that the Company will continue to
qualify as a REIT in any particular taxable year, given the highly complex
nature of the rules governing REITs, the ongoing importance of factual
determinations and the possibility of future changes in the circumstances of
the Company. If the Company were not to qualify as a REIT in any particular
year, it would be subject to Federal income tax as a regular, domestic
corporation, and its stockholders would be subject to tax in the same manner
as stockholders of such corporation. In this event, the Company could be
subject to potentially substantial income tax liability in respect of each
taxable year that it fails to qualify as a REIT, and the amount of earnings
and cash available for distribution to its stockholders could be significantly
reduced or eliminated.
The following is brief summary of certain technical requirements that
the Company must meet on an ongoing basis in order to qualify, and remain
qualified, as a REIT under the Code.
Share Ownership Tests The Shares of the Company (i) must be
transferable, (ii) must be held by 100 or more persons during at least 335
days of a taxable year of 12 months (or during a proportionate part of a
taxable year of less than 12 months), and (iii) no more than 50% of the
outstanding Shares may be owned, directly or indirectly, by five or fewer
individuals at any time during the last half of the Company's taxable year.
The requirements of (ii) and (iii) are not applicable to the first taxable
year for which an election to be treated as a REIT is made. On the Initial
Closing Date, the
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Company has represented that it will have at least 100 Shareholders who are
independent of each other and the Company. In addition, the Declaration of
Trust permits a restriction on transfers of Shares that would result in
violation of the rule in (iii) above. See "Summary of Declaration of Trust".
Applicable Treasury Regulations state that such a restriction will not cause
the shares to be nontransferable as required by (i).
Asset Tests The Company must generally meet the following asset tests
(the "REIT Asset Tests") at the close of each quarter of each taxable year.
(a) at least 75% of the value of the Company's total assets
must consist of Qualified REIT Real Estate Assets, Government
securities, cash, and cash items (the "75% Asset Test"); and
(b) the value of securities held by the Company but not taken
into account for purposes of the 75% Asset Test must not exceed (i) 5%
of the value of the Company's total assets in the case of securities
of any one non-government issuer, or (ii) 10% of the outstanding
voting securities of any such issuer.
Gross Income Tests The Company must generally meet the following gross
income tests (the "REIT Gross Income Tests") for each taxable year.
(a) at least 75% of the Company's gross income must be derived
from certain specified real estate sources including interest income
and gain from the disposition of Qualified REIT Real Estate Assets or
"qualified temporary investment income" (i.e., income derived form
"new capital" within one year of the receipt of such capital) (the
"75% Gross Income Test");
(b) at least 95% of the Company's gross income for each taxable
year must be derived from sources of income qualifying for the 75%
Gross Income Test, dividends, interest, and gains from the sale of
stock or other securities not held for sale in the ordinary course of
business (the "95% Gross Income Test"); and
(c) less than 30% of the Company's gross income must be derived
from the sale of Qualified REIT Real Estate Assets held for less than
four years, stock or securities held for less than one year (including
certain interest rate swap and cap agreements entered into to hedge
variable rate debt incurred to acquire Qualified Real Estate Assets)
and certain "dealer" property (the "30% Gross Income Test").
The Company intends to maintain its REIT status by carefully
monitoring its income, to comply with the REIT Gross Income Tests. See
"Taxation of the Company" for a discussion of the tax consequences of failure
to comply with the REIT provisions of the Code.
Distributions to Shareholders Each year, the Company must distribute
to its Shareholders an amount equal to (a) 95% of the sum of (i) its REIT
Taxable Income (defined below) before deduction of dividends paid and
excluding any net capital gain and (ii) the excess of net income from
"foreclosure property" (described above in "Sources of Income") over the tax
on such income, minus (b) any "excess noncash income" (income attributable to
leveled stepped rents, original issue discount on purchase money debt, or a
like kind exchange that is later determined to be taxable) (the "95%
Distribution Test").
REIT Taxable Income is the taxable income of a REIT, computed as if
the REIT were an ordinary corporation, but with an allowance for a deduction
for dividends paid, an exclusion for net
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income from foreclosure property, a deduction for the 100% tax on the greater
of the amount by which the REIT fails the 75% or the 95% income test, and an
exclusion for an amount equal to any net income derived from prohibited
transactions.
Dividends that are either (i) paid during the taxable year or (ii)
declared before the Company's tax return for the taxable year must be filed
(including extensions) and paid within 12 months of the end of such taxable
year and no later than the Company's next regular distribution payment, are
considered distributions for purposes of the 95% Distribution Test. Such
dividends are taxable to the Shareholders (other than Tax-Exempt Entities) in
the years in which they are paid, even though they reduce the Company's REIT
Taxable Income for the year in which declared. However, see "Taxation of the
Company" for discussion of an excise tax provision which could require the
Company to distribute its fourth quarter dividend in each year on or before
January 31st of the following year.
The Trustees intend to make Distributions to the Shareholders on a
monthly basis sufficient to meet the 95% Distribution Test. Because of the
possible receipt of income from certain sources without corresponding cash
receipts, because of timing differences that may arise between the realization
of taxable income and net cash flow (e.g. as a result of the original issue
discount rules), and because of possible adjustments by the IRS to deductions
and gross income reported by the Company, it is possible that the Company may
not have sufficient cash or liquid assets at a particular time to distribute
95% of its REIT Taxable Income. In such event, the Company may attempt to
declare a consent dividend, which is a hypothetical distribution to
Shareholders out of the earnings and profits of the Company. The effect of
such a consent dividend, to those Shareholders who agree to such treatment,
and as long as such consent dividend is not preferential, would be that such
Shareholders would be treated for federal income tax purposes as if such
amount had been paid to them in cash and they had then immediately contributed
such amount back to the Company as additional paid-in capital. This would
result in taxable income distribution but would also increase their tax basis
in their Shares by the amount of the taxable income recognized.
If the Company fails to meet the 95% Distribution Test due to an
adjustment to the Company's income by reason of a judicial decision or by
agreement with the IRS, the Company may pay a "deficiency dividend" to
Shareholders in the taxable year of the adjustment, which would relate back to
the year being adjusted. In such case, the Company would also be required to
pay interest plus a penalty to the IRS. However, a deficiency dividend cannot
be used to meet the 95% Distribution Test if the failure to meet such test was
not due to a later adjustment to the Company's income but rather was
attributable to the Company's failure to distribute sufficient amounts to the
Shareholders. If the Company cannot declare a consent dividend or if it lacks
sufficient cash to distribute 95% of its REIT Taxable Income or to pay a
"deficiency dividend" in appropriate circumstances, the Company could be
required to borrow funds or liquidate a portion of its investments in order to
pay its expenses, make the required cash distributions to Shareholders, or
satisfy its tax liabilities. There can be no assurance that such funds will be
available to the extent, and at the time, required by the Company.
In addition, if the IRS successfully challenged the Company's
deduction of all or a portion of the fees it pays to the Advisor, such
payments could be recharacterized as dividend distributions to the Advisor in
its capacity as Shareholder. If such distributions were viewed as preferential
distributions they would not count toward the 95% Distribution Test. Because
of the factual nature of the inquiry, Counsel is unable to opine as to the
deductibility of such fees. See "Taxation of the Company - Fees paid by the
Company", below.
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Termination of the Company
In any year in which the Company qualifies as a REIT, the Company will
generally not be subject to Federal income tax on that portion of its REIT
taxable income or capital gain which is distributed to its stockholders. The
Company will, however, be subject to Federal income tax at normal corporate
income tax rates upon any undistributed taxable income or capital gain.
Notwithstanding its qualification as a REIT, the Company may also be
subject to tax in certain other circumstances. If the Company fails to satisfy
either the 75% or the 95% Gross Income Test, but nonetheless maintains its
qualification as a REIT because certain other requirements are met, it will
generally be subject to a 100% tax on the greater of the amount by which the
Company fails either the 75% or the 95% Gross Income Test. The Company will
also be subject to a tax of 100% on net income derived from any "prohibited
transaction", and if the Company has (i) net income from the sale or other
disposition of "foreclosure property' which is held primarily for sale to
customers in the ordinary course of business or (ii) other non-qualifying
income from foreclosure property, it will be subject to Federal income tax on
such income at the highest corporate income tax rate. In addition, if the
Company fails to distribute during each calendar year at least the sum of (i)
85% of its REIT ordinary income for such year and (ii) 95% of its REIT capital
gain net income for such year, the Company would be subject to a 4% Federal
excise tax on the excess of such required distribution over the amounts
actually distributed during the taxable year, plus any undistributed amount of
ordinary and capital gain net income from the preceding taxable year. The
Company may also be subject to the corporate alternative minimum tax, as well
as other taxes in certain situations not presently contemplated.
Taxation of Taxable Shareholders
Dividend Income. Distributions from the Company will be taxable to
Shareholders who are not Tax-Exempt Entities as ordinary income to the extent
of the current or accumulated earnings and profits of the Company.
Distributions from the Company which are designated as capital gains dividends
by the Company will be taxed as long-term capital gains to taxable
Shareholders to the extent that they do not exceed the Company's actual net
capital gain for the taxable year. Shareholders that are corporations may be
required to treat up to 20% of any such capital gains dividends as ordinary
income. Such distributions, whether characterized as ordinary income or as
capital gain, are not eligible for the 70% dividends received deduction for
corporations.
Distributions from the Company to Shareholders which are not
designated as capital gains dividends and which are in excess of the Company's
current or accumulated earnings and profits are treated as a return of capital
to the Shareholders and reduce the tax basis of a Shareholder's Shares (but
not below zero). Any such distribution in excess of the tax basis is taxable
to any such Shareholder that is not a Tax-Exempt Entity as a gain realized
from the sale of the Shares.
The declaration by the Company of the consent dividend would result in
taxable income to consenting Shareholders other than Tax-Exempt Entities)
without any corresponding cash distributions.
See "Qualification as a REIT - Distributions to Shareholders", above.
Portfolio Income. Dividends paid to Shareholders will be treated as
portfolio income with respect to Shareholders who are subject to the passive
activity loss rules. Such income therefore will not be subject to reduction by
losses from passive activities (i.e. any interest in a rental activity or in a
trade or business in which the Shareholder does not materially participate,
such as an interest held as a limited partner) of such Shareholder. Such
Distributions will, however, be considered investment income which may be
offset by certain investment expense deductions.
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No Flow Through of Losses. Shareholders should note that they are not
permitted to deduct any net losses of the Company.
Sale of Shares. Shareholders who sell their Shares will recognize
taxable gain or loss equal to the difference between the amount realized on
such sale and their basis in such Shares. Gain or loss recognized by a
Shareholder who is not a dealer in securities and whose Shares have been held
for more than one year will generally be taxable as long-term capital gain or
loss.
Back-up Withholding. Distributions from the Company will ordinarily
not be subject to withholding of federal income taxes. Withholding of such tax
at a rate of 31% may be required, however, by reason of a failure of a
Shareholder to supply the Company or its agent with the Shareholder's Taxpayer
Identification Number. Such "Backup" withholding may also apply to a
Shareholder who is otherwise exempt from backup withholding if such
shareholder fails properly to document his status as an exempt recipient of
distributions. Each Shareholder will therefore be asked to provide and certify
his correct Taxpayer Identification Number or to certify that he is an exempt
recipient.
Taxation of Tax-Exempt Entities
In general, a Shareholder which is a Tax-Exempt Entity will not be
subject to tax on distributions from the Company. The IRS has ruled that
amounts distributed as dividends by a qualified REIT do not constitute
unrelated business taxable income ("UBTI") when received by a Tax-Exempt
Entity. Thus, Distributions paid to a Shareholder which is a Tax-Exempt entity
and gain on the sale of Shares by a Tax-Exempt Entity (other than those
Tax-Exempt Entities described below) will not be treated as UBTI, even if the
Company incurs indebtedness in connection with the acquisition of real
property or the acquisition or making of a Mortgage, provided that the
Tax-Exempt Entity has not financed the acquisition of its Shares of the
Company.
For Tax-Exempt Entities which are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Code
sections 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from an
investment in the Company will constitute UBTI unless the organization is able
properly to deduct amounts set aside or placed in reserve for certain purposes
so as to offset the UBTI generated by its investment in the Company. Such
prospective investors should consult their own tax advisors concerning these
"set aside" and reserve requirements.
In the case of a "qualified trust" (generally, a pension or profit
sharing trust) holding stock in a REIT, the Revenue Reconciliation Act of 1993
treats the beneficiaries of such a trust as holding stock in the REIT in
proportion to their actuarial interests in the qualified trust, instead of the
prior law treatment of a qualified trust as a single individual. The Revenue
Reconciliation Act of 1993 also requires a qualified trust that holds more
than 10% of the shares of a REIT to treat a percentage of REIT dividends as
UBTI if the REIT incurs debt to acquire or improve real property. This new
rule applies to taxable years beginning in 1994 only if (i) the qualification
of the REIT depends upon the application of the "look through" exception
(described above) to the restriction on REIT shareholdings by five or fewer
individuals, including qualified trusts, and (ii) the REIT is "predominantly
held" by qualified trusts. A REIT is "predominantly held" by qualified trusts
if either (A) a single qualified trust holds more than 25% by value each
owning more than 10% by value, hold in the aggregate more than 50% of the
interests in the REIT. The percentage of any dividend paid (or treated as
paid) to such a qualified trust that is treated as UBTI is equal to the amount
of modified gross income (gross income less directly connected expenses) from
the unrelated trade or business of the REIT (treating the REIT as if it were a
qualified trust), divided by the total modified gross income of the REIT. A de
minimis exception applies
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where the percentage is less than 5%. Because (i) the Company expects the
Shares to be widely held, and (ii) the Declaration of Trust prohibits any
Shareholder from owning more than 9.8 percent of the Shares entitled to vote,
this new provision should not result in UBTI to any Tax-Exempt Entity.
Statement of Stock Ownership
The Company is required to demand annual written statements from the
record holders of designated percentages of its Shares disclosing the actual
owners of the Shares. The Company must also maintain, within the Internal
Revenue District in which it is required to file its federal income tax
return, permanent records showing the information it has received as to the
actual ownership of such Shares and a list of those persons failing or
refusing to comply with such demands.
State and Local Taxes
The tax treatment of the Company and its Shareholders in states having
taxing jurisdiction over them may differ from the federal income tax
treatment. Accordingly, no discussion of state taxation of the Company, the
Shares or the Shareholders is provided herein nor is any representation made
as to the tax status of the Company, the Shares or Shareholders in such
states. Each Shareholder should consult his own tax advisor as to the status
of the Shares under the respective state tax laws applicable to him.
ERISA CONSIDERATIONS
In considering whether to purchase Shares with the assets of a
Qualified Plan, the plan fiduciary should consider (i) whether the investment
is in accordance with the documents and instruments governing the Qualified
Plan; (ii) whether such an investment, alone and in conjunction with any other
plan investment, satisfies the diversification, prudence and liquidity
requirements of ERISA, to the extent applicable; (iii) the need to value the
assets of the Qualified Plan annually; and (iv) the effect if the assets of
the Company are treated as "plan assets" following such investment.
The plan fiduciary should also recognize that ERISA generally requires
that the assets of an employee benefit plan be held in trust and that the
trustee, or a duly authorized investment manager (within the meaning of
Section 3(38) of ERISA), has exclusive authority and discretion to manage and
control the assets of the plan. As discussed below, the Company has received
an opinion of Berry, Moorman, King & Hudson, P.C. ("Counsel") that, under
current law (and subject to certain reservations and requirements set forth
therein), it is more likely than not that the assets of the Company will not
be deemed to be "plan assets" if Qualified Plans invest in Shares. In the
event that the assets of the Company are nevertheless deemed to be plan assets
under ERISA despite such opinion of Counsel, the Trustees and the Advisor
would be deemed fiduciaries to each Qualified Plan which purchased Shares. As
such, they would be held to the fiduciary standards of ERISA in all Company
investments, and the person or persons who have investment discretion over the
assets of Qualified Plans subject to ERISA who authorized the investment could
be liable under ERISA for investments made by the Company which do not conform
to such standards.
If the Trustees and the Advisors are considered fiduciaries under
ERISA and the Code, they will also be "parties in interest" under ERISA (and
"disqualified persons" under the Code) with respect to an investing Qualified
Plan and one or more of their Affiliates could also be so characterized. ERISA
and the Code absolutely prohibit certain transactions between a Qualified Plan
and a "party in interest" (or "disqualified person"). Under these rules,
certain of the contemplated transactions between the Trustees and the Advisor
or any of their Affiliates and the Company could constitute "prohibited
transactions" under ERISA and the Code. In such event, certain of the parties
involved in the transaction could be
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required to take any or all of the following actions: (i) undo the
transaction, (ii) restore to the Qualified Plan any profit realized on the
transaction, (iii) make good to the Qualified Plan any loss suffered by it as
a result of such transaction, and (iv) pay an excise tax. If an IRA engages in
a prohibited transaction, it could lose its tax-exempt status, but, in that
case, the other penalties for prohibited transactions would not apply.
A fiduciary of a Qualified Plan is prohibited from taking certain
actions with respect to the assets of such plan, including investing the
assets with respect to which it is a fiduciary in an entity from which the
fiduciary could derive a benefit. To prevent a violation of these rules, the
Company will not permit the purchase of Shares with assets of any Qualified
Plan (including an IRA) if the Company, the Sponsor, the Advisor or any of
their Affiliates (i) has investment discretion with respect to the assets of
the Qualified Plan to be invested, (ii) regularly gives individualized
investment advice which serves as the primary basis for the investment
decisions made with respect to such assets, or (iii) is otherwise a fiduciary
with respect to the assets for purposes of the prohibited transaction
provisions of ERISA or the Code.
Plan Assets Regulation/Opinion of Counsel
On November 13, 1986, the Department of Labor promulgated a final
regulation defining the term "plan assets" for purposes of ERISA and the
prohibited transaction rules of the Code (the "Final Regulation"). Under the
Final Regulation, when a plan makes an equity investment in another entity,
the underlying assets of that entity generally will not be considered plan
assets if (1) the equity interest is a "publicly offered security" (as such
term is used in the Final Regulation) or a security issued by an investment
company registered under the Investment Company Act of 1940, (2) the entity is
a "real estate operating company" (as such term is used in the Final
Regulation), or (3) equity participation by benefit plan investors is "not
significant" (as such term is used in the Final Regulation).
The Final Regulation provides that a "publicly offered security" is a
security that is (i) freely transferable, (ii) part of a class of securities
that is owned by 100 or more investors independent of the issuer and of one
another, and (iii) sold to the plan as part of an offering of securities to
the public pursuant to an effective registration statement under the
Securities Act of 1933 and the class of securities of which such security is a
part is registered under the Securities Exchange Act of 1934 within 120 days
(or such later time as may be allowed by the Securities and Exchange
Commission) after the end of the fiscal year of the issuer during which the
offering of such securities to the public occurred. The Company has
represented that the Initial Closing Date for the sale of Shares will not take
place unless a minimum of 100 investors independent of each other and the
Company subscribe for Shares and that condition (iii) will be met with respect
to the Shares.
The underlying assets of the Company will not be considered to be plan
assets so long as the Shares remain "freely transferable" under the Final
Regulation. The Final Regulation provides that a determination as to whether a
security is freely transferable is inherently factual in nature and must be
made on the basis of all relevant facts and circumstances. The Final
Regulation also provides that if a security is part of an offering in which
the minimum investment is $10,000 or less (as the case with the Shares),
certain enumerated restrictions on transfer and assignment ordinarily will
not, along or in combination, affect a finding that such securities are freely
transferable. The preamble to the Final Regulation (which is not considered
primary legal authority) goes one step further providing that if the minimum
investment requirement is satisfied and there are no transfer restrictions
other than those enumerated, the security in effect will be presumed to be
freely transferable. A security that is not entitled to the presumption may
still qualify as freely transferable if the facts and circumstances so
indicate.
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The Company has represented that no restrictions on transferability of
the Shares exist other than those set forth in the Declaration of Trust.
Accordingly, the Shares should qualify as "freely transferable" under the
Final Regulation, and Counsel has rendered an opinion that, if the Shares are
"widely held" and properly registered for securities purposes under the
requirements described above, it is more likely than not that the Shares will
be "publicly offered securities" and that the underlying assets of the Company
will not be considered to be plan assets under the Final Regulation.
The Company has determined that the Initial Closing Date for the sale
of Shares will not take place until it obtains an opinion of Counsel that the
Company qualifies for an exemption from plan assets treatment.
Annual Valuation
A fiduciary of a Qualified Plan subject to ERISA is required to
determine annually the fair market value of the assets of such Qualified Plan
as of the end of such Plan's fiscal year and to file annual reports reflecting
such value. In addition, a trustee of an IRA must provide an IRA participant
with a statement of the value of the IRA each year.
Because the Shares are not expected to be listed for quotation and a
public market is unlikely to develop until the sale of all of the Shares, it
is likely that no determination of the fair market value of a Share will be
readily available. In these circumstances, the Declaration of Trust provides
that the Company may, but need not, make available to fiduciaries of Qualified
Plans an annual good faith estimate of the value of the Company's portfolio of
investments, on the basis of their value if then liquidated, and the amount
attributable to each Share. There can be no assurance that, if the Company
does provide this estimate, (i) such value could or will actually be realized
by the Company or by Shareholders upon liquidation (in part because appraisals
or estimates of value do not necessarily indicate the price at which assets
could be sold and because no attempt will be made to estimate the expenses of
selling any asset of the Company), (ii) Shareholders could realize such value
if they were to attempt to sell their Shares, or (iii) such value would comply
with the ERISA or IRA requirements described above.
SUMMARY OF DECLARATION OF TRUST
Each Shareholder shall be bound by and deemed to have agreed to the
terms of the Declaration of Trust by his election to become a Shareholder. The
Company's Declaration of Trust is the Company's organizational document and it
has been reviewed and approved unanimously by the Trustees. The following is a
summary of the material provisions of the Declaration of Trust but is
qualified in its entirety by specific reference to the Declaration of Trust
attached as an exhibit to the Registration Statement.
Shareholder Meetings
An annual meeting of Shareholders for the election of the Trustees and
such other business as shall be stated in the notice of meeting will be held
in 1997 and each year thereafter, not less than 30 days after delivery of the
annual report, but in no event later than June 30 of each such year. Special
meetings may be called by the Chairman of the Board, by the President, by a
majority of Trustees or by a majority of the Independent Trustees, or by
Shareholders holding, in the aggregate, not less than 10% of the outstanding
Shares. At any meeting of Shareholders, each Shareholder is entitled to one
vote for each Share owned of record (other than Excess Shares, described
below) on the applicable record date. In general, the presence in person or by
proxy of a majority of the outstanding Shares shall constitute a
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quorum, a majority vote of the Shareholders will be binding on all the
Shareholders of the Company. See "Description of the Shares", below.
Shareholder Voting Rights
Except as otherwise provided, all Shares shall have equal voting
rights. Shareholders are entitled to vote by written consent and do not have
cumulative voting rights.
Excess Shares (Shares held by a Shareholder in excess of 9.8% of the
outstanding Shares entitled to vote) are not entitled to any voting rights and
are not considered outstanding for the purpose of determining a quorum.
All elections for Trustees shall be decided by a plurality vote (at a
meeting or without a meeting, provided that at least a majority of the
outstanding Shares shall cast a vote in such election). Unless otherwise
provided by the Declaration of Trust, all other questions shall be decided by
a majority of the votes cast at a meeting at which a quorum is present or a
majority of outstanding Shares cast, without a meeting.
Each Shareholder entitled to vote may do so (i) at a meeting, in
person, by written proxy or by a signed writing or consent directing the
manner in which he desires that his vote be cast (which must be received by
the Trustees prior to such meeting) or (ii) without a meeting, by a signed
writing or consent directing the manner in which he desires that his vote be
cast (which must be received by the Trustees prior to the date the votes of
the Shareholders are to be counted).
Any or all Trustees may be removed, with or without cause, by the
affirmative vote of the holders of at least a majority of the outstanding
Shares entitled to vote.
None of the Advisor, the Trustees nor their Affiliates may vote any
Shares held by them on matters submitted to the Shareholders regarding: (1)
the removal of the Advisor, the Trustees or their Affiliates and (2) any
transaction between the Company and the Advisor, the Trustees or their
Affiliates. Shares held by the Advisor, the Trustees and their Affiliates
shall not be included in determining the number of outstanding Shares entitled
to vote on these matters, nor in the Shares actually voted thereon.
The Company is subject to termination at any time by the vote or
written consent of the holders of a majority of the outstanding Shares.
A vote of the majority of the outstanding Shares entitled to vote is
necessary to amend the Declaration of Trust, except that amendment of the
provision regarding supermajority approval of certain Rollups or conversion
transactions requires the vote of the holders of 80% of the outstanding
Shares. See "Summary of Declaration of Trust - Amendment of the Declaration of
Trust", below.
Shareholder Lists; Inspection of Books and Records
An alphabetical list of names, record addresses and business telephone
numbers of all Shareholders with the number of Shares held by each, shall be
maintained as part of the books and records of the Company at the Company's
principal office. Such list shall be updated at least quarterly, and shall be
open for inspection by a Shareholder or his designated agent upon such
Shareholder's request. Such list shall also be mailed to any Shareholder
requesting the list within 10 days of the request. The Company may require the
Shareholder requesting such shareholder's list to represent that the list is
not requested for a commercial purpose unrelated to the Shareholder's interest
in the Company.
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Any Shareholder and any designated representative thereof shall be
permitted access to all records of the Company at all reasonable times, and
may inspect and copy any of them. In addition, the books and records of the
Company shall be open for inspection by state securities administrators upon
reasonable notice and during normal business hours at the principal place of
business of the Company.
Trustees
A majority of the Trustees shall at all times be Independent Trustees.
The Board of Trustees will initially consist of four Trustees, to include
three Independent Trustees and one Trustee employed by the Company. Each
Trustee shall serve a term of one year, except that the first annual election
by Shareholders will be held in 1997.
The Declaration of Trust provides that the number of Trustees may be
increased or decreased by the Trustees but shall not be less than three nor
more than nine at any one time. Any Trustee may resign at any time and may be
removed by a majority of the Trustees for cause only or by a majority of the
outstanding Shares entitled to vote with or without cause. Vacancies occurring
as a result of the removal of Trustees by Shareholders shall be filled by the
Shareholders.
No bond is required to secure the performance of a Trustee unless the
Trustees so provide. The Trustees are empowered to fix the compensation of all
officers whom they select, including the Administrator. The Independent
Trustees will be paid the greater of $1,000 per meeting or $4,000 per year.
Trustees affiliated with the Advisor or employed by the Company will not be
compensated by the Company for their service as Trustees.
None of the Administrator, the Advisor, the Trustees nor their
Affiliates may vote any Shares held by them on matters submitted to the
Shareholders regarding the removal of the Administrator, Advisor, the Trustees
or their Affiliates. Shares held by the Administrator, the Advisor, the
Trustees and their Affiliates may not be included in determining the number of
outstanding Shares entitled to vote on these matters, nor in the Shares
actually voted thereon.
Amendment of the Declaration of Trust
The Company's Declaration of Trust may be amended by the vote of the
holders of a majority of the outstanding Shares and a majority of the
Trustees, including a majority of the Independent Trustees, except that: (a)
the amendment of the provision contained in the Declaration of Trust regarding
super majority shareholder approval of certain Roll-Up or conversion
transactions requires the vote of the holders of 80% of the outstanding
Shares; and (b) any amendment which would change any rights with respect to
any outstanding class of securities of the Company, by reducing the amount
payable thereon upon liquidation of the Company, or by diminishing or
eliminating any voting rights pertaining thereto, requires the vote or written
consent of the holders of two-thirds of the outstanding securities of such
class. Notwithstanding the foregoing, a majority of the Trustees, including a
majority of the Independent Trustees, are authorized to amend the Company's
Declaration of Trust without the consent of Shareholders (i) to the minimum
extent necessary, based on an opinion of counsel, if any provision of the
Declaration of Trust conflicts with the provisions of the Code applicable to
REITs, the regulations thereunder, or to comply with other laws or
regulations, (ii) to delete or add any provision required to be deleted or
added by the Securities and Exchange Commission or a state "blue sky"
commissioner, which addition or deletion is deemed by such official to be for
the benefit or protection of Shareholders, or (iii) to clarify an ambiguity,
correct an inconsistency or supplement the Declaration of Trust in a manner
not inconsistent with any other provision contained therein.
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Responsibility of Trustees
The Board of Trustees is responsible for the general policies of the
Company and for such general supervision and management of the business of the
Company as may be necessary to insure that such business conforms to the
provisions of this Declaration of Trust.
The Trustees are accountable to the Shareholders as fiduciaries and
are required to perform their duties in good faith and in a manner each
Trustee believes to be in the best interest of the Company and its
Shareholders, with such care, including reasonable inquiry, as a prudent
person in a like position would use under similar circumstances. See
"Fiduciary Responsibilities of Trustees".
The laws of the State of Maryland and the Company's Declaration of
Trust provide certain limits on the liability of the Trustees and officers to
the Company and its Shareholders. See "Fiduciary Responsibility of Trustees -
Limitation on Liability of Trustees and Officers". In addition, the
Declaration of Trust provides for the Company to indemnify the Trustees, the
Advisor and their Affiliates against certain liabilities. See "Fiduciary
Responsibility of Trustees - Indemnification of Trustees, Officers and
Others".
The Declaration of Trust provides that the Trustees shall have full,
absolute and exclusive power, control, management and authority over the
Company's assets and over the business and affairs of the Company to the same
extent as if the Trustees were the sole owners thereof in their own right. The
Trustees have the power to enter into commitments to make any investment,
purchase or acquisition, or to exercise any power authorized by the
Declaration of Trust. The Company intends, however, to retain the
Administrator to supervise the day to day operations of the Company, subject
to compliance with the Company's investment objectives and policies, and the
supervision of the Trustees.
The Trustees have the responsibility to establish written policies on
investments and borrowings and shall monitor the administrative procedures,
investment operations and performance of the Company and the Advisor to assure
that such policies are carried out. Until modified by the Trustees, the
Company shall follow the policies on investments and borrowings set forth in
this Prospectus. The approval of a majority of the Independent Trustees must
approve any change in the investment objectives of the Company or the
Administrator.
In addition, the Trustees have a fiduciary duty to the Shareholders to
review the relationship of the Company with the Advisor.
The Trustees (including the Independent Trustees) have the
responsibility periodically to monitor the allocation of Mortgage Investments
among the Company and the Affiliated Programs to insure that the allocation
method described herein is being applied fairly to the Company. See "Conflicts
of Interest - Competition by the Company with Affiliates for Purchase and Sale
of Mortgages".
Limited Liability of Shareholders
The Maryland statute under which the Company was formed provides that
Shareholders are not personally liable for the obligations of the Company. The
Declaration of Trust also provides that every written agreement entered into
by the Company shall contain a provision that the obligations of the Company
are not enforceable against the Shareholders personally.
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Description of the Shares
Except with respect to "Excess Shares" (described in the following
paragraph), the Shares are of one class and have a par value of $.01 per
Share. The Company is authorized to issue as many Shares (including fractional
shares) as the Trustees may determine. Shareholders are entitled to one vote
for each Share held on all matters presented for a vote of Shareholders. In
meetings where a quorum is present, a majority of the votes cast by
Shareholders is required to adopt a provision, unless otherwise provided. All
Shares participate equally in distributions when and as declared by the
Trustees and in the assets available for distribution after payment of
liabilities upon dissolution and liquidation. The Shares, when issued, will be
fully paid and nonassessable and will not be subject to redemption by the
Company (except in the case of a redemption to prevent a violation of the
concentration of ownership provisions of the Code applicable to REITs), nor
will they have any preference, conversion, exchange, preemptive or cumulative
voting rights.
"Excess Shares" are those Shares held by a Shareholder which are in
excess of 9.8% of the outstanding Shares entitled to vote.
Any demands or distributions with respect to the Excess Shares (see
"Shareholder Voting Rights") shall be held by the Company in a savings bank
account for the benefit of the holders of such Excess Shares until such time
as the Excess Shares cease to be Excess Shares.
Excess Shares shall be deemed to have been offered for sale to the
Company for a period of 120 days from the date of (i) the transfer that
created the Excess Shares, if the Company had actual knowledge of the
transfer, or (ii) if the Company does not know of the transfer, the
determination by the Trustees that a transfer creating Excess Shares has taken
place. The price for such Excess Shares shall be their fair market value as of
the date of either (i) or (ii) above. After the Company gives notice of its
intention to purchase the Excess Shares, such Shares shall have no further
rights (beyond the right of the Shareholder to receive payment therefor). In
the event the Company determines not to purchase the Excess Shares, said
Shares shall have no further rights until they are held by a Shareholder
owning 9.8% or less of the outstanding Shares of the Company.
Maryland Anti-Takeover Law Provisions
The Declaration of Trust provides that the Company elects to be
governed by the special voting requirements of the Maryland Corporations and
Associations Article (the "Special Voting Article").
The Special Voting Article contains an "interested stockholder"
provision that prohibits a Maryland corporation (which includes a Maryland
real estate investment trust) from engaging in a broad range of business
combination or other similar transaction with an interested stockholder for a
period of five years after the stockholder first became an interested
stockholder and thereafter may not be consummated unless (i) the transaction
is first recommended by the board of the Maryland company, (ii) the
transaction is approved by the affirmative vote of at least 80% of the votes
entitled to be cast by all stockholders and 66 2/3% of the votes entitled to
be cast by all stockholders other than the interested stockholder unless,
among other things, the Company' stockholders receive a minimum price (as
defined in the Special Voting Article) for their shares and the consideration
is received in cash or in the same form as previously paid by the interested
stockholder for its shares.
A business combination with an interested stockholder which is
approved by the board of a Maryland company at any time before an interested
stockholder first becomes an interested stockholder is not subject to the
special voting requirements or fair price provisions of the Special Voting
Article.
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An amendment to a Maryland company's charter electing not to be subject to the
foregoing requirements must be approved by the affirmative vote of at least
80% of the votes entitled to be cast by all holders of outstanding shares of
voting stock and 66 2/3% of the votes entitled to be cast by holders of
outstanding shares of voting stock who are not interested stockholders. Any
such amendment is not effective until eighteen months after the vote of
stockholders and does not apply to any business combination of a company with
a stockholder who was an interested stockholder on the date of the stockholder
vote.
The Special Voting Article also contains a control share provision
which states that "control shares" acquired in a "control share acquisition"
have no voting rights except to the extent approved by a vote of two-thirds of
the votes entitled to be cast on the matter, excluding shares of stock owned
by the acquirer or by officers or directors who are employees of the company.
"Control shares" are voting shares of stock which, if aggregated with all
other shares of stock previously acquired by such a person, would entitle the
acquirer to exercise voting power in electing directors within one of the
following ranges of voting power: (i) 20% or more but less than 33 1/3%, or
(ii) 33 1/3% or more but less than a majority, or (iii) a majority of all
voting power. Control shares do not include shares the acquiring person is
entitled to vote as a result of having previously obtained shareholder
approval. A "control share acquisition" means, subject to certain exceptions,
the acquisition of, ownership of, or the power to direct the exercise of
voting power with respect to, control shares.
A person who has made or proposes to make a control share acquisition
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the board of directors to call a special meeting of
shareholders to be held within 50 days of demand to consider the voting rights
of the shares. If no request for a meeting is made, the Maryland company may
itself present the question at any shareholders' meeting.
If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as permitted by the
statute, then, subject to certain conditions and limitations, the Maryland
company may redeem any or all of the control shares (except those for which
voting rights have previously been approved) for fair value, without regard to
voting rights. Fair value shall be determined as of the date of the meeting of
the shareholders at which the voting rights of the control shares are
considered as of the date of the last acquisition of control shares by the
acquiring person. If voting rights for control shares are approved at a
shareholders' meeting and the acquirer becomes entitled to vote a majority of
the shares entitled to vote, all other shareholders may exercise appraisal
rights. The fair value of the shares as determined for purposes of such
appraisal rights may not be less than the highest price per share paid in the
control share acquisition, and certain limitations and restrictions otherwise
applicable to the exercise of dissenters' rights do not apply in the context
of a control share acquisition.
Restrictions on Transfer of Shares
Certain transfers or purchases may be prohibited by the Trustees to
ensure the Company's continued qualification as a REIT under the Code.
For the Company to qualify as a REIT under the Code, not more than 50%
of its outstanding Shares may be owned by five or fewer individuals during the
last half of the year, and the Shares must be owned by 100 or more persons
during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year except with respect to the first
taxable year for which an election to be treated as a REIT is made. In order
to prevent five or fewer individuals from acquiring more than 50% of the
Company's outstanding Shares, and the resulting failure of the Company to
qualify
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as a REIT, the Company will limit the ownership and transfer of the Shares in
order to comply with such limitations.
The Trustees will require each proposed transferee of Shares to
deliver a statement or affidavit setting forth the number of Shares, if any,
already owned, directly or indirectly, by such transferee and will refuse to
permit any transfer of Shares which would cause an accumulation of Shares that
would jeopardize the status of the Company as a REIT.
The Declaration of Trust also provides that the Board of Trustees may
redeem Shares in order to maintain the REIT status of the Company. Except for
the redemption of "Excess Shares" which will be at the price set forth under
"Summary of Declaration of Trust - Description of the Shares" above, the
redemption price shall be determined in good faith by the Independent
Trustees.
Restrictions on Certain Conversion Transactions and Rollups
The Declaration of Trust requires that 80% in interest of the
Shareholders and all the Independent Trustees approve certain exchange offers,
mergers, consolidations or similar transactions involving the Company in which
the Shareholders receive securities in a surviving entity having a
substantially longer duration or materially different investment objectives
and policies, or that provides significantly greater compensation to
management form that which is described in this Prospectus, except for any
such transaction effected because of changes in applicable law, or to preserve
tax advantages for a majority in interest of the Shareholders. It should be
noted that standards such as "substantially longer life", "materially
different investment objectives and policies" or "provides significantly
greater compensation to management" are not defined and are by their nature
potentially ambiguous. Any ambiguities will be resolved by the Trustees (a
majority of whom are independent).
Notwithstanding the foregoing, the Company may not participate in any
proposed Roll-Up which would:
(a) result in the Shareholders having voting rights that are
less than those provided in the Declaration of Trust;
(b) result in the Shareholders having rights to receive reports
that are less than those provided in the Declaration of Trust;
(c) include provisions which would operate materially to impede
or frustrate the accumulation of Shares by any purchaser of the
securities of the Roll-Up Entity (except to the minimum extent
necessary to preserve the tax status of the Roll-Up Entity);
(d) limit the ability of an investor to exercise the voting
rights of its securities in the Roll-Up Entity on the basis of the
number of the Company's Shares hold by that investor;
(e) result in investors in the Roll-Up Entity having rights of
access to the records of the Roll-Up Entity that are less than those
provided in the Declaration of Trust; or
(f) place the cost of the transaction on the Company if the
Roll-Up is not approved by the Shareholders;
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provided, however, that nothing shall be construed to prevent participation in
any proposed Roll-Up which would result in Shareholders having rights and
restrictions comparable to those contained in the Declaration of Trust, with
the prior approval of a majority of the Shareholders.
The Declaration of Trust also requires that an appraisal of all the
Company's assets shall be obtained from a competent independent expert in
connection with a proposed Roll-Up.
Ratification of Declaration of Trust
The Declaration of Trust has been reviewed and ratified by all of the
Trustees by unanimous written consent.
Termination
The Company may be dissolved at any time without approval of a
majority of the Board of Trustees by an affirmative vote of the holders of a
majority of the outstanding Shares.
Limitation on Total Operating Expenses
The Company's goal is to limit its annual Total Operating Expenses
(exclusive of loan servicing fees) to 0.5% of the Average Invested Assets.
But, if less than all of the Shares are sold, it is unlikely that the Company
will be able fully to achieve that goal, at least in the initial years of
operation. In any event, however, the Declaration of Trust provides that the
annual Total Operating Expenses of the Company shall not exceed in any fiscal
year the greater of 2% of the Average Invested Assets of the Company or 25% of
the Company's Net Income. In the event the Total Operating Expenses exceed the
limitations described above then within 60 days after the end of the Company's
fiscal year, the Advisor shall reimburse the Company the amount by which the
aggregate annual Total Operating Expenses paid or incurred by the Company
exceed the limitation.
Restrictions on Transactions with Affiliates
The Company's Declaration of Trust imposes certain restrictions upon
dealings between the Company and the Advisor, any Trustee or Affiliates
thereof. In particular, the Declaration of Trust provides that The Company
shall not engage in transactions with any Sponsor, the Advisor, a Trustee or
Affiliates thereof, except to the extent that each such transaction has, after
disclosure of such affiliation, been approved or ratified by the affirmative
vote of a majority of the Independent Trustees, not otherwise interested in
such transaction, who have determined that (a) the transaction is fair and
reasonable to the Company and its shareholders; (b) the terms of such
transaction are at least as favorable as the terms of any comparable
transactions made on arms length basis and known to the Trustees; and (c) the
total consideration is not in excess of the appraised value of the property
being acquired, if an acquisition is involved. Notwithstanding the foregoing,
the Trustees will not be required to provide prior approval (but will need to
subsequently ratify the transaction) for the purchase of each individual
Mortgage Investment that is purchased from a Sponsor, the Advisor or an
Affiliate thereof, if the Advisor represents that those purchases are made on
terms and conditions that are no less favorable than those that could be
obtained from independent third parties for mortgages with comparable terms,
rates, credit risks and seasoning. The Advisor Agreement with the Advisor and
the use of South Central Mortgage, Inc., an affiliate of the Advisor, to
service the mortgage notes acquired by the Company for an annual service fee
equal to 0.5% of the outstanding principal balance of each note that it
services for the Company have been approved by the Trustees. See "Investment
Objectives and Policies - Other Policies".
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Payments to the Advisor, the Trustees and their Affiliates for
services rendered in a capacity other than that as the Advisor or Trustees may
only be made upon a determination of a majority of the Independent Trustees,
not otherwise interested in such transaction that: (1) the compensation is not
in excess of their compensation paid for any comparable services; and (2) the
compensation is not greater than the charges for comparable services available
from others who are competent and not affiliated with any of the parties
involved.
Restrictions on Borrowing
The Declaration of Trust provides that the Company may not incur
indebtedness unless: (i) needed to satisfy the requirement that the Company
distribute at least 95% of its REIT Taxable Income; (ii) such indebtedness is
otherwise necessary or advisable to assure that the Company maintains its
qualification as a REIT for federal income tax purposes; or (iii) a majority
of the Independent Trustees have determined that it is in the Company's best
interest to incur such indebtedness whether in acquiring Mortgage Investments
or otherwise. In addition, the aggregate borrowings of the Company, secured
and unsecured, shall be reasonable in relation to the Net Assets of the
Company and shall be reviewed by the Trustees at least quarterly. The maximum
amount of such borrowings in relation to the Net Assets shall, in the absence
of satisfactory showing that a higher level of borrowing is appropriate, not
exceed 50%. Any excess over such 50% level shall be approved by a majority of
Independent Trustees and disclosed to Shareholders in the next quarterly
report of the Company, along with justification for such excess, provided
that, unless at least 80% of the Company's tangible assets are comprised of
first mortgage loans, in no event may the Company incur any indebtedness which
would result in an aggregate amount of indebtedness in excess of 300% of the
Net Asset Value of the Company.
Restriction on Investments
The Declaration of Trust prohibits investments in (i) any foreign
currency, bullion, commodities or commodities future contracts (this
limitation is not intended to apply to interest rate futures, when used solely
for hedging purposes); (ii) short sales; and (iii) any security in any entity
holding investments or engaging in activities prohibited by the Company's
Declaration of Trust.
In addition to other investment restrictions imposed by the Trustees
from time to time consistent with the Company's objective to qualify as a
REIT, the Company will observe the following restrictions on its investments
set forth in its Declaration of Trust:
(a) Not more than 10% of the Company's total assets will be
invested in unimproved real property or mortgage loans on unimproved
real property. For purposes of this paragraph, "unimproved real
properties" does not include properties under construction, under the
contract for development or plan for development within one year;
(b) The Company may not invest in real estate contracts of sale
unless such contracts of sale are recordable in the chain of title and
unless such investment is made in conjunction with the acquisition or
sale of real property or when held as security for Mortgages made or
acquired by the Company;
(c) Except for the types of investments described herein in the
section entitled "Investment Objectives and Policies", the Company may
not invest in equity securities unless a majority of Trustees,
including a majority of Independent Trustees, not otherwise interested
in such transaction approve the transaction as being fair, competitive
and commercially reasonable;
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(d) The Company may not make or invest in any mortgage loans
that are subordinate to any mortgage or equity interest of the
Advisor, a Trustee or Affiliates thereof;
(e) To the extent the Company invests in real property, a
majority of the Trustees shall determine the consideration paid for
such real property, based on the fair market value of the property. If
a majority of the Independent Trustees determine, or if the real
property is acquired from the Advisor, as Trustee or Affiliates
thereof, such fair market value shall be determined by a qualified
independent real estate appraiser selected by the Independent
Trustees;
(f) The Company will not invest in indebtedness (herein called
"junior debt") secured by a mortgage on real property which is
subordinate to the lien of other indebtedness (herein called "senior
debt"), except where the amount of such junior debt, plus the
outstanding amount of the senior debt, does not exceed 90% of the
appraised value of such property, if after giving effect thereto, the
value of all such investments of the Company (as shown on the books of
the Company in accordance with generally accepted accounting
principles after all reasonable reserves but before provision for
depreciation) would not then exceed 25% of the Company's tangible
assets. The value of all investments in junior debt of the Company
which does not meet the aforementioned requirements would be limited
to 10% of the Company's tangible assets (which would be included
within the 25% limitation);
(g) The Company will not engage in trading, as compared with
investment activities; and
(h) The Company will not engage in underwriting or the agency
distribution of securities issued by others.
Subject to the above restrictions, a majority of the Trustees may
alter the investment policies if they determine that such change is in the
best interests of the Company.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries of certain legal aspects
of mortgage loans which are general in nature. Because many of the legal
aspects of mortgage loans are governed by applicable state laws (which may
vary substantially), the following summaries do not purport to be complete, to
reflect the laws of any particular state, to reflect all the laws applicable
to any particular mortgage loan or to encompass the laws of all states in
which the properties securing mortgage loans in which the Company might invest
are situated. The summaries are qualified in their entirety by reference to
the applicable federal and state laws governing mortgage loans.
Mortgages and Deeds of Trust Generally
Mortgage loans are secured by either mortgages or deeds of trust or
other similar security instruments, depending upon the prevailing practice in
the state in which the related mortgaged property is located. There are two
parties to a mortgage, the mortgagor, who is the borrower and owner of the
mortgaged property, and the mortgagee, who is the lender. In a mortgage
transaction, the mortgagor delivers to the mortgagee a note, bond or other
written evidence of indebtedness and a mortgage. A mortgage creates a lien
upon the real property encumbered by the mortgage as security for the
obligation evidenced by the note bond or other evidence of indebtedness.
Although a deed of trust is similar to a mortgage, a deed of trust has three
parties, the borrower-property owner called the trustor (similar to a
mortgagor), a lender called the beneficiary (similar to a mortgagee), and a
third-party grantee called the
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trustee. Under a deed of trust, the borrower grants the property, until the
debt is paid, in trust for the benefit of the beneficiary to the trustee to
secure payment of the obligation generally with a power of sale. The trustee's
authority under a deed of trust and the mortgagee's authority under a mortgage
are governed by applicable law, the express provisions of the deed of trust or
mortgage, and, in some cases, the direction of the beneficiary.
The real property covered by a mortgage is most often the fee estate
in land and improvements. However, a mortgage may encumber other interests in
real property such as a tenant's interest in a lease of land and improvements
and the leasehold estate created by such lease. A mortgage covering an
interest in real property other than the fee estate requires special
provisions in the instrument creating such interest or in the mortgage to
protect the mortgagee against termination of such interest before the mortgage
is paid.
Priority of liens on mortgaged property created by mortgages and deeds
of trust depends on their terms and, generally, on the order of filing with a
state, county or municipal office, although such priority may in some states
be altered by the mortgagee's or beneficiary's knowledge of unrecorded liens
against the mortgaged property. However, filing or recording does not
establish priority over governmental claims for real estate taxes and
assessments. In addition, the Internal Revenue Code of 1986, as amended,
provides priority to certain tax liens over the lien of the mortgage.
Foreclosure
Foreclosure of a mortgage is generally accomplished by judicial
actions initiated by the service of legal pleadings upon all necessary parties
having an interest in the real property. Delays in completion of foreclosure
may occasionally result from difficulties in locating necessary parties
defendant. When the mortgagee's right to foreclose is contested, the legal
proceedings necessary to resolve the issue can be time-consuming. A judicial
foreclosure may be subject to most of the delays and expenses of other
litigation, sometimes requiring up to several years to complete. At the
completion of the judicial foreclosure proceedings, if the mortgagee prevails,
the court ordinarily issues a judgment of foreclosure and appoints a referee
or other designated official to conduct the sale of the property. Such sales
are made in accordance with procedures which vary from state to state. The
purchaser at such sale acquires the estate or interest in real property
covered by the mortgage.
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust
and/or applicable statutory requirements which authorizes the trustee,
generally following a request from the beneficiary/lender, to sell the
property to a third party upon any default by the borrower under the terms of
the note or deed of trust. A number of states may also require that a lender
provide notice of acceleration of a note to the borrower. Notice requirements
under a trustee' sale vary from state to state. In some states, the trustee
must record a notice of default and send a copy to the borrower-trustor and to
any person who has recorded a request for a copy of a notice of default and
notice of sale. In addition, the trustee must provide notice in some states to
any other individual having an interest in the real property, including any
junior lienholders. In some states, the borrower, or any other person having a
junior encumbrance on the real estate, may, during a reinstatement period,
cure the default by paying the entire amount in arrears plus the costs and
expense incurred in enforcing the obligations. Generally, state law controls
the amount of foreclosure expenses and costs, including attorneys' fees, which
may be covered by a lender. If the deed of trust is not reinstated, a notice
of sale must be posted in a public place and, in most states, published for a
specific period of time in one or more newspapers. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest in the real property.
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In case of foreclosure under either a mortgage or deed of trust, the
sale by the referee or other designated official or by the trustee is often a
public sale. However, because of the difficulty a potential buyer at the sale
might have in determining the exact status of title to the property subject to
the lien of the mortgage or deed of trust and the redemption rights that may
exist (see "Statutory Rights of Redemption" below), and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings and/or for a variety of other reasons (including exposure to
potential fraudulent transfer allegations), a third party may be unwilling to
purchase the property at the foreclosure sale. For these and other reasons, it
is common for the lender to purchase the property from the trustee, referee or
other designated official for an amount equal to the outstanding principal
amount of the indebtedness secured by the mortgage or deed of trust, together
with accrued, and unpaid interest and the expenses of foreclosure, in which
event, if the amount bid by the lender equals the full amount of such debt,
interest and expenses, the mortgagee's debt will be extinguished. Thereafter,
the lender will assume the burdens of ownership, including paying operating
expenses and real estate taxes and making repairs. The lender is then
obligated as an owner until it can arrange a sale of the property to a third
party. The lender will commonly obtain the services of a real estate broker
and pay the broker's commission in connection with the sale of the property.
Depending upon market conditions, the ultimate proceeds of the sale of the
property may not equal the lender's investment in the property. Moreover, a
lender commonly incurs substantial legal fees and court costs in acquiring a
mortgaged property through contested foreclosure and/or bankruptcy
proceedings. Furthermore, an increasing number of states require that any
environmental hazards be eliminated before a property may be resold. In
addition, a lender may be responsible under federal or state law for the cost
of cleaning up a mortgaged property that is environmentally contaminated. See
"Environmental Risks" below. As a result, a lender could realize an overall
loss on a mortgage loan even if the related mortgaged property is sold at
foreclosure or resold after it is acquired through foreclosure for an amount
equal to the full outstanding principal amount of the mortgage loan, plus
accrued interest.
In foreclosure proceedings, some courts have applied general equitable
principles. These equitable principles are generally designed to relieve the
borrower from the legal effects of his defaults under the loan documents.
Examples of judicial remedies that have been fashioned include judicial
requirements that the lender undertake affirmative and expensive actions to
determine the causes of the borrower's default and the likelihood that the
borrower will be able to reinstate the loan. In some cases, courts have
substituted their judgment for the lender's judgment and have required that
lenders reinstate loans or recast payment schedules in order to accommodate
borrowers who are suffering from temporary financial disability. In other
cases, courts have limited the right of the lender to foreclose if the default
under the mortgage instrument is not monetary, such as the borrower's failing
to maintain adequately the property or the borrower's executing a second
mortgage or deed of trust affecting the property. Finally, some courts have
been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under mortgages receive notices in addition to the
statutorily-prescribed minimum. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that the sale under a deed
of trust, or under a mortgage having a power of sale, does not involve
sufficient state action to afford constitutional protection to the borrower.
Environmental Risks
Real property pledged as security to a lender may be subject to
potential environmental risks. Of particular concern may be those mortgaged
properties which are, or have been, the site of manufacturing, industrial or
disposal activity. Such environmental risks may give rise to a diminution in
value of property securing any mortgage loan or, as more fully described
below, liability for clean-up costs or other remedial actions, which liability
could exceed the value of such property or the principal
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balance of the related mortgage loan. In certain circumstances, a lender may
choose not to foreclose on contaminated property rather than risk incurring
liability for remedial actions.
Under the laws of certain states, the owner's failure to perform
remedial actions required under environmental laws may in certain
circumstances give rise to a lien on mortgaged property to ensure the
reimbursement of remedial costs incurred by the same. In some states such lien
law priority over the lien of an existing mortgage against such property.
Because the costs of remedial action could be substantial, the value of a
mortgaged property as collateral for a mortgage loan could be adversely
affected by the existence of an environmental condition giving rise to a lien.
The state of law is currently unclear as to whether and under what
circumstances clean-up costs, or the obligation to take remedial actions, can
be imposed on a secured lender. Under the laws of some states and under the
federal Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, as amended ("CERCLA"), current ownership or operation of a property
provides a sufficient basis for imposing liability for the costs of addressing
releases or threatened releases of hazardous substances on that property.
Under such laws, a secured lender who holds indicia of ownership primarily to
protect its interest in a property could under certain circumstances fall
within the liberal terms of the definition of "owner or operator",
consequently, such laws often specifically exclude such a secured lender,
provided that the lender does not participate in the facility's management of
environmental matters.
In 1992, the United States Environmental Protection Agency (the "EPA")
issued a rule interpreting and delineating CERCLA's secured creditor
exemption. This rule defined and specified the range of permissible actions
that may be undertaken by a lender who holds a contaminate facility as
collateral without exceeding the bounds of the secured creditor exemption. In
February 1994, however, the United States Court of Appeals for the D.C.
Circuit struck down the EPA's lender liability rule on the grounds that it
exceeded EPA's rule making authority under CERCLA. A petition for writ of
certiorari to the United States Supreme Court appealing the D.C. Circuit's
decision was denied in January 1995. At the present time, the future status of
the rule and similar legislation now pending in Congress is unclear, although
the EPA has stated that it will continue to adhere to the rule as a matter of
policy and is in the process of preparing guidance to this effect. Certain
courts that have addressed the issue of lender liability under CERCLA have, in
some cases without relying on any EPA rule or policy, nonetheless interpreted
the secured creditor exemption consistent with the EPA rule. In any event, the
EPA rule does not or would not necessarily affect the potential for liability
under state law or federal laws other than CERCLA. Furthermore, it is not
clear at the present time whether any such lender protections would be binding
in actions brought by a party other than the federal government.
The Company expects that at the time most, if not all, mortgage loans
are purchased no environmental assessment or a very limited environmental
assessment of the mortgaged properties will have been conducted.
"Hazardous substances" are generally defined as any dangerous, toxic
or hazardous pollutants, chemicals, wastes or substances, including, without
limitation, those so identified pursuant to CERCLA or any other environmental
laws now existing, and specifically including, without limitation, asbestos
and asbestos containing materials, polychlorinated biphenyls, radon gas,
petroleum and petroleum products, and urea formaldehyde.
If a lender is or becomes liable for clean up costs, it may bring an
action for contribution against the current owners or operators, the owners or
operators at the time of on-site disposal activity or any other party who
contributed to the environmental hazard, but such persons or entities may be
bankrupt
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or otherwise judgment proof. Furthermore, such action against the borrower may
be adversely affected by the limitations on recourse in the loan documents.
Similarly, in some states anti-deficiency legislation and other statutes
requiring the lender to exhaust its security before bringing a personal action
against the borrower (see "Anti-Deficiency Legislation" below) may curtail the
lender's ability to recover from its borrower the environmental clean up and
other related costs and liabilities incurred by the lender.
Junior Mortgage and Deeds of Trust; Rights of Senior Mortgages or Beneficiaries
Priority of liens on mortgaged property created by mortgages or deeds
of trust depends on their terms and, generally, on the order of filing with a
state, county or municipal office, although such priority may in some states
be altered by the mortgagee's or beneficiary's knowledge of unrecorded liens,
leases or encumbrances against the mortgaged property. However, filing or
recording does not establish priority over governmental claims for real estate
taxes and assessments or, in some states, for reimbursement of remediation
costs of certain environmental conditions. See "Environmental Risks". In
addition, the Code provides priority to certain tax liens over the lien of a
mortgage.
The Company does not presently intend to acquire junior mortgages or
deeds of trust which are subordinate to senior mortgages or deeds of trust
held by the other lenders. The rights of the Company as mortgagee or
beneficiary under a junior mortgage or deed of trust will be subordinate to
those of the mortgagee as beneficiary under the senior mortgage or deeds of
trust, including the prior rights of the senior mortgagee as beneficiary to
receive rents, hazard insurance and condemnation proceeds and to cause the
property securing the mortgage loan to be sold upon default of the mortgagor,
thereby extinguishing the junior mortgagee's or beneficiary's lien unless the
Company asserts its subordinate interest in foreclosure litigation or
satisfies the defaulted senior loan. As discussed more fully below, in many
states a junior mortgagee may satisfy a defaulted senior loan in full, or may
cure such default, and bring the senior loan current, in either event adding
the amounts expended to the balance due on the junior loan. Absent a provision
in the senior mortgage, no notice of default is required to be given to the
junior mortgagee or beneficiary.
The form of mortgage or deed of trust used by many institutional
lenders confers on the mortgagee or beneficiary the right both to receive
proceeds collected under any hazard insurance policy and awards made in
connection with any condemnation proceedings, and to apply such proceeds and
awards to any indebtedness secured by the mortgage or deed of trust, in such
order as the mortgagee may determine. Thus, in the event improvements on the
property are damaged or destroyed by fire or other casualty, or in the event
the property is taken by condemnation, the mortgagee or beneficiary under the
senior mortgage or deed of trust will have the prior right to collect any
insurance proceeds payable under a hazard insurance policy and any award of
damages in connection with the condemnation and to apply the same to the
indebtedness secured by the senior mortgage or deed of trust. Proceeds in
excess of the amount of senior indebtedness will, in most cases, be applied to
the indebtedness secured by a junior mortgage or deed of trust. The laws of
certain states may limit the ability of mortgagees or beneficiaries to apply
the proceeds of hazard insurance and partial condemnation awards to the
secured indebtedness. In such states, the mortgagor or trustor must be allowed
to use the proceeds of hazard insurance to repair the damage unless the
security of the mortgagee or beneficiary has been impaired. Similarly, in
certain states, the mortgagee or beneficiary is entitled to the award for a
partial condemnation of the real property security only to the extent that its
security is impaired.
The form of mortgage or deed of trust used by many institutional
lenders typically contains a "future advance" clause, which provides that
additional amounts advanced to or on behalf of the mortgagor or trustor by the
mortgagee or beneficiary are to be secured by the mortgage or deed of trust
While such a clause is valid under the laws of most states, the priority of
any advance made under the
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clause depends, in some states, on whether the advance was an "obligatory" or
"optional" advance. If the mortgagee or beneficiaries obligated to advance the
additional amounts, the advance may be entitled to receive the same priority
as amounts initially made under the mortgage or deed of trust, notwithstanding
that there may be intervening junior mortgages or deeds of trust and other
liens between the date of recording of the mortgage or deed of trust and the
date of the future advance, and notwithstanding that the mortgagee or
beneficiary had actual knowledge of such intervening junior mortgages or deeds
of trust and other liens at the time of the advance. Where the mortgagee or
beneficiary is not obligated to advance the additional amounts and has actual
knowledge of the intervening junior mortgages or deeds of trust and other
liens, the advance may be subordinate to such intervening junior mortgages or
deeds of trust and other liens. Priority of advances under a "future advance"
clause rests, in other states, on state law giving priority to advances made
under the loan agreement up to a "credit limit" amount stated in the recorded
mortgage or deed of trust.
Another provision typically found in the forms of mortgage and deed of
trust used by many institutional lenders obligates the mortgagor or trustor to
pay before delinquency all taxes and assessments on the property and, when
due, all encumbrances, charges and liens on the property which appear prior to
the mortgage, to provide and maintain fire insurance on the property, to
maintain and repair the property and not to commit or permit any waste
thereof, and to appear in and defend any action or proceeding purporting to
affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor or trustor to perform any of these obligations, the
mortgagee or beneficiary is given the right under the mortgage or deed of
trust to perform the obligation itself, at its election, with the mortgagor or
trustor agreeing to reimburse the mortgagee or beneficiary for any sums
expended by the mortgagee or beneficiary on behalf of the mortgagor or
trustor. All sums so expended by the mortgagee or beneficiary become part of
the indebtedness secured by the mortgage.
Statutory Rights of Redemption
In some states, after a foreclosure sale pursuant to a mortgage or
deed of trust, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the borrower pays only a portion of
the sums due. The effect of a statutory right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The right of redemption
may defeat the title of any purchaser as a foreclosure sale or any purchaser
from the lender subsequent to a foreclosure sale. Certain states permit a
lender to avoid a post-sale redemption by waiving its right to a deficiency
judgment. Consequently, the practical effect of the redemption right is often
to force the lender to retain the property and pay the expenses of ownership
until the redemption period has run.
Anti-Deficiency Legislation
The Company may acquire interests in mortgage loans which are
nonrecourse loans as to which, in the event of default by a borrower, recourse
may be had only against the specific property pledged to secure the related
mortgage loan and not against the borrower's other assets. Even if recourse is
available pursuant to the terms of the mortgage loan against the borrower's
assets in addition to the mortgaged property, certain states have imposed
statutory prohibitions which impose prohibitions against or limitations on
such recourse. Some state statutes limit the right of the mortgagee or
beneficiary to obtain a deficiency judgment against the borrower following
foreclosure. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the security and the amount due to the lender. Other
statutes require the mortgagee or beneficiary to exhaust the security afforded
under a mortgage by foreclosure in an attempt
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to satisfy the full debt before bringing a personal action against the
borrower. In certain states, the lender has the option of bringing a personal
action against the borrower on the debt without first exhausting such
security; however, in some of these states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. The practical
effect of such an election requirement is that lenders will usually proceed
first against the security rather than bringing personal action against the
borrower. Other statutory provisions limit any deficiency judgment against the
former borrower following a judicial sale to the access of the outstanding
debt over the fair market value of the property at the time of the public
sale. The purpose of these statutes is generally to prevent a mortgagee form
obtaining a large deficiency judgment against the borrower as a result of low
bids or the absence of bids at the judicial sale.
Bankruptcy Laws
Statutory provisions, including the Bankruptcy Code and state laws
affording relief to debtors, may interfere with and delay the ability of the
secured mortgage lender to obtain payment of the loan, to realize upon
collateral and/or to enforce a deficiency judgment. Under the Bankruptcy Code,
virtually all actions (including foreclosure actions and deficiency judgment
proceeding) are automatically stayed upon the filing of the bankruptcy
petition, and, often, no interest or principal payments are made during the
course of the bankruptcy proceeding. The delay and consequences thereof caused
by such automatic stay can be significant. Also, under the Bankruptcy Code,
the filing of a petition in bankruptcy by or on behalf of a junior lienor,
including, without limitation, any junior mortgagee, may stay the senior
lender form taking action to foreclose out such junior lien.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards for the lender are met, the amount and terms of a mortgage secured
by property of the debtor may be modified under certain circumstances. The
outstanding amount of the loan secured by the real property may be reduced to
the then current value of the property (with a corresponding partial reduction
of the amount of the lender's security interest) pursuant to a confirmed plan
or lien avoidance proceeding, thus leaving the lender a general unsecured
creditor for the differences between such value and the outstanding balance of
the loan. Other modifications may include the reduction in the amount of each
monthly payment, which reduction may result from a reduction in the rate of
interest and/or the alteration of the repayment schedule (with or without
affecting the unpaid principal balance of the loan), and/or an extension (or
reduction) of the final maturity date. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a mortgage loan default by
paying arrearage over a number of years. Also, under the Bankruptcy Code, a
bankruptcy court may permit a debtor through its rehabilitative plan to
de-accelerate a secured loan and to reinstate the loan even though the lender
accelerated the mortgage loan and final judgment of foreclosure had been
entered in state court (provided no sale of the property had yet occurred)
prior to the filing of the debtor's petition. This may be done even if the
full amount due under the original loan is never repaid. Other types of
significant modifications to the terms of the mortgage or deed of trust may be
acceptable to the bankruptcy court, often depending on the particular facts
and circumstances of the specific case.
In a bankruptcy or similar proceeding action may be taken seeking the
recovery as a preferential transfer of any payments made by the mortgagor
under the related mortgage loan to the lender. Payments on long-term debt may
be protected from recovery as preferences if they are payments in the ordinary
course of business made on debts incurred in the ordinary course of business.
Whether any particular payment would be protected depends upon the facts
specific to a particular transaction.
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Enforceability of Certain Provisions
Prepayment Provisions
In the absence of state statutory provisions prohibiting prepayment
fees (e.g., in the case of single-family residential loans) courts generally
enforce claims requiring prepayment fees unless enforcement would be
unconscionable. However, the laws of certain states may render prepayment fees
unenforceable for certain residential loans or after a mortgage loan has been
outstanding for a certain number of years, or may limit the amount of any
prepayment fee to a specified percentage of the original principal amount of
the mortgage loan, to a specified percentage of the outstanding principal
balance of a mortgage loan, or to a fixed number of month's interest on the
prepaid amount. In certain states, prepayment fees payable on default or other
involuntary acceleration of a mortgage loan may not be enforceable against the
mortgagor or trustor. Some state statutory provisions may also treat certain
prepayment fees as usurious if in excess of statutory limits. See "Certain
Laws and Regulations - Applicability of Usury Laws". The Company may invest in
mortgage loans that do not require the payment of specified fees as a
condition to prepayment or the requirements of which have expired, and to the
extent mortgage loans do require such fees, such fees generally may not be a
material deterrent to the prepayment of mortgage loans by the borrowers.
Due-On-Sale Provisions
The enforceability of due-on-sale clauses has been the subject of
legislation or litigation in many states, and in some cases, typically
involving single family residential mortgage transactions, their
enforceability has been limited or denied. The Garn-St. Germain Depository
Institutions Act of 1982 (the "Garn-St. Germain Act") preempts state
constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses and permits lenders to enforce these claims in accordance
with their terms, subject to certain exceptions. As a result, due-on-sale
clauses have become generally enforceable except in those states whose
legislatures exercised their authority to regulate the enforceability of such
clauses with respect to certain mortgage loans. The Garn-St. Germain Act does
"encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rates.
Under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
Acceleration on Default
The Company may invest in mortgage loans which contain a
"debt-acceleration" clause, which permits the lender to accelerate the full
debt upon a monetary or nonmonetary default of the borrower. The courts of
most states will enforce clauses providing for acceleration in the event of a
material payment default after giving effect to any appropriate notices. The
equity courts of any state, however, may refuse to foreclose a mortgage or
deed of trust when an acceleration of the indebtedness would be inequitable or
unjust or the circumstances would render the acceleration unconscionable.
Furthermore, in some states, the borrower may avoid foreclosure and reinstate
an accelerated loan by paying only the defaulted amounts and the costs and
attorneys' fees incurred by the lender in collecting such defaulted payments.
State courts also are known to apply various legal and equitable
principles to avoid enforcement of the forfeiture provisions of installment
contracts. For example, a lender's practice of accepting late
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payments from the borrower may be deemed a waiver of the forfeiture clause.
State courts also may impose equitable grace periods for payment of arrearage
or otherwise permit reinstatement of the contract following a default. Not
infrequently, if a borrower under an installment contract has significant
equity in the property, equitable principles will be applied to reform or
reinstate the contract or to permit the borrower to share the proceeds upon a
foreclosure sale of the property if the sale price exceeds the debt.
Secondary Financing: Due-on-Encumbrance Provisions
Some mortgage loans may have no restrictions on secondary financing,
thereby permitting the borrower to use the mortgaged property as security for
one or more additional loans. Some mortgage loans may preclude secondary
financing (often by permitting the first lender to accelerate the maturity of
its loan if the borrower further encumbers the mortgaged property) or may
require the consent of the senior lender to any junior or substitute
financing; however, such provisions may be unenforceable in certain
jurisdictions under certain circumstances.
Where the borrower encumbers the mortgaged property with one or more
junior liens, the senior lender is subjected to additional risk. First, the
borrower may have difficulty servicing and repaying multiple loans. Second,
acts of the senior lender which prejudice the junior lender or impair the
junior lender's security may create a superior equity in favor of the junior
lender. Third, if the borrower defaults on the senior loan and/or any junior
loan or loans, the existence of junior loans and actions taken by junior
lenders can impair the security available to the senior lender and can
interfere with, delay and in certain circumstances even prevent the taking of
action by the senior lender. Fourth, the bankruptcy of a junior lender may
operate to stay foreclosure or similar proceedings by the senior lender.
Applicability of Usury Laws
State and federal usury laws limit the interest that lenders are
entitled to receive on a mortgage loan. In determining whether a given
transaction is usurious, courts may include charges in the form of "points"
and "fees" as "Interest", but may exclude payments in the form of
"reimbursement of foreclosure expenses" or other charges found to be distinct
from "interest". If, however, the amount charged for the use of the money
loaned is found to exceed a statutorily established maximum rate, the form
employed and the degree of overcharge are both immaterial. Statutes differ in
their provision as to the consequences of a usurious loan. One group of
statues requires the lender to forfeit the interest above the applicable limit
or imposes a specified penalty. Under this statutory scheme, the borrower may
have the recorded mortgage or deed of trust cancelled upon paying its debt
with lawful interest, or the lender may foreclose, but only for the debt plus
lawful interest. Under a second, more severe type of statute, a violation of
the usury law results in the invalidation of the transaction, thereby
permitting the borrower to have the recorded mortgage or deed of trust
cancelled without any payment and prohibiting the lender from foreclosing.
PLAN OF DISTRIBUTION
The Company is offering through the Selling Group Manager and the
Selected Dealers, on a best efforts basis, a minimum of 125,000 Shares and a
maximum of 2,500,000 Shares priced at $20 per Share. The Company may terminate
the offering at any time in its sole discretion. The minimum subscription per
investor is 250 Shares or $5,000 (50 Shares or $1,000 for an IRA or Keogh
plan).
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Compensation
The Selling Group Manager will receive a commission of 10% of the
Gross Offering Proceeds, plus 0.5% of the Gross Offering Proceeds as a due
diligence fee. The Selling Group Manager may, in its sole discretion, provide
volume discounts of up to 2% on a negotiated basis to Institutional Investors
who purchase at least 50,000 Shares. The application of any volume discounts
will reduce the amount of commissions that would be paid to the Selling Group
Manager but will not change the Net Offering Proceeds to the Company. The
Selling Group Manager will pay to Selected Dealers a commission equal to 4% of
the offering price of Shares sold through them unless a higher commission (up
to, but not exceeding, 8%) is designated by the Selling Group Manager.
The Selling Group Manager will also receive, for nominal
consideration, Shares (the "SGM Shares") equal to 0.5% of all Shares sold
(12,500 Shares if all Shares offered hereunder are sold). The Selling Group
Manager may allocate all or a portion of the SGM Shares to Selected Dealers
and registered representatives of the Selling Group Manager.
The Advisor purchased 10,000 Shares at the public offering price prior
to the date of this Prospectus. See "Terms of the Offering".
The Selling Group Manager Agreement provides that the Company shall
indemnify the Selling Group Manager and the Selected Dealers with respect to
any liabilities arising out of the Securities Act. The Selling Group Manager
and certain Selected Dealers may be deemed to be "underwriters" as that term
is defined in the Securities Act of 1933 (the "Securities Act"), and
compensation paid the Selling Group Manager and any Selected Dealers in
connection with the sale of Shares may be deemed to be "underwriting
commissions" within the meaning of the Securities Act.
Subscription Procedure
In order to purchase Shares in the Company, the investor must complete
and execute a Subscription Agreement in the form attached to this Prospectus.
Payment for the Shares in an amount equal to $20 per Share, should be
delivered to the Selling Group Manager or Selected Dealer, together with
executed Subscription Agreements, where applicable.
Payment for subscriptions may be made by an investor: (a) by delivery
to the Selling Group Manager or Selected Dealer of a check made payable to
"Texas Commerce Bank Escrow" or (b) by authorizing his broker to wire transfer
the purchase price for shares indicated in the Subscription Agreement to the
Escrow Agent, in each case in the amount of $20 for each Share he wishes to
purchase and in total amount of not less than the minimum subscription of 250
Shares ($5,000) (50 Shares ($1,000) for IRA's and Keogh plans). A subscriber
must have his subscription payment in the escrow account on the specified
settlement date. All payments should be made directly to the escrow account so
that good funds are available on the settlement date. Properly completed
Subscription Agreement must be in the Selling Group Manager's possession at
that time.
An investor, by subscribing for Shares and accepting confirmation of
the purchase of Shares without objection after receipt of such confirmation
accompanied by the Prospectus and the Company's Declaration of Trust, will be
assenting to all of the terms and conditions of the Declaration of Trust. In
addition, by placing an order for Shares, an investor (i) represents that he,
she or it has authority to order Shares and, if appropriate, to execute a
Subscription Agreement, (ii) if he, she or it is a qualified plan (including a
Keogh plan or an Individual Retirement Account) or is otherwise a "benefit
plan investor" as defined in Department of Labor Regulation
ss.2510.3-101(f)(2), represents that to the best of his, her
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or its knowledge none of the Company, the Advisor or any Affiliate (a) has
investment discretion with respect to the assets being used to purchase
Shares, (b) regularly gives individualized investment advice which serves as
the primary basis for the investment decisions made with respect to such
assets, or (c) is otherwise a fiduciary with respect to such assets, and (iii)
represents that he, she or it meets the suitability requirements established
by the Company or, if different, the standard applicable to residents of the
state in which the investor resides, as set forth in "Who May Invest".
Escrow Arrangements
Commencing on the date of the Prospectus, all funds from subscriptions
for Shares will be placed in escrow with the Escrow Agent. The Escrow Agent,
at the direction of the Company, is given the right of investments permitted
under Rule 15c2-4 of the Securities Exchange Act of 1934 in bank accounts,
including savings accounts, bank money market accounts, short-term
certificates of deposit, or short term securities issued by the United States
government, including treasury notes and obligations guaranteed by the full
faith and credit of the United States government.
If a minimum of 125,000 Shares have not been subscribed for by more
than 100 persons independent of the Company and of each other on or before one
year from the date of the Prospectus, then the Company will cancel all
existing subscriptions and all funds paid on account of such subscriptions
will be released from escrow and returned promptly to each subscriber,
together with all interest to the extent earned on the subscription proceeds
and without any reduction for escrow expenses, whereupon the offering will be
terminated and no further attempt will be made to offer additional
subscriptions.
The first closing on Shares will occur promptly after the receipt by
the Company of subscriptions for a minimum of 125,000 Shares to a minimum of
100 persons independent of the Company and each other. If the initial closing
does occur, the interest earned on subscription proceeds in the escrow account
prior to the initial closing will be distributed by the Escrow Agent within 10
days following the initial closing to each such subscriber, pro rata,
calculated based upon the number of days each such subscriber's funds are held
in escrow hereunder, subject to any applicable withholding provisions of the
Code.
After the first closing, additional closings shall occur on the first
day of each month until the termination of the offering of the Shares. The
subscription proceeds will be held in escrow until the next monthly closing
and interest earned on those subscription proceeds pending that monthly
closings will be distributed to each subscriber, pro rata, calculated based
upon the number of days each such subscriber's funds are held in escrow
hereunder, subject to any applicable withholding provisions of the Code. If
any purchaser has so requested and paid any required fees, a certificate
evidencing the Shares will be issued to such holder not later than 60 days
after the subscription proceeds are released from escrow.
SALES MATERIAL
The Company reserves the right to modify those suitability standards
for investors in states where the securities administrator of that state has
required higher standards or agreed to lower standards.
In addition to and apart from this Prospectus, the Company will
utilize certain sales material in connection with the offering of Shares. This
material may include fact sheets and other guides to be used internally by
broker dealers, an investor sales promotion brochure, speeches for public
seminars, audio video and slide presentations, invitations to attend public
seminars, prospecting letters, mailing cards,
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articles and publications concerning real estate and mortgage investments, and
so called "tombstone" advertisements. In certain jurisdictions, such sales
material will not be available. Use of any materials, including sales
materials to be distributed to NASD members and their associated persons will
be conditioned on filing with and, if required, clearance by appropriate
regulatory authorities. Such clearance does not mean, however, that the agency
allowing use of the sales literature has passed on the merits of this offering
or the accuracy of the material contained in such literature.
Other than as described herein, the Company has not authorized the use
of other sales material, other than marketing bulletins to be used internally
by broker dealers. The offering is made only by means of this Prospectus.
Although the information contained in such material does not conflict with any
of the information contained in this Prospectus, such material does not
purport to be complete, and should not be considered as part of this
Prospectus or the Registration Statement of which this Prospectus is a part,
or as incorporated in this Prospectus or the Registration Statement by
reference, or as forming the basis of the offering of the Shares which are
offered hereby.
LEGAL MATTERS
Legal matters in connection with the Shares offered hereby will be
passed on for the Company by Berry, Moorman, King & Hudson, P.C., Detroit,
Michigan. Certain tax matters will be passed on by Berry, Moorman, King &
Hudson, P.C.
REPORTS TO INVESTORS
The Company will furnish to each registered Shareholder certain
reports, statements and tax information, including annual financial statements
prepared in accordance with generally accepted accounting principles, an
annual statement of cash flow, Company information necessary in the
preparation of the Shareholders' federal income tax returns, an annual report
of the business of the Company and an annual statement of the fees,
commissions, compensation and other benefits paid or accrued by the Company to
the Administrator, Advisor or its Affiliates for the fiscal year completed.
The Company shall distribute to the Shareholders, within 120 days
after the end of the Company's fiscal year, copies of the annual report which
includes annual financial statements (balance sheet, statement of income or
loss, statement of Shareholders' equity and statement of cash flows,
accompanied by a report containing an opinion of independent certified public
accountants), and all Company information necessary in the preparation of
their federal income tax returns within 75 days after December 31 of each
year. The Company shall distribute to the Shareholders within 60 days after
the end of the Company's first three fiscal quarters of each fiscal year,
copies of the quarterly report which incudes an unaudited balance sheet, an
unaudited statement of income for the year to date, and an unaudited statement
of cash flows for the year to date.
Financial information contained in all reports to investors will be
prepared on an accrual basis of accounting in accordance with generally
accepted accounting principles.
EXPERTS
The balance sheet of the Company as of July 18, 1996 included herein
and elsewhere in the registration statement has been included herein and in
the registration statement in reliance upon the report of Jackson and Rhodes,
P.C., independent certified public accountants, appearing elsewhere herein,
and upon the authority of said firm as experts in accounting and auditing.
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FURTHER INFORMATION
The Prospectus does not omit any material fact and does not contain
any misstatement of a material fact. This Prospectus does not contain all the
information set forth in the registration statement and the exhibits relating
thereto which the Company has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933, as amended,
and to which reference is hereby made. Copies of the Registration Statement of
which this Prospectus forms a part and exhibits thereto are on file at the
offices of the Commission pursuant to the Securities Act of 1933, as amended.
This Prospectus omits certain of the information contained in the Registration
Statement, and reference is hereby made to the Registration Statement for
further information with respect to the Company and the Shares offered hereby.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each instance
reference is made to a copy of such contract or other document filed as an
exhibit to the Registration Statement or otherwise filed with the SEC and
incorporated by reference herein. Each such statement is qualified in its
entirety by such contract or other document reference.
GLOSSARY
The definitions of terms used in this Prospectus are set forth below.
"Acquired Mortgage" shall mean existing Mortgages that the Company
acquires on single-family residential property.
"Acquisition Fees" shall mean the total of all fees and commissions,
however designated, paid by any party in connection with the origination or
acquisition of Mortgages and other Mortgage Investments by the Company.
Included in the computation of such fees or commissions shall be any real
estate commission, selection fee, development fee, nonrecurring management
fee, or any fee of a similar nature, however designated.
"Adjusted Contributions" shall mean (i) the product of $20 times the
number of outstanding Shares, reduced by (ii) the total of cash distributed to
Shareholders with respect to the Shares from Disposition Proceeds and the
return (if any) of uninvested Net Offering Proceeds.
"Administrator" shall mean the Company's President who shall be an
officer and director of the Company and who, subject to the Trustees, will
manage the day-to-day operations of the Company.
"Advisor" shall mean the person(s) or entity retained by the Trustees
that will be responsible for providing advice with respect to developing a
model for the Company's portfolio, developing underwriting criteria and
monitoring yields and performing other duties as described in the Advisory
Agreement, including a person or entity to which an Advisor subcontracts
substantially all such functions. Initially the Advisor shall be Mortgage
Trust Advisors, Inc., or anyone which succeeds it in such capacity.
"Advisory Agreement" shall mean the agreement between the Company and
the Advisor pursuant to which the Advisor will act as the investment advisor
and administrator of the Company.
"Affiliate" shall mean (i) any Person directly or indirectly
controlling, controlled by or under common control with another Person, (ii)
any Person owning or controlling 10% or more of the outstanding voting
securities or beneficial interests of such other Person, (iii) any executive
officer, director, trustee, general partner of such Person, and (iv) if such
other Person is an executive officer,
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director, trustee or partner of another entity, then the entity for which that
Person acts in any such capacity.
"Affiliated Programs" shall mean any and all REITs, partnerships or
other entities which may in the future be formed by the Advisor, a Sponsor or
their Affiliates to engage in businesses which may be competitive with the
Company and which have similar investment objectives as the Company (or
programs with dissimilar objectives for which a particular Mortgage Investment
may nevertheless be suitable). An Affiliated Program may have the same
management as the Company.
"Average Invested Assets" shall mean the average of the aggregate book
value of the assets of the Company for any period invested, directly or
indirectly, in Mortgage Investments before reserves for depreciation or bad
debts or other similar non-cash reserves, computed by taking the average of
such values at the end of each month during such period.
"Capital Distributions" shall mean Distributions of: (i)
non-reinvested principal payments and (ii) Proceeds of Mortgage Prepayments,
Sales and Insurance.
"Cash Flow" shall mean, with respect to any period, (a) all cash
receipts derived from payments of principal and base interest on Mortgages
held by the Company (exclusive of any Proceeds of Mortgage Prepayments, Sales
and Insurance) plus (b) cash receipts from operations (including any interest
from temporary investments of the Company) without deduction for depreciation
or amortization, less (c) cash receipts used to pay operating expenses.
"Code" shall mean the Internal Revenue Code of 1986, as amended, or
corresponding provisions of subsequent revenue laws.
"Company" shall mean United Mortgage Trust, a Maryland real estate
investment trust.
"Counsel" shall mean Berry, Moorman, King & Hudson, P.C.
"Declaration of Trust" shall mean the Declaration of Trust of the
Company, as amended and/or amended and restated from time to time.
"Disposition Proceeds" shall mean: (1) Proceeds of Mortgage
Prepayments, Sales or Insurance and (2) payments of principal when due which
are paid to the Company with respect to Mortgage Investments and other
Mortgages.
"Distributions" shall mean any cash distributed to Shareholders
arising from their interest in the Company.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
"Escrow Agent" shall mean Texas Commerce Bank National Association or
any other qualified financial institution designated as escrow agent by the
Company and the Selling Group Manager.
"Fannie Mae" shall mean the Federal National Mortgage Association.
"FHA" shall mean the Federal Housing Administration.
"Freddie Mac" shall mean the Federal Home Loan Mortgage Corporation.
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"Ginnie Mae" shall mean the Government National Mortgage Association.
"Gross Offering Proceeds" shall mean the total proceeds from the sale
of Shares during the offering period before deductions for Organization and
Offering Expenses. For purposes of calculating Gross Offering Proceeds, the
purchase price of all Shares shall be deemed to be $20 per Share.
"HUD" shall mean the United States Department of Housing and Urban
Development.
"Independent Trustees" shall mean the Trustees who (i) are not
affiliated, directly or indirectly, with the Advisor, a Sponsor or any of
their Affiliates, whether by ownership of, ownership interest in, employment
by, any material business or professional relationship with, or service as an
officer or director of the Advisor, a Sponsor or any of their Affiliates, (ii)
do not serve as a director or Trustee of more than two other REITs organized
by a Sponsor or advised by the Advisor and (iii) perform no other services for
the Company, except as Trustees. For this purpose, an indirect relationship
shall include circumstances in which a member of the immediate family of a
Trustee has one of the foregoing relationships with the Advisor, a Sponsor or
the Company.
"Initial Closing Date" shall mean the date on which the first closing
on Shares sold pursuant to the Prospectus occurs, which shall be no later than
365 days after the date of the Prospectus.
"Institutional Investors" shall mean a bank, trust company, savings
institution, insurance company, securities dealer, investment company or
business development company as defined in the Investment Company Act of 1940,
or a pension or profit sharing trust with assets of at least $5,000,000.
"Interim Mortgage Loans" shall mean loans of 12 months or less in
term, made to investors for the purchase, renovation and sale of single family
homes. Interim Mortgage Loans are "Mortgages" but are not "Mortgage
Investments" as that term is defined herein.
"IRA" shall mean an individual retirement account established pursuant
to Section 408 of the Code.
"IRS" shall mean the Internal Revenue Service of the United States of
America.
"Mortgage Investments" shall mean the Company's permanent investments
in Mortgages. As of the date hereof, the Company has not invested in or
committed to invest in any Mortgage Investments and has not committed to
originate or acquire any Mortgages. There may be a delay between the time
investors purchase Shares and the time the investment proceeds are invested in
Mortgage Investments. Until the Company's funds are invested in Mortgage
Investments, the Company will invest its funds in short-term investments,
including investments with various financial institutions (meeting certain
asset or net worth requirements) which may not be insured or guaranteed by a
government or government- sponsored entity and in Interim Mortgage Loans.
"Mortgage Prepayments, Sales or Insurance" shall mean any Company
transaction (other than the receipt of base interest, principal payments when
due on a Mortgage and the issuance of Shares) including without limitation
prepayments, sales, exchanges, foreclosures, or other dispositions of Mortgage
Investments and other Mortgages held by the Company or the receipt of
insurance proceeds or of guarantee proceeds from any insurer or recoursing
party or otherwise, or any other disposition of Company assets.
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"Mortgages" shall mean, in a broad sense, beneficial interests or
participation interests in whole mortgages, mortgage certificates,
mortgage-backed securities, participation certificates backed by either a
single mortgage or a pool of mortgages or interests in pass-through entities
which, under the REIT provisions of the Internal Revenue Code, would be
considered to be qualifying real estate assets for purposes of the Company's
qualification as a REIT (e.g. regular interests in real estate mortgage
investment conduits ("REMICs")).
"Net Assets" or "Net Asset Value" shall mean the total assets of the
Company (other than intangibles) at cost before deducting depreciation or
other non-cash reserves less total liabilities of the Company, calculated at
least quarterly on a basis consistently applied.
"Net Income" shall mean, for any period, total revenues applicable to
such period, less the expenses applicable to such period other than additions
to allowances or reserves for depreciation, amortization or bad debts or other
similar non-cash reserves.
"Net Offering Proceeds" shall mean the Gross Offering Proceeds
received by the Company with respect to the sale of Shares less Organization
and Offering Expenses.
"Organization and Offering Expenses" shall mean those expenses
incurred in connection with organizing the Company and in preparing the
Company's Shares for registration and subsequently offering and distributing
Shares to the public, including sales commissions paid to broker dealers in
connection with the distribution of the Company's Shares, escrow fees and
expenses and all advertising expenses. For the purposes of determining
"Organization and Offering Expenses", any volume discounts that are given by
the Selling Group Manager shall be deemed to be part of the selling
commissions paid to brokers for selling the Shares.
"Originated Mortgage" shall mean a Mortgage originated by or on behalf
of the Company or by another lender and sold by or on behalf of the Company or
by another lender and sold to the Company prior to the time it has been fully
funded.
"Person" shall mean and include individuals, corporations, limited
liability companies, limited partnerships, general partnerships, joint stock
companies or associations, joint ventures, companies, trusts, banks, trust
companies, land trusts, business trusts or other entities and governments and
agencies and political subdivisions thereof.
"Proceeds of Mortgage Prepayments, Sales and Insurance" shall mean
receipts from Mortgage Prepayments, Sales or Insurance less the following:
(i) the amount paid or to be paid in connection with or as an
expense of such Mortgage Prepayments, Sales or Insurance; and
(ii) the amount necessary for the payment of all debts and
obligations of the Company including but not limited to fees to the
Advisor or Affiliates and amounts, if any, required to be paid to,
arising from or otherwise related to the particular Mortgage
Prepayments, Sales or Insurance.
"Prospectus" shall mean the final prospectus of the Company in
connection with the initial registration of Shares filed with the Securities
and Exchange Commission on Form S-11, as amended.
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"Qualified Plan" shall mean any qualified pension, profit sharing or
other retirement plan (including a Keogh plan) and any trust, bank commingled
trust fund for such a plan and any IRA.
"REIT" shall mean a corporation or trust which qualifies as a real
estate investment trust described in sections 856 through 860 of the Code (the
"REIT Provisions").
"REIT Taxable Income" shall mean the taxable income as computed for a
corporation which is not a REIT, (ii) without the deductions allowed by
sections 241 through 247, 249 and 250 of the Code (relating generally to the
deduction for dividends received); (ii) excluding amounts equal to (a) the net
income from foreclosure property, and (b) the net income derived form
prohibited transactions; (iii) deducting amounts equal to (x) any net loss
derived from prohibited transactions, and (y) the tax imposed by section
857(b)(5) of the Code upon a failure to meet the 95% and/or the 75% gross
income tests; and (iv) disregarding the dividends paid, computed without
regard to the amount of the net income from foreclosure property which is
excluded from REIT Taxable Income.
"Roll-Up" shall mean a transaction involving the acquisition, merger,
commission or consolidation either directly or indirectly of the Company and
the issuance of securities of a Roll-Up Entity. Such term does not include:
(i) a transaction involving securities of the Company that have
been for at least 12 months listed on a national securities exchange
or traded through the National Association of Securities Dealers
Automated Quotation Market System; or
(ii) a transaction involving the conversion to corporate, trust
or association form of only the Company, if as a consequence of the
transaction, there will be no significant adverse change in any of the
following:
(A) shareholders' voting rights;
(B) the term and existence of the Company;
(C) Sponsor or Advisor compensation;
(D) the Company's investment objectives.
"Roll-Up Entity" shall mean a partnership, real estate investment
trust, corporation, trust or other entity that would be created or would
survive after the successful completion of a proposed Roll-Up transaction.
"Selling Group Manager" shall mean First Financial United Investments,
Ltd., the Selling Group Manager of the public offering of the Shares.
"Shareholders" shall mean holders of the Shares.
"Shares" shall mean the shares of beneficial interest, par value $.01
per share, of the Company.
"Selected Dealers" shall mean the dealer members of the National
Association of Securities Dealers, Inc. that are designated by the Selling
Group Manager to participate in the sale of the Shares.
72
<PAGE>
"Sponsor" shall mean any person directly or indirectly instrumental in
organizing, wholly or in part, the Company or any Person who will manage or
participate in the management of the Company and any Affiliate of such Person,
but does not include (i) any person whose only relationship with the Company
is that of an independent asset manager whose only compensation from the
Company is as such, and (ii) wholly-independent third parties such as
attorneys, accountants, and underwriters whose only compensation from the
Company is for professional services.
"Subordinated Incentive Fee" shall mean the fee paid to the Advisor
pursuant to the Advisory Agreement. The Subordinated Incentive Fee shall be
equal to 25% of the amount by which the Company's Net Income for a year
exceeds a 10% per annum non-compounded cumulative return on its Adjusted
Contributions. For each year which it receives a Subordinated Incentive Fee,
the Advisor shall also receive 5-year options to purchase 10,000 Shares at the
initial offering price of $20 per share. See "Management - Summary of Advisory
Agreement".
"Tax-Exempt Entities" shall mean any investor that is exempt from
federal income taxation, including without limitation a Qualified Plan, an
endowment fund, or a charitable, religious, scientific or educational
organization.
"Total Operating Expenses" shall mean all operating, general, and
administrative expenses of the Company as determined by generally accepted
accounting principles, exclusive of the expenses of raising capital, interest
payments, taxes, non-cash expenditures (i.e. depreciation, amortization, bad
debt reserve), Acquisition Fees and other costs related directly to a specific
Mortgage by the Company, such as expenses for originating, acquiring,
servicing or disposing of a Mortgage.
"Trustees" shall mean the trustees of the Company.
"UBTI" shall mean unrelated business taxable income as described in
the Code.
73
<PAGE>
UNITED MORTGAGE TRUST
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report..............................................F-2
Balance Sheet as of July 18, 1996.........................................F-3
Statement of Operations For the Period From July 12, 1996
(Date of Inception) to July 18, 1996...............................F-4
Statement of Changes in Stockholders' Equity
For the Period From July 12, 1996
(Date of Inception) to July 18, 1996...............................F-5
Statement of Cash Flows For the Period From July 12, 1996
(Date of Inception) to July 18, 1996...............................F-6
Notes to Financial Statements.............................................F-7
</TABLE>
F-1
<PAGE>
JACKSON & RHODES P.C.
- ---------------------------------------------------------------------------
8140 Walnut Hill Lane, Suite 800 Certified Public Accountants
Dallas, Texas 75231-4335
214 361-7588 Fax 214 361-9726
INDEPENDENT AUDITORS' REPORT
Board of Trustees
United Mortgage Trust
We have audited the accompanying balance sheet of United Mortgage Trust (a
development stage company) as of July 18, 1996 and the related statements of
operations, changes in stockholders' equity and cash flows for the period from
July 12, 1996 (date of inception) to July 18, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of United Mortgage Trust (a
development stage company) as of July 18, 1996, and the results of its
operations and its cash flows for the period from July 12, 1996 (date of
inception) to July 18, 1996, in conformity with generally accepted accounting
principles.
/s/ Jackson & Rhodes P.C.
Jackson & Rhodes P.C.
Dallas, Texas
July 22, 1996
Members: American Institute of Certified Public Accountants -
Texas Society of Certified Public Accountants
F-2
<PAGE>
<TABLE>
<CAPTION>
UNITED MORTGAGE TRUST
(A Development Stage Company)
BALANCE SHEET
July 18, 1996
ASSETS
<S> <C>
Current assets:
Cash $ 149,257
---------
Office equipment 2,586
---------
Other assets:
Organization costs 1,000
Deferred offering costs 40,215
---------
41,215
---------
$ 193,058
=========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
Current liabilities:
Accounts payable $ 2,507
---------
Commitments and contingencies --
Stockholders' equity:
Common stock, $.01 par, 100,000,000 shares
authorized, 10,000 issued and outstanding 100
Paid-in capital 199,900
Accumulated deficit (9,449)
---------
Total stockholders' equity 190,551
---------
$ 193,058
=========
<FN>
See accompanying notes to financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
UNITED MORTGAGE TRUST
(A Development Stage Company)
STATEMENT OF OPERATIONS
For the Period From July 12, 1996 (Date of Inception)
to July 18, 1996
<S> <C>
General and administrative expenses $ 9,449
--------
Net loss $ (9,449)
========
Net loss per common share $ (0.94)
========
Weighted average number of
common shares outstanding 10,000
========
<FN>
See accompanying notes to financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
UNITED MORTGAGE TRUST
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Period From July 12, 1996 (Date of Inception)
to July 18, 1996
Common Stock Additional
----------------------- Paid-in Accumulated
Shares Par Value Capital Deficit Total
------ ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Sale of common stock 10,000 $ 100 $ 199,900 $ -- $ 200,000
Net loss -- -- -- (9,449) (9,449)
------ --------- --------- --------- ---------
Balance, July 18, 1996 10,000 $ 100 $ 199,900 $ (9,449) $ 190,551
====== ========= ========= ========= =========
<FN>
See accompanying notes to financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
UNITED MORTGAGE TRUST
(A Development Stage Company)
STATEMENT OF CASH FLOWS
For the Period From July 12, 1996 (Date of Inception)
to July 18, 1996
<S> <C>
Cash flows from operating activities:
Net loss $ (9,449)
Adjustments to reconcile net loss
to net cash used in operating activities:
Organization costs (1,000)
Accounts payable 2,507
---------
Net cash used in operating activities (7,942)
---------
Cash flows from investing activities:
Purchase of equipment (2,586)
---------
Cash flows from financing activities:
Issuance of common stock 200,000
Deferred offering costs (40,215)
---------
Net cash provided by financing activities 159,785
---------
Net increase in cash and cash at end of period $ 149,257
=========
<FN>
See accompanying notes to financial statements.
</TABLE>
F-6
<PAGE>
UNITED MORTGAGE TRUST
(A Development Stage Company)
Notes to Financial Statements
For the Period From July 12, 1996 (Date of Inception)
to July 18, 1996
1. Description of Business
The Company
United Mortgage Trust ("the Company") is a Maryland real estate investment
trust which intends to qualify as a real estate investment trust (a
"REIT") under federal income tax laws. The Advisor to the Company is its
sole shareholder, Mortgage Trust Advisors, Inc., a Texas corporation. The
Company will invest exclusively in first lien, fixed rate mortgages
secured by single family residential property throughout the United
States. Such loans will be originated by others to the Company's
specifications or to specifications approved by the Company. Most, if not
all, of such loans will not be insured or guaranteed by a federally owned
or guaranteed mortgage agency.
The Company intends to offer up to 2,500,000 shares in a public offering
at an initial offering price of $20 per share.
2. Summary of Significant Accounting Policies
Basis of Presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash and certificates of deposit with original maturities of less than
three months.
Office Equipment
Office equipment is recorded at cost and depreciated by the straight-line
method over the five-year expected useful lives of the assets.
Expenditures for normal maintenance and repairs are charged to income, and
significant improvements are capitalized.
F-7
<PAGE>
UNITED MORTGAGE TRUST
(A Development Stage Company)
Notes to Financial Statements
2. Summary of Significant Accounting Policies
Organization Costs
Costs incident to the creation of the corporation, including various
accounting and legal fees, have been capitalized and are being amortized
over a five-year period.
Deferred Offering Costs
Costs incurred related to the Company's proposed public offering are being
deferred and will be offset against the proceeds.
Income Taxes
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109)
which requires a change from the deferred method to the asset and
liability method of computing deferred income taxes. The objective of the
asset and liability method is to establish deferred tax assets and
liabilities for the temporary differences between the financial reporting
basis and the tax basis of the Company's assets and liabilities at enacted
tax rates expected to be in effect when such amounts are realized or
settled.
3. Income Taxes
The Company has recorded no income tax benefit due to the existence of a
net operating loss. There are no deferred tax assets or liabilities as
there are no temporary differences between the tax and financial bases of
the Company's assets and liabilities.
4. Employment Contract/Stock Options
The Company has entered into an employment agreement with its Chairperson
which provides for a salary plus a bonus equal to 25% multiplied by the
amount which the Company's administrative expenses fall below the approved
administrative budget. The Chairperson also will receive annually options
to purchase 2,500 shares of Company stock.
5. Related Party Transactions
The Company leases its office space from an affiliate under terms of a
month-to-month lease at $385 per month.
F-8
<PAGE>
UNITED MORTGAGE TRUST
(A Development Stage Company)
Notes to Financial Statements
6. Commitments and Contingencies
Concentration of Credit Risk
The Company invests its cash primarily in deposits with major banks.
Certain deposits are in excess of federally insured limits. The Company
has not incurred losses related to its cash.
F-9
<PAGE>
(LOGO)
----------------------------
UNITED MORTGAGE TRUST
- -----------------------------------------------------------------------------
Subscription Agreement
- -----------------------------------------------------------------------------
First Financial United Investments, Ltd.
16801 Greenspoint Park Drive
Suite 155
Houston, Texas 77060
Attention: New Subscription/
United Mortgage Trust
Gentlemen:
The Subscriber named below (the "Subscriber"), who is executing and
delivering the Subscription Agreement attached hereto or, alternatively, who
has authorized the execution and delivery of the Subscription Agreement
attached hereto, hereby tenders payment and applies for the purchase of the
number of shares of beneficial interest (the "Shares") specified below in
United Mortgage Trust, a Maryland real estate investment trust (the
"Company"). A check or other payment in the amount of the number of Shares
subscribed for is attached hereto. By tendering payment for Shares and
accepting confirmation of purchase without objection following the mailing of
such confirmation accompanied by the Prospectus, the Subscriber assents to all
the terms and conditions of this Subscription Agreement and of the Declaration
of Trust.
The Subscriber understands that his, her or its subscription payment
will be held by Texas Commerce Bank National Association, as Escrow Agent, and
will be returned promptly to the Subscriber with interest in the event that at
least 125,000 Shares offered by the Prospectus are not subscribed for and
payment therefore not received within one year of the date of the Prospectus.
The Subscriber understands that if the Subscription Agreement submitted by or
on behalf of the Subscriber is not accompanied by payment in full, the
Subscription Agreement will not be processed. Upon receipt of a properly
executed Subscription Agreement at First Financial United Investments, Ltd., a
confirmation will be sent to the Subscriber at his, her or its registered
address and to the selling representative at the registered office address. If
the confirmation is not received within 14 days after submission of the order,
the Subscriber understands that he, she or it should contact First Financial
United Investments, Ltd. at the above address immediately.
By placing an order for Shares, a Subscriber (i) represents that he,
she or it has authority to order Shares and, if appropriate, to execute the
Subscription Agreement, (ii) if he, she or it is a qualified plan (including a
KEOGH plan or an Individual Retirement Account) or is otherwise a "benefit
plan investor" as defined in Department of Labor Regulations
ss.2510.3-101(f)(2), represents that to the best of his, her or its knowledge
none of the Company, the Advisor, a Sponsor or any Affiliate (a) has
investment discretion with respect to the assets being used to purchase
Shares, (b) regularly gives individualized investment advice which serves as
the primary basis for the investment decisions made with respect to such
assets, or (c) is otherwise a fiduciary with respect to such assets, and (iii)
represents that he, she or it meets the suitability requirements established
by the Company or, if different, the standard applicable to residents of the
state in which the Subscriber resides, as set forth in "Who May Invest" in the
Prospectus.
A-1
<PAGE>
(LOGO)
______________________________ Subscription Agreement
UNITED MORTGAGE TRUST
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------------------------------------------------------------
1. Investor Information (Please print. Check only one.)
/ / Individual or Joint Account
- --------------------------------------------- -------------- - ------------ - -----------------
Individual Owner's Name Social Security Number
- --------------------------------------------- -------------- - ------------ - -----------------
Joint Owner's Name (if applicable) Social Security Number
/ / Gift or Transfer to a Minor
- ----------------------------, as custodian for --------------------------------------
Custodian's Name (only one) Minor's Name
under the --------------- UGMA/UTMA (circle one) ------------- - ------------ - ---------------
State Minor's Social Security Number
/ / Trust (Including Corporate Retirement Plans)
- --------------------------------------------- -----------------------------------------------
Trustee(s) Name of Trust
- --------------------------------------------- ----------------------------------------------
Trust Date Trust's Taxpayer Identification Number
/ / Other Entities
TYPE: / / Corporation / / Partnership / / Foundation / / Charitable
Organization
/ / Other: -----------------------------
---------------------------------------------- ------------ - ---------------------------
Name of Entity Taxpayer ID Number
o Tax Status
/ / IRA / / H. R. 10 / / Section 401(a) / / Section 401(b) / / Corporate Pension
/ / SEP/IRA / / Non-Qualified / / Section 401(k) / / Section 457 / / Corporate Profit
Sharing
- ----------------------- ---------------------- ----------------------- ------------------------ --------------------
- ---------------------------------------------------------------------------------------------------------------------
2. Address
- ------------------------------------------ ---------------------- -----------------------
Street Address or P.O. Box Home Telephone Number Business Telephone Number
Check One: ___ U. S. Citizen ___ Resident Alien
___ Non-Resident Alien
- ------------------------------------------- -----------------------------------------------
City State Zip Code Country of Citizenship
- --------------------------------------------------------------------------------------------------------------------
United Mortgage Trust, Inc.
1701 N. Greenville Ave., Suite 403
Richardson, Texas 75081
(214) 705-9805
A-2
<PAGE>
- --------------------------------------------------------------------------------------------------------------------
3. Investment Information (Minimum $5,000/250 Shares or $1,000/50 Shares for IRA and Keogh Accounts)
I wish to invest $------------------ to purchase ------------ shares of United Mortgage Trust.
/ / By Check: $------------------ Please make your check payable to Texas Commerce Bank Escrow.
/ / By Wire: Funds were wired on --------------, ----- in the amount of $-----------------------------
Date
Do you already own shares of United Mortgage Trust, Inc.? ------------ (If yes, minimum reorder is $1,000 / 50 Shares.)
- ---------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
4. Investor Services
- -----------------------------------
If you would like direct deposit of
dividend checks into your brokerage
account, please complete the section
below. Direct Deposit is not to be used
for IRAs. (The Company or Affiliates
cannot be responsible for any adverse
consequences of direct
DIRECT DEPOSIT deposit.)
- -----------------------------------
Institution/Investment Name ------------------------------------------------------------------------
Account Number ------------------------ Street Address -----------------------------------------
City ---------------------------------- State -------------------- Zip Code -------------------
- -----------------------------------
ADDITIONAL MAILINGS If you would like investment mailings
sent to an address other than the
one listed in Section 2 of this agreement,
please fill in below. (Recommended for IRA
accounts.)
- -----------------------------------
Name -------------------------------- Street Address ------------------------------------------
City --------------------------------- State ------------------ Zip Code ---------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
5. Payment Instructions
Please make the check payable to Texas Commerce Bank Escrow. The check and
completed Signature Page are to be sent to the following address:
First Financial United Investments, Ltd.
16801 Greenspoint Park Drive, Suite 155, Houston, Texas 77060
Attention: New Subscription/United Mortgage Trust
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
6. Signature and Certification
I have received, read and agree to the terms of the current Under penalties of
perjury I certify that the social Prospectus of United Mortgage Trust. I have
the authority security or taxpayer identification number entered above and
legal capacity to purchase shares, and I am of legal age is correct and that t
I have not been notified by the IRS in my state. I authorize United Mortgage
Trust and its that I am subject to backup withholding, or that the IRS
affiliates to act on any instructions believed to be genuine has notified me
that I am no longer subject to backup for any service authorized on this form.
I agree that they withholding. will not be liable for any resulting loss or
expense.
Please sign here: / / If you are subject to backup withholding check the
box.
- --------------------------------------- --------------------------------------
Signature of Owner, Trustee or Custodian Date
- --------------------------------------- --------------------------------------
Signature of Joint Owner (if any) Date
- --------------------------------------------------------------- ------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
7. Broker/Dealer or Investment Advisor Authorization
The undersigned Dealer/Adviser agrees to all applicable provisions in the
Agreement, and guarantees the genuineness of the signature on the Agreement.
If the shareholder does not sign this Agreement, the Dealer warrants that this
Agreement is completed in accordance with the shareholder's interactions and
agrees to indemnify United Mortgage Trust for any loss or liability from
acting or relying upon such instructions.
- --------------------------------------- --------------------------------------
Firm's Name Representative's/Advisor's Name
- --------------------------------------- --------------------------------------
Firm's Address Authorized Signature
- --------------------------------------------------------------- ------------------------------------------------------
</TABLE>
A-3
<PAGE>
- -----------------------------------------------------------------------------
INSTRUCTIONS FOR COMPLETION OF FORMSS
- -----------------------------------------------------------------------------
1. INVESTOR INFORMATION. An Account Executive is required to complete
and execute a Subscription Agreement. All fields in the order data
section must be completed. Be sure to complete the INVESTOR
INFORMATION section on the Subscription Agreement with the investor's
social security number or employer identification number.
INVESTOR STATUS. Check applicable box. When Shares are being
purchased by a Trust, in the IRA or Keogh Plan, please furnish the
date of establishment in the Trust section of the Subscription
Agreement. Then locate the Additional Mailing Address under Section
4. Use this area to fill in the name and address of the individual
other than the registered owner who would wish to receive additional
copies of Company correspondence.
A TAXPAYER IDENTIFICATION NUMBER is a taxpayer's social security
number or employer identification number, as the case may be. For
most individual taxpayers, the TIN is the social security number. For
trusts, estates, pension trusts, corporations and partnerships, the
TIN is the employer identification number. See Guidelines for
Certification of Taxpayer Identification Number on Substitute Form
W-9, page ____. An Investor should fill in its TIN on the
Subscription Agreement and distinguish its type by marking one of the
boxes in the Tax Status section and signing, under penalties of
perjury, the Signature Certification in section 6. United States
investors that are exempt from backup withholding need only complete
the Signature and Certification in section 6 of the subscription
agreement.
SUBSTITUTE FORM W-9. Under the federal income tax law, payers of
interest, dividends and certain other payments must withhold 31% of
such amounts (this is referred to as "backup withholding") if the
payee fails to furnish the payer with (1) the payee's correct
Taxpayer Identification Number ("TIN") and (2) a certification under
penalties of perjury that (a) the payee has supplied an accurate TIN
and (b) the payee is not subject to backup withholding because the
Internal Revenue Service ("IRS") has not informed the payee that he
is subject to backup withholding due to a failure to report all
interest and dividends. If an investor's TIN and the foregoing
certification is not received, backup withholding will be applicable
to payments of escrow interest and to Distributions. False
certifications or the provision of an inaccurate TIN can result in
the imposition of penalties by the IRS or criminal sanctions. Certain
payees (including corporations, tax exempt entities, such as employee
benefit plans, and certain foreign individuals and entities) are
exempt from backup withholding and information reporting
requirements.
FOR PAYEES SUBJECT TO BACKUP WITHHOLDING. If the IRS has notified the
record owner of the account that the record owner is subject to
backup withholding and the record owner has not received notice from
the IRS advising that backup withholding has terminated, then the
record owner, prior to signing the certification, must check the
backup withholding box in Section 6. In such event, backup
withholding will apply to payments of escrow interest and to
Distributions.
A-4
<PAGE>
Foreign Investors (as defined in Instruction #2) may be exempt from
backup withholding (which is a separate withholding obligation form
that Substitute Form W-9 described in Instruction #1) and reporting
requirements if they certify that they are exempt by completing and
filing with the Company an IRS Form W-8. A foreign Investor should
check the box on Form W-8 indicating that he is an "exempt foreign
person" if the Shares of the Company will not be held in connection
with a trade or business conducted by or planned by, the Foreign
Investor in the United States that has effectively connected gains
from a broker or barter exchange or there is a tax treaty between the
Foreign Investor's country and the United States exempting the
Foreign Investor's transactions from United States taxes. However, a
Foreign Investor who is a non-resident alien individual, married to a
U.S. citizen or resident and who has made an election to be treated
as a resident under Code Section 6013(g) or (h) is considered to be a
U.S. resident for back-up withholding purposes and may not use Form
W-8. Foreign Investors should also delete the Substitute Form W-9.
Any person who acts as a nominee for a Foreign Investor should
indicate next to the box entitled "Foreign Investor" that his is a
nominee for a Foreign Investor.
IF AN INVESTOR DOES NOT HAVE A TIN, he should obtain Form SS-5 for a
Social Security Number, or Form SS-4 for an Employer ID Number from
his local office of the Social Security Administration or the IRS. IF
THE INVESTOR HAS APPLIED FOR A TIN and has not yet received it, he
should write "APPLIED FOR" in Section 1 and complete and sign a
Substitute Form W-9, certifying under penalties of perjury that he is
not subject to backup withholding. The Investor should also
understand that if he does not provide a TIN to the payer within 60
days, the payer is required to withhold 31% of all reportable
payments thereafter until a certified TIN is provided.
TAX STATUS. Please indicate if the investor is a "Benefit Plan
Investor" as defined in Department of Labor Regulation
ss.25103-101(f)(2), by checking the appropriate Tax Status. A
"Benefit Plan Investor" is defined as any employee benefit plan as
defined in Section 3(3) of ERISA (regardless of whether or not it is
subject to the provisions of Title I of ERISA), a plan described in
Section 4975(e)(1) of the Code, and any entity whose underlying
assets include plan assets by reason of a plan's investment in the
entity. It should be noted that individual retirement accounts (IRAs)
are "Benefit Plan Investors" for this purpose.
A-5
<PAGE>
<TABLE>
<CAPTION>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER
ON SUBSTITUTE FORM W-9.
<S> <C>
For this type of account: Give the identification number for:
A. Individual The individual
B. Two or more individuals (joint account) The actual owner of the account or,
if combined funds, the
first individual on the account
C. Custodian account of a minor The minor (Uniform Gift to Minors
Act)
D. (i) The usual revocable savings trust The grantor-trustee, who should be listed
first (Grantor is also trustee)
(ii) So-called trust account that is not a The actual owner, who should be listed first
legal or valid trust under state law
E. Sole proprietorship The owner, who should be named
F. A valid trust, estate or pension trust The legal entity (unless the legal entity
itself is not designated in the account
title) which should be listed first
G. Corporate The corporation
H. Association, club, religious, charitable, The organization educational or other tax-
exempt organization
I. Partnership The Partnership
J. Broker or registered nominee The broker or nominee
</TABLE>
A-6
<PAGE>
2. ADDRESS. Please be sure to complete the ADDRESS section of the
Subscription Agreement with the Investor's name, address, city and
state. Address should be Investor's primary state of residence.
Please indicate whether or not the Investor is a Foreign Investor by
checking the appropriate box. A Foreign Investor is a (i) nonresident
alien individual (i.e., a non-U.S. citizen who is not a "resident" of
the United States, as defined below), (ii) foreign corporation, (iii)
foreign partnership, (iv) foreign trust, or (v) foreign estate,
within the meaning of Section 7701 of the United States Internal
Revenue Code (the "Code"). A "resident" is an individual who (i) is a
lawful permanent resident of the United States at any time during the
calendar year (such as an individual who holds an immigrant visa a
"green card") or (ii) was physically present in the United States on
(a) at least 31 days during the calendar year, and (b) 183 days or
more in the aggregate during the current year and the two preceding
calendar years, determined by aggregating the actual presence days of
the current year, 1/3 of such days of the first preceding year and
1/8 of such days of the second preceding year). See Code Section
7701(b) for other special rules and elections for determining
residency. An investor who is not currently a Foreign Investor must
notify the Company immediately upon a change in status. See the
discussion in the Prospectus in the section entitled "Income Tax
Consequences - Taxation of Foreign Investors" for rules regarding
withholding of U.S. income tax from Foreign Investors on their
allocable share of dividend income and gain from the disposition of a
Mortgage with Participating Interest.
An individual investor who is not a citizen of the United States but
is a resident (as defined above) must furnish the Company with a
signed copy of IRS Form 1078 verifying that status so as to avoid
withholding. All other persons who subscribe for Shares and who do
not indicate that they, or the beneficial owners of such Shares, are
Foreign Investors are representing, under penalty of perjury, that
the subscriber or beneficial owner is a United States citizen, United
States resident alien individual, domestic corporation, domestic
partnership, domestic trust or domestic estate, as these terms are
defined in Section 7701 of the Code.
3. INVESTMENT. Fill in the number of Shares subscribed for (minimum
purchase is 250 Shares or $5,000, except for IRA or KEOGH accounts
whose minimum purchase is 50 Shares or $1,000, and except as
otherwise noted in the Prospectus under "Who May Invest"). Minimum
reorder is 50 Shares or $1,000. Purchase of fractional Shares are not
allowed pursuant to the initial public offering of Shares.
Please indicate if the investor is investing by check or by wire. All
checks should be made payable to "Texas Commerce Bank Escrow".
4. ADDITIONAL MAILING ADDRESS. When Shares are being purchased by a
Trust, Individual Retirement Account (IRA) or Keogh Plan, use this
area to fill in the name and address of the individual other than the
registered owner who would wish to receive additional copies of
Company correspondence.
A-7
<PAGE>
DIRECT DEPOSIT ADDRESS. This section should be left blank if the form
of ownership is an IRA. It should be completed only if the Investor
wishes distribution checks sent directly to the client brokerage
account identified in Section 4 or Section 7.
5. PAYMENT. Please make the check payable to "Texas Commerce Bank
Escrow". The check and completed Signature Page are to be sent to:
First Financial United Investments, Ltd.
16801 Greenspoint Park Drive
Suite 155
Houston, Texas 77060
Attention: New Subscription/
United Mortgage Trust
==================================================
NO SUBSCRIPTION AGREEMENT WILL BE PROCESSED
UNLESS IT IS ACCOMPANIED BY
PAYMENT IN FULL
==================================================
6. SIGNATURE CERTIFICATION. If the Investor is completing this
Subscription Agreement, the following will apply:
The signature of an IRA or other retirement plan trustee is always
required. The signature of the beneficiary is not necessary. All
other Investors must sign and date. If ownership is held by joint
tenants with rights of survivorship, tenants in common, tenants by
the entirety or community property, then all parties must sign and
date.
CAUTION: If Investor checks box for backup withholding the account
executive and/or office manager must make sure the Investor has
properly completed and signed a W-9 or substitute W-9 and is on file
with the office manager's member firm.
If Shares are being purchased by a Corporation, please furnish an
appropriate corporate resolution authorizing the purchase of the
Shares and the name and title of the person authorized to sign any
documents or make any certifications relating to this subscription.
The Investor should read and sign the certification set forth in
Section 6. If Shares are being purchased by a municipality, a credit
union (other than a federal credit union), a national or state
chartered bank, or a pension plan or profit sharing plan, please
furnish appropriate evidence of the authorization of the purchase of
the Shares and the name and title of the person authorized to sign
any document or make any certifications relating to this
subscription. The Investor must read and sign the Certification
provided in Section 6. If Shares are being purchased by a Trust or a
Partnership, please provide a copy of the Trust or Partnership
Instrument.
A-8
<PAGE>
7. BROKER/DEALER SIGNATURES. This section on this form should be
completed by the selling broker who should include his full name,
representative number, branch office address and telephone number.
A-9
<PAGE>
Until __________, 1997, (90 days after the date of this Prospectus)
all dealers effecting transactions in the registered securities, whether or
not participating in this distribution, may be required to deliver a
Prospectus. This Prospectus does not constitute an offer or solicitation by
anyone in any state or other jurisdiction in which such offer or solicitation
is not authorized or in which the person making such offer is not qualified to
do so or to any person to whom it is unlawful to make such offer or
solicitation.
125,000 SHARES OF BENEFICIAL INTEREST
(Minimum Offering)
2,500,000 SHARES OF BENEFICIAL INTEREST
(Maximum Offering)
UNITED MORTGAGE TRUST,
a Maryland Real Estate Investment Trust
PROSPECTUS
FIRST FINANCIAL UNITED INVESTMENTS, LTD.
Dated ______________, 1996
---------
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus or in Supplements to this Prospectus, or in literature issued by
the Company, the Advisor or the Selling Group Manager (which shall not be
deemed to be a part of this Prospectus), in connection with the offering
contained herein and if given or made such information or representation must
not be relied upon. The statements in this Prospectus or in any Supplement are
made as of the date hereof or thereof, unless another time is specified, and
neither the delivery of this Prospectus or any Supplement nor any sale made
hereunder shall, under any circumstances, create an implication that there has
been no change in the facts set forth herein since the date hereof or thereof.
However, if any such material adverse changes occur during the period when a
Prospectus is required to be delivered, this Prospectus or any Supplement will
be amended or supplemented accordingly.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 30. Other Expenses of Issuance and Distribution.
The expenses expected to be incurred in connection with the issuance
and distribution of the securities being registered are as set forth below.
All such expenses, except for the SEC registration and filing fees, are
estimated:
<TABLE>
<S> <C>
SEC Registration Fee $ 17,241
NASD Filing Fee 5,500
Blue Sky Filing Fees and Expenses 5,000
Legal Fees and Expenses 75,000
Accounting Fees and Expenses 5,000
Printing and Engraving Fees 32,000
Miscellaneous 35,259
--------
Total $175,000
========
</TABLE>
Item 31. Sales to Special Parties.
As part of its compensation for selling the Shares, the Selling Group
Manager will receive, for a purchase price of $.01 per Share, Shares (the "SGM
Shares") equal to 0.5% of all Shares sold (12,500 Shares if all 2,500,000
Shares offered hereunder are sold). The Selling Group Manager may allocate all
or a portion of the SGM Shares to Selected Dealers and registered
representatives of the Selling Group Manager.
Item 32. Recent Sales of Unregistered Securities.
The Advisor has purchased 10,000 Shares for a purchase price of $20
per Share.
Since the transaction described above was not considered to have
involved a "public offering" within the meaning of Section 4(2) of the
Securities Act of 1933, as amended, the interests issued were deemed to be
exempt from registration under said Act. The recipient of Shares in the
foregoing transaction represented that such Shares were being acquired for the
purpose of investment and not with a view to the distribution thereof.
Item 33. Indemnification of Directors and Officers.
Indemnification of the Advisor and of the Trustees of the Company is
provided for in Article XI, Section 2 of the Declaration of Trust (Exhibits 3,
4 to the Prospectus). See also the discussion under "Fiduciary Responsibility
of Trustees" in the Prospectus.
Item 34. Treatment of Proceeds From Stock Being Registered.
None
II-1
<PAGE>
Item 35. Financial Statements and Exhibits.
(a) Financial Statements: The following are included
in the Prospectus:
Balance Sheet and related Notes thereto of Registrant, United
Mortgage Trust, at July 18, 1996.
All other statements and schedules are omitted as inapplicable.
(b) Exhibits:
No Description
- -- -----------
1.1 * Form of Selling Group Manager Agreement
1.2 * Form of Selected Dealer Agreement
3.1A* Form of Second Amended and Restated Declaration of Trust to
be filed with the State of Maryland (this supersedes prior
Exhibit 3.1)
3.2 Bylaws of the Company
4.1 ** Form of certificate to be issued to represent the Shares
4.2 Instruments defining the rights of security holders
(See Exhibits 3.1, 3.2 and 4.1)
5 * Opinion of Berry, Moorman, King and Hudson, P.C.
as to the legality of the securities being registered
8.1 * Opinion of Berry, Moorman, King and Hudson, P.C.
regarding tax matters.
10.1 Form of Escrow Agreement between the Company and
Texas Commerce Bank National Association
10.2 Advisory Agreement dated August 6, 1996 between the
Company and Mortgage Trust Advisors, Inc.
10.3 Agreement of Employment dated August 6, 1996 between the
Company and Christine Griffin
10.4 Note Sale, Recourse and Remarketing Agreement dated
August 6, 1996 between the Company and South Central
Mortgage, Inc.
10.5* Form of Mortgage Servicing Agreement to be entered into
between the Company and South Central Mortgage, Inc.
II-2
<PAGE>
23.1 * Consent of Jackson & Rhodes, P.C.
23.2 * Consent of Berry, Moorman, King & Hudson, P.C. (included
in Exhibits 5 and 8.1)
24.1 Power of Attorney (included as part of page II-5 of the
original filing of this Registration Statement)
99 * United Mortgage Trust Product Brochure Copy.
- ---------
* Filed as an exhibit with this Amendment No. 1.
** To be filed by amendment
Item 36. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) That all post-effective amendments will comply with the applicable
forms, rules and regulations of the Commission in effect at the time such
post-effective amendments are filed;
(4) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
(5) To send to each investor at least on an annual basis a detailed
statement of any transactions with the Administrator, Advisor or its
Affiliates, and of fees, commissions, compensation and other benefits paid or
accrued to the Advisor or its Affiliates for the fiscal year completed,
showing the amount paid or accrued to each recipient and the services
performed;
(6) To provide to the investors the financial statements required by
Form 10-K for the first full year of operations of the Company;
II-3
<PAGE>
(7) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant, pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
(8) The undersigned Registrant hereby undertakes that: (1) for
purposes of determining any liability under the Securities Act of 1933, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant; pursuant to Rule 424(b)(1) or (4) or
497(b) under the Securities Act of 1933 shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and (2) for
the purpose of determining any liability under the Securities Act of 1933,
each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new Registration Statement relating to the securities offered
therein and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(9) The Registrant undertakes to file a sticker supplement pursuant to
Rule 424(c) under the Act during the distribution period describing each
material Mortgage Investment (or Mortage Investments which, in the aggregate,
are material) not identified in the prospectus as such time as there arises a
reasonable probability that such Mortgage Investment(s) will be acquired and
to consolidate all such stickers into a post-effective amendment filed at
least once every three months, with the information contained in such
amendment provided simultaneously to the existing Shareholders. Each sticker
supplement should disclose all compensation and fees received by the Trustee,
the Advisor and their Affiliates in connection with any such acquisition. The
post-effective amendment shall include audited financial statements meeting
the requirements of Rule 3-14 of Regulation S-X only for properties acquired
during the distributed period.
The Registrant also undertakes to file, after the end of the
distribution period, a current report on Form 8-K containing the financial
statements and any additional information required by Rule 3-14 of Regulation
S-X, to reflect each commitment (i.e., the signing of a binding purchase
agreement) made after the end of the distribution period involving the use of
10% or more (on a cumulative basis) of the net proceeds of the offering and to
provide the information contained in such report to the Shareholders at least
once each quarter after the distribution period of the offering has ended.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-11 and has duly caused this
amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Richardson, State of
Texas on the 7th day of November, 1996.
UNITED MORTGAGE TRUST
By: /S/ CHRISTINE A. GRIFFIN
------------------------------
Christine A. Griffin, President
Pursuant to the requirements of the Securities Act of 1933, this
amended registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
Principal Executive Officer:
/S/ CHRISTINE A. GRIFFIN Trustee, Chairman of the November 7, 1996
- ----------------------------- Board and President
Christine A. Griffin
Principal Financial and
Accounting Officer:
/S/ CHRISTINE A. GRIFFIN Trustee, Chairman of the November 7, 1996
- ----------------------------- Board
Christine A. Griffin
* Trustee November 7, 1996
- -----------------------------
Paul R. Guernsey
* Trustee November 7, 1996
- -----------------------------
Douglas R. Evans
* Trustee November 7, 1996
- -----------------------------
Richard D. O'Connor, Jr.
*By: /S/ CHRISTINE A. GRIFFIN
- -----------------------------
Attorney-in-fact
II-5
Exhibit 1.1
UNITED MORTGAGE TRUST
A MARYLAND REAL ESTATE INVESTMENT TRUST
SELLING GROUP MANAGER AGREEMENT
_______________________, 1996
First Financial United Investments, Ltd.
16801 Greenspoint Park Drive, Suite 155
Houston, Texas 77060
Gentlemen:
United Mortgage Trust, a Maryland real estate investment trust (the
"Company"), of which the Advisor (the "Advisor") is Mortgage Trust Advisors,
Inc., a Texas corporation, has been organized to invest in mortgage
investments. The Company will invest primarily in first lien mortgages, most
if not all of which will not be guaranteed by Ginnie Mae, Fannie Mae or
Freddie Mac or insured by FHA. Unless otherwise stated herein, defined terms
are used herein as defined in the Prospectus (as hereinafter defined),
included in the Registration Statement (as hereinafter defined), filed with
the Securities and Exchange Commission (the "Commission").
This Agreement sets forth the understandings and agreements between
the Company and you whereby, subject to the terms and conditions herein
contained, you will offer to sell, on a best commercially reasonable efforts
basis, and the Company will sell, 2,500,000 shares of a beneficial interest
(the "Shares") in the Company, priced at $20 per share.
1. Representations and Warranties of the Company.
1.1. Registration Statement. The Company has filed with the Commission
a registration statement on Form S-11 (File No. 333-10109), including a
related preliminary prospectus, for the registration of the Shares under the
Securities Act of 1933, as amended (the "Securities Act") and has filed such
amendments of such registration statement and such amended preliminary
prospectuses as may have been required to the date hereof. Such registration
statement, as amended, and the prospectus on file with the Commission at the
time such registration statement becomes effective (including financial
statements and schedules, exhibits and all other documents filed as a part
thereof or incorporated therein) are herein called, respectively, the
"Registration Statement" and the "Prospectus", except that if the registration
statement is amended by a post-effective amendment, from and after the date of
effectiveness of such post-effective amendment, the term "Registration
Statement" shall refer to the Registration Statement as so amended, and if a
prospectus or prospectus supplement is filed or transmitted for filing
pursuant to Rule 424(b) of the Rules and Regulations of the Commission under
the Securities Act (the "Regulations"), the term "Prospectus" shall refer to
the prospectus filed or transmitted for filing pursuant to Rule 424(b) of the
Regulations from and after the date on which it shall have been so filed or
transmitted to the Commission for filing or to the Prospectus as supplemented,
if supplemented pursuant to Rule 424(c) of the Regulations, from and after the
date on which such supplement shall have been so filed or transmitted to the
Commission for filing.
1.2. Organization; Qualification. The Company has been duly formed and
is validly existing as a real estate investment trust pursuant to its
Declaration of Trust under the laws of the State of Maryland with full power
and authority to own its property and to conduct its business as described in
the Prospectus. The Company is or will be duly qualified under the laws of
each other jurisdiction, if
<PAGE>
any, in which the conduct of its business or ownership of its assets requires
such action, except where the failure to be so qualified will not have a
material adverse effect on the business of the Company.
1.3 Lack of Subsidiaries. The Company does not have any interest in
any corporation, partnership or other entity that would constitute a
"significant subsidiary" as defined in the regulations promulgated under the
Securities Act.
1.4. Validity of Declaration of Trust; Shares. The Amended and
Restated Declaration of Trust of the Company (the "Declaration of Trust") has
been duly and validly authorized, executed and delivered by or on behalf of
each of the Trustees, and constitutes the valid, binding and enforceable
agreement of each of them. The Company has an authorized capitalization of
100,000,000 Shares, par value $.01 per Share. The Declaration of Trust
provides for the issuance and sale of the Shares; all action required to be
taken by the Company and the Trustees as a condition to the offering or sale
of the Shares has been, or prior to the Initial Closing (as hereinafter
defined), if any, will have been, taken; and upon recordation of the holders
of the Shares on the books of the Company in accordance with the Declaration
of Trust, the purchasers will be entitled to the interest and rights
specifically set forth in the Declaration of Trust and will be entitled to
direct any voting of such Shares all as provided in the Declaration of Trust.
On each Closing Date (as hereinafter defined) the Shares will conform to all
statements with respect to the descriptions thereof contained in the
Prospectus. At each Closing Date, the Shares sold at such Closing will have
been duly authorized and validly issued, and upon payment therefor, will be
fully paid and non-assessable by or on behalf of the Company. The Company does
not have and, at each Closing Date will not have, any options to purchase
Shares or securities that are convertible into Shares or any rights to
subscribe for Shares other than as described in the Registration Statement. No
person has any preemptive rights with respect to the Shares.
1.5. Compliance with Securities Act. At the time the Registration
Statement is declared effective by the Commission (the "Effective Date") and
at each Closing Date, the Registration Statement and the Prospectus and any
supplemental sales material will contain all statements which are required to
be stated therein in accordance with the Securities Act and the Regulations,
will comply with the provisions of the Securities Act and the Regulations and
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that the representations
and warranties in this Section 1.5. shall not apply to statements in or
omissions from the Registration Statement or the Prospectus in reliance upon
and in conformity with information furnished to the Company in writing by you
expressly for use in the Registration Statement or the Prospectus. Every
contract or other document required by the Securities Act or the Regulations
to be filed as an exhibit to the Registration statement has been so filed.
1.6. Tax Status. The Company intends to qualify as a real estate
investment trust (a "REIT") under the Internal Revenue Code of 1986 (the
"Code") and to make an election to be treated as such. Within the times and in
the manner prescribed by law, the Company has filed all federal, state and
local tax returns required by law and has paid all taxes, assessments and
penalties due and payable that could become a lien on the Company's assets.
1.7. Litigation. There is not pending, threatened, or to the knowledge
of the Company, contemplated, any action, suit or proceeding before or by any
court or any Federal, state or local governmental authority or agent to which
the Company is or may be a party, or to which its properties or assets is or
may be subject, or which is not described in the Prospectus, and which might
result in any
2
<PAGE>
material adverse change in the condition (financial or otherwise), business or
prospects of the Company or might materially and adversely affect any of its
properties or assets.
1.8. Financial Statements. The financial statements of the Company
filed as part of the Registration Statement and included in the Prospectus
fairly present the financial position of the Company at the date indicated.
Such financial statements comply as to form in all material respects with the
requirements of the Securities Act and the Regulations and has been prepared
in conformity with generally accepted accounting principles. The accountants
who expressed an opinion on the financial statements filed as part of the
Registration Statement with the Commission are, with respect to the Company,
independent public accountants as required by the Securities Act and the
Regulations.
1.9. Description of the Company. The condition (financial or
otherwise) of the Company, the business of the Company and the terms and
provisions of the Declaration of Trust conform in all material respects to the
descriptions thereof contained in the Registration Statement and the
Prospectus.
1.10. Validity of Selling Group Manager Agreement. This Agreement has
been duly and validly authorized, executed and delivered by or on behalf of
the Company and constitutes the valid, binding and enforceable agreement of
the Company.
1.11. Authorized Transaction. The Company is not in default under its
Declaration of Trust or bylaws or any material obligation, agreement or
condition contained in any indenture, mortgage, deed of trust, loan agreement,
evidence of indebtedness, note, lease, franchise, license, permit or other
agreement, instrument, judgment, decree or order to which it is a party, by
which it is bound or to which it or any of its properties or assets is
subject; and there exists no condition which, at the Closing Date, either by
itself or upon notice of passage of time, or both, would constitute a material
default under any such document or instrument or result in the imposition of
any material penalty or acceleration of any indebtedness. The Company will
take steps necessary to comply with all applicable laws and obtain any and all
necessary regulatory and other approvals in connection with the offer and sale
of the Shares, and in connection with the conduct of operations by the Company
as described in the Prospectus. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated by this
Agreement, including the offer and sale of the Shares, will constitute a
breach of, or default under, any instrument or agreement to which the Company
is a party or by which it or any material portion of its assets are bound or
under any order, rule or regulation issued by any court or governmental body
or administrative agency having jurisdiction over the Company. Neither the
nature of the Company or its business or properties, nor any relationship
between the Company and any other person, nor any circumstance in connection
with the offer, issue, sale or delivery of the Shares is such as to require on
behalf of the Company any consent, approval or other action by governmental
body (other than filings required by the Securities Act and applicable state
securities laws) in connection with the execution and delivery of this
Agreement, or the transactions contemplated herein or in the Prospectus, other
than filings which have been made or consents which have been obtained or
which are not required to be made or obtained until after the Closing Date.
1.12. Property. The Company has good and marketable title to or valid
and binding leasehold interests in, all properties and assets described in the
Prospectus as being owned or leased by the Company which are material to its
business, free and clear of all liens (including liens arising under federal
and state environmental codes and regulations), charges, mortgages, pledges,
encumbrances or restrictions, security interests, title defects or defaults of
any kind except those reflected in the Prospectus
3
<PAGE>
and those which do not materially affect the value of such properties and
assets and do not interfere with the use made and proposed to be made of such
properties and assets.
1.13. Insider Transactions. Except as described in the Prospectus and
excluding payments of salaries to employees in the ordinary course of
business, no current or former shareholder, director, officer or key employee
of the Company or any "Associate" (as defined in Rule 405 promulgated under
the Securities Act) of any such person, is presently, directly or indirectly
through his affiliation with any other person or entity, a party to any
material transaction with the Company providing for the furnishing of services
by or to, or rental of real or personal property from or to, or otherwise
requiring cash payments to or by any such person. In addition, except as
described in the Prospectus, there are no outstanding loans or advances, other
than ordinary travel and expense advances, or guarantees of indebtedness by
the Company to or for the benefit of any officer, director, shareholder or
affiliate (as defined in Rule 405) of the Company, or any member of the
families of such, and there are no material transactions between or among the
Company or any of its officers, directors, shareholders or affiliates of a
type or character required to be described in Item 404 of Regulation S-K
promulgated under the Securities Act which are not described in the
Prospectus.
1.14. Securities Violations and Litigation; Bankruptcy. Neither the
Company, any affiliate of the Company, or any officer, director, beneficial
owner of 10% or more of any class of equity securities of the Company:
(a) has filed a registration statement which is the subject of
a currently effective registration stop order entered pursuant to any
state's securities laws within five (5) years prior to the date of
this Agreement;
(b) has been convicted within five (5) years prior to the date
of this Agreement of any felony or misdemeanor in connection with the
offer, purchase or sale of any security, or any felony involving fraud
or deceit, including, but not limited to, forgery, embezzlement,
obtaining money under false pretenses, larceny or conspiracy to
defraud;
(c) is currently subject to any self-regulatory, federal or
state administrative enforcement complaint, investigation, preliminary
or permanent restraining order or judgment entered by any
self-regulatory, federal or state securities administrator within five
(5) years prior to the date of this Agreement, or is subject to any
self-regulatory, federal or state's administrative enforcement
complaint, investigation, preliminary or permanent restraining order
or judgment entered within five (5) years prior to the date of this
Agreement in which fraud or deceit, including, but not limited to,
making untrue statements of material facts and/or omitting to state
material facts, was found;
(d) is subject to any state's administrative enforcement order
or judgment which revokes, denies or prohibits utilization by the
Company of any exemption from registration in connection with the
offer, purchase or sale of securities; or
(e) is currently subject to any order, judgment or decree of
any court of competent jurisdiction temporarily or preliminarily
restraining or enjoining, or is subject to any order, judgment or
decree of any court of competent jurisdiction permanently restraining
or enjoining, such party from engaging in or continuing any conduct or
practice in connection with the
4
<PAGE>
purchase or sale of any security or involving the making of any false
filing with any jurisdiction, entered within five (5) years prior to
the date of this Agreement; and
The is not nor has there ever been any litigation or governmental
proceeding against the Company involving a charge of fraud or deceit,
violation of state or federal securities laws, or any similar charge. Further,
the Company has not filed any form of bankruptcy proceeding, nor does the
Company contemplate filing any form of bankruptcy proceeding or have any
knowledge with respect to any contemplated or threatened filing of an
involuntary bankruptcy proceeding.
1.15. Insurance. The Company maintains insurance of the types and in
the amounts which is reasonable and customary for its business, including, but
not limited to, general liability insurance and insurance covering all
material real and personal property owned or leased by the Company against
theft, damage, destruction, acts of vandalism and all other risks customarily
insured against, all of which insurance is in full force and effect.
1.16. Proceeds. The net proceeds derived from the sale of Securities
will be used in the manner described in the Prospectus subject to the
qualifications set forth therein.
1.17. Changes, etc. Since the respective dates as of which information
is given in the Registration Statement and the Prospectus, except as may
otherwise be stated in or contemplated by the Registration Statement and the
Prospectus: (a) there has not been any material adverse change in the
condition (financial or otherwise) of the Company, or to any properties or
assets of the Company or to the earnings, affairs or business prospects of the
Company, whether or not arising in the ordinary course of business; (b) there
has not been any material transaction entered into by the Company whether or
not relating to any properties or assets of the Company, or to the knowledge
of the Company other than in the ordinary course of business; (c) there has
not been any increase in the indebtedness or borrowings of or any change in
the capitalization of the Company; and (d) the Company has not issued or sold
any Shares or any right or option to acquire any such interest other than at a
Closing pursuant to this Agreement (other than the 10,000 Shares purchased by
the Advisor prior to the commencement of the offering).
1.18. Investment Company Act. The Company is not an investment company
as that term is defined in the Investment Company Act of 1940, as amended.
1.19. Receipt of Commissions and Fees. Neither the Company nor any
affiliate thereof has received or is entitled to receive, directly or
indirectly, any compensation or other benefit including, but not limited to,
any real estate commission, finder's fee, acquisition fee, selection fee,
nonrecurring management fee or other fee relating to the investments of the
Company, except as described in the Prospectus.
1.20. Payment of Commissions and Fees. Neither the Company nor any
affiliate thereof has paid or awarded, nor will the Company or any affiliate
thereof pay or award, directly or indirectly, any commission or other
compensation to any person engaged to render investment advice to a potential
purchaser of Shares as an inducement to advise the purchase of Shares, except
as such commissions or other compensation may be paid or awarded by you or by
Selected Dealers in connection with the sale of Shares as described in the
Prospectus.
5
<PAGE>
1.21. Government Consents. Except as set forth in the Registration
Statement and the Prospectus, no authorization, approval or consent of any
court or Federal, state or local governmental authority or agency is necessary
on the part of the Company in connection with the execution and delivery of
this Agreement, the consummation of the transactions contemplated hereby or
the issuance and sale of the Shares, except such as may be required (i) by the
National Association of Securities Dealers, Inc. (the "NASD"), (ii) under the
Securities Act or (iii) under the "blue sky" or securities laws of the
jurisdictions referred to in Section 3.1.3, which in each case have been
obtained or will be obtained when required. With respect to any authorization,
approval or consent which has not yet been obtained, the Company does not have
any reason to believe that such authorization, approval or consent will not be
obtained when required.
1.22. Tax Benefit. The Prospectus does not contain any statement with
respect to the availability of any credit, allowance of any deduction, the
exclusion of income or the securing of any other federal income tax benefit
which the Company knows or has reason to know is incorrect in any material
respect.
2. Sales of Shares.
2.1. Exclusive Agency. The Company hereby appoints you as its
exclusive agent to offer for sale, and hereby agrees to sell, the Initial
Shares and, on the basis of the representations and warranties and subject to
the terms and conditions herein set forth, you accept such appointment and
agree to use your best commercially reasonable efforts as agent to offer for
sale for the account of the Company, the Initial Shares at the public offering
price of $20 per share, payable upon such terms and in such amounts as are
described in the Prospectus. Subject to Section 3.2.3 hereof, you are also
authorized to associate yourself with any securities broker or dealer for the
sale of the Initial Shares (the "Selected Dealers") pursuant to the terms of
this Agreement and a soliciting dealer agreement (the "Selected Dealer
Agreement") in a form satisfactory to the Company, which consent shall not be
unreasonably withheld. Except for the Shares distributed to the Advisor
pursuant to the Advisory Agreement, during the period (the "Offering Period")
from the Effective Date through the Termination Date (as hereinafter defined)
the Company will not sell or agree to sell Shares other than through you as
herein provided. Nothing in this Agreement shall prevent you from entering
into any agency agreement, underwriting agreement or other similar agreement
governing the offer and sale of securities with any other issuer of
securities, and nothing contained herein shall be construed in any way as
precluding or restricting your right to sell or offer for sale securities
issued by any other person; including securities similar to, or competing
with, the Shares.
2.2. Minimum Offering; Termination Date. All sales of Shares will be
conditioned on the receipt and acceptance, within one year from the date of
the Prospectus, of purchases of an aggregate minimum of 125,000 Shares by a
minimum of 100 investors independent of the Company and of each other (the
"Minimum Offering"). The Offering will commence on or about the Effective Date
or such later date as the Company and you shall agree. Subject to the
provisions of Section 8, the Offering will continue until the date (the
"Termination Date") which is the earlier of (i) the date which is one year
from the Effective Date if the Minimum Offering has not been sold at that
date, (ii) the date to which the offering is extended if the Minimum Offering
has been sold by the date which is one year from the Effective Date and the
Company elects to extend the offering from time to time to a date not later
than 24 months after the Effective Date (subject to requalification in any
State in which it is necessary) or (iii) the effective date of termination of
this Agreement pursuant to Section 8 hereof; provided, however, that the
Offering may be terminated by the Company at any time for any reason
whatsoever.
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2.3. Subscription for Shares. Each person desiring to purchase Shares
shall be required to provide an Subscription Agreement and make payment for
the Shares as described in the Prospectus and below. The Company, upon receipt
of a copy of the Subscription Agreement and such other documents as it may
deem necessary or desirable, shall inform such person within 10 days whether
it wishes to accept the proposed purchaser, it being understood that the
Company reserves the right to reject any proposed purchaser.
Payment for subscriptions may be made by an investor by delivery of a
check made payable to "Texas Commerce Bank Escrow," or by a wire transfer of
funds into the escrow account maintained by the Escrow Agent. Each investor
must subscribe for not less than the minimum subscription of 250 Shares (50
Shares (for IRA's and Keogh plans).
You will maintain a cumulative list of all investors, denoting thereon
the name and mailing address of each investor, the number of Shares subscribed
for by each investor, the amount of any volume discounts applicable to that
investor and the amount and date of receipt by the Escrow Agent (as defined in
Section 2.4 below) of the deposit of each investor.
2.4. Escrow Agent. Upon receipt of any checks for the purchase price
for the Shares, pursuant to Section 2.3 above, you shall deposit the same in a
segregated interest-bearing escrow account (the "Escrow Account") with Texas
Commerce Bank National Association or such other agent as shall be designated
by you and the Company (the "Escrow Agent") pursuant to the escrow agreement
substantially in the form filed as an exhibit to the Registration Statement
(the "Escrow Agreement"). All such amounts shall be held in the Escrow Account
pursuant to the terms of the Escrow Agreement and in compliance with Rule
15c2-4 of the Securities Exchange Act of 1934. In the event that the Minimum
Offering is not achieved on or before the Termination Date, all Escrow Agent
fees and expenses shall be paid by the Company and all cleared funds then held
in the Escrow Account (including accrued interest) shall be promptly returned
to the respective purchasers as provided in the Escrow Agreement. Each such
deposit shall be accompanied by a properly completed and executed Subscription
Agreement (as set forth in the Prospectus), along with a statement setting
forth the name, address and social security or taxpayer identification number
of each investor whose payment is then being deposited, the amount received
from each such investor, any volume discount given to that investor and the
number of Shares which each such investor has agreed to purchase. You
represent that you will communicate sales data to the Escrow Agent on a daily
basis.
2.5. Initial Closing Date. Upon the receipt of purchases of Shares
representing at least the Minimum Offering, and if the conditions set forth
herein have been satisfied or waived, you and the Company shall determine the
date (the "Initial Closing Date"), time and place at which the initial closing
of the sale of Shares shall occur and provide the Escrow Agent with at least
two business days advance notice of the Initial Closing Date. On the Initial
Closing Date the Escrow Agent will notify you and the Company of: (i) the
amount received for subscriptions for Shares that was on deposit in the Escrow
Account for at least three business days prior to the Initial Closing Date
(the "Initial Subscription Proceeds"), (ii) any volume discounts applicable to
those Initial Subscription Proceeds, (iii) the amount of accrued interest on
the Initial Subscription Proceeds, and (iv) any then unpaid escrow fees and
expenses. On the Initial Closing Date, the Escrow Agent shall: (x) deliver to
you by wire transfer in immediately available funds, as payment of the amounts
owed to you pursuant to Sections 2.7 (a) and (b), an amount equal to ten and
one half percent (10.5%) of the Initial Subscription Proceeds grossed up for
any applicable volume discounts, minus the amount of any volume discounts
applicable to those Initial Subscription Proceeds and (y) deliver to the
Company by wire transfer in immediately available funds
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an amount equal to the balance of the Initial Subscription Proceeds minus any
then unpaid escrow fees and expenses. The Escrow Agent will be directed to
distribute the aggregate accrued interest on the funds held in the Escrow
Account to the purchasers of the Shares, on a pro rata basis, calculated based
on the number of days each purchaser's cleared funds are held in escrow,
without reduction for any fees and reimbursements to be paid to the Escrow
Agent and subject to the applicable withholding provisions of the Internal
Revenue Code. You will, upon your receipt from the Escrow Agent of funds
pursuant to this Section 2.5, deliver (or cause to be delivered) to the
Selected Dealers, by wire transfer in immediately available funds, an amount
equal to the selling commissions payable to them.
2.6. Additional Closing Date. If, after the Initial Closing Date and
on or before the Termination Date, proceeds are received for additional sales
of Shares, and if the conditions set forth herein have been satisfied or
waived, you and the Company shall determine the date ("Additional Closing
Date"), time and place at which each additional closing of the sale of Shares
shall occur and provide the Escrow Agent with at least two business days
advance notice of each Additional Closing Date (the Initial Closing Date and
each Additional Closing Dates are herein referred to each as a "Closing
Date"). On each Additional Closing Date the Escrow Agent will notify you and
the Company of: (i) the amount received for subscriptions for Shares that was
on deposit in the Escrow Account for at least three business days prior to the
Additional Closing Date (the "Additional Subscription Proceeds"), (ii) any
volume discounts applicable to those Additional Subscription Proceeds, (iii)
the amount of accrued interest on the Additional Subscription Proceeds, and
(iv) any then unpaid escrow fees and expenses. On each Additional Closing
Date, the Escrow Agent shall: (x) deliver to you by wire transfer in
immediately available funds, as payment of the amounts owed to you pursuant to
Sections 27.(a) and (b), an amount equal to ten and one half percent (10.5%)
of the Additional Subscription Proceeds grossed up for any applicable volume
discounts, minus any volume discounts applicable to those Additional
Subscription Proceeds; and (y) deliver to the Company by wire transfer in
immediately available funds an amount equal to the balance of the Additional
Subscription Proceeds minus any then unpaid escrow fees and expenses. The
Escrow Agent will be directed to distribute the aggregate accrued interest on
the funds held in the Escrow Account to the purchasers of the Shares, on a pro
rata basis, calculated based on the number of days each purchaser's cleared
funds are held in escrow, without reduction for any fees and reimbursements to
be paid to the Escrow Agent and subject to the applicable withholding
provisions of the Internal Revenue Code. You will, upon your receipt from the
Escrow Agent of funds pursuant to this Section 2.6, deliver (or cause to be
delivered) to the Selected Dealers, by wire transfer in immediately available
funds, an amount equal to the selling commissions payable to them.
2.7. Selling Commissions and Other Compensation. In consideration for
your execution of this Agreement and for the performance of your obligations
hereunder:
(a) The Company agrees to pay you a selling commission (the
"Selling Commission") equal to 10% of the Gross Offering Proceeds
(subject to any volume discounts) from the sale of Shares made by you
and each Selected Dealer. The Gross Offering Proceeds will be equal to
the sum of the Initial Subscription Proceeds and all Additional
Subscription Proceeds grossed up for any applicable volume discounts.
You may, in your sole discretion, provide volume discounts of up to 2%
to any bank, trust company, savings institution, insurance company,
securities dealer, investment company or business development company
as defined in the Investment Company Act of 1940, or a pension or
profit sharing trust with assets of at least $5,000,000
("Institutional Investors") who purchase at least 50,000 Shares. The
application of any volume discounts will reduce the amount of
commissions that would be paid to you but will not change
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the net offering proceeds to the Company. The Selling Commissions will
be paid as provided in Sections 2.5 and 2.6.
(b) The Company agrees to pay you, a due diligence expense
allowance of 0.5% of the Gross Offering Proceeds from the sale of
Shares by you and such Selected Dealers. The due diligence expense
allowance will be paid as provided in Sections 2.5 and 2.6.
(c) At each Closing Date, you shall be entitled to purchase
Shares equal to 0.5% of all Shares sold (12,500 Shares if all Shares
offered are sold) (the "SGM Shares") for a purchase price of $.01 per
Share.
(d) You shall have the right to associate yourself with
Selected Dealers, all of whom will be members of the National
Association of Securities Dealers, Inc. ("NASD") to participate in
selling the shares and you shall have the right to reallow all or any
portion of the Selling Commission and SGM Shares to such Selected
Dealers.
2.8. Finder's Fees. Except as set forth in the Prospectus, none of
you, the Company or the Advisor, or any affiliate thereof, shall pay or award
any finder's fee, commission or other compensation to any person engaged by a
potential purchaser for investment advice as an inducement to such advisor to
advise the purchase of Shares or for any other purpose.
2.9. Effect of Misstatements or Omissions. Notwithstanding anything
contained in this Agreement to the contrary, you shall not, in your sole
discretion, be required to hold a Closing on any Closing Date if at any time
during the period between the immediately preceding Closing Date (or the
Effective Date if there has not been a Closing) and such Closing Date, the
Registration Statement or the Prospectus contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, including, without
limitation, any such untrue statement or omission subsequently cured by an
amendment to the Registration Statement or a supplement to the Prospectus. In
that event, upon your request, the Company will instruct the Escrow Agent to
deliver all funds then remaining in the Escrow Account and all interest earned
thereon to the investors who provided those funds.
3. Covenants.
3.1. The Company. The Company further covenants with you as follows:
3.1.1. Notices. The Company immediately will notify you, and
confirm the notice in writing, (i) when the Registration Statement and any
post-effective amendment thereto become effective, (ii) when any Prospectus is
filed with the Commission or mailed to the Commission for filing pursuant to
Rule 424(b) of the Regulations or any prospectus supplement is filed with the
Commission or transmitted to the Commission for filing pursuant to Rule 424(c)
of the Regulations, (iii) of the issuance by the Commission of any stop order
or of the initiation or threatening of any proceeding for that purpose, (iv)
of the receipt of comments from the Commission with respect to the
Registration Statement or of any request, written or oral, by the Commission
for any amendment to the Registration Statement or any amendment or supplement
to the Prospectus or for additional information relating thereto and (v) of
any fact which would make inaccurate any representation or warranty by the
Company or of any change in facts on which your obligation to perform under
this Agreement is dependent. If the
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Commission shall enter a stop order at any time, the Company will make every
reasonable effort to obtain the lifting of such order at the earliest possible
moment.
3.1.2. Delivery of Registration Statements, Prospectuses, etc.
The Company will deliver to you, without expense to you, at such locations as
you shall request, (1) as soon as practicable, three signed copies of the
Registration Statement and all amendments thereto, including exhibits and (ii)
as soon as any Prospectus is filed with the Commission or is transmitted to
the Commission for filing pursuant to Rule 424(b) of the Regulations, or any
supplement to the Prospectus is filed with the Commission or is transmitted
for filing pursuant to Rule 424(C) of the Regulations, such number of copies
of the Prospectus and supplements and amendments thereto, if any, as you may
reasonably request.
3.1.3. Blue Sky Qualification. The Company, in good faith, in
cooperation with you will use its best efforts to qualify the Shares, or to
establish an exemption of the Shares from qualification, at or prior to the
time the Registration Statement becomes effective or as soon thereafter as
possible, for offering and sale under the "blue sky" or securities laws of
California, Florida, Illinois, Michigan, Ohio and Texas, with the number of
Shares to be so qualified in each such jurisdiction being as determined by
you, and thereafter to maintain such qualification in effect until the
Termination Date. The Company will cause a "blue sky" survey advising you as
to the jurisdictions in which the Shares have been qualified for offering and
sale to be prepared and delivered to you on or before the Effective Date and
an amendment to be prepared and delivered on each date that (i) the Shares are
qualified in any additional jurisdiction or (ii) the status of the
qualification of the Shares in any jurisdiction is altered in any respect. In
each jurisdiction where such qualification shall be effected, the Company will
file and make such statements or reports at such time as may be required by
the laws of such jurisdiction. The Company immediately will notify you, and
confirm such advice in writing, of the issuance by the authorities in any such
jurisdiction of any stop order or of the initiation or the threatening of any
proceeding for that purpose. If any such authority shall enter a stop order at
any time, the Company will make every reasonable effort to obtain the lifting
of such order at the earliest possible moment.
The filings, notices, applications and other submissions to
state securities administrators required in connection with obtaining
qualification or exemption of the Shares in each state may be made by an
affiliate of the Company or counsel to the Company or by both of them acting
together. The "blue sky" surveys may be prepared by an affiliate of the
Company or counsel to the Company. If a "blue sky" survey is prepared by
counsel to the Company, you understand and acknowledge that counsel to the
Company may rely on representations by the affiliate of the Company concerning
both the actions taken by such affiliate to obtain qualification or exemption
in the states included in the "blue sky" survey and any communications
received by such affiliate from state securities administrators and that
counsel to the Company will have no liability or responsibility for any
actions or omissions of such affiliate of the Company or for any consequences
thereof.
3.1.4. Amendment to Registration Statement, etc. The Company
will not, before the Registration Statement becomes effective, file any
amendment thereto to which you reasonably shall object after being furnished
with a copy thereof. If during the time when a Prospectus is required to be
delivered under the Securities Act any event, including, but not limited to,
any event relating to or affecting the Company shall occur as a result of
which it is necessary to amend or supplement the Prospectus in order to make
the statements in the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a potential purchaser,
the Company will notify you promptly of the occurrence of each such event and
prepare and file with the Commission an amendment or amendments of, or a
supplement or supplements to, the Registration Statement and the Prospectus
will
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not contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the
statements therein not misleading; provided, however, that the Company will
not file any amendment to the Registration Statement or any supplement to the
Prospectus to which you reasonably shall object after being furnished with a
copy thereof. The Company will furnish to you such information with respect to
themselves as you or your counsel may at any time or from time to time
reasonably request. During the time when a Prospectus is required to be
delivered under the Securities Act, the Company shall comply at their own
expense with all requirements imposed upon them by the Securities Act, the
Regulations, the Securities Exchange Act of 1934, as amended, and the rules
and regulations promulgated thereunder (the "Exchange Act"), and by the laws
of the jurisdictions in which the States shall have been qualified for
offering and sale in accordance with the provisions of Section 3.1.3. in order
to permit continued sales of the Shares in accordance with the provisions
hereof and of the Prospectus.
3.1.5. Financial and Other Information. During a period of five
years from the date hereof, the Company will furnish to the person designated
in Section 10 of this Agreement as the recipient of Notices for you (but not
withstanding anything to the contrary contained in such section, not
necessarily to your counsel or any other persons designated in such section),
the following:
(a) as soon as available, and not later than the date on which
the same is filed with the Commission, two copies of each of the
Company's annual and interim financial and other report, application,
communication or document furnished to the Shareholders or filed with
the Commission, including, without limitation, any accountants'
reports;
(b) as soon as available, a copy of any report, application or
document which the Company shall file with or submit to any
administrative authority under the "blue sky" or securities laws of
any state or other jurisdiction;
(c) as soon as available, two copies of every press release to
be issued and every material news item and article in respect of the
Company or its affairs to be released by the Company; and
(d) promptly, such additional documents and information with
respect to the Company and its affairs as you at any time or from time
to time reasonably may request.
3.1.6. Supplemental Sales Material. The Company will deliver to
you in such reasonable quantities as you may request all supplemental sales
material (whether designated solely for broker-dealer use or otherwise)
proposed to be used or delivered by the Company in connection with the
offering of the Shares prior to the use or delivery to third parties of such
material and will not use or deliver any such material to which you shall
object. Prior to the use or delivery to third parties of any such supplemental
sales material, the Company, at its expense, will file such materials (i) in
any jurisdiction where so required by law in which an application for
qualification is pending and (ii) if you so request, with the NASD.
3.1.7. Earnings Statement. The Company will make generally
available to the Shareholders (through compliance with Rule 158 under the
Securities Act or otherwise) as soon as practicable, but not later than 120
days after the close of the period covered thereby, an earnings statement
covering the first complete 12-month fiscal year of the Company commencing
after the Effective Date which shall satisfy the provisions of Section 11(a)
of the Securities Act.
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3.1.8. Application of Net Proceeds. The Company will apply the
proceeds of the sale of the Shares substantially as set forth under the
caption "Use of Proceeds" in the Prospectus and will file such reports on Form
SR with the Commission with respect to the sale of the Shares and the
application of the proceeds therefrom as may be required in accordance with
Rule 463 of the Regulations.
3.1.9. Solicitation of Purchasers.
(a) The Company will, and will require its affiliates to,
maintain the confidentiality of the list of Shareholders except as
provided in the Declaration of Trust, and not to use such list to
solicit Shareholders in respect of any other transaction.
(b) The Company agrees and understands that violation of the
provisions of Section 3.1.9(a) of this Agreement will cause you, your
subsidiaries and affiliates irreparable harm and injury and that money
damages you receive will not compensate you for any breach thereof.
Accordingly, the Company agrees that, in addition to monetary damages,
you will be entitled to all such equitable relief, including, without
limitation, injunctive relief, as a court of equity or proper
jurisdiction shall deem appropriate in the circumstances. Such relief
shall not be exclusive of any other rights you may have at law or in
equity. All of the rights and remedies you have hereunder shall be
cumulative and not alternative. The provisions of this Section shall
not limit your remedies upon the breach by the Company of any other
Section of this Agreement.
3.1.10. Other Transactions. The Company will not change its
investment objectives as stated in the Prospectus, except as permitted by the
Declaration of Trust and disclosed in the Prospectus.
3.1.11. Undertakings. The Company will comply with all
provisions of any undertaking contained in the Registration Statement and will
timely file all documents, and any amendments to previously filed documents,
required to be filed by the Company pursuant to Section 13, 14 or 15(d) of the
Exchange Act.
3.1.12. Filings. The Company shall execute or cause to be
executed all such certificates and other documents consistent with the
Declaration of Trust and to do or cause to be done all such filing, recording,
publishing and other acts as may be appropriate to comply with the
requirements of law for the formation and operation of a real estate
investment trust in the State of Maryland and the qualification of the Company
to do business in each jurisdiction in which the conduct of its business
requires such qualification.
3.1.13. Availability of Documentation. The Company shall make
available to you or your authorized representatives ("Authorized
Representatives"), any and all documentation reasonably requested in
connection with your due diligence efforts regarding the Company or the offer
and sale of shares including, but not limited to, information included in the
Registration Statement and the Prospectus.
3.2. The Selling Group Manager. You agree as follows:
3.2.1. Suitability and Disclosure Requirements. You agree, and
you shall use your best commercially reasonable efforts to cause any Selected
Dealers to agree, that:
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(a) In recommending to a customer the purchase, sale or
exchange of Shares, each of you or they, as the case may be, will
comply with all applicable laws and the rules of the NASD.
(b) Each of you or they, as the case may be, will not execute
any transaction for the discretionary accounts maintained by you or
them, as the case may be, respectively.
(c) Each of you or they, as the case may be, will provide the
Company with accurate blue sky information for all sales made by you
or they, as the case may be, including the state of residence of each
beneficial owner of Shares.
(d) All subscribers must be of a majority age in the
jurisdictions in which they subscribe.
3.2.2. Solicitation of Purchasers. You agree, and you shall
require the Selected Dealers to agree, that each of you or they, as the case
may be:
(a) will not give any information or make any representation in
connection with the offering of Shares other than those contained in
the Prospectus;
(b) will not distribute any sales or advertising material that
has not been approved by the Company and will distribute such
materials in accordance with the legends thereon and applicable
securities laws;
(c) will solicit purchasers for Shares only in the states in
which and to the extent that you have been advised by Berry, Moorman,
King & Hudson, P.C. ("Berry, Moorman"), counsel to the Company, that
such solicitation can be made in accordance with applicable securities
laws and in which you are qualified to so act;
(d) will not sell to an investor that is a Qualified Plan,
including an IRA or a Keogh Plan (or is using the assets of a
Qualified Plan to make the investment) if the Company, the Sponsor,
the Advisor or any of their Affiliates (i) has investment discretion
with respect to the assets of the Qualified Plan to be invested in the
Company, (ii) regularly gives individualized investment advice which
serves as the primary basis for the investment decisions made with
respect to such assets, or (iii) is otherwise a fiduciary with respect
to such assets; and
(e) will deliver a Prospectus and current supplements, if any,
to each potential investor.
3.2.3. Selected Dealers. You agree to notify the Company, in
writing, prior to entering into any Selected Dealer Agreement. The Company may
reasonably object to the use of such entity as a Selected Dealer, in writing,
within five days from the receipt of such notice and must give reasons for
such objection. You agree not to include in the offering of the Shares any
Selected Dealer to which the Company reasonably objects pursuant to this
Section.
3.2.4. Taxpayer Identification. You acknowledge that the
persons signing the Subscription Agreement as office manager/dealer authorized
signature have the authority to inform the Company, on behalf of your firm, of
the taxpayer identification number of an investor and whether (i)
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back-up withholding is required under Section 3406 of the Internal Revenue
Code of 1986; and (ii) withholding is required because the investor is a
foreign corporation or a non-resident alien. You further acknowledge that the
company is permitted to rely on such information upon the execution of the
Subscription Agreement by such persons. You will require in your Selected
Dealer Agreements that your Selected Dealers make the same acknowledgements to
the Company.
4. Payment of Expenses.
4.1. Expenses of the Company and the Advisor. The Company will
pay all costs and expenses incident to the performance of the obligations of
the Company and of the Advisor under this Agreement (the "Organization and
Offering Expenses"), including all costs and expenses incident to (i) the
preparation, printing, filing and delivery of the Registration Statement and
the Prospectus, including the cost of all copies thereof and of any
preliminary prospectus and of the Prospectus and any amendment thereof or
supplement thereto, including such quantities of each such document as you
reasonably may request, (ii) the preparation of this Agreement, the
Declaration of Trust, the Advisory Agreement, the Escrow Agreement and all
amendments or supplements thereto, other solicitation material and related
documents and the filing or recording of such certificates or other documents
necessary to comply with the laws of the State of Maryland and other
jurisdictions in which the Company may own properties or conduct business to
the extent applicable thereto, (iii) the delivery of the Shares, including
payment of any applicable transfer tax, (iv) any escrow arrangement in
connection with the offering and sale of the Shares, including any
compensation and reimbursement to the Escrow Agent, (v) the qualification of
the Shares under, and continued compliance with "Blue Sky" or securities laws
of the jurisdictions designated in Section 3.1.3, including filing fees and
the fees and disbursements of counsel incurred in connection therewith and the
cost of printing of the "blue sky" survey and supplements thereto referred to
in Section 3.1.3, (vi) the filing fees payable to the Commission and to the
NASD, (vii) printing and distribution expenses, and (viii) the fees of counsel
and accountants for the Company.
4.2. Expenses of Selling Group Manager. You and the Selected
Dealers will pay all costs and expenses incurred by any of you in connection
with the offering of Shares and, except with respect to the amounts payable
pursuant to Section 2.7, shall not be entitled to reimbursement therefor by
the Company or the Advisor. In the event the Minimum Offering is not achieved,
neither you nor any Selected Dealer shall receive any Selling Commissions or
SGM Shares or other compensation or expense reimbursement in connection with
this offering.
5. Conditions of Your Obligations. Your obligations hereunder and the
right of the Company to the receipt of subscription funds at any closing
hereunder shall be subject to the continued accuracy throughout the Offering
period of the representations, warranties and agreements of the Company of
their obligations hereunder and to the following terms and conditions:
5.1. Effective Registration Statement. The Registration
Statement shall have been declared effective not later than 5:30 p.m., Eastern
time, on the date of this Agreement or such later date and time as shall be
consented to in writing by you and, at any time during the term of this
Agreement, no stop order shall have been issued or proceeding therefor
initiated or threatened by the Commission or by the authorities in any
jurisdiction in which the Shares shall have been qualified for offering and
sale in accordance with the provisions of Section 3.1.3, unless such order or
proceedings have been withdrawn or terminated by the Commission or such
authorities.
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5.2. Opinion of Counsel for the Company. At the Initial Closing
Date, you shall receive the opinion of Berry, Moorman, counsel for the
Company, in form and substance satisfactory to you and your counsel, to the
effect that:
(a) The Company has been duly formed and is validly existing as
a Maryland real estate investment trust pursuant to its Declaration of
Trust under the laws of the State of Maryland and has the power to
conduct its business as described in the Prospectus.
(b) The Company has authorized the Shares for issuance to the
public pursuant to the Prospectus and such Shares, when issued
pursuant to the Registration Statement and the Declaration of Trust
against full payment therefor, as provided in this Agreement, will,
under the laws of the State of Maryland, be duly and validly issued,
fully paid and nonassessable by the Company.
(c) No approval, authorization or other action by or filing
with, any governmental authority, is required in connection with the
execution or delivery by the Company of this Agreement, or the
issuance and sale by the Company of the Shares, except such as may be
required under the Securities Act or state securities laws.
(d) The execution, delivery and performance of this Agreement
have been duly and validly authorized by all requisite Company action,
and this Agreement has been duly executed and delivered by the
Company.
(e) This Agreement is a legal, valid and binding obligation of
the Company enforceable against the Company in accordance with its
terms, (i) subject to bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights in general and to
general principles of equity (whether considered in a proceeding in
equity or at law), and (ii) except to the extent that the
enforceability of the indemnity and/or contribution provisions
contained in Section 6 of this Agreement may be limited under
applicable securities laws.
(f) The Registration Statement and the Prospectus and any
further amendment or supplement thereto made by the Company prior to
the Initial Closing Date comply as to form in all material respects
with the requirements of the Securities Act and the Regulations
promulgated thereunder (except that no opinion need be expressed as to
any financial statement, schedules or other financials or statistical
data included) and such counsel has no reason to believe that either
the Registration Statement or the Prospectus or any amendment or
supplement thereto contains any untrue statement of a material fact or
omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading in light of
the circumstances under which they were made.
(g) The Registration Statement has been filed on Form S-11,
which is in the proper form for registration of the Company's Shares
in the offering described in the Registration Statement.
(h) As to such other matters incident to the transactions
contemplated hereby as you may reasonably request.
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In rendering the opinions set forth above, Berry, Moorman may rely (a)
as to matters of fact upon certificates furnished to them by the Company or
the Advisor and (b) as to all matters of law other than Federal and Michigan
law upon the opinion of local counsel. Such opinions may expressly state that
any agreement covered by such opinion is a legal, valid and binding obligation
of the Company enforceable against the Company in accordance with its terms
(i) subject to bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors' rights in general and to general principles of
equity (whether considered in a proceeding in equity or at law), and (ii)
except to the extent that the enforceability of the indemnity and/or
contribution provisions contained in Section 6 of this Agreement may be
limited under applicable securities laws.
5.3. Opinion of Tax Counsel. At the Initial Closing Date, you
shall receive the opinion of Berry, Moorman in the Registration Statement, and
to the further effect that the information in the Prospectus under the
captions "Risk Factors Tax Risks" and "Income Tax Consequences" to the extent
that it constitutes matters of law or legal conclusions, has been reviewed by
them and is correct.
5.4. Opinion of Counsel for Selling Group Manager. At the
Initial Closing Date, you shall receive the favorable opinion of such counsel
as you shall designate, if any, with respect to the Shares, the Registration
Statement, the Prospectus and such other related matters as you may reasonably
require.
5.5. Certificates of Company. At each Closing Date with respect
to which you or a Selected Dealer (who sold Shares involved in that Closing)
requests, you shall receive certificates signed on behalf of the Company to
the effect that (i) at all times from the Effective Date to that Closing Date,
the Registration Statement did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and the Prospectus did not contain an
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading; (ii) the representations and warranties
of the Company in this Agreement are true and correct on and as of such
Closing Date with the same effect as though expressly made at such Closing
Date; and (iii) the Company has performed all covenants or conditions on their
or its part to be performed or satisfied at or prior to the Effective Date and
such Closing Date.
5.6. Satisfactory Proceeding. All proceedings taken in
connection with the sale of the Shares herein contemplated shall be
satisfactory in form and substance to you and your counsel.
5.7. No Stop Order. You shall receive notification upon the
receipt of any stop order suspending the sale of Shares in any jurisdiction.
At the Initial Closing Date and at each Additional Closing Date, you shall
receive such evidence as you reasonably shall request to evidence that no
order suspending the sale of the Shares in any jurisdiction designated in
Section 3.1.3 shall have been issued and no proceeding for that purpose shall
have been instituted or contemplated.
5.8. Additional Information. At the Initial Closing Date, such
counsel as you shall designate, if any, shall have been furnished with such
additional information, opinions, certificates and documents as they
reasonably may require for the purpose of enabling them to pass upon the sale
of the Shares as herein contemplated and related proceedings, in order to
evidence the accuracy or completeness of any of the representations or
warranties or the fulfillment of any of the conditions herein contained and
all actions taken by the Company in connection with satisfactory in form and
substance to you.
16
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6. Indemnification and Contribution.
6.1. Indemnification by the Company. Subject to the conditions
set forth below, the Company agrees to indemnify and hold harmless, you, each
Selected Dealer and each person, if any, who controls you and each Selected
Dealer within the meaning of Section 15 of the Securities Act, against any and
all loss, liability, claim, damage and expense whatsoever (including but not
limited to any and all expense whatsoever reasonably incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever) arising out of or based upon (a) any
untrue statement or alleged untrue statement of a material fact contained (i)
in any preliminary prospectus, the Registration Statement or the Prospectus
(including, without limitation, any untrue statement or alleged untrue
statement subsequently cured by an amendment to the Registration Statement or
supplement to the Prospectus), (ii) in any application or other document (in
this Section 6 collectively called "application") filed in any jurisdiction in
order to qualify the Shares under the "blue sky" or securities laws thereof or
filed with the Commission or any securities exchange, (iii) in any
supplemental sales material (whether designated for broker-dealer use or
otherwise; however, if broker-dealer use only material is distributed to
investors by you or a Selected Dealer, you and the Selected Dealers shall not
be entitled to indemnification hereunder) approved by the Company for use by
you or (iv) in any additional written or oral information provided to
prospective purchasers of Shares by an authorized representative of the
Company other than you or a Selected Dealer or (b) the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading (including, without
limitation, any omission or alleged omission subsequently cured by an
amendment to the Registration Statement or supplement to the Prospectus),
except insofar as such untrue statement or omission was made in reliance upon
and in conformity with information furnished by you or a Selected Dealer
expressly for use in the Registration Statement or the Prospectus and any
other information relating to you, a Selected Dealer or your programs for the
inclusion in any future amendment to the Registration Statement or supplement
to the Prospectus; provided, however, that the foregoing indemnity in
subclause (ii) above shall not extend to any losses, claims, damages or
liabilities incurred as a result of (x) you or a Selected Dealer selling
Shares in jurisdictions other than those set forth in Section 3.1.3 hereof or
(y) you or a Selected Dealer selling more Shares than were registered in any
jurisdiction pursuant to your request under said Section 3.1.3.
6.2. Indemnification by Selling Group Manager. You agree to
indemnify and hold harmless the Company, its officers and Trustees, and the
Advisor and its officers and directors, and each person, if any, who controls
any of the foregoing persons within the meaning of Section 15 of the
Securities Act to the same extent as the foregoing indemnity from the Company
to you but only with respect to the statements in or omissions from the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information furnished by you or a Selected Dealer specifically
or inclusion in the Registration Statement or the Prospectus and any other
information relating to you or a Selected Dealer or your programs for the
offering and sale of the Shares furnished by you or a Selected Dealer
expressly for inclusion in any future amendment to the Registration Statement
or supplement to the Prospectus.
6.3. Notices of Claims; Employment of Counsel. Any party which
proposes to assert the right to be indemnified under this Section 6 promptly
shall notify in writing each party against which a claim is to be made under
this Section 6 of the institution of such action but the omission so to notify
such indemnifying party of any action shall not relieve it from any liability
it may have to any indemnified party otherwise than under this Section 6. Such
indemnifying party or parties shall assume the defense of such action,
including the employment of counsel (satisfactory to the indemnified party)
17
<PAGE>
and payment of fees and expenses. An indemnified party shall have the right to
employ its own counsel in any such case but the fees and expenses of such
counsel shall be at the expense of such indemnified party unless the
employment of such counsel shall have been authorized in writing by the
indemnifying party or parties in connection with the defense of such action or
the indemnifying party or parties shall not have employed counsel to have
charge of the defense of such action or such indemnified party or parties
reasonably shall have concluded that there may be defenses available to it or
them which are different from or parties (in which case such indemnifying
party or parties shall not have the right to direct the defense of such action
on behalf of the indemnified party or parties), in any of which events such
fees and expenses shall be borne by such indemnifying party or parties.
Anything in this paragraph to the contrary notwithstanding, an indemnifying
party shall not be liable for any settlement of any such claim or action
effected without its written consent.
6.4. Contribution. If the indemnification provided for in
Section 6.1 or 6.2 is unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, claims, damages or liabilities (or
actions in respect thereof) referred to therein, then the Company and you
shall contribute to the amount paid or payable as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion so that you shall be responsible for the portion represented by the
percentage that the commissions and other compensation paid to you and the
Selected Dealers pursuant to Section 2.7 hereof, bears to the aggregate public
offering price of the Shares as set forth on the cover page of the Prospectus,
and the Company, on the other had, shall be responsible for the remaining
portion (subject to the last sentence of this Section 6.4). If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law, then the Advisor and you shall contribute to such amount paid
or payable in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company and the Advisor
on the one hand and you and the Selected Dealers on the other in connection
with the statements or omissions which resulted in such losses, claims,
damages or liabilities (or actions in respect thereof), as well as any other
relevant equitable considerations. The relative benefits received by the
Company and the Advisor on the one hand and you and the Selected Dealers on
the other shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
bear to the total selling commissions and other compensation received by you
and the Selected Dealers, as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company on the one hand or to information with
respect to you and the Selected Dealers furnished in writing specifically for
inclusion in the Registration Statement or the Prospectus on the other and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company, the Advisor and
you agree that it would not be just and equitable if contribution pursuant to
this Section 6.4 were determined by pro rata allocation or by any other method
of allocation which does not take account of the equitable considerations
referred to above in this Section 6.4. The amount paid or payable as a result
of the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this Section 6.4 shall be deemed to include any legal or
other expenses reasonably incurred by any such party in connection with
investigating or defending any such action or claim. Notwithstanding any other
provisions of this Agreement, no person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) with respect to
the transactions giving rise to the right of contribution provided in this
Section 6.4 shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
18
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7. Representations and Agreements to Survive. Except as the context
otherwise requires, all indemnity agreements set forth in Section 6, all
representations, warranties, covenants and other agreement of the Company, the
Advisor and you contained in this Agreement shall remain operative and in full
force and effect regardless of any investigation made by you, or on your
behalf, or by a controlling person, or by or on behalf of the Company or the
Advisor, and shall survive any termination or cancellation of this Agreement
and shall survive the delivery of and payment for the Shares,and any successor
of yours or of the Company or the Advisor, as the case may be, shall be
entitled to the benefit of the respective indemnity agreements.
8. Effective Date and Termination of Agreement.
8.1. Effective Date. This Agreement shall become effective on
the Effective Date, unless prior thereto you or the Company have elected to
prevent this Agreement form becoming effective without liability of any party
to any other party except as provided in Section 8.3, by giving written notice
of such election to the other parties hereto before the time this Agreement
otherwise would become effective.
8.2. Termination of Agreement. You shall have the right to
terminate this Agreement at any time prior to the Initial Closing Date or any
Additional Closing Date (i) if any representation or warranty hereunder shall
be found to have been incorrect or misleading when made or the Company or the
Advisor shall fail, refuse or be unable to perform any of their agreement
hereunder or to fulfill any condition of your obligations hereunder, (ii) if
there shall have been a material adverse change in the condition (financial or
otherwise) or prospects of the Company or any of its affiliates (including the
Advisor) or if the Company has sustained a material or substantial loss by
fire, flood, accident, earthquake or other calamity or malicious act which,
whether or not said loss shall have been insured, will in your opinion make it
inadvisable to proceed with the offering and sale of the Shares, (iii) if
trading on the New York Stock Exchange or the American Stock Exchange shall
have been suspended, or minimum or maximum prices for trading generally shall
have been fixed or maximum ranges for prices for all securities that shall
have been required on either such exchange by such exchange or by order of the
Commission or any other governmental authority having jurisdiction, (iv) if
the United States shall have become involved in a war or majority hostilities,
(v) if a banking moratorium has been declared by a state or Federal authority,
(vi) if there shall have been such change in the condition of securities
markets generally as in your judgment would make it inadvisable to proceed
with the offering and sale of the Shares or (vii) there shall have been
Federal legislation, a change in Internal Revenue Services rulings or a
proposed change in Treasury Regulations or relevant court decisions which in
your reasonable judgment have a material adverse effect on the tax
consequences to Shareholders as set forth in the Registration Statement.
In addition, you shall have the right, upon thirty days advance
written notice, to terminate this Agreement after the earlier of: (i) the sale
of the Minimum Offering, or (ii) one year after the Effective Date. In
addition, the Company shall have the right to terminate this Agreement at any
time. This Agreement will also terminate upon the Termination Date of the
Offering as provided in Section 2.2.
8.3. Result of Termination. If for any reason this Agreement
shall not become effective or the Offering hereunder is terminated before the
Minimum Offering is achieved, the Company and the Advisor shall nevertheless
meet the obligations assumed pursuant to Section 4, but shall have no
additional liability to you except for the obligations of the Company with
respect to indemnification and
19
<PAGE>
contribution as provided in Section 6, and you shall have no liability to the
Company or the Advisor except for your obligations with respect to
indemnification and contribution as provided in Section 6.
9. Entire Agreement. This Agreement embodies the entire Agreement
among the Company, the Advisor and you with respect to the matters covered
hereby. There are no promises, agreements, terms, conditions or obligations
relating to such matters other than those contained in this Agreement. This
Agreement cannot be changed or terminated orally.
10. Method of Notice. Except as this Agreement otherwise provides,
whenever notice is required by this Agreement, it shall be made in writing or
by telegram if promptly confirmed in writing and shall be sufficient in all
respects if delivered or sent by certified or registered mail to the address
set forth in the beginning of this Agreement or at such other addresses as the
party addressed may have designated to the other.
11. Parties. This Agreement shall inure solely to the benefit of and
shall be binding upon you, the Company, the Advisor and the other persons
referred to in Section 6 hereof who are entitled to indemnification hereunder,
and their respective successors, legal representatives and assigns, and no
other person shall have or be construed to have a legal or equitable right,
remedy or claim under or in respect of or by virtue of this Agreement or any
provision herein contained.
12. Limited Recourse. You agree that you shall look solely to the
assets of the Company for satisfaction of all claims against the Company, and
in no event shall any Shareholder, Trustee, officer or agent of the Company
have any personal liability for the obligations of the Company under this
Agreement.
13. Governing Law. This Agreement shall be construed in accordance
with the laws of the State of Texas.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
UNITED MORTGAGE TRUST
By: ___________________________________
Christine A. Griffin, Administrator
20
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Confirmed and accepted with respect to
Sections 2.4, 2.8, 4.1, 4.2, 6.2, 6.3,
6.4, 7., 8.2, 8.3 and 9.
MORTGAGE TRUST ADVISORS, INC.
By: __________________________________
Todd Etter, President
Confirmed and accepted as of the date first above written.
FIRST FINANCIAL UNITED INVESTMENT, INC.
By: ___________________________________
As Karan Bhagat, General and Compliance Manager
And By: H & H Services, Inc., General Partner
By: ___________________________________
Dan Hill, President
21
Exhibit 1.2
Selected Dealer Agreement
September __, 1996
First Financial United Investments, Ltd.
16801 Greenspoint Park Drive, Suite 155
Houston, Texas 77060
Gentlemen:
1. General. We understand that First Financial United Investments,
Ltd., as selling group manager ("Selling Group Manager"), is entering into
this Agreement with us and other firms who may be offered the right to sell
to the public shares of beneficial interest ("Shares") of United Mortgage
Trust, a Maryland real estate investment trust (hereinafter, the "Issuer"
or the "Company"). We agree to participate as a "Selected Dealer" in
offering the Shares to the public pursuant to the Company's Registration
Statement on Form S-11 filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Securities Act"),
subject to the terms of (a) this Agreement, (b) the Selling Group Manager
Agreement between the Issuer and the Selling Group Manager, as amended from
time to time, and (c) the Selling Group Manager's instructions which may be
forwarded to the selected dealers from time to time. We agree that our
participation is subject to the eligibility of the Shares for sale to the
public only in those states where such offers or sales may lawfully be
made.
The terms and conditions of this Agreement shall be applicable to any
public offering of Shares of the Issuer wherein the Selling Group Manager
is responsible for managing or otherwise implementing the sale of the
Shares to the public on a "best efforts" basis through selected dealers
("Selected Dealers"), provided that the Selling Group Manager has invited
our participation in such Offering and expressly informed us that such
terms and conditions shall be applicable, and we have elected to
participate as a Selected Dealer in such Offering. Any such offering of the
Shares in which you are acting as a selling group manager on behalf of the
Issuer is hereinafter called the "Offering."
The term "preliminary prospectus" means, in the case of an Offering
registered under the Securities Act any preliminary prospectus relating to
the Offering of Shares or any preliminary prospectus supplement together
with a prospectus relating to such Offering and, in the case of an Offering
not registered under the Securities Act, any preliminary offering circular
relating to the Offering or any preliminary offering circular supplement
together with an offering circular relating to such Offering; the term
"prospectus" means, in the case of an Offering registered under the
Securities Act, the prospectus, together with the final prospectus
supplement, if any, relating to such Offering, filed pursuant to Rule
424(b) or Rule 424(c) under the Securities Act and, in the case of an
Offering not registered under the Securities Act, the final offering
circular, including any supplements, relating to such Offering.
2. Conditions of Offering; Acceptance and Purchase. We understand
and agree to the following terms and conditions:
(a) Pursuant to the terms and conditions herein set forth, we agree
to use our best efforts as an independent contractor, and not as
an agent of the Selling Group Manager or
<PAGE>
First Financial United Investments, Ltd.
September __, 1996
Page 2
the Issuer, to find subscribers acceptable to the Issuer
("Investors") for the Shares at a public offering price of $20
per share. Each Investor must subscribe for not less than the
minimum subscription of 250 Shares (50 Shares for IRA's and
Keough plans). Any Offering will be subject to delivery of the
Shares by the Issuer, the approval of all legal matters by
counsel, acceptance of each subscription by the Issuer, and the
satisfaction of other conditions, and may be made on the basis of
reservation of Shares or an allotment against subscription. No
subscription for Shares shall be effective unless and until
accepted by the Issuer. The Issuer has reserved the right, at its
sole discretion, to refrain from accepting any subscription
submitted.
(b) Subscription Materials; Escrow Account. Each person solicited by
us who desires to purchase shares will be required to complete
and execute an Subscription Agreement (as set forth in the
Prospectus) and to complete and execute such other documents as
the Issuer may require (collectively, the "Subscription
Documents"). Payment for subscription may be made by or on behalf
of an investor (i) by delivery of a check made payable to "Texas
Commerce Bank Escrow Account No. _____" (the "Escrow Account") or
(ii) wire transfer to the Escrow Account. Each subscriber must
have his subscription payment in the Escrow Account in
immediately available funds (i.e., all checks must clear) on or
before the specified settlement date (the "Settlement Date").
(c) Minimum Offering. If subscriptions for at least 125,000 Shares
(the "Minimum Number of Shares") are not accepted by the Issuer
and fully paid for by a minimum of 100 Investors in accordance
with the terms of the Offering within a period of one (1) year
following the Public Offering Date (as such term is hereinafter
defined)(the "Initial Offering Termination Date"), this Agreement
shall automatically terminate and the full proceeds from the sale
of such Shares as may have been sold, without any deductions
whatsoever, together with interest thereon as provided in the
Prospectus, shall be returned forthwith to the subscribers.
Pending the sale of the Minimum Number of Shares as aforesaid,
the full purchase price shall be held in the Escrow Account at
Texas Commerce Bank in Houston, Texas.
If subscriptions for the Minimum Number of Shares are
accepted by the Issuer and fully paid for as aforesaid, then the
sales shall be declared effective and the escrow agent shall
deliver to the Selling Group Manager from the proceeds derived
from the sale of such Shares the commissions and the proportion
of non-accountable expense allowance payable to the Selling Group
Manager and the Selected Dealers on the sale of such Shares; and
the balance of the said proceeds shall be remitted to the Issuer.
The Selling Group Manager will promptly remit to us the Selected
Dealer compensation provided in Section 2(e) below.
(d) Closings After the Initial Offering. After the Initial Closing
Date (as defined in the Selling Group Manager Agreement),
additional closings of the sale of Shares are
<PAGE>
First Financial United Investments, Ltd.
September __, 1996
Page 3
anticipated to occur monthly (each an "Additional Closing Date").
If subscription for more than the Minimum Number of Shares are
accepted by the Issuer and fully paid for by the Initial Offering
Termination Date, then as to all Shares sold thereafter pursuant
to the Offering, as funds are received by the escrow agent from
the sale thereof (and following acceptance of such subscription
by the Issuer) they shall be held until the Additional Closing
Date first following the date when the escrow agent is in
possession of immediately available funds with respect to the
subscription in question. Following such date, the Issuer shall
cause the issuance and delivery of definitive share certificates
in accordance with the instructions of the Selling Group Manager.
Upon each such delivery ("Delivery Date(s)") the net proceeds
(offering prices less the Selling Group Manager's and Selected
Dealers' commission and non-accountable expense allowance) shall
be immediately forwarded to the Issuer by the escrow agent.
(e) Selected Dealer Compensation. As sole compensation, we will be
entitled to receive a commission equal to __% of the gross sales
price of the Shares sold by or through us.
(f) Supplementary Terms and Conditions. You may advise us by
facsimile, telegram, telex or other form of written communication
("Written Communication") of the particular method and
supplementary terms and conditions (including, without
limitation, the information as to prices and offering date
referred to in Section 3(b) of this Agreement) of any Offering in
which we are invited to participate. To the extent such
supplementary terms and conditions are inconsistent with any
provision herein, such terms and conditions shall supersede any
such provision. Unless otherwise indicated in any such Written
Communication, acceptances and other communications by us with
respect to any Offering will be sent to the Selling Group Manager
at the address for notices provided in Section 7 below.
3. Representations, Warranties and Agreements.
(a) Prospectuses. You shall provide us with such number of copies of
each preliminary prospectus, the Prospectus and any supplement thereto
relating to each Offering as we may reasonably request. If the Shares will
be registered under the Securities Act, we represent that we are familiar
with Rule 15c2-8 under the Securities Exchange Act of 1934 ("Exchange Act")
relating to the distribution of preliminary and final prospectuses and
agree that we will comply therewith, we agree to keep an accurate record of
our distribution (including dates, number of copies and persons to whom
sent) of copies of the Prospectus or any preliminary prospectus (or any
amendment or supplement to any thereof), and promptly upon request by you,
to bring all subsequent changes to the attention of anyone to whom such
material shall have been furnished, and we agree to furnish to persons who
receive a confirmation of sale a copy of the Prospectus filed pursuant to
Rule 424(b) or Rule 424(c) under the Securities Act. If the Shares will not
be registered under the Securities Act, we agree that we will deliver all
preliminary and final offering circulars required for compliance with
<PAGE>
First Financial United Investments, Ltd.
September __, 1996
Page 4
the applicable laws and regulations governing the use and distribution of
offering circulars by underwriters, and, to the extent consistent with such
laws and regulations, we confirm that we have delivered and agree that we
will deliver all preliminary and final offering circulars which would be
required if the provisions of Rule 15c2-8 under the Exchange Act applied to
this offering. We agree that in offering Shares we will rely upon no
statements whatsoever, written or oral, other than the statements in the
Prospectus delivered to us by you. We will not be authorized by the Issuer
or any other seller of Shares offered pursuant to a Prospectus or by any
underwriters to give any information or to make any representation not
contained in the Prospectus in connection with the sale of such Shares.
(b) Offer and Sale to the Public. With respect to any Offering of
Shares you will inform us by a Written Communication of any change to the
public offering price, the selling commission to Selected Dealers or the
time when we may commence selling Shares to the public. After such public
offering has commenced, you may change the public offering price or the
selling commission. With respect to each Offering of Shares, until the
provisions of this Section 3(b) shall be terminated pursuant to Section 5,
we agree to offer Shares to the public only at the public offering price as
provided in the Prospectus.
(c) Open Market Transactions. We agree not to bid for, purchase,
attempt to purchase, or sell, directly or indirectly, any Shares, any other
securities of the Issuer of the same class and series as the Shares, or any
other securities of the Issuer as you may designate, except as brokers
pursuant to unsolicited orders and as otherwise provided in this Agreement.
We agree not to effect, or attempt to induce others to effect, directly or
indirectly, any transactions in or relating to put or call options on any
Shares of such Issuer, except to the extent permitted by Rule 10b-6 under
the Exchange Act as interpreted by the Securities and Exchange Commission.
An opening uncovered writing transaction in options to acquire Shares for
our account or for the account of any customer shall be deemed, for
purposes of the preceding sentence, to be a transaction effected by us in
or relating to put or call options on stock of the Issuer not permitted by
Rule 10b-6. The term "opening uncovered writing transaction" means an
opening sale transaction where the seller intends to become a writer of an
option to purchase stock to which it does not own or have the right to
acquire upon exercise of conversion or option rights.
(d) NASD. We represent that we are actually engaged in the investment
banking or securities business and we are either a member in good standing
of the NASD, or, if not such a member, a foreign dealer not eligible for
membership. If we are such a member we agree that in making sales of the
Shares we will comply with all applicable rules of the NASD, including,
without limitation, the NASD's Interpretation with Respect to Free-Riding
and Withholding and Section 24 of Article III of the Rules of Fair
Practice. If we are such a foreign dealer, we agree not to offer or sell
any Shares in the United States of America except through you and in making
sales of Shares outside the United States of America we agree to comply as
though we were a member with such Interpretation and Sections 8.24 and 36
of Article III of the NASD's Rules of Fair Practice and to comply with
Section 25 of such Article III as it applies to a nonmember broker or
dealer in a foreign country.
<PAGE>
First Financial United Investments, Ltd.
September __, 1996
Page 5
(e) Relationship among the Selling Group Manager and Selected
Dealers. We are not authorized to act as agent for you, the Issuer or any
Selected Dealer or other seller of any Shares in offering the Shares to the
public or otherwise. Nothing contained herein or in any Written
Communication from you shall cause the Selected Dealers to be or become
partners with the Selling Group Manager or the Issuer or with one another.
We shall be under no obligation to you except for obligations assumed
hereby or in any Written Communication from you in connection with any
Offering. In connection with any Offering we agree to pay our proportionate
share of any claim, demand or liability, asserted against us, and the other
Selected Dealers or any of them, or against the Selling Group Manager or
the Issuer, if any, based on any claim that such Selected Dealers or any of
them constitute an association, unincorporated business or other separate
entity, including in each case our proportionate share of any expense
incurred in defending against any such claim, demand or liability.
(f) Blue Sky Laws. Upon application to you, you will inform us as to
the jurisdictions in which you believe the Shares have been qualified for
sale under the respective securities laws or "blue sky laws" of such
jurisdictions. Notwithstanding the above, we understand and agree that
compliance with the securities or "blue sky laws" in each jurisdiction in
which we shall offer or sell any of the Shares shall be our sole
responsibility and that you assume no responsibility or obligations as to
the eligibility of the Shares for sale or our right to sell the Shares in
any jurisdiction.
(g) Compliance with Law. We agree that in selling Shares pursuant to
any Offering (which agreement shall also be for the benefit of the Issuer
or other seller of such Shares) we will comply with the applicable
provisions of the Securities Act and the Exchange Act, the applicable rules
and regulations of the Securities and Exchange Commission thereunder, the
applicable rules and regulations of the NASD and the applicable rules and
regulations of any securities exchange having jurisdiction over the
Offering. You and the Issuer shall have full authority to take such action
as you may deem advisable in respect of all matters pertaining to any
Offering. Neither you, the Issuer nor any Selected Dealer shall be under
any liability to us, except for lack of good faith and for obligations
expressly assumed by you in this Agreement; provided, however, that nothing
in this sentence shall be deemed to relieve you from any liability imposed
by the Securities Act.
4. Selected Dealer's Employees. We have assumed full responsibility
for proper training and instruction of our employees and representatives
concerning the selling methods to be used by them in connection with the
offer and sale of the Shares, giving special emphasis to the principles of
suitability and full disclosure to prospective investors and the
prohibitions against "free-riding and withholding."
5. Termination; Supplements and Amendments. This Agreement may be
terminated by either party hereto upon five business days' written notice
to the other party, provided that with respect to any Offering, this
Agreement as it applies to such Offering shall remain in full force and
effect and shall terminate with respect to such Offering in accordance with
the last sentence of this Section; provided further that the
Indemnification provisions of Section 6 of this Agreement shall continue as
therein provided. This Agreement may be supplemented or amended by you by
written
<PAGE>
First Financial United Investments, Ltd.
September __, 1996
Page 6
notice thereof to us, and any such supplement or amendment to this
Agreement shall be effective with respect to any Offering to which this
Agreement applies after the date of such supplement or amendment. Each
reference to "this Agreement" herein shall, as appropriate, be to this
Agreement as so amended and supplemented. The terms and conditions set
forth in Sections 3(b) and (c) with regard to any Offering will terminate
at the close of business on the thirtieth day after the completion date of
the initial public offering of the Shares to which such Offering relates,
but such terms and conditions, upon notice to us, may be terminated by you
at any time.
6. Indemnification. The Issuer and the Selling Group Manager have
agreed to certain indemnities, as more particularly set forth in the
Selling Group Manager Agreement between the parties which has been filed as
an exhibit to the Issuer's Registration Statement. We agree to indemnify
and hold harmless the Issuer, the Selling Group Manager, each of the
Issuer's officers and directors who signed the Registration Statement, and
each person, if any, who controls the Issuer or the Selling Group Manager
within the meaning of Section 15 of the Securities Act, as amended, against
any and all loss, liability, claim, damage and expense (a) but only with
respect to untrue statements or omissions, or alleged untrue statements or
omissions made in the registration statement or the prospectus or any
amendment or supplement to it in reliance upon and in conformity with
written information, if any, furnished to the Issuer by us expressly for
use in the registration statement (or any amendment to it) or the
prospectus (or any amendment or supplement to it) or (b) based upon alleged
misrepresentations or omissions to state material facts in connection with
statements made by us or our employees, salespersons or representatives,
orally or by other means; and we will reimburse the Issuer and the Selling
Group Manager for any legal or other expenses reasonably incurred in
connection with the investigation of or the defending of any such action or
claim. The provisions of this Section shall survive for the applicable
limitations period under the Securities Act.
7. Communications. All communications to the Selling Group Manager
shall be sent by mail or facsimile with confirmation copy by mail to the
address or facsimile number set forth below:
First Financial United Investments, Ltd.
16801 Greenspoint Park Drive, Suite 155
Houston, Texas 77060
Telephone: (713) 873-4433
Facsimile: (713) 873-6504
Attention: Mr. Dan Hill
Any notice to the Selected Dealer shall be properly given if mailed or
Faxed to the Selected Dealer at the address or Fax number indicated under
the Selected Dealer's signature line below. Either party may change its
address for notices hereunder by providing written notice of its new
address and Fax number to the other party hereto as provided above.
8. Successors and Assigns. This Agreement shall be binding on, and
inure to the benefit of the parties hereto and other persons specified or
indicated in Section 1, and the respective
<PAGE>
First Financial United Investments, Ltd.
September __, 1996
Page 7
successors and assigns of each of them. This Agreement may not be assigned
by the Selected Dealer without the Selling Group Manager's prior written
consent.
9. Governing Law. This Agreement and the terms and conditions set
forth herein with respect to any Offering together with such amended or
supplementary terms and conditions with respect to such Offering as may be
contained in any Written Communication from you to us in connection
therewith shall be governed by, and construed in accordance with, the laws
of the State of Texas.
By signing this Agreement we confirm that our offering of the Shares
to the public, or our acceptance of any reservation of any Shares pursuant
to an Offering, shall constitute (1) acceptance of and agreement to other
terms and conditions of this Agreement (as supplemented and amended
pursuant to Section 5) together with and subject to any supplementary terms
and conditions contained in any Written Communication from you in
connection with such Offering, all of which shall constitute a binding
agreement between us and you, (ii) confirmation that our representations
and warranties set forth in Section 3 are true and correct at that time and
(iii) confirmation that our agreements set forth herein have been and will
be performed by us to the extent and at the times required thereby.
Very truly yours,
_______________________________________
(Name of Firm)
By: ___________________________________
Address: ________________________
________________________
Telephone: ________________________
Fax: ________________________
Confirmed as of the date
first above written.
First Financial United
Investments, Ltd.
By: _________________________________
Name: _______________________________
Title: ______________________________
Exhibit 3-1A
UNITED MORTGAGE TRUST
---------
SECOND AMENDED AND RESTATED
AGREEMENT AND DECLARATION OF TRUST
THIS AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST is
made at Richardson, Texas, this __th day of November, 1996 by Christine
Griffin of Dallas, Texas, Paul R. Guernsey of Arlington, Texas, Douglas R.
Evans of Dallas, Texas, and Richard D. O'Connor, Jr. of Dallas, Texas (such
persons and any successor to such persons and additional persons, so long as
they shall continue in or be admitted to office in accordance with the terms
of this Declaration of Trust, are hereafter together called the "Trustees"),
and by the holders of shares of beneficial interest that are and will be
issued hereunder as hereinafter provided.
The four above named Trustees of United Mortgage Trust (the "Trust")
desire to amend and restate the Declaration of Trust of the Trust that was
filed on July 12, 1996 and subsequently amended and restated on August 15,
1996. This Second Amended and Restated Declaration of Trust was approved by
the four Trustees of the Trust and the Shareholder of the Trust in accordance
with Section 8-501 of the Corporation and Associations Article of the
Annotated Code of the State of Maryland and contains the provisions of the
Declaration of Trust as previously in effect, along with amendments that were
approved by the Trustees and the Shareholder. The principal office of the
Trust is currently located at 1701 N. Greenville, Suite 403, Richardson, Texas
75081 and the name and address of its resident agent is as set forth in
Article I, Section 2 and Article XV.
WITNESSETH that
A. It is hereby expressly declared that there is created a real
estate investment trust, under the laws of the State of Maryland for
the purpose of acquiring holding, managing, controlling,
administering, investing in and disposing of Mortgage Investments.
B. The Trust has been formed with the objectives of raising
capital and utilizing such capital to invest in Mortgage Investments.
C. The Trustees desire that such Trust qualify as a "real
estate investment trust" under the REIT Provisions of the Internal
Revenue Code.
D. The Trustees may hereafter acquire, hold, invest and dispose
of Trust assets as trustees in the manner provided in this Declaration
of Trust.
E. The beneficial interest in the Trust assets shall be divided
into one or more classes of transferable shares of beneficial interest
(the "Shares"), as provided in this Declaration of Trust.
NOW, THEREFORE, the Trustees are hereby direct that this Agreement and
Declaration of Trust be filed with the Maryland State Department of
Assessments and Taxation and do hereby declare that they will hold all
property of every type and description which they may acquire as such
trustees, together with the proceeds thereof, in trust, to manage, hold and
dispose of the same for the benefit of the holders of record from time to time
of the Shares being issued and to be issued hereunder and in the manner and
subject to the provisions of this Declaration of Trust:
<PAGE>
ARTICLE I - NAME, LOCATION AND POWERS
SECTION 1. NAME. The name of the Trust created by this Declaration of
Trust shall be "UNITED MORTGAGE TRUST" (hereinafter called the "Trust") and so
far as may be practicable the Trustees shall conduct the Trust's activities,
execute all documents and sue or be sued under that name, which name (and the
word "Trust" whenever used in this Declaration of Trust, except where the
context otherwise requires) shall refer to the Trustees in their capacity of
Trustees, and not individually or personally, and shall not refer to the
officers or Shareholders of the Trust or to the agents or employees of the
Trust or of such Trustees. Should the Trustees determine that the use of such
name is not practicable, legal or convenient, they may use such other
designation or they may adopt such other name for the Trust as they deem
proper and the Trust may hold property and conduct its activities under such
designation or name, subject, however, to the limitations contained in the
next succeeding paragraph.
SECTION 2. LOCATION. The Trust shall maintain an office of record in
Baltimore, Maryland, initially at 11 E. Chase Street, Baltimore, Maryland
21202, care of CSC - Lawyers Incorporating Service Company (the Trust's
resident agent initially), and the Trust may have such other offices or places
of business as the Trustees may from time to time determine as necessary or
expedient.
SECTION 3. POWERS. The Trust shall have the powers provided to a real
estate investment trust under Section 8-301 of the Corporation and
Associations Article of the Annotated Code of the State of Maryland.
ARTICLE II - DEFINITIONS
SECTION 1. DEFINITIONS. Whenever used in this Declaration of Trust,
unless the context otherwise requires, the terms defined in this Article II
shall have the following respective meanings:
(a) Acquired Mortgage. "Acquired Mortgage" shall mean existing
Mortgages that the Trust acquires on single-family residential
property.
(b) Acquisition Expenses. "Acquisition Expenses" shall mean
expenses related to the Trust's selection of, and investment in,
Mortgage Investments, whether or not acquired or made, including but
not limited to legal fees and expenses, travel and communications
expenses, costs of appraisals, accounting fees and expenses, title
insurance and miscellaneous other expenses.
(c) Acquisition Fees. "Acquisition Fees" shall mean the total
of all fees and commissions, however designated, paid by any party in
connection with the origination or acquisition of Mortgage Investments
and other Mortgages by the Trust. Included in the computation of such
fees or commissions shall be any real estate commission, selection
fee, development fee, nonrecurring management fee, or any fee of a
similar nature, however designated.
(d) Administrator. "Administrator" shall mean the President of
the Trust, who shall be an officer and employee of the Trust and who,
subject to the Trustees, shall be in general and active charge of the
day-to-day operations of the Trust.
(e) Advisor. "Advisor" shall mean the person(s) or entity
retained by the Trustees that will be responsible for using its best
efforts to seek out and present to the Company, whether through its
own efforts or those of third parties retained by it, suitable and a
sufficient number
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<PAGE>
of investment opportunities which are consistent with the investment
policies and objectives of the Trust and consistent with such
investment programs as the Trustees may adopt from time to time in
conformity with this Declaration of Trust. Initially, the Advisor
shall be Mortgage Trust Advisors, Inc. or anyone who succeeds it in
such capacity.
(f) Advisory Agreement. "Advisory Agreement" shall mean the
agreement between the Trust and the Advisor pursuant to which the
Advisor will act as the investment advisor of the Trust.
(g) Affiliate. "Affiliate" shall mean (i) any Person directly
or indirectly controlling, controlled by or under common control with
another Person, (ii) any Person owning or controlling 10% or more of
the outstanding voting securities or beneficial interests of such
other Person, (iii) any executive officer, director, trustee or
general partner of such Person and (iv) if such other Person is an
executive officer, director, trustee or partner of another entity,
then the entity for which that Person acts in any such capacity.
(h) Affiliated Programs. "Affiliated Programs" shall mean any
and all REITs, partnerships or other entities which may in the future
be formed by the Advisor, a Sponsor or their Affiliates to engage in
businesses which may be competitive with the Trust and which have
similar investment objectives as the Trust (or programs with
dissimilar objectives for which a particular Mortgage Investment may
nevertheless be suitable). An Affiliated Program may have the same
management as the Trust.
(i) Average Invested Assets. "Average Invested Assets" shall
mean the average of the aggregate Book Value of the assets of the
Trust for any period invested, directly or indirectly, in Mortgage
Investments, before reserves for depreciation or bad debts or other
similar non-cash reserves computed by taking the average of such
values at the end of each month during such period.
(j) Book Value. "Book Value" shall mean the value of an asset
or assets of the Trust on the books of the Trust before provision for
amortization or depreciation, and before deducting any indebtedness or
other liability in respect thereto, except that no asset shall be
valued at more than its fair value as determined by the Board of
Trustees.
(k) Code. "Code" shall mean the Internal Revenue Code of 1986,
as amended, or corresponding provisions of subsequent revenue laws.
(l) Competitive Commission. "Competitive Commission" shall have
the meaning ascribed to such term in Article VI, Section 6.
(m) Fannie Mae. "Fannie Mae" shall mean the Federal National
Mortgage Association.
(n) FHA. "FHA" shall mean the Federal Housing Administration.
(o) Final Closing Date. "Final Closing Date" shall mean the
date of the last closing of Shares sold pursuant to the initial public
offering of Shares.
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<PAGE>
(p) Freddie Mac. "Freddie Mac" shall mean the Federal Home Loan
Mortgage Corporation.
(q) Ginnie Mae. "Ginnie Mae" shall mean the Government National
Mortgage Association.
(r) Gross Proceeds. "Gross Proceeds" shall mean the total
proceeds from the sale of Shares during the initial public offering
period, before deductions for Organization and Offering Expenses and
without taking into account "volume discounts". For purposes of
calculating Gross Proceeds, the purchase price of all Shares shall be
deemed to be $20 per share.
(s) HUD. "HUD" shall mean the United States Department of
Housing and Urban Development.
(t) Independent Expert. "Independent Expert" shall mean a
person with no current or prior business or personal relationship with
the Advisor or the Trustees and who is engaged, to a substantial
extent, in the business of rendering opinions regarding the value of
assets of the type held by the Trust.
(u) Independent Trustees. "Independent Trustees" shall mean the
Trustees who (i) are not affiliated, directly or indirectly, with the
Advisor, a Sponsor or their Affiliates, whether by ownership of,
ownership interest in, employment by, any material business or
professional relationship with, or service as an officer or director
of the Advisor, a Sponsor or their Affiliates, (ii) do not serve as a
director or trustee for more than three other REITs organized by a
Sponsor, or advised by the Advisor and (iii) perform no other services
for the Trust except as trustees. For this purpose, an indirect
relationship shall include circumstances in which a member of the
immediate family of a Trustee has one of the foregoing relationships
with the Advisor, a Sponsor or the Trust.
(v) Initial Investment. "Initial Investment" shall mean the
$200,000 investment in Shares which the Advisor has made pursuant to
Article VI, Section 7 of this Declaration of Trust.
(w) IRS. "IRS" shall mean the Internal Revenue Service of the
United States of America.
(x) Mortgage Investments. "Mortgage Investments" shall mean the
investments of the Trust as described in the Prospectus.
(y) Mortgage Prepayments, Sales or Insurance. "Mortgage
Prepayments, Sales or Insurance" shall mean any Trust transaction
(other than the receipt of base interest, principal payments when due
on a Mortgage and the issuance of Shares), including without
limitation, prepayments, sales, exchanges, foreclosures, or other
dispositions of Mortgage Investments and other Mortgages held by the
Trust or the receipt of insurance proceeds or guarantee proceeds with
respect to any Mortgage, or any other disposition of Trust assets.
(z) Mortgages. "Mortgages" shall mean, in a broad sense,
beneficial interests or participation interests in whole mortgages,
mortgage certificates, mortgage-backed securities, participation
certificates backed by either a single mortgage or a pool of mortgages
or interests in pass-through entities which, under the REIT Provisions
of the Internal Revenue Code, would
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<PAGE>
be considered to be qualifying real estate assets for purposes of the
Trust's qualification as a REIT (e.g. regular interests in real estate
mortgage investment conduits ("REMICs")).
(aa) Net Assets or Net Asset Value. "Net Assets or Net Asset
Value" shall mean the Total Assets of the Trust (other than
intangibles) at cost before deducting depreciation or other non-cash
reserves less total liabilities of the Trust, calculated at least
quarterly on a basis consistently applied.
(bb) Net Income. "Net Income" shall mean, for any period, total
revenues applicable to such period, less the expenses applicable to
such period other than additions to allowances or reserves for
depreciation, amortization or bad debts or other similar non-cash
reserves.
(cc) Organization and Offering Expenses. "Organization and
Offering Expenses" shall mean those expenses incurred in connection
with and in preparing the Trust for registration and subsequently
offering and distributing the Shares to the public, including sales
commissions paid to broker-dealers in connection with the distribution
of the Trust's Shares, escrow fees and expenses, and all advertising
expenses.
(dd) Originated Mortgage. "Originated Mortgage" shall mean a
Mortgage originated by or on behalf of the Trust or by another lender
and sold to the Trust prior to the time it has been fully funded.
(ee) Person. "Person" shall mean and include individuals,
corporations, limited partnerships, general partnerships, limited
liability companies, joint stock companies or associations, joint
ventures, companies, trusts, banks, trust companies, land trust,
business trusts or other entities and governments and agencies and
political subdivisions thereof.
(ff) Proceeds of Mortgage Prepayments, Sales and Insurance.
"Proceeds of Mortgage Prepayments, Sales and Insurance" shall mean
receipts from Mortgage Prepayments, Sales or Insurance less the
following: (i) the amount paid or to be paid in connection with or as
an expense of such Mortgage Prepayments, Sales or Insurance; and (ii)
the amount necessary for the payment of all debts and obligations of
the Trust including but not limited to fees to the Advisor or
Affiliates and amounts, if any, required to be paid to, arising from
or otherwise related to the particular Mortgage Prepayments, Sales or
Insurance.
(gg) Prospectus. "Prospectus" shall mean the final prospectus
of the Trust in connection with the initial registration of Shares
filed with the Securities and Exchange Commission on Form S-11, as
amended.
(hh) Real Estate Investment Trust ("REIT") Provisions of the
Internal Revenue Code. "Real Estate Investment Trust Provisions of the
Internal Revenue Code" shall mean part II, subchapter M, chapter 1 of
the Code, as now enacted or hereafter amended, or successor statutes,
other sections of the Code specifically applicable to REITs and
regulations and rulings promulgated thereunder.
(ii) REIT. "REIT" shall mean a corporation or trust which
qualifies as a real estate investment trust as defined in Sections 856
to 860 of the Code.
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<PAGE>
(jj) Rollup. "Rollup" shall mean a transaction involving the
acquisition, merger, conversion or consolidation either directly or
indirectly of the Trust and the issuance of securities of a Rollup
Entity. Such term does not include:
(i) a transaction involving securities of the Trust that
have been for at least 12 months listed on a national
securities exchange or traded through the National Association
of Securities Dealers Automated Quotation National Market
System; or
(ii) a transaction involving the conversion to corporate
or association form of only the Trust if, as a consequence of
the transaction, there will be no significant adverse change in
any of the following:
(A) Shareholders' voting rights;
(B) the term and existence of the Trust;
(C) Sponsor or Advisor compensation;
(D) the Trust's investment objectives.
(kk) Rollup Entity. "Rollup Entity" shall mean a partnership,
real estate investment trust, corporation, limited liability company,
trust or other entity that would be created or would survive after the
successful completion of a proposed Rollup transaction.
(ll) Securities. "Securities" shall mean any instrument
commonly known as "securities", including stock, shares, voting trust
certificates, bonds, debentures, notes or other evidences of
indebtedness, secured or unsecured, convertible, subordinated or
otherwise, or any certificates of interest, shares or participation,
or warrants, options or rights to subscribe to, purchase or acquire
any of the forgoing.
(mm) Selling Compensation. "Selling Compensation" shall mean
compensation payable by the Trust, the Advisor and any affiliates
thereof to the Selling Group Manager (or any broker-dealer designated
by the Selling Group Manager) in connection with the initial public
offering of Shares, as set forth in the Prospectus.
(nn) Shareholders. "Shareholders' shall mean holders of the
Shares.
(oo) Shares. "Shares" shall mean shares of beneficial interest,
par value $.01 per share, of the Trust.
(pp) Sponsor. "Sponsor" shall mean any Person directly or
indirectly instrumental in organizing, wholly or in part, the Trust or
any Person who will manage or participate in the management of the
Trust and any Affiliate of any such Person, but does not include (i)
any person whose only relationship with the Trust is that of an
independent asset manager and whose only compensation from the Trust
is as such, and (ii) wholly independent third parties such as
attorneys, accountants and underwriters whose only compensation from
the Trust is for professional services.
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(qq) Total Assets of the Trust. "Total Assets of the Trust"
shall mean the value of all assets of the Trust as shown on the books
of the Trust.
(rr) Total Operating Expenses. "Total Operating Expenses" shall
mean all operating, general and administrative expenses of the Trust
as determined by generally accepted accounting principles, exclusive
of the expenses of raising capital, interest payments, taxes, non-cash
expenditures (i.e. depreciation, amortization, bad debt reserve),
Acquisition Fees and other costs related directly to a specific
Mortgage Investment by the Trust, such as expenses for originating,
acquisitions, servicing or disposing of a Mortgage.
(ss) Trust. "Trust" shall mean the real estate investment trust
created pursuant to this Declaration of Trust.
(tt) Trustees. "Trustees" shall have the meaning ascribed to
such term in the heading of this Declaration of Trust and who
collectively shall constitute the Board of Trustees of the Trust.
(uu) Unimproved Real Property. "Unimproved Real Property" shall
mean property which has the following three characteristics: (1) the
property was not acquired for the purpose of producing rental or other
operating income, (2) there is no development or construction in
process on such land, and (3) no development or construction on such
land is planned in good faith to commence on such land within one
year.
ARTICLE III - MEETING OF SHAREHOLDERS
SECTION 1. ANNUAL MEETINGS. Annual meetings of Shareholders in 1997
and each subsequent year for the election of Trustees and for such other
business as may be stated in the notice of the meeting, shall be held at such
convenient location determined by the Trustees and at such time and date not
less than 30 days after delivery of the annual report, but in no event later
than June 30 of each such year as the Board of Trustees, by resolution, shall
determine. If the date of the annual meeting shall fall upon a legal holiday,
the meeting shall be held on the next succeeding business day. At each annual
meeting, the Shareholders entitled to vote shall elect a Board of Trustees and
may transact such other Trust business as shall be stated in the notice of the
meeting.
SECTION 2. OTHER MEETINGS. Meetings of Shareholders for any purpose
other than the election of Trustees may be held at such time and place, as
shall be stated in the notice of the meeting.
SECTION 3. VOTING. Each Shareholder entitled to vote in accordance
with the terms and provisions of this Declaration of Trust shall be entitled
to one vote for each Share held by such Shareholder (i) at a meeting, in
person, by written proxy or by a signed writing or consent directing the
manner in which he desires that his vote be cast, which writing must be
received by the Trustees prior to such meeting or (ii) without a meeting, by a
signed writing or consent directing the manner in which he desires his vote to
be cast, which writing must be received by the Trustees prior to the date upon
which the votes of the Shareholders are to be counted. In connection with the
foregoing, no proxy shall be voted after six months from its date unless such
proxy is coupled with an interest sufficient in law to support an irrevocable
power and provides for a longer period and except that the Board of Trustees
may prohibit the holders of Excess Shares (as defined in Article XII Section
1) from voting the Excess Shares. Upon the demand of any Shareholder, the vote
for Trustees and upon any question before a meeting shall be by ballot. All
elections for Trustees shall be decided by plurality vote (at a meeting or
without a
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<PAGE>
meeting, provided that at least a majority of the outstanding Shares shall
cast a vote in such election). Unless otherwise provided by this Declaration
of Trust, all other questions shall be decided by a majority of the votes cast
at a meeting at which a quorum is present or a majority of outstanding Shares
cast, without a meeting. Notwithstanding the foregoing, none of the Advisor,
the Trustees nor their Affiliates may vote any Shares held by them, or
consent, on matters submitted to the Shareholders regarding:
(a) the removal of the Advisor, the Trustees or their
Affiliates; or
(b) any transaction between the Trust and the Advisor, the
Trustees or their Affiliates.
Shares held by the Advisor, the Trustees and their Affiliates shall not be
included in determining the number of outstanding Shares entitled to vote on
the matters discussed in (a) and (b) above, nor in the Shares actually voted
thereon.
SECTION 4. INSPECTORS OF ELECTION. The Board of Trustees, in advance
of any Shareholders' meeting or other Shareholder vote, may appoint one or
more inspectors to act at the meeting or any adjournment thereof or in
connection with any other Shareholder vote. If inspectors are not so
appointed, the person presiding at a Shareholders' meeting or the Chairman of
the Board where there is no meeting, may, and on the request of any
Shareholder entitled to vote in connection with a particular question, shall,
appoint two inspectors. In case any person appointed fails to appear or act,
the vacancy may be filled by appointment made by the Board of Trustees in the
case of a meeting in advance of the meeting or at that meeting by the person
presiding thereat or, in the case of a vote without a meeting, in advance of
counting the vote. Each inspector, before entering upon the discharge of his
duties, shall make and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his ability.
The inspectors shall determine the number of Shares outstanding and
the voting power of each, the Shares represented at the meeting, if
applicable, the existence of a quorum, if applicable, and the validity and
effect of proxies, and shall receive votes, ballots or consents, hear and
determine all challenges and questions arising in connection with the right to
vote, count and tabulate all votes, ballots or consents, determine the result,
and do such acts as are proper to conduct the election or vote with fairness
to all Shareholders. On request of the person presiding at the meeting, if
applicable, or any Shareholder entitled to vote thereat or in connection with
a particular solicitation, the inspectors shall make a report in writing of
any challenge, question or matter determined by them and execute a certificate
of any fact found by them. Any report or certificate made by them shall be
prima facie evidence of the facts stated and of the vote as certified by them.
SECTION 5. ACCESS TO RECORDS. Any Shareholder and any designated
representative thereof shall be permitted access to all records of the Trust
at all reasonable times, and may inspect and copy any of them. Inspection of
the Trust books and records by a state securities administrator shall be
provided upon reasonable notice and during normal business hours. In addition,
with respect to access to the list of Shareholders:
(a) An alphabetical list of the names, addresses, and business
telephone numbers of the Shareholders of the Trust along with the
number of Shares held by each of them (the "Shareholder List") shall
be maintained as a part of the books and records of the Trust and
shall be available for inspection by any Shareholder or the
Shareholder's designated agent at the home
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<PAGE>
office of the Trust at 1701 N. Greenville, Suite 403, Richardson,
Texas 75081, or such other address as may be designated by the Trust,
upon the request of the Shareholder;
(b) The Shareholder List shall be updated at least quarterly to
reflect changes in the information contained therein;
(c) A copy of the Shareholder List shall be mailed to any
Shareholder requesting the Shareholder List within ten days of the
request. The copy of the Shareholder List shall be printed in
alphabetical order, on white paper and in a readily readable type size
(in no event smaller than 10 point type). A reasonable charge for copy
work may be charged by the Trust;
(d) The purposes for which a Shareholder may request a copy of
the Shareholder List include, without limitation, matters relating to
Shareholders' voting rights under the Declaration of Trust, and the
exercise of Shareholders' rights under federal proxy laws; and
(e) If the Advisor or the officers or Trustees of the Trust
neglect or refuse to exhibit, produce, or mail a copy of the
Shareholder List as requested, the Sponsor shall be liable to any
Shareholder requesting the list for the costs, including attorney's
fees, incurred by that Shareholder for compelling the production of
the Shareholder List, and for actual damages suffered by any
Shareholder by reason of such refusal or neglect. It shall be a
defense that the actual purpose and reason for the requests for
inspection or for a copy of the Shareholder List is to secure such
list of Shareholders or other information for the purpose of selling
such list or copies thereof, or of using the same for a commercial
purpose other than in the interest of the applicant as a Shareholder
relative to the affairs of the Trust. The Trust may require the
Shareholder requesting the Shareholder List to represent that the list
is not requested for a commercial purpose unrelated to the
Shareholder's interest in the Trust. The remedies provided hereunder
to Shareholders requesting copies of the Shareholder List are in
addition to, and shall no in any way limit, other remedies available
to Shareholders under federal law, or the laws of any state.
Subject to the foregoing, with respect to certain solicitations made
by the Trust, the Trust may, with the consent of the Shareholder, mail
communications on behalf of any Shareholder at his expense who so requests in
writing and is entitled to vote on the same subject matter as the Trust's
solicitation.
SECTION 6. QUORUM. Except as otherwise required by law or by this
Declaration of Trust, the presence, in person or by proxy, of Shareholders
holding a majority of the outstanding Shares of the Trust entitled to vote,
shall constitute a quorum at all meetings of the Shareholders. In case a
quorum shall not be present at any meeting, a majority in interest of the
Shareholders entitled to vote thereat, present in person or by proxy, shall
have power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until the requisite amount of Shares entitled to
vote shall be present. At any such adjourned meeting at which the requisite
amount of Shares entitled to vote shall be present, any business may be
transacted which might have been transacted at the meeting as originally
noticed, but only those Shareholders entitled to vote at the meeting as
originally noticed shall be entitled to vote at any adjournment or
adjournments thereof.
SECTION 7. SPECIAL MEETINGS. Special meetings of the Shareholders may
be called by the Chairman of the Board, by the President, by a majority of the
Trustees or by a majority of the Independent Trustees, and shall be called by
any officer of the Trust upon written request of Shareholders holding in the
aggregate not less than 10% of the outstanding Shares of the Trust entitled to
vote at such
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meeting. The call of a special meeting shall state the nature of the business
to be transacted and that no other business shall be considered at such
meeting.
Upon receipt of a written request either in person or by registered
mail stating the purpose(s) of the meeting requested by Shareholders, the
Trust shall provide all Shareholders, within ten (10) business days after
receipt of said request, written notice (either in person or by mail) of a
meeting and the purpose of such meeting to be held on a date not less than
twenty (20) nor more than sixty (60) days after receipt of said request (or as
soon thereafter as the applicable proxy rules may reasonably be complied with)
for such meeting, at a time and place convenient to the Shareholders.
The place, date and time of, as well as the record date for
determining the persons entitled to notice of and to vote at, any special
meeting, including any special meeting to be called at the request of the
holders of 10% or more of the Shares outstanding, shall be determined by the
Board of Trustees; provided, however, in the case of a special meeting to be
called at the request of the holders of 10% or more of the Shares outstanding,
if the Board of Trustees declines or fails to make any such determination
within ten business days of such request, then the officer calling such
special meeting shall at the time of such call designate the place, date and
time of such special meeting as well as the record date for determining
persons entitled to notice of and to vote at such meeting.
SECTION 8. NOTICE OF ANNUAL AND SPECIAL MEETINGS CALLED BY CERTAIN OR
ALL OF THE TRUSTEES AND SOLICITATION OF CONSENT WITHOUT MEETING. Written
notice, stating the place, date and time of the annual meeting or a special
meeting not called at the request of the Shareholders, and the general nature
of the business to be considered in the case of an annual meeting, or the
specific nature of the business to be considered in the case of a special
meeting, shall be given to each Shareholder entitled to vote thereat at his
address as it appears on the records of the Trust not less than twenty (20)
nor more than sixty (60) days before the date of such meeting. In the case of
a Shareholder vote without a meeting, the date for responding to such
solicitation and the counting of the votes in connection therewith must occur
no later than sixty (60) days and no sooner than twenty (20) days after notice
of such requested vote is given.
SECTION 9. BUSINESS TRANSACTED. No business other than that stated in
the notice shall be transacted at any meeting without the unanimous consent of
all the Shareholders entitled to vote thereat.
ARTICLE IV - TRUSTEES
SECTION 1. NUMBER, TERM AND QUALIFICATIONS. No later than the time
when the Trust first has public Shareholders, the number of Trustees shall be
not less than three nor more than nine, as fixed from time to time by the
Board of Trustees, a majority of whom shall at all times be Independent
Trustees (except that in the event of death, resignation or removal of an
Independent Trustee, the requirement for such majority shall not be applicable
for a period of 60 days). Unless otherwise fixed by the Board of Trustees or
the Shareholders, the number of Trustees constituting the entire board of
Trustees shall be four.
The following persons shall be the initial Trustees of the Trust to
serve until the first meeting of Shareholders and until their successors are
elected and qualify: Christine Griffin, Paul R. Guernsey, Douglas R. Evans and
Richard D. O'Connor, Jr.
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The Trustees shall be elected at the annual meeting of shareholders.
Each Trustee shall serve a term of one year subject to his successor being
elected and qualified.
A Trustee shall be an individual at least 21 years of age who is not
under legal disability. A Trustee shall not be required to devote his full
business time and effort to the Trust. A Trustee shall qualify as such when he
has either signed this Declaration of Trust or agreed in writing to be bound
by it. No bond shall be required to secure the performance of a Trustee unless
the Trustees so provide or as required by law.
A Trustee must have at least three years of relevant experience
demonstrating the knowledge and experience required successfully to acquire
and manage Mortgage Investments. At least one Independent Trustee must have at
least three years of relevant real estate experience.
Nominations for the election of Trustees may be made by the Board of
Trustees or a committee appointed by the Board of Trustees or by any
Shareholder entitled to vote in the election of Trustees generally. However,
any Shareholder entitled to vote in the election of Trustees generally may
nominate one or more persons for election as Trustees at a meeting only if
written notice of such Shareholders' intent to make such nomination or
nominations has been given, either by personal delivery or by United States
mail, postage prepaid, to the Secretary of the Trust not later than (i) with
respect to an election to be held at an annual meeting of Shareholders, ninety
days prior to the anniversary date of the immediately preceding annual
meeting, and (ii) with respect to an election to be held at a special meeting
of Shareholders for the election of Trustees, the close of business on the
tenth day following the date on which notice of such meeting is first given to
the Shareholders. Each such notice shall set forth: (a) the name and address
of the Shareholder who intends to make the nomination and of the person or
persons to be nominated; (b) a representation that the Shareholder is a holder
of record of Shares of the Trust entitled to vote at such meeting and intends
to appear in person or by proxy at the meeting to nominate the person or
persons specified in the notice; (c) a description of all arrangements or
understandings between the Shareholder and each nominee and any other person
or persons (naming such person or person) pursuant to which the nomination or
nominations are to be made by the Shareholder; (d) such other information
regarding each nominee proposed by such Shareholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission, had the nominee been nominated, or
intended to be nominated, by the Board of Trustees; and (e) the consent of
each nominee to serve as a Trustee of the Trust if so elected. The presiding
officer of the meeting may refuse to acknowledge the nomination of any person
not made in compliance with the foregoing procedure.
SECTION 2. AUTHORITY OF TRUSTEES.
(a) General Responsibilities and Authority. Consistent with the
duties and obligations of, and limitations on, the Trustees as set
forth herein, and under the laws of the State of Maryland, the
Trustees are accountable to the Shareholders as fiduciaries and are
required to perform their duties in good faith and in a manner each
Trustee believes to be in the best interest of the Trust and its
Shareholders, with such care, including reasonable inquiry, as a
prudent person in a like position would use under similar
circumstances. In addition, the Trustees shall have a fiduciary duty
to the Shareholders to review the relationship of the Trust with the
Advisor.
The Trustees shall have full, absolute and exclusive power,
control, management and authority over the Trust's assets and over the
business and affairs of the Trust to the same extent as if the
Trustees were the sole owners thereof in their own right. The
enumeration of any
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specific power or authority herein shall not be construed as limiting
the aforesaid power or authority or any specific power or authority.
The Trustees shall have the power to enter into commitments to make
any investment, purchase or acquisition, or to exercise any power
authorized by this Declaration of Trust.
The Trustees shall establish written policies on investments
and borrowings and shall monitor the administrative procedures,
investment operations and performance of the Trust and the Advisor to
assure that such policies are carried out. Until modified by the
Trustees, the Trust shall follow the policies on investments and
borrowings set forth in the Prospectus.
(b) Specific Powers and Authorities. Subject only to the
express limitations contained in this Declaration of Trust and in
addition to any powers and authorities conferred by this Declaration
of Trust or which the Trustees may have by virtue of any present or
future statute or rule of law, the Trustees without any action or
consent by the Shareholders shall have and may exercise at any time
and from time to time the following powers and authorities which may
or may not be exercised by them in their sole judgment and discretion
in such manner and upon such terms and conditions as they may from
time to time deem proper:
(i) To retain, invest and reinvest the capital or other
funds of the Trust in Mortgage Investments and other Mortgages
without regard to whether any such Mortgage Investments and
other Mortgages may mature before the possible termination of
the Trust, and to possess and exercise all the rights, powers
and privileges appertaining to the ownership of the Trust
assets.
(ii) For such consideration as they deem proper to
invest in, purchase or otherwise acquire for cash or other
property and hold for investment Mortgages secured by real
property located in the United States, and, in connection with
any such investment in Mortgages, acquire (i) the entire or any
participating interest in rents, lease payments or other income
from or the entire or any participating interest in the profits
from, or the entire or any participating interest in the equity
or ownership of, real property; and (ii) such investments,
either directly or, subject to Article VII Section 8, through
joint ventures, partnerships, or other lawful combinations or
associations.
(iii) To sell, exchange, release, partition, assign,
mortgage, pledge, hypothecate, grant security interests in,
encumber, negotiate, convey, transfer or otherwise dispose of
any and all of the assets of the Trust by deeds, trust deeds,
assignments, bills of sale, transfers, leases, mortgages,
financing statements, security agreements and other instruments
for any of such purposes executed and delivered for and on
behalf of the Trust or the Trustees by one or more of the
Trustees or by a duly authorized officer, employee, agent or
any nominee of the Trust.
(iv) To, subject to Article VIII Section 1 and Article
VII Section 7, issue authorized Shares or other Securities, all
without the vote of or other action by the Shareholders, to
such Persons for such cash, property or other consideration
(including Securities issued or created by, or interests in any
Person) at such time or times and on such terms and the
Trustees may deem advisable and to purchase or otherwise
acquire, hold, cancel, reissue, sell and transfer the Shares or
any of such Securities.
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(v) To enter into contracts, obligations, and other
agreement for a term extending beyond the term of office of the
Trustees and beyond the possible termination of the Trust or
for a lesser term.
(vi) To, subject to Article VII, Section 9, borrow money
and give negotiable or non-negotiable instruments therefor; to
enter into other obligations on behalf of the Trust; and to
assign, convey, transfer, mortgage, subordinate, pledge, grant
security interests in, encumber or hypothecate the assets of
the Trust to secure any of the foregoing.
(vii) To lend money, whether secured or unsecured.
(viii) To create reserve funds for any purpose.
(ix) To incur and pay out of the Trust assets any
charges or expenses, and disburse any funds of the Trust, which
charges, expenses or disbursements are, in the opinion of the
Trustees, necessary for or incidental to or desirable for, and
are incurred in connection with, the carrying out of any of the
purposes of the Trust or the conducting of the business of the
Trust, including without limitation taxes and other
governmental levies, charges and assessments of whatever kind
or nature, imposed upon or against the Trustees in connection
with the Trust or upon or against the Trust assets or any part
thereof, and for any of the purposes herein.
(x) To deposit funds or securities held by the Trust in
banks, trust companies, savings and loan associations and other
depositories, whether or not such deposits will draw interest,
the same to be subject to withdrawal on such terms and in such
manner and by such Person or Persons (including any one or more
Trustees, officers, agents or representatives) as the Trustees
may determine.
(xi) To possess and exercise all the rights, powers and
privileges appertaining to the ownership of all or any
interests in, or mortgages or securities issued or created by,
any Person, forming part of the assets of the Trust, to the
same extent that an individual might, and without limiting the
generality of the foregoing, to vote or give any consent,
request or notice, or waive any notice, either in person or by
proxy or power of attorney, with or without power of
substitution, to one or more Persons, which proxies and powers
of attorney may be for meetings or action generally or for any
particular meeting or action, and may include the exercise of
discretionary powers.
(xii) To enter into joint ventures, general or limited
partnerships and any other lawful combinations or associations
with independent third parties or, subject to Article VII,
Section 8, with Affiliated Programs.
(xiii) To elect, appoint, engage or employ such officers
for the Trust as the Trustees may determine, who may be removed
or discharged at the discretion of the Trustees, such officers
to have such powers and duties, and to serve such terms and at
such compensation, as may be prescribed by the Trustees; to
engage or employ any Persons as agents, representatives,
employees, or independent contractors (including, without
limitation, mortgage servicers, real estate advisors,
investment advisors, transfer agents, registrars, underwriters,
accountants, attorneys at law, real estate agents,
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managers, appraisers, brokers, architects, engineers,
construction managers, general contractors or otherwise) in one
or more capacities, and to pay compensation from the Trust for
services in as many capacities as such Person may be so engaged
or employed; and, except as prohibited by law and subject to
the supervision of the Trustees, to delegate any of the powers
and duties of the Trustees to the Advisor.
(xiv) To determine the proper accounting treatment for
Trust income, loss and capital.
(xv) To determine from time to time the value of all or
any part of the Trust assets and of any securities, assets or
other consideration to be furnished to or acquired by the
Trust, and from time to time to revalue all or any part of the
Trust assets in accordance with such appraisals or other
information as are, in the Trustees' sole judgment, necessary
and/or satisfactory.
(xvi) To collect, sue for, and receive all sums of money
or other assets coming due to the Trust, and to engage in,
intervene in, prosecute, join, defend, compound, compromise,
abandon or adjust, by arbitration or otherwise, any actions,
suits proceedings, disputes, claims, controversies, demands or
other litigation relating to the Trust, the assets of the Trust
or the Trust's affairs, to enter into agreements therefor,
whether or not any suit is commenced or claim accrued or
asserted and, in advance of any controversy, to enter into
agreements regarding arbitration, adjudication or settlement
thereof.
(xvii) To renew, modify, release, compromise, extend,
consolidate, or cancel, in whole or in part, any obligation to
or of the Trust.
(xviii) To purchase and pay for out of the Trust assets
insurance contracts and policies insuring the Trust assets
against any and all risks and insuring the Trust and/or any or
all of the Trustees, the Shareholders, officers, employees,
agents, investment advisors or independent contractors of the
Trust against any and all claims and liabilities of every
nature asserted by any Person arising by reason of any action
alleged to have been taken or omitted by the Trust or by any
such person as Trustee, Shareholder, officer, employee, agent,
investment advisor or independent contractor; provided,
however, that the Trustees may purchase and pay for out of
Trust assets insurance contracts and policies insuring
independent contractors or agents, only if such policies are
customarily provided to independent contractors or agents
providing the services being rendered in the locality where
such services are being rendered; provided, further, that
limitations on the acquisition of insurance contracts or
policies shall not apply to the Advisor, unless otherwise
restricted as set forth in Article XI Section 2(d).
(xix) To adopt a fiscal year for the Trust, and from
time to time to change such fiscal year.
(xx) To adopt and use a seal (but the use of a seal
shall not be required for the execution of instruments or
obligations of the Trust).
(xxi) To increase or decrease the aggregate number of
Shares that the Trust has authority to issue.
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(xxii) To make and alter bylaws to regulate the
government of the Trust and the administration of its affairs.
(xxiii) To make, perform, and carry out, or cancel and
rescind, contracts of every kind for any lawful purpose without
limit as to amount, with any Person, firm, trust, association,
corporation, municipality, county, parish, state, territory,
government or other municipal or governmental subdivisions. The
contracts shall be for such duration and upon such terms as the
Trustees in their sole discretion shall determine.
(xxiv) To renew, modify, extend, consolidate or cancel,
in whole or in part, the Trust's dividend reinvestment plan, if
adopted, or the Trust's redemption plan, if adopted.
(xxv) To acquire real property (or an interest therein)
in the event of a Mortgage foreclosure and perform all acts
incidental to the ownership of real property including, without
limitation, entering into leases for space located therein.
(xxvi) To do all other such acts and things as are
incident to the foregoing, and to exercise all powers which are
necessary or useful to carry on the business of the Trust, to
promote any of the purposes for which the Trust is formed, and
to carry out the provisions of this Declaration.
(c) Additional Powers. The Trustees shall additionally have and
exercise all the powers conferred by the laws of Maryland upon real
estate investment trusts formed under such laws, insofar as such laws
are not in conflict with the provisions of this Declaration of Trust.
(d) Business Opportunities with Affiliated Programs. The
Trustees (including the Independent Trustees) shall periodically
monitor the allocation of Mortgage Investments among the Trust and the
Affiliated Programs to insure that the allocation method described in
the Prospectus is being applied fairly to the Trust.
(e) Suitable Investment Opportunities. Before any Trustee,
including any Independent Trustee, may take advantage of an investment
opportunity that is suitable for the Trust for their own account or
present or recommend it to others, they shall present such investment
opportunity to the Trust if (i) such opportunity is within the Trust's
investment objectives and policies, (ii) such opportunity is of a
character which could be taken by the Trust, and (iii) the Trust has
the financial resources to take advantage of such opportunity.
(f) Ratification of Declaration of Trust. Not later than the
first issuance of Shares to the public, the Declaration of Trust shall
be reviewed and ratified by a majority of the Trustees and of the
Independent Trustees.
SECTION 3. RESIGNATIONS. Any Trustee or other officer may resign at
any time. Such resignation shall be made in writing, and shall take effect at
the time specified therein, and if no time is specified, at the time of its
receipt by the Chairman of the Board or Secretary. The acceptance of a
resignation shall not be necessary to make it effective.
SECTION 4. REMOVAL OF TRUSTEES. Any one or more the Trustees may be
removed but only for cause, by action of a majority of the Board of Trustees.
Any or all of the Trustees may be
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removed, with or without cause, by the affirmative vote of the holders of a
majority of the outstanding Shares entitled to vote, subject to the provisions
of Article III Section 3 hereof. A special meeting of the Shareholders for the
purpose of removing a Trustee shall be called by an officer of the Trust in
accordance with the provisions of Article III Section 7 hereof.
SECTION 5. NEWLY CREATED TRUSTEESHIPS AND VACANCIES. Newly created
trusteeships resulting from an increase in the number of Trustees or vacancies
occurring in the Board of Trustees for any reason except the removal of
Trustees by Shareholders may be filled by vote of a majority of the Trustees
then in office, although less than a quorum exists. Vacancies occurring as a
result of the removal of Trustees by Shareholders shall be filled by the
Shareholders. A Trustee elected to fill a vacancy shall be elected to hold
office for the unexpired term of his predecessor. The Independent Trustees
shall nominate replacements for vacancies among the Independent Trustee's
positions. Upon the resignation or removal of any Trustee, or his otherwise
ceasing to be a Trustee, he shall execute and deliver such documents as the
remaining Trustees shall require for the conveyance of any Trust property held
in his name, shall account to the remaining Trustee or Trustees as they
require for all property which he holds as Trustee and shall thereupon be
discharged as Trustee. Upon the incapacity or death of any Trustee, his legal
representative shall perform the acts set forth in the preceding sentence and
the discharge mentioned therein shall run to such legal representative and to
the incapacitated Trustee, or the estate of the deceased Trustee as the case
may be. Notwithstanding anything to the contrary contained in this Article IV,
Section 5, the filling of vacancies or newly created trusteeships on the Board
of Trustees shall be subject to compliance with the requirements of Section 1
of this Article IV.
SECTION 6. SUCCESSOR AND ADDITIONAL TRUSTEES. The right, title and
interest of the Trustees in and to the assets of the Trust shall also vest in
successor and additional Trustees upon their qualification, and they shall
thereupon have all the rights and obligations of the Trustees hereunder. Such
right, title and interest shall vest in the Trustees whether or not
conveyancing documents have been executed and delivered pursuant to Section 5
of this Article IV or otherwise.
SECTION 7. ACTIONS BY TRUSTEES. The Trustees may act with or without a
meeting. A quorum for all meetings of the Trustees shall be a majority of the
number of incumbent Trustees, provided that at least a majority of such number
are Independent Trustees. Unless specifically provided otherwise in this
Declaration, any action of the Trustees may be taken at a meeting by vote of a
majority of the Trustees present at such meeting if a quorum is present. Any
action of the Trustees taken without a meeting shall be taken pursuant to the
consent procedures set forth in Section 9 of this Article IV. Any agreement,
deed, mortgage, lease or other instrument or writing executed by any one or
more of the Trustees or by any one or more authorized persons or by mortgage
servicers as agents for the Trust shall be valid and binding upon the Trustees
and upon the Trust when authorized by action of the Trustees.
SECTION 8. COMPENSATION. Each Independent Trustee shall be entitled to
receive compensation for serving as a Trustee at the rate of $1,000 per
meeting of the Board of Trustees but no more than $4,000 per year, plus
five-year options to purchase 2,500 Shares at a purchase price of $20 per
Share at the end of each year of service up to a maximum of options to
purchase 12,500 shares. Additionally, Independent Trustees shall be reimbursed
for travel expenses and other out-of-pocket disbursements incurred in
connection with attending any meetings. Non-Independent Trustees shall not
receive any compensation from the Trust. Nothing herein contained shall be
construed to preclude any non-Independent Trustee from serving the Trust in
any other capacity as an officer, agent or otherwise, and receiving
compensation therefor. Independent Trustees shall not perform any services for
the Trust except as Trustees.
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SECTION 9. ACTION WITHOUT MEETING. Any action required or permitted to
be taken at any meeting of the Board of Trustees may be taken without a
meeting, provided prior to such action a written consent thereto is signed by
a majority of the Board of Trustees, and provided, further, at least a
majority of the consenting Trustees are Independent Trustees. Any such written
consent shall be filed with the minutes of proceedings of the Trustees.
SECTION 10. TELEPHONIC MEETING. All or any one or more Trustees may
participate in a meeting of the Trustees or any committee thereof by means of
conference telephone or similar communications equipment by means of which all
participants can hear each other and participation in a meeting pursuant to
such communication shall constitute presence in person at such meeting.
SECTION 11. EXECUTIVE AND OTHER COMMITTEES. The Trustees may appoint
an executive committee or other committee from among their number consisting
of three or more members, a majority of whom shall be Independent Trustees,
which shall have such powers, duties and obligations as the Trustees may deem
necessary and appropriate, including, without limitation, the power to conduct
the business and affairs of the Trust during periods between meetings of the
Trustees. The Executive and other Committees shall report its activities
periodically to the Trustees.
ARTICLE V - OFFICERS
SECTION 1. OFFICERS. The officers of the Trust shall consist of a
Chairman of the Board, a President, a Treasurer and a Secretary, and shall be
elected by the Board of Trustees and shall hold office until their successors
are elected and qualified. In addition, the Board of Trustees may elect one or
more Vice Presidents and such Assistant Secretaries and Assistant Treasurers
as it may deem proper. None of the officers of the Trust need be Trustees. The
officers shall be elected at the first meeting of the Board of Trustees after
each annual meeting. More than one office may be held by the same person.
SECTION 2. OTHER OFFICERS AND AGENTS. The Board of Trustees may
appoint such officers and agents as it may deem advisable, who shall hold
their offices for such terms and shall exercise such powers and perform such
duties as shall be determined from time to time by the Board of Trustees.
SECTION 3. CHAIRMAN OF THE BOARD. The Chairman of the Board of
Trustees shall be the chief executive officer of the Trust and shall preside
at all meetings of the Board of Trustees. She shall have and perform such
other duties as from time to time may be assigned to her by the Board of
Trustees.
SECTION 4. PRESIDENT. The President shall be the chief operating
officer of the Trust and shall have the general powers and duties of
supervision and management usually vested in the office of President of a
corporation. The President shall also serve as the Administrator of the Trust.
She shall preside at all meetings of the shareholders if present thereat, and
in the absence of the Chairman of the Board, at all meetings of the Board of
Trustees,and shall have general supervision, direction and control of the
business of the Trust. Unless the Board of Trustees shall authorize the
execution thereof in some other manner, she shall execute bonds, mortgages,
and other contracts on behalf of the Trust, and shall cause the seal to be
affixed to any instrument requiring it and when so affixed the seal shall be
attested by the signature of the Secretary or the Treasurer or an Assistant
Secretary or an Assistant Treasurer.
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SECTION 5. VICE PRESIDENT. Each Vice President shall have such powers
and shall perform such duties as shall be assigned to him by the Board of
Trustees.
SECTION 6. TREASURER. The Treasurer shall have custody of the funds
and Securities of the Trust and shall keep a full and accurate account of
receipts and disbursements in books belonging to the Trust. He shall deposit
all moneys and other valuables in the name and to the credit of the Trust in
such depositories as may be designated by the Board of Trustees.
The Treasurer shall disburse the funds of the Trust as may be ordered
by the Board of Trustees, the Chairman of the Board or the President, taking
proper vouchers for such disbursements. He shall render to the President or
Board of Trustees at the regular meetings of the Board of Trustees, or
whenever they may request it, an account of all his significant transactions
as Treasurer and of the financial condition of the Trust. If required by the
Board of Trustees, he shall give the Trust a bond, at the Trust's expense, for
the faithful discharge on his duties in such amount and with such surety as
the Board of Trustees shall prescribe.
SECTION 7. SECRETARY. The Secretary shall give, or cause to be given,
notice of all meetings of Shareholders and Trustees; and all other notices
required by law or by this Declaration of Trust, and in case of his absence or
refusal or neglect to do so, any such notice may be given by any person
thereunto directed by the Chairman of the Board, the President, or by the
Trustees or Shareholders, upon whose requisition the meeting is called as
provided in this Declaration of Trust. He shall record all the proceedings of
the meetings of the Trust and of Trustees in a book to be kept for that
purpose. He shall keep in safe custody the seal of the Trust, and when
authorized by the Board of Trustees, affix the same to any instrument
requiring it, and when so affixed, it shall be attested by his signature or by
the signature of any assistant secretary.
SECTION 8. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. Assistant
Treasurer and Assistant Secretaries, if any, shall be elected and shall have
such powers and shall perform such duties as shall be assigned to them,
respectively, by the Board of Trustees.
ARTICLE VI - ADVISOR
SECTION 1. EMPLOYMENT OF ADVISOR. The Board of Trustees is responsible
for the general policies of the Trust and for such general supervision and
management of the business of the Trust as may be necessary to insure that
such business conforms to the provisions of this Declaration of Trust.
However, the Board of Trustees and officers shall not be required personally
to conduct all the business of the Trust and consistent with their ultimate
responsibility as stated above, the Board of Trustees shall have the power to
appoint, employ or contract with any Person (including one or more of the
directors or officers or any corporation, partnership, or trust in which one
or more of the Trustees or officers may be directors, officers, stockholders,
partners or trustees) as the Board of Trustees may deem necessary or proper
for the transaction of the business of the Trust. The Board of Trustees, upon
approval by a majority of the Trustees (including a majority of the
Independent Trustees), shall initially employ Mortgage Trust Advisors, Inc.
(herein referred to as the "Advisor") to (i) develop underwriting criteria and
a model for the Trust's investment portfolio; (ii) acquire, retain or sell
Mortgage Investments; (iii) seek out, present and recommend investment
opportunities consistent with the Trust's investment policies and objectives,
and negotiate on behalf of the Trust with respect to potential investments or
the disposition thereof; (iv) pay the debts and fulfill the obligations of the
Trust, and handle, prosecute and settle any claims of the Trust, including
foreclosing and otherwise enforcing mortgages and other liens
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securing investments; (v) obtain for the Trust such services as may be
required for mortgage brokerage and servicing and other activities relating to
the investment portfolio of the Trust; (vi) evaluate, structure and negotiate
prepayments or sales of Mortgage Investments; (vii) from time to time, or as
requested by the Trustees, make reports to the Trust as to its performance of
the foregoing services and (viii) to supervise other aspects of the business
of the Trust. The Trust may grant or delegate such authority to the Advisor as
the Board of Trustees may in its sole discretion deem necessary or desirable
without regard to whether such authority is normally granted or delegated by
the Board of Trustees, including, without limitation, the power to delegate to
the Advisor the authority (i) to cause the Trust to enter into, or dispose of,
investments not involving Affiliates of the Advisor, a Trustee, the Sponsor or
Affiliates thereof unless expressly permitted by Article VI Section 1 and (ii)
to defer any fees due to it under the Advisory Agreement, without the approval
of the Board of Trustees. The Board of Trustees may, upon approval by a
majority of the Trustees (including a majority of the Independent Trustees),
employ or contract with any other Person to serve as the Advisor, with the
same rights, powers and limitations described herein in substitution of
Mortgage Trust Advisors, Inc.
The Board of Trustees (subject to the provisions of Sections 2, 3, 4,
and 5 of this Article) shall have the power to determine the terms of any
agreement with, and compensation of, the Advisor or any other person whom they
may employ or with whom they may contract, provided, however, that any
decision to employ or contract with any Trustee or any Person of which a
Trustee is an Affiliate, shall be valid only if made, approved or ratified by
a majority of the Trustees (including a majority of Independent Trustees) not
otherwise interested in such transaction as being fair and reasonable to the
Trust and on terms and conditions not less favorable to the Trust than those
that could be obtained from independent third parties. The Trustees may
exercise broad discretion in allowing the Advisor to administer and regulate
the operations of the Trust, to act as agent for the Trust, to execute
documents on behalf of the Board of Trustees, and to make executive decisions
which conform to the general policies and general principles previously
established by the Board of Trustees.
SECTION 2. TERM. The Board of Trustees shall not enter into any
Advisory Agreement with the Advisor unless such contract has a term of no more
than one year; except that the original term of the first Advisory Agreement
shall terminate one year from the first closing of Shares sold pursuant to the
initial public offering of Shares. It shall be the duty of the Board of
Trustees to evaluate the performance of the Advisor before entering into or
renewing any Advisory Agreement with the Advisor. The criteria used by the
Board of Trustees in its evaluation of the Advisor shall be reflected in the
minutes of the meeting of Trustees. The Advisory Agreement with the Advisor
shall be terminable (i) without cause by the Advisor or (ii) with or without
cause by a majority of the Independent Trustees, each without penalty, and
each upon 50 days' prior written notice to the non-terminating party. In the
event of the termination of the Advisory Agreement with the Advisor, the
Advisor will cooperate with the Trust and take all reasonable steps requested
to assist the Board of Trustees in making an orderly transition of the
advisory function. The Trustees shall determine that any successor Advisor
possess sufficient qualifications (a) to perform the advisory function for the
Trust and (b) to justify the compensation provided for in its Advisory
Agreement.
SECTION 3. COMPENSATION. The Independent Trustees shall determine from
time to time but at least annually that the compensation which the Trust
contracts to pay to the Advisor is reasonable in relation to the nature and
quality of the services performed. Each determination made by the Independent
Trustees concerning the reasonableness of the compensation paid to the Advisor
shall be recorded in the minutes of the meeting of Trustees and shall be based
on the factors set forth below and such other factors as the Independent
Trustees deem relevant:
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(a) the size of the advisory fee in relation to the size,
composition and profitability of the portfolio of the Trust;
(b) the success of the Advisor in generating opportunities that
meet the investment objectives of the Trust;
(c) the rates charged to other REITs and to investors other than
REITS by advisors performing similar services; and
(d) additional revenues realized by the Advisor and its
Affiliates through their relationship with the Trust,
including loan administration, underwriting or broker
commissions, servicing, engineering, inspection and
other fees, whether paid by the Trust or by others with
whom the Trust does business;
(e) the quality and extent of service and advice furnished by
the Advisor;
(f) the performance of the investment portfolio of the
Trust, including income, conservation or appreciation of
capital, frequency of problem investment and competence
in dealing with distress situations; and
(g) the quality of the portfolio of the Trust in relationship to
the investments generated by the Advisor for its own
account.
The Independent Trustees shall review the performance of the Advisor
and the compensation paid to it by the Trust to determine that the provisions
of the contract with the Advisor are being carried out.
In the case of multiple Advisors, incentive fees paid to such Advisors
and Affiliates thereof shall be distributed by a proportional method
reasonably designed to reflect the value added to the Trust's assets by each
respective Advisor or Affiliates.
The Independent Trustees shall determine from time to time but at
least annually that the total fees and expenses of the Trust are reasonable in
light of the investment experience of the Trust, its Net Asset Value, its Net
Income, and the fees and expenses of other comparable advisors in real estate.
Each such determination shall be recorded in the minutes of the meeting of
Trustees.
SECTION 4. OTHER ACTIVITIES OF ADVISOR. The Advisor shall not be
required to administer the investment activities of the Trust as its sole and
exclusive function. The Advisor may have other business interests and may
engage in other activities similar or in addition to those relating to the
Trust, including the rendering of services and advice to other Persons
(including REITs) and the management of other investments (including
investments of the Advisor and its Affiliates). The Board of Trustees may
request the Advisor to engage in other activities which complement the Trust's
investments and to provide services requested by the borrowers or prospective
borrowers from the Trust, and the Advisor may receive compensation or
commissions therefor from the Trust or other Persons.
The Advisor shall seek out and present to the Trust whether through
its own efforts or those of third parties retained by it, investment
opportunities consistent with the investment policies and objectives of the
Trust and such investment policies as the Trustees may adopt from time to
time. Except for the allocation of investment opportunities between the Trust
and the Affiliated Programs as set forth in the
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Prospectus, the Advisor shall be obligated to present an investment
opportunity to the Trust if (i) such opportunity is of a character which could
be taken by the Trust, (ii) such opportunity is compatible when the Trust's
investment objectives and policies and (iii) the Trust has the financial
resources to take advantage of such opportunity before the Advisor may take
advantage of such opportunity for its own account or present or recommend it
to others. Subject to the limitations contained in this paragraph, the Advisor
shall be protected in taking for its own account or recommending to others any
such particular investment opportunity.
SECTION 5. LIMITATION ON TOTAL OPERATING EXPENSES. The annual Total
Operating Expenses of the Trust may not exceed the greater of: (i) 2% of the
Average Invested Assets of the Trust of (ii) 25% of the Trust's Net Income.
The Independent Trustees have the fiduciary responsibility of limiting the
Trust's annual Total Operating Expenses to amounts that do not exceed the
limitations described above. Within 60 days after the end of any fiscal year
of the Trust for which Total Operating Expenses for the 12 months then ended
exceed 2% of the Average Invested Assets of the Trust or 25% of the Trust's
Net Income, whichever is greater, the Advisor will reimburse the Trust for the
excess amount.
SECTION 6. LIMITATION ON REAL ESTATE COMMISSIONS. If the Trust
forecloses on a property securing a Mortgage and sells such property, the
Trust may pay real estate brokerage fees which are reasonable, customary and
competitive, taking into consideration the size, type and location of the
property ("Competitive Commission"). The aggregate of all real estate
brokerage commissions paid to all parties with respect to the sale of a
property shall not exceed the lesser of the Competitive Commission or an
amount equal to 6% of the gross sales price of the property. The amount of
such fees payable to the Advisor, a Trustee, a Sponsor or an Affiliate thereof
shall not exceed the lesser of (i) one-half of the Competitive Commission or
(ii) three percent of the gross sales price of a property and, shall be paid
only if such person provides a substantial amount of services in the sales
effort.
SECTION 7. INITIAL INVESTMENT BY AFFILIATES OF THE ADVISOR. Prior to
the initial public offering of Shares pursuant to the Prospectus, the Advisor
shall make an Initial Investment of $200,000 in the Trust by acquiring 10,000
Shares. The Advisor shall not withdraw such Initial Investment for a period of
one year following the Final Closing Date and may only sell Shares represented
by this initial investment through the market on which the Shares are formally
traded.
ARTICLE VII - INVESTMENT POLICY
SECTION 1. GENERAL STATEMENT OF POLICY. The Trust intends to invest in
Originated Mortgages and Acquired Mortgages which will be secured directly by
first mortgage liens on residential real estate. The Trust shall have the
right to acquire or originate Mortgages without first obtaining a real
property appraisal, unless a majority of the Independent Trustees determine
that such an appraisal is necessary; if obtained, any real property appraisals
will be maintained in the Trust's books and records for at least five years.
The foregoing investments are intended to be structured to comply with the
Real Estate Investment Trust Provisions of the Code. In addition to the
investments referred to above, the Trust may, in the discretion of the Board
of Trustees or the Advisor, make the investments described in Section 2 below
or such other investments that the Board of Trustees or the Advisor deem in
good faith to be consistent with the Investment objectives and policies of the
Trust as set forth in the Prospectus.
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The Trust may make commitments to make investments consistent with the
foregoing policies. The Trust may also participate in investments with other
unaffiliated investors, including unaffiliated investors having investment
policies similar to those of the Trust, on the same or different terms. The
Advisor may act as advisor to other investors, including investors who have
the same investment policies as the Trust.
The Independent Trustees shall review the investment policies of the
Trust with sufficient frequency and at least annually to determine that the
policies being followed by the Trust are in the best interests of its
Shareholders. Such determination by the Independent Trustees and the basis
therefor shall be recorded in the minutes of the meeting of Trustees.
The Trust may not enter into transactions with a Sponsor, the Advisor,
a Trustee or an Affiliate thereof, except as otherwise permitted by Sections 7
and 8 of this Article VII.
The general purpose of the Trust is to acquire assets and to seek
income which qualifies under the Real Estate Investment Trust ("REIT")
Provisions of the Code. The Board of Trustees shall endeavor to make Mortgage
Investments (including investments yielding "qualified temporary investment
income" within the meaning of Section 856(c)(6)(D) of the Code) in such a
manner as to comply with the requirements of the REIT Provisions of the Code
with respect to the composition of the Trust's investments and the derivation
of its income; provided, however, that for a period of time during which the
portfolio of investments is being developed, the Trust's assets may be
invested in investments which income which does not qualify under the REIT
Provisions of the Code.
The investment objectives of the Trust are to invest in first lien
Originated Mortgages and existing Acquired Mortgages secured by single family
residential real estate, which investments are expected to:
(1) produce net interest income on its mortgage portfolio; and
(2) provide monthly Distributions from, among other things,
interest on Mortgage Investments.
(3) permit the reinvestment of payments of principal on
Mortgage Investments, payments of penalties and premiums
on Mortgages and the proceeds of Mortgage Prepayments,
Sales and Insurance net of expenses received by the
rust.
SECTION 2. SPECIFIC INVESTMENTS. In addition to the types of
investments described above, the Trust may invest (through a cash management
account maintained at a trust company or otherwise) its assets in investments
such as: (a) securities issued, insured or guaranteed by the United States
government or government agencies, (b) savings accounts, (c) certificates of
deposit, (d) bank money market accounts, (e) bankers' acceptances or
commercial paper rated A-1 or better by Moody's Investors Service, Inc., (f)
money market funds having assets in excess of $50 million, (g) other
short-term highly liquid investments with banks having assets of at least $50
million, (h) investments which yield "qualified temporary investment income"
within the meaning of Section 856(c)(6)(D) of the Code (i) interim mortgages
having a maturity of less than twelve (12) months that otherwise meet the
Trust's investment criteria and (ii) any combination of the foregoing
investments.
SECTION 3. REAL PROPERTY. To the extent the Trust invests in real
property, a majority of the Trustees shall determine the consideration paid
for such real property based on the fair market
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value of the property. If a majority of the Independent Trustees request, or
if the real property is acquired from the Advisor, a Trustee, the Sponsors, or
Affiliates thereof, such fair market value shall be determined by a qualified
independent real estate appraiser selected by the Independent Trustees.
SECTION 4. RESERVES. The Trust may retain, as a permanent reserve, any
amounts which the Board of Trustees deems reasonable, in cash and in the types
of investments described above in Section 2 of this Article.
SECTION 5. CHANGES IN INVESTMENT POLICIES AND OBJECTIVES. Subject to
the investment restrictions in Sections 6 and 7 of this Article, a majority of
the Independent Trustees may alter any or all the above described investment
objectives and policies if they determine such change to be in the best
interests of the Trust. Subject to the preceding terms, the Board of Trustees
shall endeavor to invest the Trust's assets in accordance with the investment
policies set forth in this Article.
SECTION 6. UNINVESTED ASSETS. To the extent that the Trust has assets
not otherwise invested in accordance with Section 1 of this Article, the Board
of Trustees may invest such assets in the types of investments in which the
Trust is permitted to invest pursuant to Section 2 of this Article.
SECTION 7. RESTRICTIONS. The Board of Trustees shall not:
(a) invest in any foreign currency or bullion;
(b) invest in commodities or commodities futures contracts
other than interest rate futures, when used solely for hedging
purposes;
(c) invest in real estate contracts of sale, unless such
contracts of sale are in recordable form and are appropriately
recorded in the chain of title and unless such investment is held as
security for Mortgages made or acquired by the Trust;
(d) engage in any short sale;
(e) invest in any security in any entity holding investments or
engaging in activities prohibited by this Declaration of Trust;
(f) issue "redeemable equity securities" (as defined in Section
2(a)(32) of the Investment Company Act of 1940), "face amount
certificates of the installment type" as defined in Section 2(a)(15)
thereof, or "periodic payment plan certificates" as defined in Section
2(a)(27) thereof;
(g) invest more than 10% of its Total Assets in Unimproved Real
Property or mortgage loans on Unimproved Real Property;
(h) except as set forth in (i) below, issue options or warrants
to purchase its Shares to any Person unless (i) issued to all of its
security holders ratably or (ii) as part of a financing arrangement.
(i) issue options or warrants to purchase its Shares to the
Advisor, a Trustee, a Sponsor or an Affiliate thereof, unless such
options or warrants (i) are issued on the same terms
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as such options or warrants are sold to the general public, (ii) do
not exceed an amount equal to 10% of the outstanding Shares of the
Trust on the date of grant, (iii) are issued pursuant to a plan
approved by the Shareholders, or (iv) are described in the Prospectus
for the initial sale of Shares to the public;
(j) commingle the Trust funds with those of any other person or
entity, except that the use of a zero balance or clearing account
shall not constitute a commingling of trust funds and that funds of
the Trust and funds of other entities sponsored by a Sponsor or its
Affiliates may be held in an account or accounts established and
maintained for the purpose of making computerized disbursements and/or
short-term investments provided the Trust funds are protected from
claims of such other entities and creditors of such other entities;
(k) except for investments permitted by the Prospectus, invest
in equity securities unless a majority of Trustees, including a
majority of Independent Trustees, not otherwise interested in such
transaction approve the transaction as being fair, competitive and
commercially reasonable;
(l) issue its Shares on a deferred payment basis or other
similar arrangement;
(m) issue debt securities to the public;
(n) except for the Initial Investment by Affiliates of the
Advisor under Section 7 of Article VI hereof, issue Shares in a
private offering, unless (i) the consideration received per Share
equals or exceeds the Book Value of the Shares issued pursuant to the
Prospectus, (ii) the Shares are issued pursuant to a dividend
reinvestment plan, if subsequently adopted by the Trust or (iii) the
Shares are issued to the Advisor pursuant to the Advisory Agreement
for services rendered to the Trust;
(o) make or invest in any mortgage loans that are subordinate
to any mortgage or equity interest of the Advisor, Sponsor, a Trustee
or Affiliates thereof;
(p) sell property to the Sponsor, the Advisor, a Trustee or
Affiliate thereof, except as permitted under Article VII, Section 8;
(q) the Trust may not invest in interest only strip securities,
principal only strip securities, CMO residual interest or similar
securities or securities derivatives that are highly volatile or that
are highly sensitive to prepayment rates and other market factors. The
Trust may not purchase CMO securities at a significant premium;
(r) use or apply land for farming, horticulture or similar
purposes;
(s) Invest in indebtedness (herein called "junior debt")
secured by a mortgage on real property which is subordinate to the
lien of other indebtedness (herein called "senior debt"), except where
the amount of such junior debt, plus the outstanding amount of the
senior debt, does not exceed 90% of the appraised value of such
property, if after giving effect thereto, the value of all such
investments of the Trust (as shown on the books of the Trust in
accordance with generally accepted accounting principles after all
reasonable reserves but before provision for depreciation) would not
then exceed 25% of the Trust's tangible assets. The value of all
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investments in junior debt of the Trust which does not meet the
aforementioned requirements would be limited to 10% of the Trust's
tangible assets (which would be included within the 25% limitation);
(t) Engage in trading, as compared with investment activities;
or
(u) Engage in underwriting or the agency distribution of
securities issued by others.
SECTION 8. TRANSACTIONS BETWEEN THE TRUST AND AFFILIATED PERSONS.
The Trust shall not engage in transactions with any Sponsor, the Advisor, a
Trustee or Affiliates thereof, except to the extent that each such transaction
has, after disclosure of such affiliation, been approved or ratified by the
affirmative vote of a majority of the Independent Trustees, not otherwise
interested in such transaction, who have determined that (a) the transaction
is fair and reasonable to the Trust and its shareholders; (b) the terms of
such transaction are at least as favorable as the terms of any comparable
transactions made on arms length basis and known to the Trustees; and (c) the
total consideration is not in excess of the appraised value of the property
being acquired, if an acquisition is involved. Notwithstanding the foregoing,
the Trustees will not be required to provide prior approval (but will need to
subsequently ratify the transaction) for the purchase of each individual
Mortgage Investment that is purchased from a Sponsor, the Advisor or an
Affiliate thereof, if the Advisor represents that those purchases are made on
terms and conditions that are no less favorable than those that could be
obtained from independent third parties for mortgages with comparable terms,
rates, credit risks and seasoning.
Payments to the Advisor, the Trustees and their Affiliates for
services rendered in a capacity other than that as the Advisor or Trustees may
only be made upon a determination of a majority of the Independent Trustees,
not otherwise interested in such transaction that: (1) the compensation is not
in excess of their compensation paid for any comparable services; and (2) the
compensation is not greater than the charges for comparable services available
from others who are competent and not affiliated with any of the parties
involved.
In the absence of fraud, no contract, act or other transaction between
the Trust and any other Person, or in which the Trust is interested, that is
described in this Section 8, shall be invalid, void or voidable even though
(a) one or more of the Trustees or officers are directly or indirectly
interested in, or connected with, or are trustees, partners, directors,
officers or retired officers of such other Person, or (b) one or more of the
Trustees or officers of the Trust, individually or jointly with others,is a
party or are parties to or directly or indirectly interested in, or connected
with, such contract, act or transaction.
SECTION 9. TRUST'S RIGHT TO BORROW FUNDS. The Trust may not incur
indebtedness unless (i) such indebtedness is not in excess of 50% of the Net
Asset Value of the Trust; (ii) such indebtedness is otherwise necessary to
satisfy the requirement that the Trust distribute at least 95% of the REIT
Taxable Income or is advisable to assure that the Trust maintains its
qualification as a REIT; or (iii) a majority of the Independent Trustees have
determined that it is in the Trust's best interest to incur such indebtedness.
The aggregate borrowings of the Trust, secured and unsecured, shall be
reasonable in relation to the Net Asset Value of the Trust and shall be
reviewed by the Trustees at least quarterly. The maximum amount of such
borrowings in relation to the Net Asset Value of the Trust shall, in the
absence of a satisfactory showing that a higher level of borrowing is
appropriate, not exceed 50%. Any excess in borrowing over such 50% level shall
be approved by a majority of the Independent Trustees and disclosed to
Shareholders in the next quarterly report of the Trust, along with
justification for such
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excess; provided that, unless at least 80% of the Trust's tangible assets are
comprised of first mortgage loans, in no event may the Trust incur any
indebtedness which would result in an aggregate amount of indebtedness in
excess of 300% of the Net Asset Value of the Trust.
The Trust shall not borrow funds from the Sponsor, the Advisor, a
Trustee or Affiliate thereof unless a majority of the Trustees, including a
majority of the Independent Trustees, not otherwise interested in such
transaction approve the transaction as being fair and reasonable and no less
favorable to the Trust than loans between unaffiliated lenders and borrowers
under the same circumstances.
SECTION 10. REPORTS. The Trust will mail or deliver, within 120 days
after the end of each fiscal year, to Shareholders as of a record date after
the end of the Trust's fiscal year and to each other Person who becomes a
Shareholder between such record date and the date of mailing or delivery, an
annual report of the affairs of the Trust, including annual financial
statements of the Trust (balance sheet, statement of income or loss, statement
of Shareholders' equity statement of cash flows and a statement of surplus)
accompanied by a report containing an opinion of independent certified public
accountants. Such information will be prepared on an accrual basis in
accordance with generally accepted accounting principles. The Trust shall also
include in its annual report (i) the ratio of the costs of raising capital
during the period to the capital raised, (ii) full disclosure of all material
terms, factors and circumstances describing any and all transactions with the
Advisor, a Trustee, a Sponsor or Affiliates thereof and of fees, commissions,
compensation and other benefits paid or accrued to the Advisor, a Trustee, a
Sponsor or Affiliates thereof for the fiscal year completed, showing the
aggregate amount paid or accrued to each recipient and the services performed
for such year (including fees or charges paid or accrued to the Advisor, a
Trustee, the Sponsor or Affiliates thereof by third parties doing business
with the Trust) and (iii) a statement on distributions to the Shareholders and
their sources. The Independent Trustees shall have the duty to examine and
comment in the annual report on the fairness of any such transactions with the
Advisor, a Trustee, the Sponsor or Affiliates thereof.
Any distribution to Shareholders of income or capital assets of the
Trust will be accompanied by a written statement disclosing the source of the
funds distributed. If, at the time of distribution, this information is not
available, a written explanation of the relevant circumstances will accompany
the distribution and the written statement disclosing the source of the funds
distributed will be sent to the Shareholders not later than 60 days after the
close of the fiscal year in which the distribution was made.
The Trustees, including the Independent Trustees, shall take
reasonable steps to insure that the requirements of this Section 10 are
satisfied on a timely basis.
ARTICLE VIII - THE SHARES AND SHAREHOLDERS
SECTION 1. SHARES. The units into which the beneficial interest in the
Trust will be divided shall be designated as Shares, which Shares shall,
except as they may be Excess Shares as described in Article XII hereof, be
Shares of a single class of beneficial interest, each having a par value of
$.01 per Share. The total number of authorized Shares of the Trust is
100,000,000. The Trust is authorized to sell and issue as many Shares
(including fractional shares) as the Trustees shall determine in their sole
discretion. A majority of the Trustees,including a majority of the Independent
Trustees, are authorized to determine from time to time the number of such
authorized Shares that will be sold and issued to the public or others. The
ownership of Shares shall be recorded on the books of the Trust as its own
transfer agent or of an outside transfer or similar agent for the Trust.
Certificates evidencing the Shares shall be issued to Shareholders within a
reasonable time after a written request for such certificate is received by
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the Trust. The Trustees may make such rules as they consider appropriate for
the issuance of Share certificates, including requiring the Shareholder
requesting such issuance to pay the reasonable expenses incurred in connection
therewith, the use of facsimile signatures, the transfer of Shares and similar
matters. The record books of the Trust as kept by the Trust or any transfer or
similar agent shall be conclusive as to who are the Shareholders and as to the
number of Shares of the Trust held from time to time by each such Shareholder.
Except as prohibited by Article VII Section 7, the Shares may be issued for
such consideration as the Trustees shall determine, including upon the
conversion of convertible debt, or by way of share dividend or share split in
the discretion of the Trustees. Except as otherwise provided herein, all
Shares shall have equal voting, dividend, distribution, liquidation,
redemption and other rights. Shares reacquired by the Trust may be canceled by
action of the Trustees. All Shares shall be fully paid and non-assessable by
or on behalf of the Trust upon receipt of full consideration for which they
have been issued or without additional consideration if issued by way of share
dividend, share split, or upon the conversion of convertible debt. The Shares
shall not entitle the holder to preference, preemptive, appraisal, conversion,
or exchange rights of any kind.
No certificates for Shares shall be issued in place of any certificate
alleged to have been lost, destroyed or wrongfully taken, except, if and to
the extent required by the Board of Trustees, upon:
(i) production of evidence of loss, destruction or wrongful
taking;
(ii) delivery of a bond indemnifying the Trust and its agents
against any claim that may be made against it or them on account of
the alleged loss, destruction or wrongful taking of the replaced
certificate or the issuance of the new certificate;
(iii) payment of the expenses of the Trust and its agents
incurred in connection with the issuance of the new certificate; and
(iv) compliance with such other reasonable requirements as may
be imposed.
SECTION 2. TRANSFERS OF SHARES. Except as otherwise provided herein,
Shares shall be transferable on the records of the Trust upon presentment to
the Trust or a transfer agent for the Trust of such evidence of the payment of
transfer taxes and compliance with other provisions of law as the Trust or
such transfer agent may require.
SECTION 3. SHAREHOLDERS' DISCLOSURES; REDEMPTION OF SHARES. The
Shareholders shall upon demand disclose to the Trust in writing such
information with respect to direct and indirect ownership of the Shares as the
Board of Trustees deems necessary to comply with the provisions of the Code
and the regulations thereunder or to comply with the requirements of any other
taxing authority,including the provisions relating to qualification of the
Trust as a REIT. If the Board of Trustees shall at any time be of the opinion
that direct or indirect ownership of Shares of the Trust has or may become
concentrated to an extent which would prevent the Trust from qualifying as a
REIT under the Real Estate Investment Trust Provisions of the Code, and
whether or not any Shares are or may become Excess Shares under Article XII,
the Board of Trustees shall have the power by lot or other means deemed
equitable by them to prevent the transfer of Shares of the Trust and/or call
for redemption a number of such Shares sufficient in the opinion of the Board
of Trustees to maintain or bring the direct or indirect ownership of Shares of
the Trust into conformity with the requirements for REITs. The redemption
price shall be (i) the last reported sale price of the Shares on the last
business day prior to the redemption date on the principal national securities
exchange on which the Shares are listed or
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admitted to trading, or (ii) if the Shares are not so listed or admitted to
trading, the average of the highest bid and lowest asked prices on such last
business day as reported by the national Quotation Bureau Incorporated, the
NASDAQ National Quotation System or a similar organization selected by the
Trust for such purpose, or (iii) if not determinable as aforesaid, as
determined in good faith by the Board of Trustees. From and after the date
fixed for redemption by the Board of Trustees, the holder of any Shares so
called for redemption shall cease to be entitled to dividends, distributions,
voting rights and other benefits with respect to such Shares, except for the
right to payment of the redemption price fixed as aforesaid. For the purpose
of this Section 3, the term "ownership" of Shares shall be determined as
provided in Section 544 of the Code or any successor provision.
SECTION 4. RIGHT TO REFUSE TO TRANSFER SHARES. Whenever it is deemed
by them to be reasonably necessary to protect the tax status of the Trust, the
Board of Trustees may require a statement or affidavit from each Shareholder
or proposed transferee of Shares setting forth the number of Shares already
owned by him and any related person specified in the form prescribed by the
Board of Trustees for that purpose. If, in the opinion of the Board of
Trustees, which shall be conclusive, any proposed transfer would jeopardize
the status of the Trust as a REIT under the Real Estate Investment Trust
Provisions of the Internal Revenue Code, whether or not any Shares are or may
become Excess Shares under Article XII, the Trustees may refuse to permit such
transfer. Any attempted transfer for which the Trustees have refused their
permission shall be void and of no effect to transfer any legal or beneficial
interest in the Shares. All contracts for the sale or other transfer of Shares
shall be subject to this provision.
SECTION 5. LEGAL OWNERSHIP OF ASSETS OF THE TRUST. The legal ownership
of the assets of the Trust and the right to conduct the business of the Trust
are vested exclusively in the Trustees, and the Shareholders shall have no
interest therein other than beneficial interest in the Trust conferred by
their Shares issued hereunder and they shall have no right to compel any
partition, division, dividend, dividend or distribution of the Trust or any of
the assets of the Trust.
SECTION 6. SHARES DEEMED PERSONAL PROPERTY. The Shares shall be
personal property and shall confer upon the holders thereof only the interest
and rights specifically set forth in this Declaration of Trust. The death,
insolvency or incapacity of a Shareholder shall not dissolve or terminate the
Trust or affect its continuity nor give his legal representative any rights
whatsoever, whether against or in respect of other Shareholders, the Trustees
or the assets of the Trust or otherwise.
SECTION 7. SHAREHOLDERS RECORD DATE. In order that the Trust may
determine the Shareholders entitled to notice of or to vote at any meeting of
Shareholders or any adjournment thereof, or to express consent to Trust action
in writing without a meeting, or entitled to receive payment of any dividend
or other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Trustees may fix, in advance,
a record date, which shall not be more than sixty nor less than ten days
before the date of such meeting or other action. A determination of
Shareholders of record entitled to notice or to vote at a meeting of
Shareholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Trustees may fix a new record date for the adjourned
meeting.
SECTION 8. DIVIDENDS. Subject to the provisions of this Declaration of
Trust, the Board of Trustees may, out of funds legally available therefor,
declare dividends, including deficiency dividends, if necessary, upon the
Shares of the Trust as and when it deems expedient. Before declaring any
dividends there may be set apart out of any funds of the Trust available for
dividends, such sum or
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sums as the Board of Trustees, from time to time in its discretion, deems
proper for working capital or as a reserve fund to meet contingencies or for
equalizing dividends or for such other purposes as the Trustees shall deem
conducive to the interests of the Trust. The Board of Trustees may declare a
consent dividend as long as the form of the actual and consent dividends for
the taxable year do not constitute a preferential distribution.
ARTICLE IX - MISCELLANEOUS
SECTION 1. SEAL. The Trust seal, if adopted by the Trustees, shall be
circular in form and shall contain the name of the Trust, the year of its
creation and the words "MARYLAND REAL ESTATE INVESTMENT TRUST" or such other
words to such effect. Said seal may be used by causing it or a facsimile
thereof to be impressed or affixed or otherwise produced.
SECTION 2. FISCAL YEAR. The fiscal year of the Trust shall be
determined by resolution of the Board of Trustees.
SECTION 3. CHECKS. All checks, drafts or other orders for the payment
of money, notes or other evidences of indebtedness issued in the name of the
Trust shall be signed by such officer or officers, or agent or agents of the
Trust, and in such manner, as shall be determined from time to time by
resolution of the Board of Trustees.
SECTION 4. NOTICE AND WAIVER OF NOTICE. Whenever any notice is
required by this Declaration of Trust to be given, except as otherwise set
forth herein, personal notice is not meant unless expressly stated, and any
notice so required shall be deemed to be sufficient if given by depositing the
same in the United States mail, postage prepaid, addressed to the person
entitled thereto at his address as it appears on the records of the Trust, and
such notice shall be deemed to have been given on the day of such mailing.
Shareholders not entitled to vote shall not be entitled to receive notice of
any meetings or solicitation of Shareholder consent without a meeting except
as otherwise provided by statute.
Whenever any notice is required to be given under the provisions of
any law, or under the provisions of this Declaration of Trust, a waiver
thereon in writing signed by the person or persons entitled to said notice,
whether before or after the time stated therein, shall be deemed proper
notice.
SECTION 5. SUCCESSORS IN INTEREST. This Declaration of Trust shall be
binding upon and inure to the benefit of the undersigned Trustees and their
successors, assigns, heirs, distributees and legal representatives, and every
Shareholder and his successors, assigns, heirs, distributees and legal
representatives.
SECTION 6. INSPECTION OF RECORDS. Inspection of books and records
shall be permitted to the same extent as permitted under law applicable to
shareholders of a corporation organized in the State of Maryland, unless
broader inspection rights have been granted to the Shareholders in Article
III, Section 5, in which event the Shareholders shall be entitled to such
broader inspection rights.
SECTION 7. SEVERABILITY. If any provision of this Declaration of Trust
shall be held invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall attach only to such jurisdiction and shall not in any
manner affect or render invalid or unenforceable such provision in any other
jurisdiction or any other provision of this Declaration of Trust in any
jurisdiction.
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SECTION 8. APPLICABLE LAW. This Declaration has been
executed,acknowledged and delivered by the Trustees with reference to the
statutes and laws of the State of Maryland, and the rights of all parties and
the construction and effect of any provision hereof shall e subject to and
construed according to the statutes and laws of said State of Maryland.
ARTICLE X - DURATION AND AMENDMENT OF TRUST
SECTION 1. DURATION OF TRUST. The Trust shall continue without
limitation of time but shall be subject to termination at any time by the vote
or written consent of the holders of a majority of the Shares.
SECTION 2. AMENDMENT PROCEDURE. This Declaration of Trust may be
amended by a majority of the Trustees, including a majority of the Independent
Trustees, with the approval of the holders of a majority of the holders of a
majority of the outstanding Shares entitled to vote, except that: (i) the
amendment of the provision regarding super-majority Shareholder approval of
certain conversion ("rollup") transactions requires the vote of the holders of
eighty percent (80%) of the outstanding Shares and (ii) any amendment which
would change any rights with respect to any outstanding class of securities of
the Trust, by reducing the amount payable thereon upon liquidation of the
Trust, or by diminishing or eliminating any voting rights pertaining thereto,
requires the vote or written consent of the holders of two-thirds of the
outstanding securities of such class. Notwithstanding the foregoing,
two-thirds of the Trustees, including a majority of the Independent Trustees,
are authorized to alter or repeal any provision of this Declaration of Trust,
without the consent of the Shareholders, (i) to the minimum extent necessary,
based on an opinion of counsel, to comply with the requirements of the
provisions of the Internal Revenue Code applicable to REITs, the regulations
issued thereunder, and any ruling on or interpretation of the Internal Revenue
Code or the regulations thereunder, (ii) to delete or add any provision of
this Declaration of Trust required to be so deleted or added by the staff of
the Securities and Exchange Commission or a state "blue sky" commissioner or
such similar official, which addition or deletion is deemed by such
commissioner or official to be for the benefit or protection of Shareholders,
or (iii) to clarify any ambiguities or correct any inconsistencies.
ARTICLE XI - EXCULPATION AND INDEMNIFICATION AND OTHER MATTERS
SECTION 1. LIMITATION OF LIABILITY OF SHAREHOLDERS. Shareholders of
the Trust shall have the fullest limitation on liability permitted under the
laws of the State of Maryland and no Shareholder shall be liable for any of
the obligations of the Trust. Each Shareholder shall be entitled to pro rata
indemnity against all claims and liabilities and related reasonable expenses
from the Trust estate if, contrary to the provision hereof, such Shareholder
shall be held to any such personal liability. All contracts to which the Trust
is a party shall include a provision that the Shareholders shall not be
personally liable on such contract.
SECTION 2. LIMITATION OF LIABILITY OF TRUSTEES AND OFFICERS. The
Trustees and officers of the Trust shall have the fullest limitation on
liability permitted by the laws of the State of Maryland. No Trustee or
officer shall be liable to the Trust or the Shareholders except as
specifically provided for herein.
Trustees and officers shall have no liability for breach of the duty
of loyalty, unless such breach of duty results in an improper personal benefit
or was the result of active and deliberate dishonesty and was material to the
cause of action adjudicated in the proceeding. In all situations in which the
limitations
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of liability contained herein apply, the remedies available to the Trust or
its Shareholders shall be limited to equitable remedies, such as injunctive
relief or recision, and shall not include the right to recover money damages.
The Trustees and the officers shall be liable to the Trust or the Shareholders
only (i) to the extent the Trustee or officer actually received an improper
benefit or profit in money, property or services, in which case any such
liability shall not exceed the amount of the benefit or profit in money,
property or services actually received; or (ii) to the extent that a judgment
or other final adjudication adverse to such Trustee or officer is entered in a
proceeding based on a finding in the proceeding that such Trustee's or
officer's action or failure to act was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding.
SECTION 3. INDEMNIFICATION. (a) Subject to any limitations contained
herein, the Trust shall indemnify and hold harmless the Trustees, the
Administrator, the Advisor, and their Affiliates and the employees of each who
are performing services on behalf of the Trust (all of the foregoing being
referred to as "Indemnified Parties" and each being referred to as
"Indemnified Party") against any and all losses, claims, demands, costs,
damages, liabilities, joint and several, expenses of any nature (including
attorneys' fees and disbursements), and other amounts paid and reasonably
incurred by them in connection with or by reason of any act performed or
omitted to be performed by them in connection with the operation or business
of the Trust to the fullest extent allowed by the State of Maryland provided,
that (i) the Trustees, the Administrator, or the Advisor has determined, in
good faith, that the course and conduct which caused the loss or liability was
in the best interests of the Trust, (ii) such liability or loss was not the
result of negligence or misconduct with respect to the affiliated Trustee, the
Administrator, the Advisor and its Affiliates or the result of bad faith,
willful misfeasance, gross negligence or reckless disregard of the Trustee's
duties, and (iii) such indemnification or agreement to hold harmless is
recoverable only out of the assets of the Trust and not from the Shareholders.
The Trust shall not indemnify the Indemnified Parties for any
liability imposed by judgment, and costs associated therewith, including
attorneys' fees, arising from or out of a violation of state or federal
securities laws. Notwithstanding anything to the contrary in the preceding
paragraph, the Trust may indemnify the Indemnified Parties for settlements and
related expenses of lawsuits alleging securities law violations, and for
expenses incurred in successfully defending such lawsuits, only if: (a) a
court either (i) approves the settlement and finds that indemnification of the
settlement and related costs should be made, or (ii) approves indemnification
of litigation costs if there has been a successful defense, or (b) there has
been a dismissal with prejudice on the merits (without a settlement). Any
person seeking indemnification shall apprise the court of the published
position of the Securities and Exchange Commission with respect to
indemnification for securities law violations, before seeking court approval
for indemnification.
(b) The indemnification provided by the provisions of this Article XI
shall continue for the period of time of service or for any matter arising out
of the term of service as to an Indemnified Party and shall inure to the
benefit of the heirs, executors and administrators of such a person.
(c) The Trust shall have the power to purchase and maintain insurance
on behalf of any person who is or was an Indemnified Party who performs
services on behalf of the Trust or is or was serving at the request of the
Trust as a director, trustee or officer of another corporation, partnership,
joint venture, trust or other enterprise in which the Trust has an interest
against any liability asserted against him or it and incurred by him or it in
any such capacity, or arising out of his or its status as such.
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(d) In the event a particular state holds a Shareholder personally
liable for claims against the Trust (such as tort claims, contract claims
where the underlying agreement does not specifically exclude Shareholder
liability, claims for taxes and certain statutory liability), the Shareholder
will, upon payment of any such liability, and in the absence of willful
misconduct on his part, be entitled to reimbursement from the general assets
of the Trust, to the extent such assets are sufficient to satisfy the claim.
(e) The provision of advances from the Trust to the Indemnified
Parties for legal expenses and other costs incurred as a result of a legal
action is permissible only if the following three conditions are satisfied:
(i) the legal action relates to acts or omissions with respect
to the performance of duties or services by the Indemnified Party on
behalf of the Trust;
(ii) the legal action is initiated by a third party who is not
a Shareholder or the legal action is initiated by a Shareholder acting
in his or her capacity as such and a court of competent jurisdiction
specifically approves such advancement, and
(iii) the Indemnified Party undertakes to repay the advanced
funds to the Trust, together with applicable interest thereon, in
cases in which such Indemnified Party would not be entitled to
indemnification hereunder.
SECTION 4. RIGHT OF TRUSTEES AND OFFICERS TO OWN SHARES OR OTHER
PROPERTY AND TO ENGAGE IN OTHER BUSINESS. Except as provided for in this
Declaration of Trust, any Trustee or officer may acquire, own, hold and
dispose of Shares in the Trust, for his individual account, and may exercise
all rights of a shareholder to the same extent and in the same manner as if he
were not a Trustee or officer. Subject to Article IV Section 2(v), any Trustee
or officer may have personal business interests and may engage in personal
business activities, which interests and activities may include the
acquisition, syndication, holding, management, operation or disposition, for
his own account or for the account of others, of interests in Mortgage
Investments or real property or Persons engaged in the real estate business,
even if the same directly compete with the actual business being conducted by
the Trust; provided such interests or activities do not have a material
adverse effect on the business of the Trust. Subject to the provisions of
Article IV Section 8, any Trustee or officer may be interested as trustee,
officer, director, stockholder, partner, member, advisor or employee, or
otherwise have a direct or indirect interest in any Person who may be engaged
to render advice or services to the Trust, and may receive compensation from
such Person as well as compensation as Trustee, officer or otherwise hereunder
and no such activities shall be deemed to conflict with his duties and powers
as Trustee or officer. Notwithstanding anything to the contrary contained in
this Section 3, Independent Trustees shall at all times limit their activities
so that they at all times satisfy the definition of Independent Trustees as
set forth in Article II Section 1 hereof.
ARTICLE XII - EXCESS SHARES
SECTION 1. EXCESS SHARES. (A) If, at any time, a person (as defined in
(C) below only for purposes of this Article XII) shall be or become an Owner
(as defined in (C) below) of Shares of the Trust in excess of 9.8% of the
outstanding Shares entitled to vote (the "Limit"), those Shares of the Trust
most recently acquired by such Person which are in excess of the Limit,
including for this purpose Shares deemed owned through attribution, shall
constitute "Excess Shares". Excess Shares shall have the following
characteristics:
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(1) holders of Excess Shares shall not be entitled to exercise
any voting rights with respect to such Excess Shares;
(2) Excess Shares shall not be deemed to be outstanding for the
purpose of determining a quorum at the annual meeting or any special
meeting of Shareholders or for determining the number of outstanding
Shares for purposes of determining a "majority of the outstanding
Shares" in connection with a Shareholders' vote without a meeting;
(3) any dividends or other distributions with respect to Excess
Shares which would have been payable in respect of Shares had they not
constituted "Excess Shares" shall be accumulated by the Trust and
deposited in a savings account in a bank (which may be the Trust's
dividend disbursing agent) for the benefit of, and be payable to, the
holder or holders of such Shares at such time as such Excess Shares
shall cease to be Excess Shares;
(4) Excess Shares shall be deemed to have been offered for sale
to the Trust or its designee at their fair market value for a period
of one hundred twenty (120) days from the date of (i) the transfer of
Shares which made the Shares Excess Shares if the Trust has actual
knowledge that such transfer creates Excess Shares or (ii) if such
transfer is not actually known to the Trust, the determination by the
Trustees in good faith by resolution duly adopted that a transfer
creating Excess Shares has taken place (the "Offer Period"). Fair
market value shall be determined as of the date of (i) or (ii) above,
and shall be the price as determined in good faith by the Trustees,
provided, however, (y) if the Shares are listed on a national stock
exchange, the fair market value shall be the closing price on that
national stock exchange, or, (z) if the Shares are not listed on a
national stock exchange but publicly quoted on the National Quotation
Bureau Incorporated's "pink sheets" or the NASDAQ National Quotation
System, then the fair market value shall be the closing bid price on
the applicable system.
The Trust may accept the deemed offer for Excess Shares by mailing by
registered or certified mail (return receipt requested) a written notice to
the record holder of Excess Shares at the address appearing on the Trust's
stock transfer records stating the Trust's acceptance of the offer within the
Offer Period. Payment for Excess Shares shall be made by the Trust by check,
subject to collection, within 30 days after acknowledgement of receipt of the
above described notice. After notice has been sent, Excess Shares shall have
no further rights beyond the right to receive payment pursuant to this
paragraph.
(B) Each Person who becomes the Owner of Excess Shares is obliged
immediately to give or cause to be given written notice thereof to the Trust
and to give to the Trust such other information as the Trust may reasonably
require of such person (1) with respect to identifying all Owners and amount
of ownership of its outstanding Shares held directly or by distribution by
such Person, and (2) such other information as may be necessary to determine
the Trust's status under the Code.
(C) For the purpose of determination to be made under this Article,
(a) A Person shall be considered to "Own", be the "Owner" or
have "Ownership" of Shares if he is treated as owner of such Shares
for purposes of part 11, subchapter M of the Code, including the
attribution of ownership provisions of Sections 542 and 544 of the
Code, or if such Person would have beneficial ownership of such Shares
as defined under Rule 13d-3 of the Securities Exchange Act of 1934, as
amended (the "Act") (all as in effect on the date of the formation of
the Trust);
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(b) "Person" includes an individual, corporation, partnership,
estate, trust, association, joint stock company or other entity and
also includes a group as that term is used for purposes of Section
13(d)(3) of the Act (as in effect on the date of the formation of the
Trust); and
(c) In the case of an ambiguity in the application of any of
the provisions of (a) and (b) above, the Trustees shall have the power
to determine for the purposes of this Article XII on the basis of
information known to them (i) whether any Person Owns Shares, (ii)
whether any two or more individuals, corporations, partnership,
estates, trusts, associations or joint stock companies or other
entities constitute a Person, and (iii) whether any of the entities of
(ii) above constitute a group.
(D) If any provision of this Article XII or any application of any
such provision is determined to be invalid by any federal or state court
having jurisdiction over the issues, the validity of the remaining provisions
shall not be affected.
(E) Nothing contained in this Article XII shall limit the authority of
the Trustees to take such other action as they deem necessary or advisable to
protect the Trust and the interests of its Shareholders by preservation of the
Trust's status as a REIT under the Code, including, without limitation, those
provided in Sections 3 and 4 of Article VIII.
(F) All references in this Declaration of Trust to the vote of Shares
shall be deemed to include all Shares other than Excess Shares.
(G) Excess Shares shall be deemed to be of a class separate from the
class of Shares of beneficial interest provided in Article VIII Section 1
hereof, and upon any such Share of beneficial interest becoming an Excess
Share, it shall be deemed to have been automatically converted into a Share of
such class of Excess Shares; and upon a share ceasing to be held by a person
in whose hands it is no longer deemed to be an Excess Share, such share shall
be deemed to have been automatically converted into a share of class of Shares
of beneficial interest described in Article VIII Section 1 hereof.
ARTICLE XIII - CONVERSION TRANSACTIONS
SECTION 1. APPROVAL OF CONVERSION TRANSACTIONS. Notwithstanding any
provision to the contrary in this Declaration of Trust, and subject to the
restrictions on Rollups described in Article XIV Section 3 below, the approval
of the holders of eighty percent (80%) of the Shares and the unanimous
approval of the Independent Trustees shall be required for any exchange offer,
merger, consolidation or similar transaction involving the Trust in which the
Shareholders receive securities in a surviving entity having a different
duration, materially different investment objectives and policies, or a
management compensation structure that is anticipated to provide significantly
greater management compensation, from that described in the Prospectus, except
for any such transaction affected because of changes in applicable law, or to
preserve tax advantages for a majority in interest of the Shareholders.
ARTICLE XIV - ROLLUPS
SECTION 1. APPRAISALS. An appraisal of all the Trust's assets shall be
obtained from a competent Independent Expert in connection with a proposed
Rollup.
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If the appraisal will be included in a prospectus used to offer the
securities of a Rollup Entity, the appraisal shall be filed with the
Securities and Exchange Commission and the states as an exhibit to the
registration statement for the offering of the Rollup Entity's Shares. The
issuer of the Rollup Entity's Shares shall be subject to liability for
violation of Section 11 of the Securities Act of 1933 and comparable
provisions under state laws for any material misrepresentations or material
omissions in the appraisal.
The Trust's assets shall be appraised on a consistent basis. The
appraisal shall:
(a) be based on an evaluation of all relevant information;
(b) indicate the value of the Trust's assets as of a date
immediately prior to the announcement of the proposed rollup, and
(c) assume an orderly liquidation of the Trust's assets over a
12 month period.
The terms of the engagement of the Independent Expert shall clearly
state that the engagement is for the benefit of the Trust and its
Shareholders. A summary of the appraisal shall be included in a report to the
Shareholders in connection with the proposed Rollup.
SECTION 2. SHAREHOLDER OPTIONS. The person sponsoring the Rollup shall
offer to Shareholders who vote "no" on the proposed Rollup the choice of:
(a) accepting the securities of the Rollup Entity offered in
the proposed Rollup; or
(b) one of the following choices:
(i) remaining as Shareholders of the Trust and
preserving their interests therein on the same terms and
conditions as existed previously; or
(ii) receiving cash in an amount equal to the
Shareholders' pro rata share of the appraised value of the net
assets of the Trust.
SECTION 3. RESTRICTIONS. The Trust shall not participate in any
proposed Rollup which would:
(a) result in the Shareholders having voting rights that are
less than those provided in this Declaration of Trust;
(b) result in Shareholders having rights to receive reports
that are less than those provided in Article VII Section 10 hereof;
(c) include provisions which would operate to materially impede
or frustrate the accumulation of shares by any purchaser of the
securities of the Rollup Entity (except to the minimum extent
necessary to preserve the tax status of the Rollup Entity);
(d) limit the ability of an investor to exercise the voting
rights of its securities in the Rollup Entity on the basis of the
number of the Trust's Shares held by that investor;
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(e) result in investors in the Rollup Entity having rights of
access to the records of the Rollup Entity that are less than those
provided in Article III Section 5 hereof; or
(f) place the cost of the transaction on the Trust if the
Rollup is not approved by the Shareholders; provided, however, that
nothing shall be construed to prevent participation in any proposed
Rollup which would result in Shareholders having rights and
restrictions comparable to those contained herein.
ARTICLE XV - STATUTORY AGENT
SECTION 1. STATUTORY AGENT. At all times that Trust shall have a
resident agent in Maryland which may be a natural person or a business entity
doing business in Maryland. Until otherwise designated by the Trustees, the
statutory resident agent shall be CSC - Lawyers Incorporating Service Company.
ARTICLE XVI - ELECTION TO BE GOVERNED BY
SPECIAL VOTING REQUIREMENT LAW
SECTION 1. ELECTION. The Trust elects to be governed by the special
voting requirement of the Maryland Corporations and Associations Article of
the Annotated Code of Maryland.
IN WITNESS WHEREOF, the undersigned Trustees of UNITED MORTGAGE TRUST,
have signed this Declaration of Trust as Trustees as of the date first above
written.
------------------------
Christine A. Griffin
------------------------
Paul R. Guernsey
------------------------
Douglas R. Evans
------------------------
Richard D. O'Connor, Jr.
36
Exhibit 5
Detroit Office
November 7, 1996
United Mortgage Trust
1701 N. Greenville
Suite 403
Richardson, Texas 75081
Re: Registration Statement on Form S-11
Gentlemen/Madame:
We have acted as counsel for United Mortgage Trust, a Maryland real
estate investment trust (the "Company") in connection with the preparation and
filing with the Securities and Exchange Commission (the "Commission") of a
Registration Statement on Form S-11, File No. 333- 10109 (the "Registration
Statement"), for registration under the Securities Act of 1933, as amended
(the "Securities Act") of a maximum of 2,500,000 shares of beneficial interest
of the Company (the "Shares").
Based upon our examination of such documents, instruments and other
matters as we deem relevant, it is our opinion that the Shares, when issued
and sold by the Company, will have been duly authorized and, when issued and
sold by the Company as described in the Registration Statement and in the
manner set forth in the Selling Group Manager Agreement referred to in the
Registration Statement, will be validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus included in the Registration Statement. In giving
such consents, we do not admit hereby that we come within the category of
persons whose consent is required under Section 7 of the Securities Act or the
Rules and Regulations of the Commission thereunder.
Very truly yours,
BERRY, MOORMAN, KING & HUDSON, P.C.
By: /s/ Robert A Hudson
-------------------
Robert A. Hudson
RAH:gam
Exhibit 8.1
Detroit Office
November 6, 1996
United Mortgage Trust
1701 N. Greenville Avenue
Suite 403
Richardson, TX 75081-1848
To the Trustees:
You have requested our opinion as to certain federal income tax
issues with respect to United Mortgage Trust, a Maryland real estate
investment trust (the "Company"), which intends to elect to be taxed as a real
estate investment trust (a "REIT") for federal income tax purposes.
In rendering our opinion, we have relied upon the facts set
forth in the Company's preliminary Prospectus ("Prospectus") contained in the
Registration Statement on Form S-11 filed on the date hereof and upon
statements and representations made by the Company. We have also reviewed such
documents as we have deemed necessary for the purposes of our opinion. Unless
otherwise defined, all capitalized terms used but not defined herein shall
have the same meaning as defined in the Prospectus.
As explained in greater detail below, it is our opinion that,
under current federal income tax laws and regulations, and based on certain
facts and representations set forth below, and assuming the Company is
operated in accordance with the Declaration of Trust, it is more likely than
not that (i) the Company will be treated as a REIT for federal income tax
purposes, and (ii) the operations of the Company will not result in unrelated
business income to tax-exempt entities by reason of their ownership of Shares
of the Company. Our opinions are based upon the provisions of the Internal
Revenue Code of 1986 (the "Code"), regulations promulgated thereunder,
administrative interpretations, and judicial decisions in effect as of the
date of this opinion, all of which are subject to change either prospectively
or retroactively and may alter our opinions if changed. No opinion on any
matter not expressly discussed herein should be inferred from the opinions set
forth herein.
<PAGE>
United Mortgage Trust
November 6, 1996
Page 2
I. FACTS
The Company has advised us of the following:
1. The Company will invest primarily in originated and acquired
uninsured mortgage loans on single family residential real estate. In
addition, a portion of the Company's portfolio may be comprised of interim
mortgages having a maturity of less than twelve (12) months ("Interim
Mortgages").
2. Mortgage Trust Advisors, Inc., affiliate of South Central
Mortgage, Inc., First Financial United Investments, Ltd. and Grosse Pointe
Financial, Inc. will be the advisor to the Company.
3. The Company's objectives are to make investments, as
referred to above, which will (i) produce net interest income on its mortgage
portfolio; (ii) provide monthly distributions from among other things,
interest on mortgage investments; and (iii) permit the reinvestment of
payments of principal on mortgage investments, payments of penalties and
premiums on mortgages and the proceeds of mortgage prepayments, sales and
insurance net of expenses received by the Trust.
4. During the initial offering period, a minimum of 125,000
shares of beneficial interest and a maximum of 2,500,000 shares of beneficial
interest of the Company (the "Shares") are being publicly offered at $20 per
share.
II. DISCUSSION
A. Qualification as a REIT
The basic requirements which must be met for the Company to be
taxed as a REIT are summarized below:
1. Share Ownership: The shares of a REIT (i) must be freely
transferable, (ii) must be held by 100 or more persons during at least 335
days of a taxable year of 12 months (or during a proportionate part of a
taxable year of less than 12 months), and (iii) no more than 50%, in value, of
the outstanding shares may be owned, directly or indirectly, by five or fewer
individuals at any time during the last half of the REIT's taxable year. The
requirements of (ii) and (iii) are not applicable to the first taxable year
for which an election to be treated as a REIT is made.
The Company has represented that on the Initial Closing Date it
will have at least 100 Shareholders who are independent of each other and the
Company. In addition, the Declaration of Trust prohibits the ownership of
Shares by any person in excess of 9.8% of the value of the Company and grants
to the Trustees the power to restrict transfers of Shares that would result in
violation of the rules in (ii) and (iii) above. Applicable Treasury
Regulations state that such a restriction will not cause the shares to fail to
be freely transferable as required by (i).
<PAGE>
United Mortgage Trust
November 6, 1996
Page 3
2. Nature of Assets: On the last day of each calendar quarter,
at least 75% of the value of the total assets of a REIT (the "75% Asset Test")
must consist of (i) "real estate assets," which include real property,
interests in loans secured by mortgages on real property, and interests in
"real estate mortgage investment conduits ("REMICs"), (ii) cash and cash items
(including receivables); (iii) government securities and (iv) property (not
otherwise a real estate asset) attributable to the temporary investment of new
capital (stock or a debt instrument purchased with new capital from the sale
of shares in the REIT, but only for the one-year period beginning on the date
the REIT receives such capital). The only investment restriction on the
remainder of a REIT's assets (i.e., up to 25% of the REIT's total assets) is
that the securities of any one non-governmental issuer may not represent more
than 5% of the value of the REIT's total assets and the REIT may not own more
than 10% of the outstanding voting securities of any one issuer.
The Company has represented that it will monitor the nature of
its assets so that the 75% Asset Test will be satisfied at the end of each
quarter.
3. Sources of Income: For each taxable year, a REIT must meet
three income-based tests: (a) the 75% Income Test, (b) the 95% Income Test,
and (c) the 30% Income Test.
(a) 75% Income Test: At least 75% of a REIT's gross income
(excluding income from "prohibited transactions," described below) for the
taxable year must be derived from sources related to real property. For
purposes of the anticipated operation of the Company, the most important of
these sources are: (i) interest on loans secured by mortgages on real
property, including interest derived from an interest in a REMIC; (ii) rents
from real property; (iii) gain from the sale or other disposition of real
property and interests in mortgages on real property (excluding gain from the
sale of "dealer property" described below); (iv) income and gain from the sale
or other disposition of "foreclosure property" (described below); and (v)
"qualified temporary investment income," which is income from the temporary
investment of new capital in stock or debt instruments and which is received
or accrued during the one year period from the date the Company receives such
capital.
The Company has represented that it does not expect to derive
income from rents unless it acquires property through the foreclosure of one
of its Mortgages. Rents received by the Company with respect to foreclosure
property that it acquires or Mortgages which are recharacterized as equity for
federal income tax purposes will qualify as "rents from real property" for the
75% Income Test if the following requirements are met:
(i) The amount of rent received generally must not be
based on the income or profits of any person. The Company has
represented that it will take steps to ensure that it will not (a)
receive any rent based on the income or profits of any person, or (b)
receive interest based on the net income or profits of any
<PAGE>
United Mortgage Trust
November 6, 1996
Page 4
borrower who receives such rent based on the net income or profits of
tenants. Thus, all of the interest income received by the Company, and
any rents received, should qualify for the 75% Income Test.
(ii) Rents received from a tenant will not qualify as
"rents from real property" if the REIT owns, directly or indirectly,
10% or more of (i) the total combined voting power of all voting
classes of stock or of the total number of shares of all classes of
stock of a corporate tenant or (ii) the beneficial interests in the
assets or net profits of a non-corporate tenant. The Company does not
anticipate that it will own in excess of a 10% interest in the stock,
assets or net profits of any tenant.
(iii) Rents will only qualify as "rents from real
property," if the Company does not manage or operate the property or
furnish or render services to the tenants of such property, other than
through an independent contractor from whom the Company derives no
revenue. For this purpose, an independent contractor is any person who
does not own, directly or indirectly, more than 35% of the Shares in
the Company, and in which not more than a 35% interest is owned,
directly or indirectly, by one or more persons who also own 35% or
more of the Shares in the Company. The Company presently intends to
have South Central Mortgage, Inc. and Jimco Service Company (the
"Servicers") manage any real property that it acquires through
foreclosure. The Servicers currently meet the definition of
independent contractors, and the Company has represented that it will
not derive any revenue from the Servicers.
(iv) Rent attributable to personal property leased in
connection with a lease of real property will not qualify as "rents
from real property" if such rent is greater than 15% of the total rent
received under the lease. The Company has represented that it will
monitor the amount of rent attributable to personal property so that
its rental income will qualify as rents from real property.
(b) 95% Income Test: In addition to deriving at least 75% of
its gross income from the sources described under the 75% Income Test, at
least 95% of a REIT's gross income for the taxable year must be derived from
sources that qualify for the 75% Income Test or from (i) dividends, (ii)
interest, or (iii) gains from the sale or other disposition of stock or other
securities which are not "dealer property." The Company has represented that
it will monitor its investments in order to satisfy the requirements of the
95% Income Test.
If the Company fails to meet either the 75% Income Test or 95%
Income Test during its taxable year, it may still qualify as a REIT in such
year if (i) it reports the source and nature of each item of its gross income
in its federal income tax return for such year; (ii) the inclusion of any
incorrect information in its return is not due to fraud with intent to evade
tax; and (iii) the failure to meet such tests is due to reasonable cause and
not to willful neglect. However, the Company
<PAGE>
United Mortgage Trust
November 6, 1996
Page 5
will be subject to a tax of 100% of the greater of the amount by which it
fails either the 75% Income Test or the 95% Income Test for such year.
(c) 30% Income Test: Less than 30% of a REIT's gross income
must be derived from the sale or other disposition of: (i) stock or securities
held by the REIT for less than one year; (ii) real property, including
interests in real property, and mortgages on real property held for less than
four years (other than foreclosure property and property compulsorily or
involuntarily converted through destruction, condemnation or similar event);
and (iii) property in a prohibited transaction. Thus, sales and other
dispositions of Mortgages which have been held less than four years by the
Company, including Interim Mortgage Loans, could, depending upon the amount of
the Company's other income in the year of sale, cause the Company not to meet
the requirements of the 30% Income Test, in which event the Company's status
as a REIT would automatically terminate.
4. Distributions to Shareholders: Each year, a REIT must
distribute to its shareholders an amount equal to (a) 95% of the sum of (i)
its taxable income before deduction of dividends paid and excluding any net
capital gain, and (ii) the excess of net income from "foreclosure property"
over the tax on such income, minus (b) any "excess noncash income" (income
attributable to leveled stepped rents, original issue discount on purchase
money debt, or a like-kind exchange that is later determined to be taxable)
(the "95% Distribution Test").
The Company has represented that it intends to make
Distributions to the Shareholders monthly, or in an event, at least quarterly
sufficient to meet the 95% Distribution Test. Because of the possible receipt
of income from certain sources without corresponding cash receipts (e.g., as a
result of the original issue discount rules), because of timing differences
that may arise between the realization of taxable income and net cash flow,
and because of the possible adjustment by the IRS to deductions and gross
income reported by the Company, it is possible that the Company may not have
sufficient cash or liquid assets at a particular time to distribute 95% of its
REIT Taxable Income. In such event, the Company may attempt to declare a
consent dividend, which is a hypothetical distribution to Shareholders out of
the earnings and profits of the Company. The effect of such a consent dividend
to those Shareholders who agree to such treatment, would be that such
Shareholders would be treated for federal income tax purposes as if such
amount had been paid to them in cash and they had then immediately contributed
such amount back to the Company as additional paid-in capital. This would
result in taxable income to those Shareholders without the receipt of any
actual cash distribution but would also increase their tax basis in their
Shares by the amount of the taxable income recognized.
If the Company fails to meet the 95% Distribution Test due to
an adjustment to the Company's income by reason of a judicial decision or by
agreement with the IRS, the Company may pay a deficiency dividend to
Shareholders in the taxable year of the adjustment, which would relate back to
the year being adjusted. In such case, the Company would also be required to
pay interest plus a penalty to the IRS.
<PAGE>
United Mortgage Trust
November 6, 1996
Page 6
If the Company cannot declare a consent dividend or if it lacks
sufficient cash to distribute 95% of its REIT Taxable Income or to pay a
deficiency dividend in appropriate circumstances, the Company could be
required to borrow funds or liquidate a portion of its investments in order to
pay its expenses, make the required cash distributions to Shareholders, or
satisfy its tax liabilities. There can be no assurance that such funds will be
available to the extent, and at the time, required by the Company, in which
case its status as a REIT could be lost. The Company has represented that it
will use its best efforts to satisfy the 95% Distribution Test.
5. Conclusion: Based on (i) the Company's contemplated method
of operation as described in the Prospectus and in the Declaration of Trust
and the representations of the Company noted above concerning its anticipated
operations, (ii) the Company's intention to comply with the Share ownership,
asset, income and distribution tests necessary for treatment as a REIT for
federal income tax purposes, and (iii) the assumption that the Company will be
operated in accordance with such representations, we are of the opinion that
it is more likely than not that the Company should qualify to be taxed as a
REIT for federal income tax purposes for any taxable year in which it makes
the necessary election.
B. Unrelated Business Taxable Income
In general, dividends, interest and rent received by a
tax-exempt entity do not constitute "unrelated business taxable income"
("UBTI") unless the property producing such income is subject to acquisition
indebtedness. In Rev. Rul. 66-106, 1966-1 C.B. 151, the Internal Revenue
Service ruled that amounts distributed by a REIT to a tax-exempt employees'
pension trust did not constitute UBTI. The facts of the Ruling involved a REIT
that distributed to its shareholders rental income attributable to mortgaged
real property which, if earned directly by a tax-exempt organization, would
have been taxable as unrelated business income from debt-financed property
under Code Sections 512(b)(4) and 514. The Ruling concluded that the
distributions by the REIT were from earnings and profits and therefore
constituted dividends. Therefore, the exception of Section 512(b)(1) for
dividends applied and the pension trust was not taxed on such distributions.
Certain tax exempt shareholders may recognize UBTI from REITs
where such shareholders have a greater than ten percent ownership interest
therein. In the case of a "qualified trust" (generally, a pension or
profit-sharing trust) holding stock in a REIT, the beneficiaries of such a
trust will be treated as holding stock in the REIT in proportion to their
actuarial interests in the qualified trust. A qualified trust that holds more
than ten percent of the shares of a REIT must treat a percentage of REIT
dividends as UBTI if the REIT incurs debt to acquire or improve real property
and if (i) the qualification of the REIT depends upon the application of the
"look through" exception (described above) to the restriction on REIT
shareholdings by five or fewer individuals, including qualified trusts, and
(ii) the REIT is "predominantly held" by qualified trusts. A REIT is
"predominantly held"
<PAGE>
United Mortgage Trust
November 6, 1996
Page 7
by qualified trusts if either (A) a single qualified trust holds more than 25%
by value of the interests in the REIT or (B) one or more qualified trusts,
each owning more than 10% by value, hold in the aggregate more than 50% of the
interests in the REIT. The percentage of any dividend paid (or treated as
paid) to such a qualified trust that is treated as UBTI is equal to the amount
of modified gross income (gross income less directly-connected expenses) from
the unrelated trade or business of the REIT (treating the REIT as if it were a
qualified trust), divided by the total modified gross income of the REIT. A de
minimis exception applies where the percentage is less than 5%.
The Company expects the Shares to be widely held, and the
Declaration of Trust prohibits any Shareholder from owning more than 9.8
percent of the Shares entitled to vote. Based on the above, we are of the
opinion that distributions made by the Company to tax-exempt shareholders will
not be treated as "unrelated business income" by reason of the Company
incurring indebtedness in connection with its acquisition of any investments,
provided that such tax-exempt shareholders have not financed their acquisition
of Shares.
C. Tax Aspects of the Offering
The discussion set forth in the section of the Prospectus
entitled "Income Tax Consequences" is a fair statement of the applicable
provisions of the Code and Treasury Regulations issued thereunder and the
consequences these provisions will have on the Company and Shareholders.
We hereby consent to the use of this opinion as an exhibit to
the Registration Statement and the Prospectus.
Very truly yours,
/s/ Berry, Moorman, King & Hudson, P.C.
Exhibit 10.5
MORTGAGE SERVICING AGREEMENT
THIS AGREEMENT made and entered into this_ day of _____________, 1996
between UNITED MORTGAGE TRUST, a Maryland real estate investment trust, having
its principal place of business at 1701 N. Greenville Avenue, Suite 403,
Richardson, Texas 75031, hereinafter called "Investor" and SOUTH CENTRAL
MORTGAGE, INC., a corporation duly organized under the laws of Texas, and
having its principal place of business at 1701 N. Greenville Avenue, Suite
403, Richardson, Texas 75031, hereinafter called the "Servicer":
WITNESSETH:
WHEREAS, Investor has acquired or may acquire as holder and owner,
certain notes secured by deeds to secure debt, deeds of trust, and mortgages
on real property and the parties hereto contemplate that Servicer shall, in
the manner as herein provided, service such notes, deeds to secure debt, deeds
of trust, and mortgages subject to the terms hereof, all of which instruments
are hereinafter sometimes referred to as "mortgages"; and
WHEREAS, Investor desires Servicer to service the mortgages in the
manner as herein provided and to manage the premises covered thereby in the
event that the premises are conveyed to Investor pursuant to a foreclosure or
deed in lieu of foreclosure in the manner as herein provided;
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained, it is agreed by and between the parties hereto as follows:
1. COLLECTIONS FROM MORTGAGOR
Effective from the date of delivery of the mortgages to Investor from
Servicer and continuously thereafter until the principal and interest of the
mortgages are paid in full, or until any foreclosure sale or conveyance of the
property securing the mortgage by deed in lieu of foreclosure, Servicer shall
diligently proceed to collect all payments due under the mortgages as and when
the same payments are due, and make remittance of the same (less the servicing
fee herein provided for) to Investor in accordance with the terms hereof.
2. REMITTANCE AND HANDLING OF FUNDS
Servicer shall pay monthly to Investor or its order on or about the
25th day of each month but not later than the last day of each month all funds
previously received by Servicer from mortgagors which are applicable to the
payment of principal and interest (less the servicing fee herein provided for)
on the mortgages. Each such remittance shall be accompanied by a
reconciliation for the then current month of the total mortgage account of
Investor being serviced by Servicer. As to any mortgages reported as
delinquent in the reconciliation accompanying the monthly remittance, reports
of collections of such delinquent items shall be made by Servicer to Investor
as the same are received by
<PAGE>
Servicer. A trust account or accounts shall be maintained by Servicer in a
bank whose accounts are insured by the Federal Deposit Insurance Corporation.
Servicer's records shall clearly show the respective interests of Investor and
of each individual mortgagor in all accounts maintained aforesaid.
Servicer shall maintain appropriate bookkeeping records of each
payment made by each mortgagor, showing the amounts applicable to principal,
interest, taxes, hazard insurance and mortgage insurance. Servicer shall also
maintain appropriate records of all payments remitted to Investor and of all
funds returned by Investor to Servicer for the purpose of discharging
mortgagee's duties, rights or privileges hereunder or under the mortgage
documents and shall also maintain appropriate records of the application of
the funds returned by Investors to Servicer for the purposes aforesaid.
3. COMPENSATION OF SERVICER
As full compensation for its services rendered as herein provided,
Servicer shall retain from each monthly payment collected an amount equal to
1/12 of 1/2 of 1% of the principal balance of the note upon which the monthly
interest payment is computed. If any late charge on any past due payment or
installment on any loan is received by Servicer from any mortgagor pursuant to
the terms of any loan document, such late charge shall be retained by Servicer
as additional compensation to Servicer.
4. INSURANCE
At all times during the existence of each mortgage, Servicer shall
require each mortgagor to maintain insurance on all of the buildings upon the
premises covered by each mortgage for loss or damage by fire, with extended
coverage, and for such other insurable hazards and risks as are customarily
required by the Servicer or other prudent lenders with respect to similar
types of loan in the locality and with insurance companies rated "B Plus" or
better by Alfred M. Best Company, Inc. Servicer shall hold for the account of
Investors all such polices which shall be endorsed in such a manner as to
indicate that losses payable thereunder are payable to Investor as first
mortgagee as the interest of such first mortgagee may appear. Servicer shall
attempt to collect the proceeds from such policies with respect to all losses
which may occur, and after obtaining the endorsement or the mortgagor, if
required and if possible, and unless otherwise directed in writing by
Investor, Servicer shall transmit all checks for such proceeds to Investor, or
if the loss be $5,000.00 or less, in lieu of such transmittal, Servicer may
endorse such checks and drafts on behalf of Investor and permit the mortgagor
to apply such proceeds to the repair of the property. In the cases where
losses shall have occurred for which the insuring company or companies shall,
pursuant to its or their policy or policies, pay an amount in excess of
52,500.00, Servicer shall inspect all repairs so as to ascertain if the work
is done properly unless instructed to the contrary by Investor as mortgagee.
Servicer shall promptly notify
2
<PAGE>
Investor of any loss or damage by fire or from any other cause to the
mortgaged premises exceeding $5.000.00 of which the Servicer has actual
notice.
As to each mortgage and insofar as applicable, where it is determined
that the mortgaged premises are within an area identified by the Secretary of
Housing and Urban Development as having special flood hazards and flood
insurance is available under the National flood program, Servicer shall cause
each mortgagor to maintain insurance against loss due to flood at all times
during the existence of such mortgage.
5. DEFAULTS OF MORTGAGOR
In the event that principal and interest and all other charges with
respect to any mortgage are not paid on or before the first day of the month
following the month they become due and payable, Servicer shall notify
Investor of the same, and monthly thereafter until the default is cured, shall
send to Investor a statement listing the account numbers, the due date and
amount of default for each such mortgage, together with a report of the
servicing and collection activities in respect to each such mortgage and a
recommendation as to the future action to be taken in respect thereto. In the
event any mortgagor fails to perform any other covenant or obligation under
any mortgage, and such failure continues for a period of one month from the
time such default comes to the attention of Servicer, Servicer shall notify
Investor of the nature and extent of the default and the efforts taken by the
Servicer to cause such default to be cured, together with a recommendation as
to the future action to be taken in respect thereto. in addition to the
statement, reports and recommendations as to defaults hereinabove required,
Servicer shall send to Investor such additional statements, reports and
recommendations of the character hereinabove provided, as Investors may from
time to time request.
6. LIMITATION OF SERVICER'S AUTHORITY
Servicer is authorized only to receive and to forward the monthly
payments as provided in the notes and mortgages for interest, amortization of
principal, and service or other charges where called for herein, and shall not
receive and forward to Investor any additional sums in reduction of the
principal amount of the mortgage or for the retirement thereof (unless
permitted by the terms of the mortgage) without the written consent and
authority of Investor. Servicer is not authorized or empowered to waive or
vary the terms of any note or mortgage and shall not at any time waive or
consent to a postponement of strict compliance on the part of the mortgagors
with any term, provision or covenant of the mortgages, nor grant in any other
manner any indulgence to any mortgagor except as may be required by law or
regulation. Servicer is charged with complying with all terms of any Note or
Mortgage and will insure a delivery of all notice requirements in a timely
manner and comply with all provisions set forth in any Note or
3
<PAGE>
Mortgage.
The Servicer will comply with all applicable laws in carrying out its
duties hereunder.
7. INSPECTIONS
Servicer shall make an inspection of the premises within 60 days of
the time any default comes to the attention of Servicer and shall until any
foreclosure sale or conveyance of the property securing the mortgage by deed
in lieu of foreclosure, make such reasonable additional inspections as
Investor may from time to time request, and shall promptly call to the
attention of Investor any substantial lack of repair or other substantial
deterioration suffered, committed, or threatened in respect to such premises.
Servicer shall furnish Investor with a written report covering such
inspections upon request of investor.
8. VACANCIES AND SALES
Servicer shall promptly notify Investor of any vacancies in any of the
mortgaged premises which come to its attention. Upon request of Investor,
servicer shall notify Investor of any sale or transfer of the legal or
equitable title to any of the mortgaged premises which come to its attention.
9. FORECLOSURE
In case of default with respect to any mortgage, the Servicer when so
authorized by Investor, shall promptly institute foreclosure proceedings or
proceed to acquire the property by other means in accordance with applicable
law and the requirements of all applicable documents, provided however, that
Investor shall indemnify the Servicer for all costs and expenses necessary to
complete foreclosure proceedings and for preservation of the property,
including reasonable attorney fees. The Servicer shall have the authority and
power to appoint attorneys for the purpose of foreclosure and to negotiate
with the mortgagor to acquire the secured property by deed in lieu of
foreclosure. The Servicer shall conduct all proceedings as directed by
Investor.
10. PROPERTY MANAGEMENT
In the event that foreclosure proceedings are instituted by Servicer,
then unless and until otherwise directed by Investor, and when authorized by
the Court where such authority is required, Servicer, from the date of
commencement until the termination thereof by foreclosure sale, or by
acceptance of a deed in lieu of foreclosure from mortgagor, shall (a) protect
the mortgaged premises under foreclosure in such manner and to such extent as
are customarily embraced in the proper protection of properties in the
locality involved, (b) maintain insurance on the premises in the manner
provided in Paragraph 4 hereof, and (c) render to Investor such reports as
Investor may reasonably require. Servicer shall have no further responsibility
under the terms hereof with respect to the management, inspection, protection
or sale of such property
4
<PAGE>
after the foreclosure sale or the acceptance of a deed in lieu of
foreclosure from mortgagor.
Servicer shall segregate and hold for Investor until paid over to it,
in a special custodial account of the character described in Paragraph 2
hereof, all monies in respect to said premises which shall come into the hands
of Servicer.
11. RECORDS
Servicer shall keep satisfactory books and records pertaining to the
mortgages, and upon the termination of this agreement, Investor shall be
permitted at its own expense to make copies of such of these records as it may
desire. Such books and records may be removed from Servicer's office for the
purpose of copying, and shall be returned within a reasonable time. Servicer
shall maintain and preserve all records with respect to each mortgage or loan
serviced hereunder for Investor until each mortgage or loan shall have been
paid in full and satisfied or foreclosed.
12. ASSIGNMENT AND SATISFACTION
This agreement shall not be assignable by Servicer or its successors,
without the consent of Investor, its successors and assigns. This agreement
shall inure to the benefit of the parties hereto and their respective
successors or assigns.
In the event any owner of any of the mortgaged premises shall satisfy,
pay and discharge the mortgage indebtedness, then the obligations and rights
hereunder of both parties shall continue in full force and effect with respect
to the remaining mortgages. In the event of either or both the sale or
assignment of any or all of the mortgages which may now or hereafter be
serviced by the Servicer for Investor hereunder, Servicer agrees to service,
upon all of the terms and conditions contained in the agreement, such
mortgages so sold or assigned, for the party or parties to whom Investor shall
have sold or assigned the same mortgages or any of the same.
13. SERVICER-INDEPENDENT CONTRACTOR
Servicer is and shall be an independent contractor and is not and
shall not be subject to direction by Investor as to the manner of the
performance of the Servicer's obligations hereunder.
14. TERMINATION
Investor may terminate this agreement with or without cause upon
thirty (30) days written notice to Servicer and upon payment to Servicer of a
sum equal to 1% of the aggregate principal amount then outstanding on all of
the loans as to which servicing is being terminated provided, however, that
Investor shall pay no termination fee when a mortgage is withdrawn from this
agreement by reason of foreclosure or satisfaction of such mortgage. Upon
termination of this agreement in any manner, Servicer shall
5
<PAGE>
forthwith deliver to Investor a statement showing the payments collected and
all monies held by it for payment of taxes, insurance and other charges, and
shall immediately pay over to Investor all monies so collected and held.
Servicer shall further turn over to Investor at the main office of Servicer
all books, papers and records, or transcripts thereof, pertaining to the
mortgages for which the servicing is being terminated.
15. TERM OF AGREEMENT
Unless sooner terminated as herein provided, this agreement shall
continue from the date hereof through the term of the mortgage having the
longest term until the principal and interest on all of the mortgages are paid
in full, or until completion of proceedings instituted to foreclose all of the
mortgages remaining subject to the terms of this agreement or title to the
mortgaged premises is acquired by Investor by deed in lieu of foreclosure;
provided, however, that this agreement shall nevertheless remain in effect for
the period and to the extent provided in Paragraphs 9 and 10 hereof.
16. NO WAIVER
None of the provisions contained in this agreement shall be deemed
waived, altered, modified or changed except by an agreement in writing signed
by the parties hereto.
17. ADDRESSES
Notices required to be provided pursuant to the within agreement shall
be sent by overnight delivery service or mailed to the parties at the
addresses set forth in the first paragraph of this Agreement or at such other
addresses as the parties may from time to time designate in writing. Notice
shall be deemed effective upon actual receipt or within five (5) days
following deposit in the United States Postal System.
18. APPLICABLE LAW
This agreement shall be governed by and construed under the Laws of
the State of Texas.
19. DISCLAIMER
The parties acknowledge that Investor may purchase or may have
purchased loans from third parties pursuant to agreements containing
representations and warranties made by the sellers of said loans. The parties
hereto agree that Servicer does not warrant in any respect the loans purchased
or to be purchased by Investor from any third parties and the parties
expressly agree that Servicer is not responsible for any acts or omissions of
prior owners or servicers of such loans.
20. PRESUMPTION OF OWNERSHIP
Upon assignment by Investor of any mortgage being serviced
hereunder, Investor shall mail written notice thereof to Servicer,
giving the name and address of the assignee of Investor. Until
6
<PAGE>
Servicer receives such written notice, Investor shall be presumed to be the
owner of such mortgage and Servicer is hereby authorized and directed to
continue making payments hereunder to Investor.
21. OBLIGATIONS OF PARTIES
The parties acknowledge that nothing contained herein shall obligate
Investor to engage the services of Servicer with respect to any loan owned or
hereafter acquired by Investor and nothing contained herein shall obligate
Servicer to undertake the servicing of any such loan.
IN WITNESS WHEREOF, each party has caused this agreement to be signed
and executed by the parties duly authorized on the day and year written above.
UNITED MORTGAGE TRUST
By:
----------------------------
Christine Griffin, President
SOUTH CENTRAL MORTGAGE, INC.
By:
----------------------------
Todd Etter, President
7
Exhibit 23.1
The Board of Directors
United Mortgage Trust
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
/s/ Jackson & Rhodes P.C.
-------------------------
Jackson & Rhodes P.C.
November 7, 1996
Exhibit 99
United Mortgage Trust Product Brochure Copy
FRONT COVER:
The Investment of Choice
INSIDE LEFT PANEL:
WHO WE ARE United Mortgage Trust is a real estate investment trust (REIT)
that was established to provide you with a unique investment opportunity.
We invest exclusively in first lien, fixed rate mortgage notes that are
secured by single family homes. The investor funds are pooled to acquire
and own these valuable assets that would otherwise be beyond the means of
most investors.
The company is managed by Mortgage Trust Advisors, Inc. The principals of
Mortgage Trust Advisors collectively have more than 75 years experience in
the financial services industry, including mortgage banking, and the
development, building, financing and marketing of residential properties.
The advisors are responsible for acquiring and managing the investment
portfolio, and ensuring the quality of administrative services. Photocopies
of their biographies are available. Ask your registered representative, or
call 1-800-955-7917.
United Mortgage Trust is dedicated to providing shareholders with
competitive yields without compromising investment safety. We carefully
evaluate all mortgage notes for the most favorable risk/return ratio to
ensure we meet that objective.
WHAT WE OFFER This investment offers current income with a high level of
safety. The type of investments made by United Mortgage Trust are
considered by many to be the safest type of real estate investment, given
the value Americans place on home ownership. Our portfolio is secured by
single family, residential real estate and is expected to provide:
* Annual dividend distribution rate targeted at 10 percent
* Monthly distributions
* Safety of principal
<PAGE>
Inside Right Panel
First lien mortgage notes
You can rest assured
Back Cover
HOW WE SAFEGUARD YOUR INVESTMENT Each mortgage note in United Mortgage
Trust is serviced by a fidelity bonded, mortgage service company that acts
as custodian to all original documents, which evidence ownership of the
real estate interest to United Mortgage Trust.
In addition to being fidelity bonded, United Mortgage Trust service
companies maintain mortgage protection insurance, underwritten at Lloyds
London with coverage up to $500,000 per occurrence.
United Mortgage Trust has contracted with Continental Stock Transfer &
Trust Company to provide stock transfer and other related shareholder
services, including monthly dividend and statement distribution.
Continental is one of the top five transfer agents in the country with over
1.2 million shareholders served.
Texas Commerce Bank is the independent escrow agent responsible for holding
and safeguarding all funds received from investors. Texas Commerce Bank is
part of Chase Manhattan Corporation, a worldwide banking organization
with more than $322 billion in assets.
The president of United Mortgage Trust is responsible for the
administration of the company, and is subject to the supervision of the
Board of Trustees.
The company's advisors, Mortgage Trust Advisors, Inc., have acquired 10,000
shares of United Mortgage Trust to assure you of their ongoing vested
interest in the company's operation and performance.
Audited financial statements are prepared by certified public accountants,
and included in the annual report distributed to shareholders.
Finally, United Mortgage Trust shares are sold only through selected broker
dealer firms, in order to ensure the quality of distribution nationwide.
WHY THIS IS THE INVESTMENT OF CHOICE
* High Current Income. United Mortgage Trust distributes cash dividends
at an annual rate targeted at 10 percent.
* Monthly Distributions. Payments are sent to you every month.
2
<PAGE>
* Safety of Principal. Every mortgage note in our portfolio is secured by a
single family residence.
* Compound Investment Opportunity. Reinvesting your monthly payments in
other investments of your choice, provides you with a compound interest
opportunity that can enhance your overall annual yield.
* Liquidity. United Mortgage Trust shares may be sold in the secondary
market.
* Affordable. The minimum investment requirement is only $5,000, or
$1,000 for IRAs.
* Versatile. United Mortgage Trust shares are available to individuals,
corporations, partnerships, foundations, trusts and charitable
organizations. The shares are ERISA qualified making them an appropriate
investment for any retirement plan.
* Timely Information. Statements are mailed monthly with each payment.
* Easy to Invest. To make an investment simply obtain a subscription
agreement from your registered representative or call United Mortgage
Trust, 1-800-955-7917.
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United Mortgage Trust is registered with the Securities Exchange Commission
(SEC), and has taken all necessary steps to ensure it operates according to
federal and state regulations. Please read the prospectus for complete
information about this investment opportunity.
Selected broker dealers are members of the National Association of
Securities Dealers, Inc. (NASD).
This brochure is qualified in its entirety by the prospectus. It is not a
complete summary of the investment or a substitute for a thorough review of
the complete prospectus. It is neither an offer to sell nor a solicitation
to buy securities. Such an offer can only be made by the representation of
a prospectus and execution of a subscription agreement.
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United Mortgage Trust
1701 N. Greenville Ave., Suite 403 Richardson, Texas 75081
