As filed with the Securities and Exchange Commission on June 27, 1997
Registration No. 333-9943
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CNL AMERICAN REALTY FUND, INC.
(Exact Name of Registrant as Specified in Charter)
400 East South Street, Suite 500
Orlando, Florida 32801
Telephone: (407) 422-1574
(Address of Principal executive offices)
COPIES TO:
THOMAS H. McCORMICK, ESQUIRE
EDMUND D. GRAFF, ESQUIRE
Shaw, Pittman, Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Approximate date of commencement of proposed sale to
the public: As soon as practicable after the
registration statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [ ]
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 the registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF SECURITIES IN ANY
STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
CNL AMERICAN REALTY FUND, INC. PROSPECTUS
SUBJECT TO COMPLETION
SHARES OF COMMON STOCK DATED JUNE 27, 1997
$2,500,000 -- MINIMUM
MINIMUM PURCHASE -- 250 SHARES ($2,500)
100 SHARES ($1,000) FOR IRAS AND KEOGH AND PENSION PLANS
(MINIMUM PURCHASE MAY BE HIGHER IN CERTAIN STATES)
CNL AMERICAN REALTY FUND, INC. (the "Company") is a Maryland
corporation which intends to qualify for federal income tax purposes as a real
estate investment trust (a "REIT"). THE COMPANY MAY SELL UP TO 16,500,000 SHARES
FOR A MAXIMUM OF $165,000,000. The Company has been formed primarily to acquire
properties (the "Properties") located across the United States to be leased on a
long term, "triple-net" basis. The Company intends to invest proceeds of this
offering in hotel Properties to be leased to operators of national and regional
limited service, extended stay and full service hotel chains (the "Hotel
Chains") and in restaurant Properties to be leased to operators of selected
national and regional fast-food, family-style and casual-dining restaurant
chains (the "Restaurant Chains"). The Company is not obligated to invest in both
hotel Properties and restaurant Properties. Under the Company's triple-net
leases, the tenant generally will be responsible for property costs associated
with ongoing operations, including repairs, maintenance, property taxes,
utilities, and insurance. In addition, the leases will be structured to require
the tenant to pay base annual rent with (i) automatic increases in the base rent
and/or (ii) percentage rent based on gross sales above a specified level. The
Company may also provide mortgage financing (the "Mortgage Loans") in the
aggregate principal amount of approximately 5% to 10% of Gross Proceeds. The
Company also intends to offer furniture, fixture and equipment financing
("Secured Equipment Leases") to operators of Hotel Chains and Restaurant Chains.
Secured Equipment Leases will be funded from the proceeds of financing to be
obtained by the Company. The aggregate outstanding principal amount of Secured
Equipment Leases will not exceed 10% of Gross Proceeds. The Company is not a
mutual fund or other type of investment company within the meaning of the
Investment Company Act of 1940, and is not subject to regulation thereunder. The
Company is not affiliated with the United States Government.
THERE ARE SIGNIFICANT RISKS ASSOCIATED WITH AN INVESTMENT IN THE
COMPANY (SEE "RISK FACTORS" AT PAGE 9), INCLUDING THE FOLLOWING:
o If the Company raises only $2,500,000 from sales of Shares, it will acquire no
more than two restaurant Properties and no hotel Properties and have reduced
diversification of its investments.
o The Company will rely on CNL Real Estate Advisors, Inc. (the "Advisor") with
respect to all investment decisions subject to approval by the Board of
Directors in certain circumstances. The experience of the Advisor and
Directors of the Company with acquiring and leasing hotels, mortgage financing
and equipment leasing is limited, which could adversely affect the Company's
business.
o The Advisor and its Affiliates are or will be engaged in other activities for
other entities that will result in potential conflicts of interest with the
services that the Advisor and Affiliates will provide to the Company, and
could take actions that are more favorable to such other entities than to the
Company.
o The Company currently owns no Properties, and investors, therefore, will not
have the opportunity to evaluate the Properties that the Company will acquire.
o There is currently no public trading market for the Shares, and there is no
assurance that one will develop.
o If the Shares are not listed on a national securities exchange or
over-the-counter market ("Listing") within ten years of commencement of the
offering, as to which there can be no assurance, the Company will commence the
orderly sale of its assets and the distribution of the proceeds. Listing does
not assure liquidity.
o The Secured Equipment Lease program is dependent upon obtaining financing.
o Market and economic conditions that the Company cannot control will have an
effect (either positive or negative) on the value of the Company's investments
and the amount of revenues that the Company receives from tenants.
o The Company may incur debt, including debt to make Distributions to
stockholders in order to maintain its status as a REIT.
THE COMPANY'S PRIMARY INVESTMENT OBJECTIVES are to preserve, protect, and
enhance the Company's assets while (i) making Distributions commencing in the
initial year of Company operations; (ii) obtaining fixed income through the
receipt of base rent, and increasing the Company's income (and Distributions)
and providing protection against inflation through automatic increases in base
rent and receipt of percentage rent, and obtaining fixed income through the
receipt of payments from Mortgage Loans and Secured Equipment Leases; (iii)
qualifying as a REIT for federal income tax purposes; and (iv) providing
stockholders of the Company with liquidity of their investment within five to
ten years after commencement of the offering, either in whole or in part,
through (a) Listing, or (b) the commencement of orderly sales of the Company's
assets, and distribution of the proceeds thereof (outside the ordinary course of
business and consistent with its objective of qualifying as a REIT). There can
be no assurance that these investment objectives will be met.
This Prospectus describes an investment in Shares of the Company. The
Company will use the proceeds from the sale of Shares to purchase Properties and
to make Mortgage Loans. The Company also intends to borrow money to purchase
Properties and finance Mortgage Loans as well as to fund Secured Equipment
Leases. No stockholder may hold more than 9.8% of the total Shares. Of the
proceeds from the sale of Shares, approximately 84% will be used to acquire
Properties and make Mortgage Loans, and approximately 9% will be paid in fees
and expenses to Affiliates of the Company for their services and as
reimbursement for Organizational and Offering Expenses incurred on behalf of the
Company; the balance will be used to pay other expenses of the offering. The
Company has registered an offering of 16,500,000 Shares, with 1,500,000 of such
Shares available only to stockholders purchasing Shares in this initial public
offering who receive a copy of this Prospectus and who elect to participate in
the Company's reinvestment plan (the "Reinvestment Plan"). Any participation in
such plan by a person who becomes a stockholder otherwise than by participating
in this offering must be made pursuant to a solicitation under a separate
prospectus. See "Summary of Reinvestment Plan."
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 COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Price to Selling Proceeds to
Public Commissions(1) Company(2)
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Per Share $ 10.00 $ 0.75 $ 9.25
Total Minimum $ 2,500,000 $ 187,500 $ 2,312,500
Total Maximum(3) $165,000,000 $12,375,000 $152,625,000
(footnotes on following page)
CNL SECURITIES CORP.
____________, 1997
<PAGE>
(1) CNL Securities Corp. (the "Managing Dealer") will receive Selling
Commissions of 7.5% on sales of Shares, subject to reduction in certain
circumstances. The Managing Dealer, which is an Affiliate of the Company,
may engage other broker-dealers that are members of the National Association
of Securities Dealers, Inc. or other entities exempt from broker-dealer
registration (collectively, the "Soliciting Dealers") to sell Shares and
reallow to them commissions of up to 7% with respect to Shares which they
sell. The amounts indicated for Selling Commissions assume that reduced
Selling Commissions are not paid in connection with the purchase of any
Shares and do not include a 0.5% marketing support and due diligence expense
reimbursement fee payable to the Managing Dealer, all or a portion of which
may be reallowed to certain Soliciting Dealers, in the Managing Dealer's
sole discretion. Such amounts also do not include a Soliciting Dealer
Servicing Fee payable to the Managing Dealer by the Company (see "Management
Compensa tion"), all or a portion of which may be reallowed to certain
Soliciting Dealers in the Managing Dealer's sole discretion. See "The
Offering Plan of Distribution" for a discussion of the circumstances under
which reduced Selling Commissions may be paid and a description of the
marketing support and due diligence expense reimbursement fee payable to the
Managing Dealer.
(2) Before deducting (i) organizational and offering expenses of the Company
estimated to be 3% of gross offering proceeds computed at $10.00 per Share
sold ("Gross Proceeds") and (ii) the marketing support and due diligence
expense reimbursement fee. Organizational and offering expenses exclude
Selling Commissions and the marketing support and due diligence
reimbursement fee.
(3) Includes 1,500,000 Shares which may be issued pursuant to the Company's
Reinvestment Plan. Those stockholders who elect to participate in the
Reinvestment Plan will have their Distributions reinvested in additional
Shares.
NEITHER THE ATTORNEY GENERAL OF THE STATE OF NEW YORK NOR THE ATTORNEY
GENERAL OF THE STATE OF NEW JERSEY OR THE BUREAU OF SECURITIES OF THE STATE OF
NEW JERSEY HAS PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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All subscription funds for Shares will be deposited in an
interest-bearing escrow account with SouthTrust Asset Management Company of
Florida, N.A., which will act as the escrow agent for this offering, until
subscription funds for the Company's Shares total $2,500,000. Subscription funds
will be released from escrow to the Company to be used for Company purposes
within approximately 30 days after the minimum is reached. No sale of Shares
shall be completed until at least five business days after the date on which the
subscriber receives a copy of this Prospectus. No Shares will be sold unless
subscriptions for at least 250,000 Shares ($2,500,000) have been obtained
within one year after the initial date of this Prospectus. In no event will
subscription funds be held in escrow for longer than one year, and any refunds
of subscriptions due to the failure of the Company to reach the required minimum
shall be returned with interest. Pursuant to the Commissioner of Securities of
the State of Pennsylvania, subscriptions from Pennsylvania residents may not be
released from escrow, or included in determining whether the $2,500,000 minimum
for the Company has been reached, until subscriptions for Shares totalling at
least $8,250,000 have been received from all sources. The offering of Shares
will terminate no later than ________ ___, 1998 (one year after the initial date
of this Prospectus), unless the Company elects to extend it to a date no later
than ________ ___, 1999 (two years after the initial date of this Prospectus),
in states that permit such extension.
PENNSYLVANIA INVESTORS: Because the minimum offering is less than
$16,500,000, all Pennsylvania investors are cautioned to evaluate carefully the
Company's ability fully to accomplish its stated objectives and to inquire as to
the current dollar volume of subscriptions for the Shares.
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THIS OFFERING TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN
ANY STATE IN WHICH SUCH OFFER OR SALE WOULD BE UNLAWFUL, AND NO SUBSCRIPTION
WILL BE ACCEPTED FROM ANY PERSON WHO DOES NOT MEET THE SUITABILITY STANDARDS SET
FORTH HEREIN. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER
SHALL CREATE, UNDER ANY CIRCUMSTANCES, AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. IF, HOWEVER, ANY
MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED,
THIS PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY.
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 COMPANY IS PROHIBITED.
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Until ________ ___, 1997 (90 days after the initial 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 is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to unsold allotments or
subscriptions.
- ii -
<PAGE>
TABLE OF CONTENTS
TABLE OF CONTENTS iii
SUMMARY 1
CNL American Realty Fund, Inc. 1
Risk Factors 2
Estimated Use of Proceeds 3
Conflicts of Interest 4
Management 4
Management Compensation 4
Summary of Reinvestment Plan 5
Business 6
Investment Objectives And Policies 6
Description of Shares 7
Distribution Policy 8
Prior Performance of Affiliates 8
Tax Status Of The Company 8
The Offering 8
Definitions 9
RISK FACTORS 9
Investment Risks 9
Minimum Offering 9
Lack of Diversification 9
Limited Experience of Management 10
Reliance on Management 10
Reliance on Advisor 10
Leverage 10
Conflicts of Interest 10
Competing Demands on Officers and Directors 10
Timing of Sales and Acquisitions Impact 11
Property Development 11
The Company May Invest With Affiliates of the Advisor 11
No Independent Review of the Company or the Prospectus by
Managing Dealer 11
No Separate Counsel for the Company, Affiliates and Investors 11
Lack of Liquidity of Shares 11
Lack of Control over Joint Ventures 11
Lack of Control of Property Management 11
Mortgage Loans 12
Real Estate Market Conditions 12
Interest Rate Fluctuations 12
Delays in Liquidating Defaulted Mortgage Loans 12
Regulation 12
Secured Equipment Leases 12
Default by Lessee 12
Regulation 12
Tax Risks 12
No Operating History 12
Impact of Inflation 13
Binding Nature of Majority Stockholder Vote 13
Significant Flexibility of the Board of Directors 13
Restrictions on Transfer Relating to REIT Status 13
Limited Liability of Officers and Directors 13
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<PAGE>
Possible Effect of ERISA 13
Insufficient Working Capital 13
Ability to use Leverage to Make Distributions 13
Real Estate and Financing Risks 14
An Unspecified Property Offering 14
Inability of Potential Investors to Evaluate Properties 14
No Limitation on Number of Properties of a Particular Chain 14
No Assurance of Obtaining Suitable Investments 14
Conflicts of Interest 14
Possible Delays in Investment 14
Lack of Control Over Properties Under Construction 14
Ground Lease Property Risks 15
Impasse or Conflicts with Joint Venture Partner 15
Impasse with Joint Venture Partner 15
Interests of Joint Venture Partner 15
Limitations on the Ability of the Company to Liquidate 15
Inability to Control the Sale of Certain Properties 16
Real Property Investments 16
Lack of Control Over Market and Business Conditions 16
Multiple Property Leases or Mortgage Loans with Individual
Tenants or Borrowers 16
Re-leasing of Properties 16
Third Party Franchise Agreements 16
Lack of Adequate Insurance 16
Impact of Adverse Trends 16
Competition 17
Seasonality of Hotel Industry 17
Possible Environmental Liabilities 17
The Line of Credit and Permanent Financing 17
Unspecified Secured Equipment Leases 17
Tax Risks 18
REIT Qualification 18
Secured Equipment Lease Treatment 18
Effect of REIT Disqualification 18
Effect of Distribution Requirements 18
Restrictions on Maximum Share Ownership 19
Other Tax Liabilities 19
Changes in Tax Laws 19
SUITABILITY STANDARDS AND HOW TO SUBSCRIBE 19
Suitability Standards 19
How to Subscribe 21
ESTIMATED USE OF PROCEEDS 22
MANAGEMENT COMPENSATION 23
CONFLICTS OF INTEREST 31
Prior and Future Programs 31
Acquisition of Properties 31
Sales of Properties 32
Joint Investment With An Affiliated Program 32
Competition for Management Time 33
Compensation of the Advisor 33
Relationship with Managing Dealer 33
Legal Representation 33
Certain Conflict Resolution Procedures 34
SUMMARY OF REINVESTMENT PLAN 35
General 32
Investment of Distributions 33
Participant Accounts, Fees, and Allocation of Shares 34
Reports to Participants 34
Election to Participants or Terminate Participation 35
Federal Income Tax Considerations 35
Amendments and Termination 35
REDEMPTION OF SHARES 38
BUSINESS 40
-iv-
<PAGE>
General 40
Site Selection and Acquisition of Properties 44
Standards for Investment in Properties 48
Description of Properties 48
Description of Property Leases 49
Joint Venture Arrangements 53
Mortgage Loans 54
Management Services 56
Borrowing 56
Sale of Properties, Mortgage Loans and Secured Equipment Leases 57
Franchise Regulation 58
Competition 58
Regulation of Mortgage Loans and Secured Equipment Leases 58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE COMPANY 59
Liquidity and Capital Resources 55
Results of Operations 56
MANAGEMENT 60
General 60
Fiduciary Responsibility of the Board of Directors 60
Directors and Executive Officers 61
Independent Directors 64
Committees of the Board of Directors 64
Compensation of Directors and Executive Officers 64
Management Compensation 65
THE ADVISOR AND THE ADVISORY AGREEMENT 65
The Advisor 65
The Advisory Agreement 65
PRIOR PERFORMANCE INFORMATION 67
INVESTMENT OBJECTIVES AND POLICIES 72
General 72
Certain Investment Limitations 73
DISTRIBUTION POLICY 75
General 75
Distributions 75
SUMMARY OF THE ARTICLES OF INCORPORATION AND BYLAWS 76
General 76
Description of Capital Stock 76
Board of Directors 77
Stockholder Meetings 78
Advance Notice for Stockholder Nominations for Directors and Proposals
of New Business 78
Amendments to the Articles of Incorporation 78
Mergers, Combinations, and Sale of Assets 78
Termination of the Company and REIT Status 78
Restriction of Ownership 79
Responsibility of Directors 80
Limitation of Liability and Indemnification 80
Removal of Directors 81
Inspection of Books and Records 81
Restrictions on "Roll-Up" Transactions 82
FEDERAL INCOME TAX CONSIDERATIONS 82
Introduction 82
Taxation of the Company 83
Taxation of Stockholders 88
State and Local Taxes 91
Characterization of Property Leases 91
Characterization of Secured Equipment Leases 92
Investment in Joint Ventures 92
REPORTS TO STOCKHOLDERS 93
THE OFFERING 94
General 94
-v-
<PAGE>
Plan of Distribution 94
Subscription Procedures 97
Escrow Arrangements 99
ERISA Considerations 99
Determination of Offering Price 100
SUPPLEMENTAL SALES MATERIAL 101
LEGAL OPINIONS 101
EXPERTS 101
ADDITIONAL INFORMATION 101
DEFINITIONS 105
Form of Reinvestment Plan Exhibit A
Financial Information Exhibit B
Prior Performance Tables Exhibit C
Subscription Agreement Exhibit D
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<PAGE>
SUMMARY
THIS SECTION SUMMARIZES CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS AND IS INTENDED FOR QUICK REFERENCE ONLY. THIS IS NOT A COMPLETE
DESCRIPTION OF THE INVESTMENT. POTENTIAL STOCKHOLDERS MUST READ AND EVALUATE
THE FULL TEXT OF THIS PROSPECTUS AND ALL SUPPORTING DOCUMENTS ATTACHED AS
EXHIBITS HERETO IN ORDER TO EVALUATE AN INVESTMENT IN THE COMPANY. THE
FOLLOWING SUMMARY THEREFORE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
FULL TEXT OF THIS PROSPECTUS AND THE SUPPORTING DOCUMENTS.
CNL AMERICAN REALTY FUND, INC.
CNL American Realty Fund, Inc. (the "Company") is a Maryland
corporation which intends to qualify for federal income tax purposes as a real
estate investment trust (a "REIT"). The Company's address is 400 East South
Street, Suite 500, Orlando, Florida 32801, telephone (407) 422-1574 or toll free
(800) 522-3863.
The Company has been formed primarily to acquire properties (the
"Properties") to be leased on a long-term (generally, 10 to 20 years, plus
renewal options for an additional 10 to 20 years), "triple-net" basis, which
means that the tenant generally will be responsible for repairs, maintenance,
property taxes, utilities, and insurance. The Company intends to invest proceeds
of this offering in hotel Properties, which may include furniture, fixtures and
equipment, to be leased to operators of national and regional limited service,
extended stay and full service hotel chains (the "Hotel Chains") and in
restaurant Properties located across the United States to be leased to operators
of selected national and regional fast-food, family-style and casual-dining
restaurant chains (the "Restaurant Chains"). It is not obligated, however, to
invest in both types of Properties. The Company expects to structure the leases
of its Properties to provide for payment of base annual rent with (i) automatic
increases in base rent and/or (ii) percentage rent based on gross sales above a
certain level. The Company may also offer mortgage financing (the "Mortgage
Loans"), generally for the purchase of buildings by tenants that lease the
underlying land from the Company. However, because it prefers to focus on
investing in Properties, which have the potential to appreciate, the Company
currently expects to provide Mortgage Loans in the aggregate principal amount of
approximately 5% to 10% of Gross Proceeds. The Company expects that the interest
rate and terms (generally, 10 to 20 years) of any Mortgage Loans will be similar
to those of its leases. To a lesser extent, the Company also will offer
furniture, fixtures and equipment ("Equipment") financing to operators of
Restaurant Chains and Hotel Chains through loans or direct financing leases
(collectively, the "Secured Equipment Leases"). The aggregate outstanding
principal amount of Secured Equipment Leases will not exceed 10% of Gross
Proceeds. See "Business" for a description of the types of Properties that may
be selected by CNL Real Estate Advisors, Inc. (the "Advisor"), the Property
selection and acquisition processes, and the nature of the Mortgage Loans and
Secured Equipment Leases.
The Company intends to borrow money to acquire Properties, Mortgage
Loans, and Secured Equipment Leases (collectively, the "Assets"), and to pay
certain fees. The Company plans to obtain a revolving line of credit (the "Line
of Credit") in an amount up to $45,000,000. In addition to the Line of Credit,
the Company may obtain other financing (the "Permanent Financing"). The Board of
Directors anticipates that the aggregate amount of the Permanent Financing will
not exceed 30% of the Company's total assets. However, in accordance with the
Company's Articles of Incorporation, the aggregate maximum amount the Company
may borrow is 300% of Net Assets, unless any borrowing over such 300% level is
approved by a majority of the Independent Directors and disclosed to
stockholders in the next quarterly report of the Company, along with the
justification for such excess. In general, Net Assets are the Company's total
assets (other than intangibles), calculated at cost, less total liabilities. The
Company is engaged in preliminary discussions with potential lenders but has not
yet obtained a commitment letter for the Line of Credit or any Permanent
Financing, and may not be able to obtain the Line of Credit or the Permanent
Financing on satisfactory terms. The Company may repay the Line of Credit with
offering proceeds, working capital or with Permanent Financing. The Line of
Credit and Permanent Financing will be used to acquire Assets and are the only
source of funds for making Secured Equipment Leases. The Board of Directors may
elect to encumber Assets in connection with any borrowing.
<PAGE>
Under the Company's Articles of Incorporation, the Company will
automatically terminate and dissolve on December 31, 2007, unless the shares of
Common Stock of the Company, including the shares offered hereby (the "Shares"),
are listed on a national securities exchange or over-the-counter market
("Listing"), in which event the Company automatically will become a perpetual
life entity. If Listing does not occur by December 31, 2007, the Company will
undertake, outside the ordinary course of business and consistent with its
objective of qualifying as a REIT, the orderly Sale of the Company's assets, the
distribution of Net Sales Proceeds of such Sales to stockholders and the
limitation of its activities to those related to its orderly liquidation, or
unless the stockholders owning a majority of the Shares elect to amend the
Articles of Incorporation to extend the duration of the Company. See "Risk
Factors -- Real Estate and Financing Risks" for a complete discussion of risks
relating to future disposition of the Company's assets. As a perpetual life
entity following Listing, the Company would not be required to dissolve and
return capital to stockholders. If Listing occurs, in order to liquidate their
investment stockholders would have to sell their Shares in the market on which
the Shares are traded. Listing is no assurance of liquidity. See "Risk Factors
- -- Investment Risks" for a discussion of risks associated with the lack of
liquidity of the Shares and with borrowing. In addition, following Listing the
Company intends to reinvest proceeds from Sales of assets rather than distribute
such proceeds to stockholders.
RISK FACTORS
The "Risk Factors" section discusses in detail the more important risks
associated with an investment in the Company, including risks associated with an
investment in a real estate investment trust such as the Company, risks
associated with an investment in real estate such as the Properties, risks
associated with the Mortgage Loans, risks associated with Secured Equipment
Leases, risks associated with borrowing and tax risks. These risks include the
following:
o The Company will acquire no more than two restaurant Properties and no hotel
Properties, and will have reduced diversification of its investments, if the
Company raises only $2,500,000 from sales of Shares.
o The Company may not diversify between restaurant Properties and hotel
Properties. The Company is not obligated to invest in both types of
Properties.
o The Company will rely on the Advisor and the Board of Directors, which
together will have responsibility for the management of the Company and its
investments, subject to the ability of the stockholders to elect the
Directors.
o The services to be performed by the Advisor and its Affiliates for the Company
in connection with the offering, the selection and acquisition of the
Properties, the making of Mortgage Loans and Secured Equipment Leases and the
general operation of the Company will result in conflicts of interest.
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<PAGE>
o Because the Company currently owns no Properties, stockholders will not have
the opportunity to evaluate the Properties that the Company will acquire.
o The Board of Directors will have significant flexibility regarding the
Company's operations.
o The Company may make investments that will not appreciate in value over time,
such as building only Properties, with the land owned by a third-party, and
Mortgage Loans.
o Stockholders who must sell their Shares will not be able to sell them quickly
because it is not anticipated that there will be a public market for the
Shares in the near term, and there can be no assurance that Listing will
occur.
o The Company has not obtained a commitment for the Line of Credit or Permanent
Financing, and may be unable to do so on satisfactory terms, thereby affecting
its ability to acquire Properties or make Mortgage Loans or Secured Equipment
Leases.
o The amount of revenues the Company will receive from tenants, lessees and
borrowers cannot be predicted.
o The Company may incur debt, including debt to make Distributions to
stockholders in order to maintain its status as a REIT.
o The Company may, in connection with any borrowing, encumber Assets.
o Tenants, lessees or borrowers may default resulting in decreased income.
o The vote of stockholders owning at least a majority but less than all of the
Shares will bind all of the stockholders as to matters such as the election of
Directors and amendment of the Company's governing documents.
o Restrictions on ownership of more than 9.8% of the shares of the Company's
Common Stock (the "Common Stock") by any single stockholder or certain related
stockholders may have the effect of inhibiting a change in control of the
Company even if such a change is in the interest of a majority of the
stockholders.
o The Company may not qualify or remain qualified as a REIT for federal income
tax purposes, which could result in subjecting the Company to federal income
tax on its taxable income at regular corporate rates, thereby reducing the
amount of funds available for paying Distributions to stockholders.
ESTIMATED USE OF PROCEEDS
The Company will use the proceeds of the sale of the Shares to acquire
Properties, to make Mortgage Loans, and to pay expenses relating to the
organization of the Company and the sale of the Shares. Based on their past
experience in acquiring similar properties and in light of current market
conditions, management of the Company and the Advisor have estimated an average
purchase price of $800,000 to $900,000 per restaurant Property. The Company and
the Advisor have estimated an average purchase price of $3,000,000 to
$15,000,000 per hotel Property. See "Business -- General." If only 250,000
Shares ($2,500,000) are sold, the Company will acquire no more than two
restaurant Properties, will not acquire any hotel Properties and as a result the
Company will have reduced diversification of its investments. If 15,000,000
Shares ($150,000,000) are sold, the Company could (i) invest in only restaurant
Properties, in which case it could acquire between 140 to 160 restaurant
Properties, or (ii) invest in only hotel Properties, in which case it could
acquire between 8 to 42 hotel Properties, or (iii) invest in both restaurant and
hotel Properties, although in this instance the number of restaurant Properties
and hotel Properties would vary significantly depending upon the cost of the
hotel Properties acquired. Assuming that the Net Offering Proceeds are divided
evenly between restaurant and hotel Properties, as to which there is no
assurance, the Company could invest in approximately 70 to 80 restaurant
Properties and 4 to 21 hotel Properties. In addition, the Company has registered
an offering of an additional 1,500,000 Shares ($15,000,000) available only to
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stockholders who receive a copy of this Prospectus and who elect to participate
in the Company's reinvestment plan (the "Reinvestment Plan"). See "Estimated Use
of Proceeds" and "Business -- General" for a more detailed description of the
anticipated use of offering proceeds. Management cannot estimate the number of
Mortgage Loans that may by entered into. The Company currently expects to
provide Mortgage Loans in the aggregate principal amount of approximately 5% to
10% of Gross Proceeds. The Company may also use the proceeds of the Line of
Credit and the Permanent Financing to acquire Assets. Secured Equipment Leases
will be funded solely from borrowings.
CONFLICTS OF INTEREST
Certain officers and Directors of the Company who are also officers or
directors of the Advisor will experience conflicts of interest in their
management of the Company. These arise principally from their involvement in
other activities that will conflict with those of the Company and include
matters related to (i) allocation of new investments and management time and
services between the Company and various partnerships and other entities, (ii)
the timing and terms of the investment in or sale of an Asset, (iii) development
of Company Properties by Affiliates, (iv) investments with Affiliates of the
Advisor, (v) compensation of the Advisor, (vi) the Company's relationship with
the Managing Dealer, which is an Affiliate of the Company and the Advisor, and
(vii) the fact that the Company's securities and tax counsel also serves as
securities and tax counsel for certain Affiliates of the Company, and that
neither the Company nor the stockholders will have separate counsel.
The Directors of the Company who are independent of the Advisor (the
"Independent Directors") are responsible for monitoring the activities of the
Advisor and must approve all of the Advisor's actions that involve a potential
conflict other than certain such actions specifically permitted by the Articles
of Incorporation. The "Conflicts of Interest" section discusses in more detail
the more significant of these potential conflicts of interest, as well as the
procedures that have been established to resolve a number of these potential
conflicts.
The Company has established certain conflict resolution procedures
relating to (i) transactions between the Company and the Advisor or its
Affiliates, (ii) certain future offerings, and (iii) allocation of investments
among certain affiliated entities. See "Conflicts of Interest -- Certain
Conflict Resolution Procedures."
MANAGEMENT
The Company has retained the Advisor, a Florida corporation organized
in January 1997, to provide management, advisory and administrative services to
the Company. Pursuant to an advisory agreement with the Company, the Advisor
will handle the day-to-day operations of the Company, select the Company's real
estate investments, and administer its Secured Equipment Lease program. The five
members of the Board of Directors will oversee the management of the Company.
Three of the Directors of the Company are independent of the Advisor and have
responsibility for reviewing its performance. The Directors are elected to the
Board of Directors annually by the stockholders.
All of the officers and directors of the Advisor also are officers or
Directors of the Company. The Advisor will have responsibility for (i) selecting
the Properties that the Company will acquire, formulating and evaluating the
terms of each proposed acquisition, and arranging for the acquisition of the
Property by the Company, (ii) identifying potential lessees for the Properties
and potential borrowers for the Mortgage Loans, and formulating, evaluating, and
negotiating the terms of each lease of a Property and each Mortgage Loan, (iii)
locating and identifying potential lessees and formulating, evaluating, and
negotiating the terms of each Secured Equipment Lease, and (iv) negotiating the
terms of any borrowing by the Company, including the Line of Credit and the
Permanent Financing. All of the foregoing actions are subject to approval by the
Board of Directors. The Advisor also will have the authority, subject to
approval by a majority of the Board of Directors, including a majority of the
Independent Directors, to select assets for Sale in keeping with the Company's
investment objectives and based on an analysis of economic conditions both
nationally and in the vicinity of the assets being considered for Sale.
See "Management" and "The Advisor and the Advisory Agreement" for a
description of the business background of the individuals responsible for the
management of the Company and the Advisor, as well as for a description of the
services that the Advisor will provide.
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MANAGEMENT COMPENSATION
The Advisor, the Managing Dealer, and other Affiliates of the Advisor
will receive compensation for services they will perform for the Company and
also will receive expense reimbursements from the Company for expenses they pay
on behalf of the Company. The following paragraphs summarize the more
significant items of compensation and reimbursement. See "Management
Compensation" for a complete description.
In connection with the formation of the Company and the offering of the
Shares, the Managing Dealer will receive Selling Commissions of 7.5% (a maximum
of $11,250,000 if 15,000,000 Shares are sold), and a marketing support and due
diligence expense reimbursement fee of 0.5% (a maximum of $750,000 if 15,000,000
Shares are sold), of the total amount raised from the sale of Shares, computed
at $10.00 per Share sold ("Gross Proceeds"). The Managing Dealer in turn may
reallow Selling Commissions of up to 7% on Shares sold, and all or a portion of
the 0.5% marketing support and due diligence expense reimbursement fee, to
certain Soliciting Dealers who are not Affiliates of the Company, in the
Managing Dealer's sole discretion. In addition, the Company will incur a
Soliciting Dealer Servicing Fee in the amount of .20% of Invested Capital (as
defined below) (a maximum of $300,000 if 15,000,000 Shares are sold). The
Soliciting Dealer Servicing Fee will be payable on December 31 of each year,
commencing on December 31 of the year following the year in which the offering
terminates, and generally will be payable to the Managing Dealer, which in turn
may reallow, in its sole discretion, all or a portion of such fee to Soliciting
Dealers whose clients held Shares on such date. In general, the stockholders'
investment in the Company ("Invested Capital") is the number of Shares they own,
multiplied by $10.00 per Share, reduced by the portion of all prior
Distributions received by stockholders from the Sale of assets of the Company
and by any amounts paid by the Company to repurchase Shares pursuant to the
redemption plan.
For identifying the Properties, structuring the terms of the
acquisition and leases of the Properties and structuring the terms of the
Mortgage Loans, the Advisor will receive a fee equal to 4.5% of Gross Proceeds,
loan proceeds from Permanent Financing and amounts outstanding on the Line of
Credit, if any, at the time of Listing, but excluding that portion of the
Permanent Financing used to finance Secured Equipment Leases (collectively,
"Total Proceeds") ($6,750,000 if 15,000,000 Shares are sold and up to an
additional $2,025,000 if Permanent Financing equals $45,000,000), payable as
Acquisition Fees.
For managing the Properties and the Mortgage Loans, the Advisor will be
entitled to receive a monthly Asset Management Fee of one-twelfth of .60% of the
Company's Real Estate Asset Value (generally, the total amount invested in the
Properties, exclusive of Acquisition Fees and Acquisition Expenses) and the
total outstanding principal amount of the Mortgage Loans, as of the end of the
preceding month.
For negotiating Secured Equipment Leases and supervising the Secured
Equipment Lease program, the Advisor will be entitled to receive from the
Company a one-time Secured Equipment Lease Servicing Fee of 2% of the purchase
price of the Equipment that is the subject of a Secured Equipment Lease.
Prior to Listing, the Advisor may receive a real estate disposition fee
of 3% of the gross sales price of one or more Properties for providing
substantial services in connection with the Sale, which will be deferred and
subordinated until the stockholders have received Distributions equal to the sum
of an aggregate, annual, cumulative, noncompounded 8% return on their Invested
Capital, (the "Stockholders' 8% Return") plus 100% of the stockholders'
aggregate Invested Capital. Upon Listing, if the Advisor has accrued but not
been paid such real estate disposition fee, then for purposes of determining
whether the subordination conditions have been satisfied, stockholders will be
deemed to have received a Distribution in an amount equal to the total number of
Shares outstanding multiplied by the average closing price of the Shares over a
period of 30 days during which the Shares are traded, with such period beginning
180 days after Listing. See "The Advisor and The Advisory Agreement -- The
Advisory Agreement."
A deferred, subordinated share of Net Sales Proceeds will be paid to
the Advisor from Sales of assets of the Company in an amount equal to 10% of Net
Sales Proceeds. This amount will be subordinated and paid only after the
stockholders have received Distributions equal to the sum of 100% of the
stockholders' aggregate Invested Capital plus the Stockholders' 8% Return.
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Payment of certain fees is subject to conditions and restrictions or to
change under certain specified circumstances. The Advisor and its Affiliates
also may receive reimbursement for out-of-pocket expenses that they incur on
behalf of the Company, subject to certain expense limitations, and a
subordinated incentive fee if Listing occurs.
SUMMARY OF REINVESTMENT PLAN
The Company has established the Reinvestment Plan pursuant to which
stockholders may elect to have their cash Distributions from the Company
automatically reinvested in Shares. See "Summary of Reinvestment Plan," "Federal
Income Tax Considerations -- Taxation of Stockholders," and the form of
Reinvestment Plan accompanying this Prospectus as Exhibit A for more specific
information about the Reinvestment Plan. Expenses incurred in connection with
the Reinvestment Plan, including Selling Commissions and marketing support and
due diligence expense reimbursement fees, will be paid by the Company. A person
who becomes a stockholder otherwise than by participating in this offering may
purchase Shares through the Reinvestment Plan only after receipt of a separate
prospectus relating solely to the Reinvestment Plan.
BUSINESS
PROPERTIES AND MORTGAGE LOANS. The types of Properties which the
Company intends to purchase and lease to third parties are described in the
section entitled "Business." The Properties, which typically will be
freestanding and will be located across the United States, generally will be
leased on a long-term, "triple-net" basis to operators to be selected by the
Advisor and approved by the Board of Directors. The Properties may consist of
both land and building, the land underlying the building with the building owned
by the tenant or a third party, or the building only with the land owned by a
third party. It is expected that the Properties will be leased to operators of
Hotel Chains and for Restaurant Chains. Management intends to structure the
Company's investments to allow it to participate, to the maximum extent
possible, in any sales growth in the applicable industries, as reflected in the
Properties that it owns. Management expects to acquire Properties in part with a
view to diversification among Restaurant Chains, among Hotel Chains and of the
geographic location of the Properties.
The Company may also offer Mortgage Loans, generally for the purchase
of buildings by tenants that lease the underlying land from the Company.
However, because it prefers to focus on investing in Properties, which have the
potential to appreciate, the Company currently expects to provide Mortgage Loans
in the aggregate principal amount of approximately 5% to 10% of Gross Proceeds.
The Company expects that the interest rate and terms (generally, 10 to 20 years)
of any Mortgage Loans will be similar to those of its leases. In circumstances
in which the Company owns the land underlying the building to be financed and
the borrower under the Mortgage Loan also enters into a long-term ground lease
for the underlying land, management believes that the combined leasing and
financing structure will provide the benefit of allowing the Company to receive
the return of its initial investment plus interest on the financed building,
which is generally a depreciating asset, while retaining the ownership of the
underlying land, which may appreciate in value. The Company will not make
Mortgage Loans to Affiliates. See "Risk Factors -- Investment Risks -- Mortgage
Loans."
As of the date of this Prospectus, the Company had not purchased any
Properties or entered into any arrangements that create a reasonable probability
that the Company will purchase any Properties. The Company has undertaken to
supplement this Prospectus during the offering period to describe the
acquisition of Properties at such time as the Company believes that a reasonable
probability exists that a Property will be acquired by the Company. Based upon
the experience of management of the Company and the Advisor and the proposed
acquisition methods, a reasonable probability that the Company will acquire a
Property normally will occur as of the date on which (i) a commitment letter is
executed by a proposed lessee, (ii) a satisfactory credit underwriting for the
proposed lessee has been completed and (iii) a satisfactory site inspection has
been completed. See "Business-- General."
SECURED EQUIPMENT LEASES. The Secured Equipment Leases will be funded
solely from the proceeds of the Line of Credit or Permanent Financing. The
Company expects that the Secured Equipment Leases will be structured so that
they will be treated as loans secured by personal property for federal income
tax purposes. The Company has neither
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identified any prospective operators of Restaurant Chains or Hotel Chains that
will participate in such financing arrangements nor negotiated any specific
terms of a Secured Equipment Lease. See "Business -- General."
INVESTMENT OBJECTIVES AND POLICIES
The Company's primary investment objectives are:
o to preserve, protect, and enhance the Company's assets.
o make Distributions commencing in the initial year of Company
operations.
o obtain fixed income through the receipt of base rent, as well as to
increase the Company's income (and Distributions) and provide
protection against inflation through automatic increases in base rent
and receipt of percentage rent, and to obtain fixed income through
the receipt of payments on Mortgage Loans and Secured Equipment
Leases.
o to qualify and remain qualified as a REIT for federal income tax
purposes.
o to provide stockholders of the Company with liquidity of their
investment within five to ten years after commencement of the
offering, although liquidity cannot be assured thereby, either
through (i) Listing or (ii) outside the ordinary course of business
and consistent with its objective of qualifying as a REIT, the
commencement of orderly Sales of the Company's assets and
distribution of the proceeds thereof.
The Company intends to meet these objectives by following certain
investment policies discussed herein, as summarized on the preceding pages. See
"Business -- General," "Business -- Site Selection and Acquisition of
Properties," "Business -- Description of Leases," and "Investment Objectives and
Policies" for a more complete description of the manner in which the structure
of the Company's business will facilitate the Company's ability to meet its
investment objectives. There can be no assurance that these objectives will be
met. The Company's investment objectives are subject to review by the
Independent Directors and may not be changed without the approval of
stockholders owning a majority of the shares of outstanding Common Stock.
DESCRIPTION OF SHARES
A stockholder's investment will be recorded on the books of the
Company. The Company will provide, upon the request of any stockholder wishing
to transfer his or her Shares, a transfer form to be completed and executed by
the stockholder and returned to the Company. The Company will not issue share
certificates other than to stockholders who make a written request to the
Company.
At any time during which the Company is not engaged in a public
offering, any stockholder may request that the Company redeem for cash all or a
significant portion of such stockholder's Shares. The sole source of funds for
any such requested redemption will be the net proceeds available from the sale
of Shares pursuant to the Reinvestment Plan. There can be no assurance that such
net proceeds will be sufficient to permit the Company to redeem all such Shares
presented for redemption. See "Redemption of Shares.".
An annual meeting of stockholders will be held each year for the
election of the Directors. Other business matters may be presented at the annual
meeting or at special stockholder meetings. Each Share is entitled to one vote
on each matter to be voted on by stockholders, including the election of the
Directors. Stockholders who do not vote with the majority of Shares entitled to
vote on questions presented nonetheless will be bound by the majority vote.
Stockholder approval is required under Maryland law and the Company's
Articles of Incorporation and Bylaws for certain types of transactions.
Generally, the Articles of Incorporation and Bylaws may be amended upon a
majority vote of stockholders. Stockholders holding a majority of the Shares
must approve a merger or a sale or other disposition of substantially all of
the Company's assets other than in the ordinary course of business. Stockholders
objecting to the terms of a merger, sale, or other disposition of substantially
all of the Company's assets have the right to petition a court for the appraisal
and payment of the fair value of their Shares in certain instances. The
affirmative vote of a majority of the Shares outstanding and entitled to vote is
required to approve the voluntary dissolution of the Company.
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In order to facilitate compliance with certain restrictions imposed on
REITs by the Internal Revenue Code of 1986, as amended (the "Code"), the
Articles of Incorporation generally restrict direct or indirect ownership
(applying certain attribution rules) of more than 9.8% of the outstanding shares
of Common Stock by one Person, as defined in the Articles of Incorporation. See
"Summary of the Articles of Incorporation and Bylaws -- Restriction on
Ownership."
For a more complete description of the Shares and the capital structure
of the Company, please refer to the "Summary of the Articles of Incorporation
and Bylaws -- Description of Capital Stock" section of the Prospectus.
DISTRIBUTION POLICY
Consistent with the Company's objective of qualifying as a REIT, the
Company expects to calculate and declare Distributions monthly during the
offering period, monthly during any subsequent offering and quarterly otherwise,
and make Distributions quarterly commencing not later than the close of the
first full calendar quarter after the first release of funds from escrow to the
Company. The Board of Directors, in its discretion, will determine the amount of
the Distributions made by the Company, which amount will depend primarily on net
cash from operations. The Company intends to increase Distributions in
accordance with increases in net cash from operations. Consistent with the
Company's objective of qualifying as a REIT, the Company expects to distribute
at least 95% of its real estate investment trust taxable income, although the
Board of Directors, in its discretion, may increase that percentage as it deems
appropriate. If the cash available to the Company is insufficient to make
Distributions, the Company may obtain the needed cash by borrowing funds,
issuing new securities, or selling assets. These methods of obtaining cash could
affect future Distributions by increasing operating costs or reducing income. In
such an event, it is possible that the Company could pay Distributions in excess
of its earnings and profits and, accordingly, that such Distributions could
constitute a return of capital for federal income tax purposes, although such
Distributions would not reduce stockholders' aggregate Invested Capital.
PRIOR PERFORMANCE OF AFFILIATES
The "Prior Performance Information" section of this Prospectus contains
a narrative discussion of the public and private real estate limited
partnerships sponsored by Affiliates of the Company and of the Advisor during
the past ten years, including 18 public limited partnerships and one unlisted
public REIT formed to invest in restaurants leased on a "triple-net" basis to
operators of Restaurant Chains. As of December 31, 1996, these entities, which
invest in restaurant properties similar to those to be acquired by the Company
but do not invest in hotel properties, had purchased 762 fast-food and
family-style restaurant properties. Based on an analysis of the operating
results of the 86 real estate limited partnerships and one unlisted public REIT
in which principals of the Company have served, individually or with others, as
general partners or officers and directors, the Company believes that each of
such entities has met, or currently is in the process of meeting, its principal
investment objectives. Certain statistical data relating to the public
limited partnerships and the one unlisted REIT, the offerings of which became
fully subscribed between January 1992 and December 1996 formed to invest in
restaurants leased on a "triple net" basis to operators of Restaurant Chains,
are contained in Exhibit C -- Prior Performance Tables.
TAX STATUS OF THE COMPANY
The Company will make the election under Section 856(c) of the Internal
Revenue Code of 1986, as amended (the "Code"), to be taxed as a REIT under the
Code beginning with its taxable year ending December 31, 1997. As a REIT for
federal income tax purposes, the Company generally will not be subject to
federal income tax on income that it distributes to its stockholders. Under the
Code, REITs are subject to numerous organizational and operational requirements,
including a requirement that they distribute at least 95% of their taxable
income, as figured on an annual basis. If the Company fails to qualify for
taxation as a REIT in any taxable year, it will be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates and will not be permitted to qualify for treatment as a
REIT for federal income tax purposes for four years following the year during
which qualification is lost. See "Risk Factors -- Tax Risks" and "Federal Income
Tax Considerations." Even if the Company qualifies as a REIT for federal income
tax purposes, it may be subject to certain federal, state, and local taxes on
its income and property and to federal income and excise taxes on its
undistributed income. See "Federal Income Tax Considerations."
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THE OFFERING
A minimum of 250,000 Shares ($2,500,000) and a maximum of 15,000,000
($150,000,000) Shares in the Company will be offered at a price of $10.00 per
Share. The Company also has registered an offering of an additional 1,500,000
Shares ($15,000,000) that are available only to stockholders who receive a copy
of this Prospectus and elect to participate in the Reinvestment Plan. Any
participation in such plan subsequent to this offering must be made pursuant to
solicitation under a separate prospectus. See "Summary of Reinvestment Plan."
The Board of Directors may determine to engage in future offerings of Common
Stock of up to the number of unissued authorized shares of Common Stock
available following termination of this offering.
The Shares are being offered by the Managing Dealer and other
broker-dealers that are members of the National Association of Securities
Dealers, Inc. or exempt from broker-dealer registration (the "Soliciting
Dealers") on a "best efforts" basis, which means that no one is guaranteeing
that any minimum number of Shares will be sold. Both the Company and the Advisor
are Affiliates of the Managing Dealer. See "The Offering -- Plan of
Distribution."
Until subscription funds for the Company total $2,500,000, the funds
will be held in escrow by SouthTrust Asset Management Company of Florida, N.A.,
and interest earned on such funds will accrue to the benefit of subscribers. No
Shares will be sold unless subscriptions for at least 250,000 Shares
($2,500,000) have been obtained within one year after this Prospectus. Pursuant
to the requirements of the Commissioner of Securities of the State of
Pennsylvania, subscriptions from Pennsylvania residents may not be released from
escrow, or included in determining whether the $2,500,000 minimum for the
Company has been reached, until subscriptions for Shares totaling at least
$$8,250,000 have been received from all sources. If such minimum amount is sold,
the Company may, in its sole discretion, and without prior notice to the
subscribers, elect to extend the offering for up to an additional one year
thereafter (in states that permit such an extension). See "The Offering."
A minimum investment of 250 Shares ($2,500) is required. IRAs, Keogh
plans, and pension plans must make a minimum investment of at least 100 Shares
($1,000), except for Iowa tax-exempt stockholders who must make a minimum
investment of 250 Shares ($2,500). For Minnesota stockholders only, IRAs and
qualified plans must make a minimum investment of 200 Shares ($2,000). In
addition, Nebraska, New York, and North Carolina stockholders must make a
minimum investment of 500 Shares ($5,000). Following an initial subscription for
at least the required minimum investment, any stockholder may make additional
purchases in increments of one Share. Maine stockholders, however, may not
purchase additional Shares in amounts less than the applicable minimum
investment except with respect to Shares purchased pursuant to the Reinvestment
Plan. See "The Offering -- General," "The Offering -- Subscription Procedures,"
and "Summary of Reinvestment Plan."
DEFINITIONS
This Prospectus includes simplified terms and definitions to make the
Prospectus easier to understand. These simplified terms and definitions do not
include all of the details of the terms, however, and stockholders therefore
should review the "Definitions" section for a more complete understanding.
RISK FACTORS
The purchase of Shares involves significant risks and therefore is
suitable only for persons who understand the possible consequences of an
investment in the Company and who are able to bear the risk of loss of their
investment. Prospective stockholders should consider the following risks in
addition to other information describing an investment in the Shares set forth
elsewhere in this Prospectus.
INVESTMENT RISKS
MINIMUM OFFERING. The offering is on a best efforts basis and is
conditioned on the sale of at least 250,000 Shares. Because this offering will
be made on a best efforts basis, the potential profitability of the Company and
its ability to diversify its investments, both geographically and by type of
Properties purchased, will be limited by the amount of funds at its disposal.
For example, if minimum Gross Proceeds of $2,500,000 are raised, the Company
will be able to
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acquire no more than two restaurant Properties and will not acquire any hotel
Properties. There can be no assurance that the Company will sell the maximum
number of Shares.
LACK OF DIVERSIFICATION. The Company is not obligated to invest in both
restaurant and hotel Properties. The Company could invest entirely in hotel
Properties (assuming it raises at least $3,600,000 through the sale of Shares).
Because of the higher average purchase price of a hotel Property compared to a
restaurant Property, investment in hotel Properties will reduce the number of
Properties in which the Company could otherwise invest. While the Company
intends to invest in both restaurant and hotel Properties, management believes
that over time the Company may focus its Property investments exclusively on
hotel Properties.
LIMITED EXPERIENCE OF MANAGEMENT. The experience of the Advisor and
Directors of the Company with mortgage financing and with Secured Equipment
Leases is limited. Only two of the prior programs organized by Affiliates of the
Company have invested in Mortgage Loans, and only one of the prior programs
organized by Affiliates of the Company has offered Secured Equipment Leases. In
addition, none of the prior public programs organized by Affiliates of the
Company has invested in hotel Properties. The limited experience of management
in several areas of the Company's business may adversely affect the Company's
results of operations.
RELIANCE ON MANAGEMENT. Stockholders will be relying entirely on the
management ability of the Advisor and on the oversight of the Board of
Directors. Stockholders have no right or power to take part in the management of
the Company, except through the exercise of their stockholder voting rights.
Thus, no prospective stockholder should purchase any of the Shares offered
hereby unless the prospective stockholder is willing to entrust all aspects of
the management of the Company to the Advisor and the Board of Directors.
Reliance on Advisor. The Advisor, with approval from the Board of
Directors, will be responsible for the daily management of the Company,
including all acquisitions, dispositions, and financings. The Advisor may be
terminated by the Board of Directors, with or without cause, but only subject to
payment and release from all guarantees and other obligations incurred in
connection with its role as Advisor. See "Management Compensation." Also see
"Conflicts of Interests" for a discussion of the potential for realization by
the Advisor and its Affiliates of substantial commissions, fees, compensation,
and other income and for a discussion of various other conflicts of interest.
Leverage. The Company may borrow money to acquire Assets, to preserve
its status as a REIT or for other corporate purposes. The Company may encumber
one or more of its Assets in connection with any borrowing. The Board of
Directors anticipates that the Company will obtain a revolving Line of Credit up
to $45,000,000 in order to provide financing for the acquisition of Assets and
may also obtain, in addition to the Line of Credit, Permanent Financing.
Permanent Financing is not expected to exceed 30% of the Company's total assets.
The Company may repay the Line of Credit with offering proceeds, working capital
or Permanent Financing. The maximum amount the Company may borrow, however,
absent a satisfactory showing that a higher level of borrowing is appropriate as
approved by the majority of the Independent Directors, is 300% of the Company's
Net Assets. The use of borrowing may present an element of risk in the event
that the cash flow from the Company's real estate and other investments are
insufficient to meet its debt obligations. In addition, lenders to the Company
may seek to impose restrictions on future borrowings, Distributions and
operating policies of the Company. If Assets are mortgaged or pledged as
collateral to secure payment of indebtedness and the Company is unable to meet
its debt obligations, the Assets could be transferred to the lender, with a
consequent loss of income and asset value to the Company.
CONFLICTS OF INTEREST. The Company will be subject to conflicts of
interest arising out of its relationship to the Advisor and its Affiliates,
including the material conflicts discussed below. See "Conflicts of Interest"
for a further discussion of the conflicts of interest between the Company and
the Advisor and its Affiliates and the Company's policies to reduce or eliminate
certain potential conflicts.
COMPETING DEMANDS ON OFFICERS AND DIRECTORS. Officers and Directors of
the Company and officers and directors of the Advisor have management
responsibilities for other entities, including entities that invest in some of
the same types of assets in which the Company will invest. For this reason, the
officers and Directors will share their management
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time and services among those entities and the Company, will not devote all of
their attention to the Company, and could take actions that are more favorable
to such other entities than to the Company.
TIMING OF SALES AND ACQUISITIONS IMPACT. Investment or Sale of an Asset
by the Company may result in the immediate realization by the Advisor of
substantial commissions, fees and other compensation. The Board of Directors of
the Company must approve such transactions, but the Advisor's recommendation to
the Board may be affected by the impact of the transaction on the Advisor's
compensation. None of the agreements between the Company and the Advisor
pursuant to which the Advisor will perform services and receive compensation was
the result of arms-length negotiations.
PROPERTY DEVELOPMENT. Properties acquired by the Company may require
development prior to use of the Property by a tenant. Affiliates of the Company
may serve as developer and if so, the Affiliates would receive the development
fee that would otherwise be paid to an unaffiliated developer. The Board of
Directors, including the Independent Directors, must approve employing an
Affiliate of the Company to serve as a developer. There is a risk, however, that
the Company would acquire Properties that require development so that an
Affiliate would receive the development fee.
THE COMPANY MAY INVEST WITH AFFILIATES OF THE ADVISOR. The Company may
invest in Joint Ventures with another program sponsored by the Advisor or its
Affiliates. The Board of Directors, including the Independent Directors, must
approve the transaction, but the Advisor's recommendation may be affected by its
relationship with one or more of the co-venturers.
NO INDEPENDENT REVIEW OF THE COMPANY OR THE PROSPECTUS BY MANAGING
DEALER. The Managing Dealer is an Affiliate of the Company and will not make an
independent review of the Company and the offering. Accordingly, investors do
not have the benefit of such independent review.
NO SEPARATE COUNSEL FOR THE COMPANY, AFFILIATES AND INVESTORS. Each of
the Company, its Affiliates and investors may have interests which conflict with
one another, but none of them currently has the benefit of separate counsel.
LACK OF LIQUIDITY OF SHARES. Stockholders may not be able to sell their
Shares promptly at a desired price; therefore, the Shares should be considered
as a long-term investment only. Currently there is no public market for the
Shares. The Board of Directors, with or without the consent of the stockholders,
may apply for Listing if the Board of Directors (including a majority of
Independent Directors) determines Listing to be in the best interests of the
stockholders. There can be no assurance, however, that the Company will apply
for Listing, that any such application will be made before the passage of a
significant period of time, that any application will be accepted or, even if
accepted, that a public trading market will develop. In any event, the Articles
of Incorporation provide that the Company will not apply for Listing before the
completion or termination of this offering. If Listing occurs, the business of
the Company may continue indefinitely without any specific time limitation by
which the Company must distribute Net Sales Proceeds to the stockholders. In
that case, the stockholders would be dependent upon the sale of their Shares for
the return of their investment in the Company. There can be no assurance that
the price a stockholder would receive in a sale on an exchange or in the
over-the-counter market will be representative of the value of the assets owned
by the Company or that it will equal or exceed the amount a stockholder paid for
the Shares. In the event Listing occurs, Shares may be sold only through the
national securities exchange or the over-the-counter market on which the Shares
are listed.
Lack of Control over JOINT VENTURES. The Independent Directors of the
Company must approve all Joint Venture or general partnership arrangements to
which the Company is a party. Subject to such approval, the Company may enter
into a Joint Venture with an unaffiliated party to purchase a Property, and the
Joint Venture or general partnership agreement relating to that Joint Venture or
partnership may provide that the Company will share management control of the
Joint Venture with the unaffiliated party. In the event the Joint Venture or
general partnership agreement provides that the Company will have sole
management control of the Joint Venture, such agreement may be ineffective as to
a third party who has no notice of the agreement, and the Company therefore may
be unable to control fully the activities of such
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Joint Venture. In the event that the Company enters into a Joint Venture with
another program sponsored by an Affiliate, it is anticipated that the Company
will not have sole management control of the Joint Venture.
LACK OF CONTROL OF PROPERTY MANAGEMENT. The Company uses "triple-net"
leases and, therefore, day-to-day management of the Properties will be the
responsibility of the tenants of the Properties. The Company has not yet entered
into any lease arrangements with specific tenants and does not intend to do so
until such time as one or more Properties suitable for purchase by the Company
have been identified. In general, the Company intends to enter into leasing
agreements only with tenants having substantial prior restaurant or hotel
experience, but there can be no assurance that the Company will be able to make
such arrangements because, as of the date of this Prospectus, the Company had
not entered into any arrangements that create a reasonable probability that the
Company will purchase any Properties.
Mortgage Loans.
REAL ESTATE MARKET CONDITIONS. To the extent that the Company makes
Mortgage Loans, the results of the Company's operations will be affected, to the
extent there are defaults on such loans, by various factors, many of which are
beyond the control of the Company. These factors include local and other
economic conditions affecting real estate value and interest rate levels. The
results of the Company's operations from making Mortgage Loans would depend on,
among other things, the level of interest income generated by the Mortgage
Loans, the market value of Mortgage Loans and the supply of and demand for
Mortgage Loans. No assurance can be given that the values of the properties
securing the Mortgage Loans will remain at the levels existing on the dates of
origination of the Mortgage Loans.
INTEREST RATE FLUCTUATIONS. Fluctuations in interest rates may
adversely affect the Company to the extent it invests in fixed-rate, long-term
Mortgage Loans. In this situation, if interest rates rise, the Mortgage Loans
will yield a return lower than then-current market rates. If interest rates
decrease, the Company will be adversely affected to the extent that Mortgage
Loans are prepaid, because the Company will not be able to make new Mortgage
Loans at the previously higher interest rate.
DELAYS IN LIQUIDATING DEFAULTED MORTGAGE LOANS. Even assuming that the
mortgaged properties underlying Mortgage Loans held by the Company provide
adequate security for the Mortgage Loans, substantial delays could be encoun-
tered in connection with the liquidation of defaulted Mortgage Loans, with
corresponding delays in the receipt of related proceeds by the Company. An
action to foreclose on a mortgaged property securing a Mortgage Loan is
regulated by state statutes and rules and is subject to many of the delays and
expenses of other lawsuits if defenses or counterclaims are interposed.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a mortgaged property. In the event of
default by a mortgagor, these restrictions, among other things, may impede the
ability of the Company to foreclose on or sell the mortgaged property or to
obtain proceeds sufficient to repay all amounts due on the related Mortgage
Loan.
REGULATION. The Mortgage Loans may also be subject to regulation by
federal, state and local authorities and subject to various laws and judicial
and administrative decisions. The Company may determine not to make Mortgage
Loans in any jurisdiction in which it believes the Company has not complied in
all material respects with applicable requirements. See "Business -- Mortgage
Loans." See also "-- Real Estate and Financing Risks."
SECURED EQUIPMENT LEASES.
DEFAULT BY LESSEE. In the event that a lessee defaults on a Secured
Equipment Lease, the Company may not be able to sell the subject Equipment at a
price that would enable the Company to recover its costs associated with such
Equipment.
REGULATION. The Secured Equipment Lease program may also be subject to
regulation by federal, state and local authorities and subject to various laws
and judicial and administrative decisions. The Company may determine not to
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operate the Secured Equipment Lease program in any jurisdiction in which it
believes the Company has not complied in all material respects with applicable
requirements.
TAX RISKS. In addition, there are certain federal income tax risks
associated with the Secured Equipment Lease program. See "-- Tax Risks."
NO OPERATING HISTORY. The Company has recently been formed, is in the
development stage and has no previous performance history.
IMPACT OF INFLATION. Inflation may impact the value of some of the
Company's investments. For example, a substantial rise in inflation over the
term of an investment in Mortgage Loans and Secured Equipment Leases may reduce
the Company's actual return on those investments, if they do not otherwise
provide for adjustments based upon inflation. Investments in Properties may also
be adversely affected by inflation, although leases with percentage rent
provisions may not be so affected because inflation could cause those provisions
to be triggered earlier than they would otherwise become effective, and leases
with automatic increase in base rent may be sufficient to protect against the
effects of inflation.
BINDING NATURE OF MAJORITY STOCKHOLDER VOTE. Stockholders may take
certain actions, including approving amendments to the Articles of Incorporation
and Bylaws, by a vote of a majority of the Shares outstanding and entitled to
vote. All actions taken, if approved by the holders of the requisite number of
Shares, would be binding on all stockholders. Certain of these provisions may
discourage or make it more difficult for another party to acquire control of the
Company or to effect a change in the operation of the Company.
Significant Flexibility of the Board of Directors. The Board of
Directors has overall authority to conduct the Company's operations. This
authority includes significant flexibility. For example, the Board of Directors
can (i) prevent the ownership, transfer, and/or accumulation of Shares in order
to protect the status of the Company as a REIT, or, as otherwise deemed by the
Board of Directors, to be in the best interests of the stockholders (see
"Summary of the Articles of Incorporation and Bylaws -- Restriction of
Ownership"); (ii) issue additional Shares without obtaining stockholder
approval, which could result in dilution to existing stockholders; (iii) change
the compensation of the Advisor, and employ and compensate Affiliates; (iv)
direct the Company's investments toward investments that will not appreciate
over time, such as building only Properties, with the land owned by a
third-party, and Mortgage Loans, and (v) change minimum creditworthiness
standards with respect to tenants.
RESTRICTIONS ON TRANSFER RELATING TO REIT STATUS. The Articles of
Incorporation generally restrict direct or indirect ownership (applying certain
attribution rules) of more than 9.8% of the outstanding Common Stock or 9.8% of
any series of outstanding Preferred Stock by one Person (as defined in the
Articles of Incorporation). See "Summary of the Articles of Incorporation and
Bylaws -- Restriction of Ownership."
LIMITED LIABILITY OF OFFICERS AND DIRECTORS. The Articles of
Incorporation and Bylaws provide that an officer or Director's liability to the
Company, its stockholders, or third parties for monetary damages may be limited.
Generally, the Company is obligated under the Articles of Incorporation and the
Bylaws to indemnify its officers and Directors against certain liabilities
incurred in connection with their services in such capacities. The Company will
execute indemnification agreements with each officer and Director which will
indemnify the officer or Director for any such liabilities that he or she
incurs. Such indemnification agreements could limit the legal remedies available
to the Company and the stockholders against the Directors and Officers of the
Company. See "Summary of the Articles of Incorporation and Bylaws -- Limitation
of Director and Officer Liability."
POSSIBLE EFFECT OF ERISA. The Company believes that the assets of the
Company will not be deemed, under ERISA, to be "plan assets" of any Plan that
invests in the Shares, although it has not requested an opinion of Counsel to
that effect. If the assets of the Company were deemed to be "plan assets" under
ERISA (i) it is not clear that the exemptions from the "prohibited transaction"
rules under ERISA would be available for the Company's transactions, and (ii)
the prudence standards of ERISA would apply to investments made by the Company
(and might not be met). ERISA makes plan fiduciaries personally responsible for
any losses resulting to the plan from any breach of fiduciary duty and the Code
imposes nondeductible excise taxes on prohibited transactions.
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Insufficient Working Capital. There can be no assurance that the
Company will have sufficient working capital. As of December 31, 1996, the
Company had stockholder's equity of $200,000.
ABILITY TO USE LEVERAGE TO MAKE DISTRIBUTIONS. The Company may incur
indebtedness if necessary to satisfy the requirement that the Company distribute
at least 95% of its real estate investment trust taxable income or otherwise, as
is necessary or advisable to assure that the Company maintains its qualification
as a REIT for federal income tax purposes. In such an event, it is possible that
the Company could make Distributions in excess of its earnings and profits and,
accordingly, that such Distributions could constitute a return of capital for
federal income tax purposes, although such Distributions would not reduce
stockholders' aggregate Invested Capital.
REAL ESTATE AND FINANCING RISKS
AN UNSPECIFIED PROPERTY OFFERING.
INABILITY OF POTENTIAL INVESTORS TO EVALUATE PROPERTIES. The
Company has established certain criteria for evaluating Restaurant Chains and
Hotel Chains, particular Properties, and the operators of the Properties
proposed for investment by the Company. See "Business -- Standards for
Investment in Properties" and "Business -- General" for a description of these
criteria and the types of Properties in which the Company intends to invest. The
Company has not set fixed minimum standards relating to creditworthiness of
tenants and therefore the Board of Directors has flexibility in assessing
potential tenants. In addition, as of the date of this Prospectus, the Company
has not entered into any arrangements that create a reasonable probability that
the Company will purchase any Properties. Accordingly, this is an unspecified
property offering, and prospective investors therefore have no information to
assist them in evaluating the merits of any Property to be purchased or
developed by the Company.
NO LIMITATION ON NUMBER OF PROPERTIES OF A PARTICULAR CHAIN. There
is no limit on the number of Properties of a particular Restaurant Chain or
Hotel Chain which the Company may acquire, and the Company is not obligated to
invest in both types of Properties. The Board of Directors, however, including a
majority of the Independent Directors, will review the Company's Properties and
potential investments in terms of geographic, property type or chain
diversification.
NO ASSURANCE OF OBTAINING SUITABLE INVESTMENTS. No assurance can be
given that the Company will be successful in obtaining suitable investments on
financially attractive terms or that, if investments are made, the objectives of
the Company will be achieved.
CONFLICTS OF INTEREST. The Advisor or its Affiliates from time to
time may acquire properties on a temporary basis with the intention of
subsequently transferring the properties to one or more of the CNL Group, Inc.
("CNL") programs, including the Company, although the Company has adopted
guidelines to minimize such conflicts. See "Conflicts of Interest -- Acquisition
of Properties." Potential investors will not have the opportunity to evaluate
the manner in which these conflicts of interest are resolved.
POSSIBLE DELAYS IN INVESTMENT. To the extent consistent with the
Company's objective of qualifying as a REIT, the offering proceeds may remain
uninvested for up to the later of two years from the initial date of this
Prospectus or one year after termination of the offering, although it is
expected that substantially all net offering proceeds will be invested prior to
the end of such period. See "Prior Performance Information" for a summary
description of the investment experience of Affiliates and the Advisor in prior
CNL programs, which is not necessarily indicative of the rate at which the
proceeds of this offering will be invested.
An extended offering period, the inability of the Advisor to find
suitable Properties, the inability of two prior programs formed by Affiliates of
the Advisor that currently are in the process of acquiring fast-food,
family-style and casual-dining restaurant properties (and one of which is
currently offering mortgage loans) to substantially complete their acquisition
programs prior to the time that the Company has funds available to invest in
Properties may result in delays in investment of Company funds in Properties and
in the receipt of a return from real property investments.
Revenues received by the Company pending investment in Properties or
making Mortgage Loans will be limited to the rates of return available on
short-term, highly liquid investments with appropriate safety of principal.
These rates of return, which affect the amount of cash available to make
Distributions to the stockholders, are expected to be lower
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than the Company would receive under its Property leases or Mortgage Loans.
Further, to the extent consistent with the Company's objective of qualifying as
a REIT, any funds of the Company required to be invested in Properties and
Mortgage Loans and not so invested or reserved for Company purposes within the
later of two years from the initial date of this Prospectus, or one year after
the termination of the offering, will be distributed pro rata to the then
stockholders of the Company in accordance with the Articles of Incorporation.
LACK OF CONTROL OVER PROPERTIES UNDER CONSTRUCTION. The Company intends
to acquire sites on which a particular Property to be owned by the Company is to
be built as well as existing Properties (including Properties which require
renovation). To the extent that the Company acquires a Property on which
improvements are to be constructed or completed or renovations are to be made,
the Company may be subject to certain risks in connection with the developer's
ability to control construction costs, and the timing of completion of
construction, or to build in conformity with plans, specifications, and
timetables. The Company's agreements with the developer will provide certain
safeguards designed to minimize these risks. Further, in the event of a default
by a developer, the Company generally will have the right to require the tenant
to repurchase the Property that is under development at a pre-established price
designed to reimburse the Company for all costs incurred by the Company in
connection with the acquisition and development of the Property. There can be no
assurance, however, that under such circumstances, the tenant will have
sufficient funds to fulfill its obligations. See "Business -- Site Selection and
Acquisition Properties."
GROUND LEASE PROPERTY RISKS. If the Company invests in ground lease
Properties, the Company will not own or, except to the extent of rights set
forth in any assignment of lease or tripartite agreement that the Company may
enter into, have a leasehold interest in the underlying land. Thus, with respect
to ground lease Properties, the Company will have no economic interest in the
land or building at the expiration of the lease on the underlying land, although
it generally will retain partial ownership of, and will have the right to
remove, any equipment that the Company may own in the building. The Company will
not share in any appreciation of the land associated with any ground lease
Property. The Company, however, will share in appreciation of the income stream
derived from the lease.
IMPASSE OR CONFLICTS WITH JOINT VENTURE PARTNER.
IMPASSE WITH JOINT VENTURE PARTNER. In the event that the Company
enters into a Joint Venture, there will be a potential risk of impasse in
certain joint venture decisions since the approval of the Company and of each
co-venturer is required for certain decisions. In any Joint Venture with an
affiliated program, however, the Company will have the right to buy the other
co-venturer's interest or to sell its own interest on specified terms and
conditions in the event of an impasse regarding a Sale. Under such
circumstances, it is possible that neither party will have the funds necessary
to consummate the transaction. See "Business -- Joint Venture Arrangements." In
addition, the Company may experience difficulty in locating a third party
purchaser for its Joint Venture interest and in obtaining a favorable sale price
for such Joint Venture interest.
INTERESTS OF JOINT VENTURE PARTNER. Investments in Joint Ventures
may involve the risk that the Company's co-venturer may have economic or
business interests or goals which, at a particular time, are inconsistent with
the interests or goals of the Company, that such co-venturer may be in a
position to take action contrary to the Company's instructions, requests,
policies or objectives, or that such co-venturer may experience financial
difficulties. Among other things, actions by a co-venturer might subject
property owned by the Joint Venture to liabilities in excess of those
contemplated by the terms of the joint venture agreement or to other adverse
consequences.
LIMITATIONS ON THE ABILITY OF THE COMPANY TO LIQUIDATE. For the first
five to ten years after commencement of this offering, the Company intends to
use any proceeds from the Sale of Properties or Mortgage Loans that are not
required to be distributed to stockholders in order to preserve the Company's
status as a REIT for federal income tax purposes to acquire additional
Properties, make additional Mortgage Loans and repay outstanding indebtedness.
The proceeds from the Sale of Secured Equipment Leases will be used to fund
additional Secured Equipment Leases, or to reduce the Company's outstanding
indebtedness. If Listing occurs, the proceeds from Sales may be reinvested in
other Properties, Mortgage Loans or Secured Equipment Leases for an indefinite
period of time. Unless Listing occurs by December 31, 2007, the Company will
undertake, to the extent consistent with the Company's objective of qualifying
as a REIT, the orderly Sale of the Company's assets, the distribution of the Net
Sales Proceeds of such Sales to stockholders, and will engage only in activities
related to its orderly liquidation unless the stockholders elect otherwise.
Neither the Advisor nor the Board of Directors may be able to control the timing
of Sales due to market conditions, and there can be no assurance
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that the Company will be able to sell its assets so as to return stockholders'
aggregate Invested Capital, to generate a profit for the stockholders, or to
fully satisfy its debt obligations. Invested Capital, in the aggregate, will be
returned to stockholders upon disposition of the Properties only if the
Properties are sold for more than their original purchase price, although return
of capital, for federal income tax purposes, is not necessarily limited to
stockholder distributions following Sales of Properties. See "Federal Income Tax
Considerations." In the event that a purchase money obligation is taken in
partial payment of the sales price of a Property, the proceeds of the Sale will
be realized over a period of years. Further, entering into Mortgage Loans with
terms of 10 to 20 years and Secured Equipment Leases with terms of seven years
may cause any intended liquidation of the Company to be delayed beyond the time
of disposition of the Properties and until such time as the Mortgage Loans and
Secured Equipment Leases expire or are sold.
INABILITY TO CONTROL THE SALE OF CERTAIN PROPERTIES. Certain tenants
are expected to have the right to purchase the Property from the Company,
commencing a specified number of years after the date of the lease, which may
lessen the ability of the Advisor and the Board of Directors to freely control
the Sale of the Property. The leases also generally provide the tenant with a
right of first refusal on any proposed sale provisions. See "Business --
Description of Leases -- Right of Tenant to Purchase." A tenant will have no
obligation to purchase the Property it leases.
Real Property Investments.
LACK OF CONTROL OVER MARKET AND BUSINESS CONDITIONS. The value of
Properties such as those to be acquired by the Company, the ability of the
tenants to pay rent on a timely basis, the amount of the rent and the ability of
borrowers to make Mortgage Loan payments on a timely basis may be adversely
affected by certain changes in general or local economic or market conditions,
increased costs of energy, increased costs of food or other products, increased
costs and shortages of labor, competitive factors, fuel shortages, quality of
management, the ability of a Restaurant Chain or Hotel Chain to fulfill any
obligations to operators of its restaurant or other businesses, limited
alternative uses for the building, changing consumer habits, condemnation or
uninsured losses, changing demographics, changing traffic patterns, inability to
remodel outmoded buildings as required by the franchise or lease agreement,
voluntary termination by a tenant of its obligations under a lease, bankruptcy
of a tenant or borrower, and other factors. Neither the Company nor the Board of
Directors can control these factors.
MULTIPLE PROPERTY LEASES OR MORTGAGE LOANS WITH INDIVIDUAL TENANTS
OR BORROWERS. Tenants may lease more than one Property and borrowers may enter
into more than one Mortgage Loan. Events such as the default or financial
failure of a tenant or borrower therefore could cause one or more Properties to
become vacant under certain circumstances. Vacancies would reduce the cash
receipts of the Company and, at least until the Company is able to re-lease any
such Properties, could decrease their ultimate resale value. The value of the
Company's Properties will depend principally upon the value of the leases of the
Properties. Minor defaults by a tenant or borrower may continue for some time
before the Advisor or Board of Directors determines that it is in the interest
of the Company to evict the tenant or foreclose on the property of the borrower.
RE-LEASING OF PROPERTIES. If a Property becomes vacant, the Company
may be unable either to re-lease the Property for the rent due under the prior
lease or to re-lease the Property without incurring additional expenditures
relating to the Property. The Company could experience delays in enforcing its
rights against, and collecting rents (and, under certain circumstances, real
estate taxes and insurance costs) due from, a defaulting tenant.
THIRD PARTY FRANCHISE AGREEMENTS. The Company will not be a party
to any franchise agreement between a Restaurant Chain or Hotel Chain and a
tenant, and such agreement could therefore be modified or canceled without
notice to, or the prior consent of, the Company. In that event, the tenant could
be required to cease its operations at a Property, although the tenant's
obligation to pay rent to the Company would continue. Before operations at the
Property could resume, however, the Company would be required to locate a new
tenant acceptable to a Restaurant Chain or Hotel Chain.
LACK OF ADEQUATE INSURANCE. If the Company, as lessor, incurs any
liability which is not fully covered by insurance, the Company would be liable
for such amounts, and returns to the stockholders could be reduced. See
"Business -- Description of Property Leases -- Insurance, Taxes, Maintenance,
and Repairs" for a description of the types of insurance that the leases of the
Properties will require the tenant to obtain.
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The inability of tenants to make lease payments or of borrowers to make
Mortgage Loan payments as a result of any of these factors could result in a
decrease in the amount of cash available to make Distributions to the
stockholders.
IMPACT OF ADVERSE TRENDS. The success of the future operations of the
Company's Properties will depend largely on each of their operator's ability to
adapt to dominant trends in the restaurant and hotel industries, including
greater competitive pressures, increased consolidation, industry overbuilding,
dependence on consumer spending patterns and changing demo graphics, the
introduction of new concepts and products, availability of labor, price levels,
and general economic conditions. See "Business -- General" for a description of
the size and nature of the restaurant and hotel industries and current trends in
this industry. The success of a particular Restaurant Chain or Hotel Chain, the
ability of a Restaurant Chain or Hotel Chain to fulfill any obligations to
operators of its restaurants or other businesses, and trends in the restaurant
and hotel industries may affect the income of the Company.
COMPETITION. The Company will compete with other entities, including
Affiliates, for the acquisition of properties. See "Conflicts of Interest --
Prior and Future Programs." In addition, the restaurant and hotel businesses in
which the Company will invest are highly competitive, and it is anticipated that
any Property acquired by the Company will compete with other businesses in the
vicinity. The extent to which the Company will be entitled to receive rent, in
the form of percentage rent, in excess of the base rent (including automatic
increases in the base rent) for the Properties will depend in part on the
ability of the tenants to compete successfully with other businesses in the
vicinity. In addition, the Company will compete with other financing sources for
suitable tenants and properties.
SEASONALITY OF HOTEL INDUSTRY. The hotel industry is seasonal in
nature. This seasonality may cause quarterly fluctuations in the amount of
percentage rent, if any, the Company will receive from its hotel Properties. Any
such reduction in percentage rent would reduce the amount of cash available for
Distribution to the stockholders.
POSSIBLE ENVIRONMENTAL LIABILITIES. Under various federal and state
environmental laws and regulations, a current or previous owner or operator of
real estate may be required to investigate and clean up certain hazardous or
toxic substances, asbestos-containing materials, or petroleum product releases
at the property, and may be held liable to a governmental entity or to third
parties for property damage and for investigation and cleanup costs incurred by
such parties in connection with the contamination. In addition, some
environmental laws create a lien on the contaminated site in favor of the
government for damages and costs it incurs in connection with the contamination.
The presence of contamination or the failure to remediate contaminations may
adversely affect the owner's ability to sell or lease real estate or to borrow
using the real estate as collateral. The owner or operator of a site may be
liable under common law to third parties for damages and injuries resulting from
environmental contamination emanating from the site.
All of the Properties will be acquired by the Company subject to
satisfactory Phase I environmental assessments or satisfactory Phase II
environmental assessments. A Phase I or Phase II environmental assessment may be
determined by the Board of Directors or the Advisor to be satisfactory if a
problem exists and has not been resolved at the time the Property is acquired
provided that the seller has agreed in writing to indemnify the Company. There
can be no assurance, however, that any seller will be able to pay under an
indemnity obtained by the Company. Further, no assurances can be given that all
environ mental liabilities have been identified or that no prior owner, operator
or current occupant has created an environmental condition not known to the
Company. Moreover, no assurances can be given that (i) future laws, ordinances
or regulations will not impose any material environmental liability or (ii) the
current environmental condition of the Properties will not be affected by
tenants and occupants of the Properties, by the condition of land or operations
in the vicinity of the Properties (such as the presence of underground storage
tanks), or by third parties unrelated to the Company.
In addition, the Company may invest in Properties that include gasoline
installations. These gasoline installations will have underground storage tanks
containing petroleum products, which are subject to extensive federal and state
regulation. The underground tanks are expected to be new, double-walled storage
tanks with automatic leak detection systems. Although the Company intends to use
underground tanks that it believes are "state of the art" and to engage in
testing of the type described above and take other protective measures, such as
obtaining indemnification from the seller and the operator of the Property,
there can be no assurance that such gasoline installations do not have the
potential for environmental liability either in their current condition or as a
consequence of future conditions (including changes in applicable laws or
regulations).
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THE LINE OF CREDIT AND PERMANENT FINANCING. The Company intends to
obtain the Line of Credit, and may also obtain Permanent Financing. The Company
is engaged in preliminary discussions with potential lenders but has not yet
obtained a commitment for the Line of Credit or any Permanent Financing, and
there is no assurance that the Company will be able to obtain either the Line of
Credit or any Permanent Financing on satisfactory terms.
Unspecified Secured Equipment Leases. The Company, as of the date of
this Prospectus, has not entered into any arrangements that create a reasonable
probability that the Company will extend a Secured Equipment Lease to a
particular operator, and therefore prospective stockholders have no information
to assist them in evaluating the merits of the Secured Equipment Lease program
or of any Secured Equipment Lease. No assurance can be given that the Company
will be successful in identifying suitable operators or negotiating Secured
Equipment Leases on financially attractive terms or that lessees will fulfill
their obligations under Secured Equipment Leases.
TAX RISKS
REIT QUALIFICATION. The Company intends to operate so as to qualify and
remain qualified as a REIT for federal income tax purposes, commencing with its
taxable year ending December 31, 1997. A qualified REIT generally is not taxed
at the corporate level on income it currently distributes to its stockholders,
so long as it distributes at least 95% of its real estate investment trust
taxable income. See "Federal Income Tax Considerations -- Taxation of the
Company." The Company expects to qualify as a REIT initially, but no assurance
can be given that it will so qualify or that it will continue to qualify in the
future. In this regard, based on certain representations and assumptions, the
Company will receive an opinion of tax counsel to the Company ("Counsel") to the
effect that the Company will be organized in conformity with the requirements
for qualification as a REIT, and that the Company's proposed method of operation
will enable it to meet the requirements for qualification as a REIT for federal
income tax purposes. Qualification as a REIT, however, involves the application
of highly technical and complex Code provisions as to which there are only
limited judicial and administrative interpretations. Certain facts and
circumstances which may be wholly or partially beyond the Company's control may
affect its ability to qualify on an ongoing basis as a REIT. In addition, no
assurance can be given that future legislation, new regulations, administrative
interpretations or court decisions will not significantly change the tax laws
(or the application thereof) with respect to qualification as a REIT for federal
income tax purposes or the federal income tax consequences of such
qualification. The opinion of Counsel is not binding on the Internal Revenue
Service ("IRS") or the courts.
SECURED EQUIPMENT LEASE TREATMENT. In order to qualify as a REIT for
federal income tax purposes, not more than 25% of the Company's total assets may
be represented by personal property, or loans secured by personal property on
certain testing dates. In addition, loans secured by personal property made to
each borrower must represent less than 5% of the Company's total assets on such
testing dates. Counsel is of the opinion, based on certain assumptions, that the
Secured Equipment Leases will be treated as loans secured by personal property
for federal income tax purposes. The Company believes that the value of the
Secured Equipment Leases together with any personal property owned by the
Company, will in the aggregate represent less than 25% of the Company's total
assets and that the value of the Secured Equipment Leases entered into with any
particular lessee will represent less than 5% of the Company's total assets.
Counsel has relied on the representations of the Company regarding such values
in rendering its opinion as to the qualification of the Company as a REIT. If
the Company fails to satisfy the 25% test or the 5% test either at the time of
the offering or on any subsequent testing date, the Company will fail to qualify
(or cease to qualify, as the case may be) as a REIT for federal income tax
purposes. In addition, if, contrary to the opinion of Counsel, the Secured
Equipment Leases are not treated as loans, but are instead treated as leases for
federal income tax purposes, income from the Secured Equipment Leases will
generally not satisfy either the 95% or the 75% gross income tests for REIT
qualification. See "Federal Income Tax Considerations -- Taxation of the
Company," and "-- Characterization of the Secured Equipment Leases."
EFFECT OF REIT DISQUALIFICATION. If, in any taxable year, the Company
were to fail to qualify as a REIT for federal income tax purposes, it would not
be allowed a deduction for dividends to stockholders in computing taxable income
and would be subject to federal income tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate rates. In addition,
unless entitled to relief under certain statutory provisions, the Company would
be disqualified from treatment as a REIT for federal income tax purposes for the
four taxable years following the year during which REIT qualification is lost.
The additional tax liability resulting from the failure to so qualify would
significantly reduce the amount of funds available to make Distributions to
stockholders. Distributions to stockholders generally would
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<PAGE>
be taxable as ordinary income to the extent of current and accumulated earnings
and profits and, subject to certain limitations, would be eligible for the
corporate dividends received deduction. Although the Company intends to operate
in a manner designed to permit it to qualify as a REIT for federal income tax
purposes, it is possible that future economic, market, legal, tax, or other
events or circumstances could cause it to fail to so qualify. See "Federal
Income Tax Considerations -- Taxation of the Company."
EFFECT OF DISTRIBUTION REQUIREMENTS. The Company may be required, under
certain circumstances, to accrue as income for tax purposes interest, rent and
other items treated as earned for tax purposes but not yet received. In
addition, the Company may be required not to accrue as expenses for tax purposes
certain items which actually have been paid or certain of the Company's
deductions might be disallowed by the Service. In any such event, the Company
could fail to qualify as a REIT or have taxable income in excess of cash
available for distribution. If the Company has taxable income in excess of cash
available for distribution, the Company could be required to borrow funds or
liquidate investments on unfavorable terms in order to meet the distribution
requirement applicable to a REIT. See "Federal Income Tax Considerations --
Taxation of the Company -- Distribution Requirements."
RESTRICTIONS ON MAXIMUM SHARE OWNERSHIP. In order for the Company to
qualify as a REIT, no more than 50% of the value of the outstanding equity
securities may be owned, directly or indirectly (applying certain attribution
rules), by five or fewer individuals (or certain entities) 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 Articles of
Incorporation include certain provisions restricting 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 stockholders; or (iii) limit the opportunity for
stockholders to receive a premium for their Shares in the event a stockholder is
making purchases of Shares in order to acquire a block of Shares.
OTHER TAX LIABILITIES. Even if the Company qualifies as a REIT for
federal income tax purposes, it may be subject to certain federal, state and
local taxes on its income and property. See "Federal Income Tax Considerations
- -- State and Local Taxes."
CHANGES IN TAX LAWS. The discussions of the federal income tax aspects
of the offering are based on current law, including the Code, the Regulations
issued thereunder, certain administrative interpretations thereof, and court
decisions. Consequently, future events that modify or otherwise affect those
provisions may result in treatment for federal income tax purposes of the
Company and the stockholders that is materially and adversely different from
that described in this Prospectus, both for taxable years arising before and
after such events. There is no assurance that future legislation and
administrative interpretations will not be retroactive in effect.
SUITABILITY STANDARDS AND HOW TO SUBSCRIBE
SUITABILITY STANDARDS
The Shares offered hereby are suitable only as a long-term investment
for persons of adequate financial means who have no need for liquidity in this
investment. Initially, there is not expected to be any public market for the
Shares, which means that it may be difficult to sell Shares. See "Summary of the
Articles of Incorporation and Bylaws -- Restrictions on Owner ship" for a
description of the transfer requirements. As a result, the Company has
established suitability standards which require investors to have either (i) a
net worth (exclusive of home, furnishings, and personal automobiles) of at least
$45,000 and an annual gross income of at least $45,000, or (ii) a net worth
(exclusive of home, furnish-
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<PAGE>
ings, and personal automobiles) of at least $150,000. The Company's suitability
standards also require that a potential investor (i) can reasonably benefit from
an investment in the Company based on such investor's overall investment
objectives and portfolio structuring, (ii) is able to bear the economic risk of
the investment based on the prospective stockholder's overall financial
situation, and (iii) has apparent understanding of (a) the fundamental risks of
the investment, (b) the risk that such investor may lose the entire investment,
(c) the lack of liquidity of the Company's shares, (d) the background and
qualifications of the Advisor, and (e) the tax consequences of the investment.
Iowa, Maine, Massachusetts, Missouri, New Hampshire, North Carolina,
Ohio, Pennsylvania and Tennessee have established suitability standards
different from those established by the Company, and Shares will be sold only to
investors in those states who meet the special suitability standards set forth
below.
IOWA, MASSACHUSETTS, MISSOURI, NORTH CAROLINA AND TENNESSEE -- The
investor has either (i) a net worth (exclusive of home, furnishings, and
personal automobiles) of at least $60,000 and an annual gross income of at least
$60,000, or (ii) a net worth (exclusive of home, furnishings, and personal
automobiles) of at least $225,000.
MAINE -- The investor has either (i) a net worth (exclusive of home,
furnishings, and personal automobiles) of at least $50,000 and an annual gross
income of at least $50,000, or (ii) a net worth (exclusive of home, furnishings,
and personal automobiles) of at least $200,000.
NEW HAMPSHIRE -- The investor has either (i) a net worth (exclusive of
home, furnishings, and personal automobiles) of at least $125,000 and an annual
gross income of at least $50,000, or (ii) a net worth (exclusive of home,
furnishings, and personal automobiles) of at least $250,000.
OHIO -- The investor's investment in the Shares shall not exceed 10% of
the investor's net worth (exclusive of home, furnishings, and personal
automobiles).
PENNSYLVANIA -- The investor has (i) a net worth (exclusive of home,
furnishings, and personal automobiles) of at least ten times the investor's
investment in the Company, and (ii) either (a) a net worth (exclusive of home,
furnishings, and personal automobiles) of at least $45,000 and an annual gross
income of at least $45,000, or (b) a net worth (exclusive of home, furnishings,
and personal automobiles) of at least $150,000. Because the minimum offering of
Shares of the Company is less than $16,500,000, Pennsylvania investors are
cautioned to evaluate carefully the Company's ability to fully accomplish its
stated objectives and to inquire as to the current dollar volume of the
Company's subscription proceeds.
The foregoing suitability standards must be met by the investor who
purchases the Shares. If the investment is being made for a fiduciary account
(such as an IRA, Keogh Plan, or corporate pension or profit-sharing plan), the
beneficiary, the fiduciary account, or any donor or grantor that is the
fiduciary of the account who directly or indirectly supplies the investment
funds must meet such suitability standards.
In addition, under the laws of certain states, investors may transfer
their Shares only to persons who meet similar standards, and the Company may
require certain assurances that such standards are met. Investors should read
carefully the requirements in connection with resales of Shares as set forth in
the Articles of Incorporation and as summarized under "Summary of the Articles
of Incorporation and Bylaws -- Restrictions of Ownership."
In purchasing Shares, custodians or trustees of employee pension
benefit plans or IRAs may be subject to the fiduciary duties imposed by the
Employee Retirement Income Security Act of 1974 ("ERISA") or other applicable
laws and to the prohibited transaction rules prescribed by ERISA and related
provisions of the Code. See "Federal Income Tax Considerations -- Retirement
Plan Stockholders." In addition, prior to purchasing Shares, the trustee or
custodian of an employee pension benefit plan or an IRA should determine that
such an investment would be permissible under the governing instruments of such
plan or account and applicable law. For information regarding "unrelated
business taxable income," see "Federal Income Tax Considerations -- Taxation of
Stockholders -- Tax-Exempt Stockholders."
In order to ensure adherence to the suitability standards described
above, requisite suitability standards must be met, as set forth in the
Subscription Agreement in one of the forms attached hereto as Exhibit D. In
addition, Soliciting Dealers who sell Shares have the responsibility to make
every reasonable effort to determine that the purchase of Shares is a suitable
and appropriate investment for an investor. In making this determination, the
Soliciting Dealers will rely on relevant information provided by the investor,
including information as to the investor's age, investment objectives, invest-
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<PAGE>
ment experience, income, net worth, financial situation, other investments, and
any other pertinent information. See "The Offering -- Subscription Procedures."
Executed Subscription Agreements will be maintained in the Company's records for
six years.
HOW TO SUBSCRIBE
An investor who meets the suitability standards described above may
subscribe for Shares by completing and executing the Subscription Agreement and
delivering it to a Soliciting Dealer, together with a check for the full
purchase price of the Shares subscribed for, payable to "SouthTrust Asset
Management Company of Florida, N.A., Escrow Agent." See "The Offering --
Subscription Procedures." Certain Soliciting Dealers who have "net capital," as
defined in the applicable federal securities regulations, of $250,000 or more
may instruct their customers to make their checks for Shares subscribed for
payable directly to the Soliciting Dealer. Care should be taken to ensure that
the Subscription Agreement is filled out correctly and completely. Partnerships,
individual fiduciaries signing on behalf of trusts, estates, and in other
capacities, and persons signing on behalf of corporations and corporate trustees
may be required to obtain additional documents from Soliciting Dealers. Any
subscription may be rejected by the Company in whole or in part, regardless of
whether the subscriber meets the minimum suitability standards.
Certain Soliciting Dealers may permit investors who meet the
suitability standards described above to subscribe for Shares by telephonic
order to the Soliciting Dealer. This procedure may not be available in certain
states. See "The Offering -- Subscription Procedures" and "The Offering -- Plan
of Distribution."
A minimum investment of 250 Shares ($2,500) is required. IRAs, Keogh
plans, and pension plans must make a minimum investment of at least 100 Shares
($1,000), except for Iowa tax-exempt investors who must make a minimum
investment of 250 Shares ($2,500). For Minnesota investors only, IRAs and
qualified plans must make a minimum investment of 200 Shares ($2,000). In
addition, Nebraska, New York, and North Carolina investors must make a minimum
investment of 500 Shares ($5,000). Following an initial subscription for at
least the required minimum investment, any investor may make additional
purchases in increments of one Share. Maine investors, however, may not make
additional purchases in amounts less than the applicable minimum investment
except with respect to Shares purchased pursuant to the Reinvestment Plan. See
"The Offering -- General," "The Offering -- Subscription Procedures," and
"Summary of Reinvestment Plan."
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<PAGE>
ESTIMATED USE OF PROCEEDS
The table set forth below summarizes certain information relating to
the anticipated use of offering proceeds by the Company, assuming that 250,000
Shares and 25,000,000 Shares are sold. The Company estimates that 84% of Gross
Proceeds will be available for the purchase of Properties and the making of
Mortgage Loans, and approximately 9% of Gross Proceeds will be paid in fees and
expenses to Affiliates of the Company for their services and as reimbursement
for Organizational and Offering Expenses incurred on behalf of the Company.
While the estimated use of proceeds set forth in the table below is believed to
be reasonable, this table should be viewed only as an estimate of the use of
proceeds that may be achieved.
<TABLE>
<CAPTION>
Minimum Offering (1) MAXIMUM OFFERING(1)(2)
--------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
<S> <C>
GROSS PROCEEDS TO THE COMPANY (3).................... $2,500,000 100.0% $150,000,000 100.0%
Less:
Selling Commissions to CNL
Securities Corp. (3)........................... 187,500 7.5% 11,250,000 7.5%
Marketing Support and Due Diligence
Expense Reimbursement Fee to
CNL Securities Corp. (3)....................... 12,500 0.5% 750,000 0.5%
Organizational and Offering Expenses (4).......... 75,000 3.0% 4,500,000 3.0%
--------- ------ ----------- ------
NET PROCEEDS TO THE COMPANY.......................... 2,225,000 89.0% 133,500,000 89.0%
Less:
Acquisition Fees to the Advisor (5)............... 112,500 4.5% 6,750,000 4.5%
Acquisition Expenses (6).......................... 12,500 0.5% 750,000 0.5%
Initial Working Capital Reserve................... (7) (7)
--------- ------ ----------- ------
CASH PAYMENT FOR PURCHASE OF PROPERTIES
AND THE MAKING OF MORTGAGE LOANS
BY THE COMPANY (8)............................... $2,100,000 84.0% $126,000,000 84.0%
========== ====== ============ ======
</TABLE>
FOOTNOTES:
(1) Excludes the purchase of 20,000 Shares by the Advisor in exchange for its
$200,000 investment in the Company. The Advisor may, but is not required
to, purchase additional Shares of the Company.
(2) Excludes 1,500,000 Shares that may be sold pursuant to the Reinvestment
Plan.
(3) Gross Proceeds of the offering are calculated as if all Shares are sold at
$10.00 per Share and do not take into account any reduction in Selling
Commissions. See "The Offering -- Plan of Distribution" for a description
of the circumstances under which Selling Commissions may be reduced,
including commission discounts available for purchases by registered
representatives or principals of the Managing Dealer or Soliciting Dealers,
certain Directors and officers and certain investment advisers. Selling
Commissions are calculated assuming that reduced commissions are not paid
in connection with the purchase of any Shares. The Shares are being offered
to the public through CNL Securities Corp., which will receive Selling
Commissions of 7.5% on all sales of Shares and will act as Managing Dealer.
The Managing Dealer is an Affiliate of the Advisor. Other broker-dealers
may be engaged as Soliciting Dealers to sell Shares and reallowed Selling
Commissions of up to 7% with respect to Shares which they sell. In
addition, all or a portion of the marketing support and due diligence
expense reimbursement fee may be reallowed to certain Soliciting Dealers
for expenses incurred by them in selling the Shares, including
reimbursement for bona fide expenses incurred in connection with due
diligence activities, in the Managing Dealer's sole discretion. See "The
Offering -- Plan of Distribution" for a more complete description of this
fee.
(4) Organizational and Offering Expenses include legal, accounting,
printing, escrow, filing, registration, qualification, and other expenses
of the organization of the Company and the offering of the Shares, but
exclude Selling Commissions and the marketing support and due diligence
expense reimbursement fee.
(5) Acquisition Fees include all fees and commissions paid by the Company to
any person or entity in connection with the selection or acquisition of any
Property or the making of any Mortgage Loan, including to Affiliates or
nonaffiliates. Acquisition Fees do not include Acquisition Expenses.
(6) Represents Acquisition Expenses that are neither reimbursed to the Company
nor included in the purchase price of the Properties, and on which rent is
not received, but does not include certain expenses associated with
Property acquisitions that are part of the purchase price of the
Properties, that are included in the basis of the Properties, and on which
rent is received. Acquisition Expenses include any and all expenses
incurred by the Company, the Advisor, or any Affiliate of the Advisor in
connection with the selection or acquisition of any Property or the making
of any Mortgage Loan, whether or not acquired or made, including, without
limitation, legal fees and expenses, travel and communication expenses,
costs of appraisals, nonrefundable option payments on property not
acquired, accounting fees and expenses, taxes, and title insurance, but
exclude Acquisition Fees. The expenses that are attributable to the seller
of the Properties and part of the purchase price of the Properties is
anticipated to range between 1% and 2% of Gross Proceeds.
(7) Because leases generally will be on a "triple-net" basis, it is not
anticipated that a permanent reserve for maintenance and repairs will be
established. However, to the extent that the Company has insufficient funds
for such purposes, the Advisor may, but is not required to, contribute to
the Company an aggregate amount of up to 1% of the net offering proceeds
available to the Company for maintenance and repairs. The Advisor also may,
but is not required to, establish reserves from offering proceeds,
operating funds, and the available proceeds of any Sales.
(8) Offering proceeds designated for investment in Properties or the making of
Mortgage Loans temporarily may be invested in short-term, highly liquid
investments with appropriate safety of principal.
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<PAGE>
MANAGEMENT COMPENSATION
The table below summarizes the types, recipients, methods of
computation, and estimated amounts of all compensa tion, fees, reimbursements
and distributions to be paid directly or indirectly by the Company to the
Advisor and its Affiliates, exclusive of any distributions to which the Advisor
or its Affiliates may be entitled by reason of their purchase and ownership of
Shares. See "The Advisor and the Advisory Agreement." For information concerning
compensation to the Directors, see "Management."
A maximum of 15,000,000 Shares ($150,000,000) may be sold. An
additional 1,500,000 Shares ($15,000,000) may be sold to stockholders who
receive a copy of this Prospectus and who purchase Shares through the
Reinvestment Plan.
The following arrangements for compensation and fees to the Advisor and
its Affiliates were not determined by arm's-length negotiations. See "Conflicts
of Interest." There is no item of compensation and no fee that can be paid to
the Advisor or its Affiliates under more than one category.
Capitalized terms used but not defined in this section are defined at
the end of this Prospectus under "Definitions."
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<PAGE>
<TABLE>
<CAPTION>
TYPE OF
COMPENSATION ESTIMATED
AND RECIPIENT METHOD OF COMPUTATION MAXIMUM AMOUNT
- ----------------------- ------------------------------------------------------------------ -----------------------------------
ORGANIZATIONAL STAGE
- ----------------------- ------------------------------------------------------------------ -----------------------------------
<S> <C>
Selling Commissions Selling Commissions of 7.5% per Share on all Shares sold, subject $187,500 if 250,000 Shares are
to Managing Dealer to reduction under certain circumstances as described in "The sold; $11,250,000 if 15,000,000
and Soliciting Dealers Offering-Plan of Distribution." Soliciting Dealers may be real- Shares are sold; $12,375,000 if
lowed Selling Commissions of up to 7% with respect to Shares 16,500,000 Shares (including
they sell. 1,500,000 Shares offered pursuant
to the Reinvestment Plan) are sold.
- ----------------------- ------------------------------------------------------------------ -----------------------------------
Marketing support and Expense allowance of 0.5% of Gross Proceeds to the Managing $12,500 if 250,000 Shares are sold;
due diligence expense Dealer, all or a portion of which may be reallowed to Soliciting $750,000 if 15,000,000 Shares are
reimbursement fee to Dealers. The Managing Dealer will pay all sums attributable to sold; $825,000 if 16,500,000
Managing Dealer and bona fide due diligence expenses from this fee, in the Managing Shares (including 1,500,000
Soliciting Dealers Dealer's sole discretion. Shares offered pursuant to the Re-
investment plan are sold.
- ----------------------- ------------------------------------------------------------------ -----------------------------------
Reimbursement to the Actual expenses incurred. Amount is not determinable at this
Advisor and its Affili- time. Estimated at 3% of Gross
ates for Organiza- Proceeds, $75,000 if 250,000
tional and Offering Shares are sold; $4,500,000 if
Expenses 15,000,000 Shares are sold;
$4,950,000 if 16,500,000 Shares
(including 1,500,000 Shares of-
fered pursuant to the Reinvestment
Plan) are sold.
- ----------------------- ------------------------------------------------------------------ -----------------------------------
ACQUISITION STAGE
- ----------------------- ------------------------------------------------------------------ -----------------------------------
Acquisition Fee to the 4.5% of Total Proceeds payable to the Advisor as Acquisition Fees. $112,500 if 250,000 Shares are
Advisor sold plus $20,250 if Permanent Fi-
nancing equals $450,000;
$6,750,000 if 15,000,000 Shares
are sold plus $2,025,000 if Perma-
nent Financing equals
$45,000,000; $7,425,000 if
16,500,000 Shares (including
1,500,000 Shares offered pursuant
to the Reinvestment Plan) are sold
plus $2,227,500 if Permanent Fi-
nancing equals $49,500,000.
- ----------------------- ------------------------------------------------------------------ -----------------------------------
Other Acquisition Any fees paid to Affiliates of the Advisor in connection with the Amount is not determinable at this
Fees to Affiliates of financing, development, construction or renovation of a Property. time.
the Advisor Such fees are in addition to 4.5% of Total Proceeds payable to the
Advisor as Acquisition Fees, and payment of such fees will be sub-
ject to approval by the Board of Directors, including a majority of
the Independent Directors, not otherwise interested in the transac-
tion.
- ----------------------- ------------------------------------------------------------------ -----------------------------------
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<PAGE>
- ----------------------- ------------------------------------------------------------------ -----------------------------------
TYPE OF
COMPENSATION ESTIMATED
AND RECIPIENT METHOD OF COMPUTATION MAXIMUM AMOUNT
- ----------------------- ------------------------------------------------------------------ -----------------------------------
Reimbursement of Ac- Reimbursement to the Advisor and its Affiliates for expenses actu- Acquisition Expenses, which are
quisition Expenses to ally incurred. based on a number of factors, in-
the Advisor and its cluding the purchase price of the
Affiliates Properties, are not determinable at
this time.
The total of all Acquisition Fees and any Acquisition Expenses
payable to the Advisor and its Affiliates shall be reasonable and
shall not exceed an amount equal to 6% of the Real Estate Asset
Value of a Property, or in the case of a Mortgage Loan, 6% of the
funds advanced, unless a majority of the Board of Directors, in-
cluding a majority of the Independent Directors not otherwise in-
terested in the transaction, approves fees in excess of this limit
subject to a determination that the transaction is commercially
competitive, fair and reasonable to the Company. Acquisition Fees
shall be reduced to the extent that, and if necessary to limit, the
total compensation paid to all persons involved in the acquisition of
any Property to the amount customarily charged in arms-length
transactions by other persons or entities rendering similar services
as an ongoing public activity in the same geographical location and
for comparable types of Properties, and to the extent that other ac-
quisition fees, finder's fees, real estate commissions, or other simi-
lar fees or commissions are paid by any person in connection with
the transaction. "Real Estate Asset Value" means the amount actu-
ally paid or allocated to the purchase, development, construction or
improvement of a Property, exclusive of Acquisition Fees and Ac-
quisition Expenses.
- ----------------------- ------------------------------------------------------------------ -----------------------------------
OPERATIONAL STAGE
- ----------------------- ------------------------------------------------------------------ -----------------------------------
Asset Management A monthly Asset Management Fee in an amount equal to one- Amount is not determinable at this
Fee to the Advisor twelfth of .60% of the Company's Real Estate Asset Value and the time. The amount of the Asset
outstanding principal amount of any Mortgage Loans, as of the end Management Fee will depend upon,
of the preceding month. Specifically, Real Estate Asset Value among other things, the cost
equals the amount invested in the Properties wholly owned by the of the Properties and the amount
Company, determined on the basis of cost, plus, in the case of invested in Mortgage Loans.
Properties owned by any Joint Venture or partnership in which the
Company is a co-venturer or partner, the portion of the cost of
such Properties paid by the Company, exclusive of Acquisition Fees
and Expenses. The Asset Management Fee, which will not exceed fees
which are competitive for similar services in the same geographic
area, may or may not be taken, in whole or in part as to any year,
in the sole discretion of the Advisor. All or any portion of the
Asset Management Fee not taken as to any fiscal year shall be
deferred without interest and may be taken in such other fiscal
year as the Advisor shall determine.
- ----------------------- ------------------------------------------------------------------ -----------------------------------
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<PAGE>
- ----------------------- ------------------------------------------------------------------ -----------------------------------
TYPE OF
COMPENSATION ESTIMATED
AND RECIPIENT METHOD OF COMPUTATION MAXIMUM AMOUNT
- ----------------------- ------------------------------------------------------------------ -----------------------------------
Reimbursement to the Operating Expenses (which, in general, are those expenses relating Amount is not determinable at this
Advisor and Affiliates to administration of the Company on an ongoing basis) will be re- time.
for operating expenses imbursed by the Company. To the extent that Operating Expenses
payable or reimbursable by the Company, in any four consecutive
fiscal quarters (the "Expense Year"), exceed the greater of 2% of
Average Invested Assets or 25% of Net Income (the "2%/25%
Guidelines"),the Advisor shall reimburse the Company within 60
days after the end of the Expense Year the amount by which the to-
tal Operating Expenses paid or incurred by the Company exceed
the 2%/25% Guidelines. "Average Invested Assets" means, for a
specified period, the average of the aggregate book value of the as-
sets of the Company invested, directly or indirectly, in equity inter-
ests in and loans secured by real estate before reserves for
depreciation or bad debts or other similar non-cash reserves, com-
puted by taking the average of such values at the end of each
month during such period. "Net Income" means for any period,
the total revenues applicable to such period, less the total expenses
applicable to such period excluding additions to reserves for depre-
ciation, bad debts, or other similar non-cash reserves; provided,
however, Net Income for purposes of calculating total allowable
Operating Expenses shall exclude the gain from the sale of the
Company's assets.
- ----------------------- ------------------------------------------------------------------ -----------------------------------
Soliciting Dealer Serv- An annual fee of .20% of Invested Capital on December 31 of each Amount is not determinable at this
icing Fee to Managing year, commencing on December 31 of the year following the year time. Until such time as assets are
Dealer in which the offering terminates, generally payable to the Manag- sold, the estimated amounts pay-
ing Dealer, which, in its sole discretion, in turn may reallow all able to the Managing Dealer for
or a portion of such fee to Soliciting Dealers whose clients hold each of the years following the year
Shares on such date. In general, Invested Capital is the amount of of termination of the offering are
cash paid by the stockholders to the Company for their Shares, re- expected to be $5,000 if 250,000
duced by certain prior Distributions to the stockholders from the Shares are sold; $300,000 if
Sale of Assets. The Soliciting Dealer Servicing Fee will terminate 15,000,000 Shares are sold; and
as of the beginning of any year in which the Company is liquidated $330,000 if 16,500,000 Shares (in-
or in which Listing occurs, provided, however, that any previously cluding 1,500,000 Shares offered
accrued but unpaid portion of the Soliciting Dealer Servicing Fee pursuant to the Reinvestment Plan)
may be paid in such year or any subsequent year. are sold. The maximum total
amount payable to the Managing
Dealer through December 31, 2005
is $30,000 if 250,000 Shares are
sold; $1,800,000 if 15,000,000
Shares are sold; and $1,980,000 if
16,500,000 Shares are sold.
- ----------------------- ------------------------------------------------------------------ -----------------------------------
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<PAGE>
- ----------------------- ------------------------------------------------------------------ -----------------------------------
TYPE OF
COMPENSATION ESTIMATED
AND RECIPIENT METHOD OF COMPUTATION MAXIMUM AMOUNT
- ----------------------- ------------------------------------------------------------------ -----------------------------------
Deferred, subordinated A deferred, subordinated real estate disposition fee, payable upon Amount is not determinable at this
real estate disposition Sale of one or more Properties, in an amount equal to the lesser of time. The amount of this fee, if it
fee payable to the Ad- (i) one-half of a Competitive Real Estate Commission, or (ii) 3% of becomes payable, will depend upon
visor from a Sale or the sales price of such Property or Properties. Payment of such fee the price at which Properties are
Sales of a Property not shall be made only if the Advisor provides a substantial amount of sold.
in liquidation of the services in connection with the Sale of a Property or Properties and
Company shall be subordinated to receipt by the stockholders of Distributions
equal to the sum of (i) their aggregate Stockholders' 8% Return
and (ii) their aggregate Invested Capital. If, at the time of a Sale,
payment of the disposition fee is deferred because the subordina-
tion conditions have not been satisfied, then the disposition fee
shall be paid at such later time as the subordination conditions are
satisfied. Upon Listing, if the Advisor has accrued but not been
paid such real estate disposition fee, then for purposes of determin-
ing whether the subordination conditions have been satisfied,
stockholders will be deemed to have received a Distribution in the
amount equal to the product of the total number of Shares out-
standing and the average closing price of the Shares over a period,
beginning 180 days after Listing, of 30 days during which the
Shares are traded. "Stockholders' 8% Return," as of each date,
means an aggregate amount equal to an 8% cumulative, noncom-
pounded, annual return on Invested Capital.
- ----------------------- ------------------------------------------------------------------ -----------------------------------
Subordinated Incen- At such time, if any, as Listing occurs, the Advisor shall be paid Amount is not determinable at this
tive Fee payable to the the Subordinated Incentive Fee in an amount equal to 10% of the time.
Advisor at such time, amount by which (i) the market value of the Company (as defined
if any, as Listing oc- below) plus the total Distributions made to stockholders from the
curs Company's inception until the date of Listing exceeds (ii) the sum
of (A) 100% of Invested Capital and (B) the total Distributions re-
quired to be made to the stockholders in order to pay the Stock-
holders' 8% Return from inception through the date the market
value is determined. For purposes of calculating the Subordinated
Incentive Fee, the market value of the Company shall be the aver-
age closing price or average of bid and asked price, as the case may
be, over a period of 30 days during which the Shares are traded
with such period beginning 180 days after Listing. The Subordi-
nated Incentive Fee will be reduced by the amount of any prior
payment to the Advisor of a deferred, subordinated share of Net
Sales Proceeds from Sales of assets of the Company.
- ----------------------- ------------------------------------------------------------------ -----------------------------------
Deferred, subordinated A deferred, subordinated share equal to 10% of Net Sales Proceeds Amount is not determinable at this
share of Net Sales Pro- from Sales of assets of the Company payable after receipt by the time.
ceeds from Sales of as- stockholders of Distributions equal to the sum of (i) the Stockhold-
sets of the Company ers' 8% Return and (ii) 100% of Invested Capital. Following List-
not in liquidation of ing, no share of Net Sales Proceeds will be paid to the Advisor.
the Company payable
to the Advisor
- ----------------------- ------------------------------------------------------------------ -----------------------------------
Secured Equipment A fee paid to the Advisor out of the proceeds of the Line of Credit Amount is not determinable at this
Lease Servicing Fee to or Permanent Financing for negotiating Secured Equipment Leases time.
the Advisor and supervising the Secured Equipment Lease program equal to
2% of the purchase price of the Equipment subject to each Secured
Equipment Lease and paid upon entering into such lease.
- ----------------------- ------------------------------------------------------------------ -----------------------------------
Reimbursement to the Repayment by the Company of actual expenses incurred. Amount is not determinable at this
Advisor and Affiliates time.
for Secured Equip-
ment Lease servicing
expenses
- ----------------------- ------------------------------------------------------------------ -----------------------------------
LIQUIDATION STAGE
- ----------------------- ------------------------------------------------------------------ -----------------------------------
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<PAGE>
- ----------------------- ------------------------------------------------------------------ -----------------------------------
TYPE OF
COMPENSATION ESTIMATED
AND RECIPIENT METHOD OF COMPUTATION MAXIMUM AMOUNT
- ----------------------- ------------------------------------------------------------------ -----------------------------------
Deferred, subordinated A deferred, subordinated real estate disposition fee, payable upon Amount is not determinable at this
real estate disposition Sale of one or more Properties, in an amount equal to the lesser of time. The amount of this fee, if it
fee payable to the Ad- (i) one-half of a Competitive Real Estate Commission, or (ii) 3% of becomes payable, will depend upon
visor from a Sale or the sales price of such Property or Properties. Payment of such fee the price at which Properties are
Sales in liquidation of shall be made only if the Advisor provides a substantial amount of sold.
the Company services in connection with the Sale of a Property or Properties and
shall be subordinated to receipt by the stockholders of Distributions
equal to the sum of (i) their aggregate Stockholders' 8% Return
and (ii) their aggregate Invested Capital. If, at the time of a Sale,
payment of the disposition fee is deferred because the subordina-
tion conditions have not been satisfied, then the disposition fee
shall be paid at such later time as the subordination conditions are
satisfied.
- ----------------------- ------------------------------------------------------------------ -----------------------------------
Deferred, subordinated A deferred, subordinated share equal to 10% of Net Sales Proceeds Amount is not determinable at this
share of Net Sales Pro- from Sales of assets of the Company payable after receipt by the time.
ceeds from Sales of as- stockholders of Distributions equal to the sum of (i) the Stockhold-
sets of the Company in ers' 8% Return and (ii) 100% of Invested Capital. Following List-
liquidation of the ing, no share of Net Sales Proceeds will be paid to the Advisor.
Company payable to the Advisor.
the Advisor
- ----------------------- ------------------------------------------------------------------ -----------------------------------
</TABLE>
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<PAGE>
CONFLICTS OF INTEREST
The Company will be subject to various conflicts of interest arising
out of its relationship to the Advisor and its Affiliates, as described below.
The following chart indicates the relationship between the Advisor and
those Affiliates that will provide services to the Company.
- ----------------------------------- ---------------------------
| CNL AMERICAN REALTY FUND, INC. | | |
| (the Company) | | CNL GROUP, INC. (1) |
| | | |
- ----------------------------------- ---------------------------
| |
| |
Advisory Agreement |
| |
| ---------------------------------------------
| | | |
--------------------------------- ----------------------------
| CNL REAL ESTATE ADVISORS, INC.| | CNL SECURITIES CORP. |
| (Advisor to Company) | | (Managing Dealer) |
| | | |
--------------------------------- -----------------------------
- --------------------------
(1) James M. Seneff, Jr., Chairman of the Board and Chief Executive Officer of
the Company, shares ownership and voting control of CNL Group, Inc. with
Dayle L. Seneff, his wife.
PRIOR AND FUTURE PROGRAMS
In the past, Affiliates of the Advisor have organized over 100 other
real estate investments, currently have other real estate holdings, and in the
future expect to form, offer interests in, and manage other real estate programs
in addition to the Company, and make additional real estate investments. Some of
these (including 18 prior public partnerships, one prior unlisted public REIT
and one prior listed public REIT) involve and will involve Affiliates of the
Advisor in the ownership, operation, leasing, and management of properties that
may be suitable for the Company.
Certain of these affiliated public or private real estate programs
invest in restaurant properties, may invest in restaurant and hotel properties,
may purchase properties concurrently with the Company and may lease properties
to operators who also lease or operate certain of the Company's Properties.
These properties, if located in the vicinity of, or adjacent to, Properties
acquired by the Company may affect the Properties' gross revenues. Additionally,
such other programs may offer mortgage or equipment financing to the same or
similar entities as those targeted by the Company, thereby affecting the
Company's Mortgage Loan activities or Secured Equipment Lease program. Such
conflicts between the Company and affiliated programs may affect the value of
the Company's investments as well as its Net Income. The Company believes that
the Advisor has established guidelines to minimize such conflicts. See "Certain
Conflict Resolution Procedures" below.
ACQUISITION OF PROPERTIES
Affiliates of the Advisor regularly have opportunities to acquire
restaurant properties of a type suitable for acquisition by the Company as a
result of their existing relationships and past experience with various
Restaurant
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<PAGE>
Chains and their franchisees. Affiliates of the Advisor are expected to develop
similar relationships with various Hotel Chains and their franchisees. See
"Business -- General." A purchaser who wishes to acquire one or more of these
properties must do so within a relatively short period of time, occasionally at
a time when the Company (due to insufficient funds, for example) may be unable
to make the acquisition.
In an effort to address these situations and preserve the acquisition
opportunities for the Company (and other entities with which the Advisor or its
Affiliates are affiliated), Affiliates of the Advisor maintain lines of credit
which enable them to acquire properties on an interim basis. Typically, no more
than ten to 15 properties are temporarily owned by Affiliates of the Advisor on
this interim basis at any particular time. These properties generally will be
purchased from Affiliates of the Advisor, at their cost, by one or more existing
or future public or private programs formed by Affiliates of the Advisor.
The Advisor could experience potential conflicts of interest in
connection with the negotiation of the purchase price and other terms of the
acquisition of a Property, as well as the terms of the lease of a Property, due
to its relation ship with its Affiliates and the ongoing business relationship
of its Affiliates with operators of Restaurant Chains and Hotel Chains.
The Advisor or its Affiliates also may be subject to potential
conflicts of interest at such time as the Company wishes to acquire a property
that also would be suitable for acquisition by an Affiliate of CNL. Affiliates
of the Advisor serve as Directors of the Company and, in this capacity, have a
fiduciary obligation to act in the best interest of the stockholders of the
Company and, as general partners or directors of CNL Affiliates, to act in the
best interests of the investors in other programs with investments that may be
similar to those of the Company and will use their best efforts to assure that
the Company will be treated as favorably as any such other program. See
"Management -- Fiduciary Responsibility of the Board of Directors." The Company
has also developed procedures to resolve potential conflicts of interest in the
allocation of properties between the Company and certain of its Affiliates. See
"Certain Conflict Resolution Procedures" below.
The Company will supplement this Prospectus during the offering period
to disclose the acquisition of a Property at such time as the Advisor believes
that a reasonable probability exists that the Company will acquire the Property,
including an acquisition from the Advisor or its Affiliates. Based upon the
experience of management of the Company and the Advisor and the proposed
acquisition methods, a reasonable probability that the Company will acquire a
Property normally will occur as of the date on which (i) a commitment letter is
executed by a proposed lessee, (ii) a satisfactory credit underwriting for the
proposed lessee has been completed and (iii) a satisfactory site inspection has
been completed.
SALES OF PROPERTIES
A conflict also could arise in connection with the Advisor's
determination as to whether or not to sell a Property, since the interests of
the Advisor and the stockholders may differ as a result of their distinct
financial and tax positions and the compensation to which the Advisor or its
Affiliates may be entitled upon the Sale of a Property. See "Compensation of the
Advisor," below for a description of these compensation arrangements. In order
to resolve this potential conflict, the Board of Directors will be required to
approve each Sale of a Property. In the unlikely event that the Company and
another CNL program attempted to sell similar properties at the same time, a
conflict could arise since the two programs potentially could compete with each
other for a suitable purchaser. In order to resolve this potential conflict, the
Advisor has agreed not to approve the sale of any of the Company's Properties
contemporaneously with the sale of a property owned by another CNL program if
the two properties are part of the same Restaurant Chain or Hotel Chain and are
within a three-mile radius of each other, unless the Advisor and the principals
of the other CNL program are able to locate a suitable purchaser for each
property.
JOINT INVESTMENT WITH AN AFFILIATED PROGRAM
The Company may invest in Joint Ventures with another program sponsored
by the Advisor or its Affiliates if a majority of the Directors, including a
majority of the Independent Directors, not otherwise interested in the
transaction, determine that the investment in the Joint Venture is fair and
reasonable to the Company and on substantially the same terms and conditions as
those to be received by the co-venturer or co-venturers.
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<PAGE>
COMPETITION FOR MANAGEMENT TIME
The officers and directors of the Advisor and the officers and
Directors of the Company currently are engaged, and in the future will engage,
in the management of other business entities and properties and in other
business activities. They will devote only as much of their time to the business
of the Company as they, in their judgment, determine is reasonably required,
which will be substantially less than their full time. These officers and
directors of the Advisor and officers and Directors of the Company may
experience conflicts of interest in allocating management time, services, and
functions among the Company and the various entities, investor programs (public
or private), and any other business ventures in which any of them are or may
become involved.
COMPENSATION OF THE ADVISOR
The Advisor will be engaged to perform various services for the Company
and will receive fees and compensa tion for such services. None of the
agreements for such services were the result of arm's-length negotiations. All
such agreements, including the Advisory Agreement, require approval by a
majority of the Board of Directors, including a majority of the Independent
Directors, not otherwise interested in such transactions, as being fair and
reasonable to the Company and on terms and conditions no less favorable than
those which could be obtained from unaffiliated entities. The timing and nature
of fees and compensation to the Advisor could create a conflict between the
interests of the Advisor and those of the stockholders. A transaction involving
the purchase, lease, or Sale of any Property, or the entering into or Sale of a
Mortgage Loan or a Secured Equipment Lease by the Company may result in the
immediate realization by the Advisor and its Affiliates of substantial
commissions, fees, compensation, and other income. Although the Advisory
Agreement authorizes the Advisor to take primary responsibility for all
decisions relating to any such transaction, the Board of Directors must approve
all of the Company's acquisitions and Sales of Properties and the entering into
and Sales of Mortgage Loans or Secured Equipment Leases. Potential conflicts may
arise in connection with the determination by the Advisor on behalf of the
Company of whether to hold or sell a Property, Mortgage Loan, or Secured
Equipment Leases as such determination could impact the timing and amount of
fees payable to the Advisor. See "The Advisor and the Advisory Agreement."
RELATIONSHIP WITH MANAGING DEALER
The Managing Dealer is CNL Securities Corp., an Affiliate of the
Company. Certain of the officers and Directors of the Company are also officers,
directors, and registered principals of the Managing Dealer. This relation ship
may create conflicts in connection with the fulfillment by the Managing Dealer
of its due diligence obligations under the federal securities laws. Although the
Managing Dealer will examine the information in the Prospectus for accuracy and
completeness, the Managing Dealer is an Affiliate of the Company and will not
make an independent review of the Company and the offering. Accordingly, the
investors do not have the benefit of such independent review. Certain of the
Soliciting Dealers have made, or are expected to make, their own independent due
diligence investigations. The Managing Dealer is not prohibited from acting in
any capacity in connection with the offer and sale of securities offered by
entities that may have some or all investment objectives similar to those of the
Company and is expected to participate in other offerings sponsored by one or
more of the officers or Directors of the Company.
-31-
<PAGE>
LEGAL REPRESENTATION
Shaw Pittman Potts & Trowbridge, which serves as securities and tax
counsel to the Company in this offering, also serves as securities and tax
counsel for certain of its Affiliates, including other real estate programs, in
connection with other matters. In addition, certain members of the firm of Shaw
Pittman Potts & Trowbridge have invested as limited partners in prior programs
sponsored by Affiliates of the Advisor in aggregate amounts which do not exceed
one percent of the amounts sold by any of these programs, and members of the
firm also may invest in the Company. Neither the Company nor the stockholders
will have separate counsel. In the event any controversy arises following the
termination of this offering in which the interests of the Company appear to be
in conflict with those of the Advisor or its Affiliates, other counsel may be
retained for one or both parties.
CERTAIN CONFLICT RESOLUTION PROCEDURES
In order to reduce or eliminate certain potential conflicts of
interest, the Articles of Incorporation contain a number of restrictions
relating to (i) transactions between the Company and the Advisor or its
Affiliates, (ii) certain future offerings, and (iii) allocation of properties,
mortgage loans and secured equipment leases among certain affiliated entities.
These restrictions include the following:
1. No goods or services will be provided by the Advisor or its
Affiliates to the Company except for transactions in which the Advisor or its
Affiliates provide goods or services to the Company in accordance with the
Articles of Incorporation which provides that a majority of the Directors
(including a majority of the Independent Directors) not otherwise interested in
such transactions must approve such transactions as fair and reasonable to the
Company and on terms and conditions not less favorable to the Company than those
available from unaffiliated third parties and not less favorable than those
available from the Advisor or its Affiliates in transactions with unaffiliated
third parties.
2. The Company will not purchase or lease Properties in which the
Advisor or its Affiliates has an interest without the determination, by a
majority of the Directors (including a majority of the Independent Directors)
not otherwise interested in such transaction, that such transaction is
competitive and commercially reasonable to the Company and at a price to the
Company no greater than the cost of the asset to the Advisor or its Affiliate
unless there is substantial justification for any amount that exceeds such cost
and such excess amount is determined to be reasonable. In no event shall the
Company acquire any such asset at an amount in excess of its appraised value.
The Company will not sell or lease Properties to the Advisor or its Affiliates
unless a majority of the Directors (including a majority of the Independent
Directors) not interested in the transaction determine the transaction is fair
and reasonable to the Company.
3. The Company will not make any loans to Affiliates. Any loans to the
Company by the Advisor or its Affiliates must be approved by a majority of the
Directors (including a majority of the Independent Directors) not otherwise
interested in such transaction as fair, competitive, and commercially
reasonable, and no less favorable to the Company than comparable loans between
unaffiliated parties. It is anticipated that the Advisor or its Affiliates shall
be entitled to reimbursement, at cost, for actual expenses incurred by the
Advisor or its Affiliates on behalf of the Company or Joint Ventures in which
the Company is a co-venturer, subject to the 2%/25% Guidelines (2% of Average
Invested Assets or 25% of Net Income) described under "The Advisor and the
Advisory Agreement -- The Advisory Agreement."
4. Until completion of this offering, the Advisor and its Affiliates
will not offer or sell interests in any subsequently formed public program that
has investment objectives and structure similar to those of the Company and that
intends to (i) invest, on a cash and/or leveraged basis, in a diversified
portfolio of restaurant and hotel properties to be leased on a "triple-net"
basis to operators of Restaurant Chains and Hotel Chains, (ii) offer mortgage
loans and (iii) offer secured equipment leases. The Advisor and its Affiliates
also will not purchase a property or offer or invest in a mortgage loan or
secured equipment lease for any such subsequently formed public program that has
investment objectives and structure similar to the Company and that intends to
invest on a cash and/or leveraged basis primarily in a diversified portfolio of
restaurant and hotel properties to be leased on a "triple-net" basis to
operators of Restaurant Chains and Hotel Chains until substantially all
(generally, 80%) of the funds available for investment (Net Offering Proceeds)
by the Company have been invested or committed to invest-
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<PAGE>
ment. (For purposes of the preceding sentence only, funds are deemed to have
been committed to investment to the extent written agreements in principle or
letters of understanding are executed and in effect at any time, whether or not
any such investment is consummated, and also to the extent any funds have been
reserved to make contingent payments in connection with any Property, whether or
not any such payments are made.) Affiliates of the Advisor are currently
purchasing restaurant and other types of properties, including furniture,
fixtures and equipment, and incurring related costs for public and private
programs, which have investment objectives that are not identical, and/or a
structure not similar to, those of the Company, but which make investments that
include "triple-net" leases of fast-food, family-style and casual-dining
restaurant properties and other types of properties, Mortgage Loans and/or in
Secured Equipment Leases. The Advisor or its Affiliates currently are and in the
future may offer interests in one or more public or private programs organized
to purchase properties of the type to be acquired by the Company, to offer
Mortgage Loans and/or to offer Secured Equipment Leases.
5. The Board of Directors and the Advisor have agreed that, in the
event that an investment opportunity becomes available which is suitable for
both the Company and a public or private entity with which the Advisor or its
Affiliates are affiliated, for which both entities have sufficient uninvested
funds, then the entity which has had the longest period of time elapse since it
was offered an investment opportunity will first be offered the investment
opportunity. An investment opportunity will not be considered suitable for a
program if the requirements of Item 4 above could not be satisfied if the
program were to make the investment. In determining whether or not an investment
opportunity is suitable for more than one program, the Advisor and its
Affiliates will examine such factors, among others, as the cash requirements of
each program, the effect of the acquisition both on diversification of each
program's investments by types of restaurants and other businesses and
geographic area, and on diversification of the tenants of its properties (which
also may affect the need for one of the programs to prepare or produce audited
financial statements for a property or a tenant), the anticipated cash flow of
each program, the size of the investment, the amount of funds available to each
program, and the length of time such funds have been available for investment.
If a subsequent development, such as a delay in the closing of a property or a
delay in the construction of a property, causes any such investment, in the
opinion of the Advisor and its Affiliates, to be more appropriate for an entity
other than the entity which committed to make the investment, however, the
Advisor has the right to agree that the other entity affiliated with the Advisor
or its Affiliates may make the investment. The Advisor and certain other
Affiliates of the Company are affiliated with CNL American Properties Fund, Inc.
and CNL Income Fund XVIII, Ltd., public programs, and CNL Income & Growth Fund
VIII, Ltd., a private program, offerings of securities for each of which are
ongoing. As of April 2, 1997, CNL American Properties Fund, Inc., CNL Income
Fund XVIII, Ltd. and CNL Income & Growth Fund VIII, Ltd. had approximately
$29,900,000, $3,700,000 and $5,073,000, respectively, available for investment.
6. With respect to Shares owned by the Advisor, the Directors, or any
Affiliate, neither the Advisor, nor the Directors may vote or consent on matters
submitted to the stockholders regarding the removal of the Advisor, Directors,
or any Affiliate or any transaction between the Company and any of them. In
determining the requisite percentage in interest of Shares necessary to approve
a matter on which the Advisor, Directors, and any Affiliate may not vote or
consent, any Shares owned by any of them shall not be included.
Additional conflict resolution procedures are identified under "--
Sales of Properties," "-- Joint Investment With An Affiliated Program," and "--
Legal Representation."
SUMMARY OF REINVESTMENT PLAN
The Company has adopted the Reinvestment Plan pursuant to which
stockholders may elect to have the full amount of their cash Distributions from
the Company reinvested in additional Shares of the Company. Each prospective
investor who wishes to participate in the Reinvestment Plan should consult with
such investor's Soliciting Dealer as to the Soliciting Dealer's position
regarding participation in the Reinvestment Plan. The following discussion
summarizes the principal terms of the Reinvestment Plan. The Reinvestment Plan
is attached hereto as Exhibit A.
GENERAL
An independent agent (the "Reinvestment Agent"), which currently is MMS
Escrow and Transfer Agency, Inc., will act on behalf of the participants in the
Reinvestment Plan (the "Participants"). At anytime that
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<PAGE>
the Company is engaged in an offering including the offering described herein,
the Reinvestment Agent will invest all Distributions attributable to Shares
owned by Participants in Shares of the Company at the public offering price per
Share, which is $10.00 per Share. At anytime that the Company is not engaged in
an offering and until Listing, the price per Share will be determined by (i)
quarterly appraisal updates performed by the Company based on a review of the
existing appraisal and lease of each Property, focusing on a re-examination of
the capitalization rate applied to the rental stream to be derived from that
Property; and (ii) a review of the outstanding Mortgage Loans and Secured
Equipment Leases focusing on a determination of present value by a
re-examination of the capitalization rate applied to the stream of payments due
under the terms of each Mortgage Loan and Secured Equipment Lease. The
capitalization rate used by the Company and, as a result, the price per Share
paid by the Participants in the Reinvestment Plan prior to Listing will be
determined by the Advisor in its sole discretion. The factors that the Advisor
will use to determine the capitalization rate include (i) its experience in
selecting, acquiring and managing properties similar to the Properties; (ii) an
examination of the conditions in the market; and (iii) capitalization rates in
use by private appraisers, to the extent that the Advisor deems such factors
appropriate, as well as any other factors that the Advisor deems relevant or
appropriate in making its determination. The Company's internal accountants will
then convert the most recent quarterly balance sheet of the Company from a
"GAAP" balance sheet to a "fair market value" balance sheet. Based on the "fair
market value" balance sheet, the internal accountants will then assume a sale of
the Company's assets and the liquidation of the Company in accordance with its
constitutive documents and applicable law and compute the appropriate method of
distributing the cash available after payment of reasonable liquidation
expenses, including closing costs typically associated with the sale of assets
and shared by the buyer and seller, and the creation of reasonable reserves to
provide for the payment of any contingent liabilities. All Shares available for
purchase under the Reinvestment Plan either are registered pursuant to this
Prospectus or will be registered under the Securities Act of 1933 through a
separate prospectus relating solely to the Reinvestment Plan. Until this
offering has terminated, Shares will be available for purchase out of the
additional 1,500,000 Shares registered with the Securities and Exchange
Commission (the "Commission") in connection with this offering. See "The
Offering -- Plan of Distribution." After the offering has terminated, Shares
will be available from any additional Shares (not expected to exceed 1,500,000
Shares at any one time) which the Company elects to register with the Commission
for the Reinvestment Plan. The Reinvestment Plan may be amended or supplemented
by an agreement between the Reinvestment Agent and the Company at any time,
including but not limited to an amendment to the Reinvestment Plan to add a
voluntary cash contribution feature or to substitute a new Reinvestment Agent to
act as agent for the Participants or to increase the administrative charge
payable to the Reinvestment Agent, by mailing an appropriate notice at least 30
days prior to the effective date thereof to each Participant at his or her last
address of record; provided, that any such amendment must be approved by a
majority of the Independent Directors of the Company. Such amendment or
supplement shall be deemed conclusively accepted by each Participant except
those Participants from whom the Company receives written notice of termination
prior to the effective date thereof.
Stockholders who have received a copy of this Prospectus and
participate in this offering can elect to participate in and purchase Shares
through the Reinvestment Plan at any time and would not need to receive a
separate prospectus relating solely to the Reinvestment Plan. A person who
becomes a stockholder otherwise than by participating in this offering may
purchase Shares through the Reinvestment Plan only after receipt of a separate
prospectus relating solely to the Reinvestment Plan.
At anytime that the Company is not engaged in an offering, the price
per Share purchased pursuant to the Reinvestment Plan shall be the fair market
value of the Shares based on quarterly appraisal updates of the Company's assets
until such time, if any, as Listing occurs. Upon Listing, the Shares to be
acquired for the Reinvestment Plan may be acquired either through such market or
directly from the Company pursuant to a registration statement relating to the
Reinvestment Plan, in either case at a per-Share price equal to the
then-prevailing market price on the national securities exchange or
over-the-counter market on which the Shares are listed at the date of purchase.
The Company is unable to predict the effect which such a proposed listing would
have on the price of the Shares acquired through the Reinvestment Plan.
INVESTMENT OF DISTRIBUTIONS
Distributions will be used by the Reinvestment Agent, promptly
following the payment date with respect to such Distributions, to purchase
Shares on behalf of the Participants from the Company. All such Distributions
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<PAGE>
shall be invested in Shares within 30 days after such payment date. Any
Distributions not so invested will be returned to Participants.
At this time, Participants will not have the option to make voluntary
contributions to the Reinvestment Plan to purchase Shares in excess of the
amount of Shares that can be purchased with their Distributions. The Board of
Directors reserves the right, however, to amend the Reinvestment Plan in the
future to permit voluntary contributions to the Reinvestment Plan by
Participants, to the extent consistent with the Company's objective of
qualifying as a REIT.
PARTICIPANT ACCOUNTS, FEES, AND ALLOCATION OF SHARES
For each Participant, the Reinvestment Agent will maintain a record
which shall reflect for each fiscal quarter the Distributions received by the
Reinvestment Agent on behalf of such Participant. The Company shall be
responsible for all administrative charges and expenses charged by the
Reinvestment Agent. Any interest earned on such Distributions will be paid to
the Company to defray certain costs relating to the Reinvestment Plan. The
administrative charge for each fiscal quarter will be the lesser of 5% of the
amount reinvested for the Participant or $2.50, with a minimum charge of $0.50.
The maximum annual charge is $10.00.
The Reinvestment Agent will use the aggregate amount of Distributions
to all Participants for each fiscal quarter to purchase Shares for the
Participants. If the aggregate amount of Distributions to Participants exceeds
the amount required to purchase all Shares then available for purchase, the
Reinvestment Agent will purchase all available Shares and will return all
remaining Distributions to the Participants within 30 days after the date such
Distributions are made. The purchased Shares will be allocated among the
Participants based on the portion of the aggregate Distributions received by
the Reinvestment Agent on behalf of each Participant, as reflected in the
records maintained by the Reinvestment Agent. The ownership of the Shares
purchased pursuant to the Reinvestment Plan shall be reflected on the books of
the Company.
Subject to the provisions of the Articles of Incorporation relating to
certain restrictions on and the effective dates of transfer, Shares acquired
pursuant to the Reinvestment Plan will entitle the Participant to the same
rights and to be treated in the same manner as those purchased by the
Participants in the offering. Accordingly, the Company will pay the Managing
Dealer Selling Commissions of 7.5% (subject to reduction under the circumstances
provided under "The Offering -- Plan of Distribution") a marketing support and
due diligence fee of .5%. The Company will also pay the Advisor Acquisition Fees
of 4.5% of the purchase price of the Shares sold pursuant to the Reinvestment
Plan until the termination of the offering. Thereafter, Acquisition Fees will be
paid by the Company only in the event that proceeds of the sale of Shares are
used to acquire Properties or to invest in Mortgage Loans. As a result,
aggregate fees payable to Affiliates of the Company will total between 8.0% and
12.5% of the proceeds of reinvested Distributions, up to 7.5% of which may be
reallowed to Soliciting Dealers.
The allocation of Shares among Participants may result in the ownership
of fractional Shares, computed to four decimal places.
REPORTS TO PARTICIPANTS
Within 60 days after the end of each fiscal quarter, the Reinvestment
Agent will mail to each Participant a statement of account describing, as to
such Participant, the Distributions reinvested during the quarter, the number of
Shares purchased during the quarter, the per Share purchase price for such
Shares, the total administrative charge paid by the Company on behalf of each
Participant (see "Participant Accounts, Fees, and Allocation of Shares" above),
and the total number of Shares purchased on behalf of the Participant pursuant
to the Reinvestment Plan. Until such time, if any, as Listing occurs, the
statement of account also will report the most recent fair market value of the
Shares, deter mined as described above. See "General" above.
Tax information for income earned on Shares under the Reinvestment Plan
for the calendar year will be sent to each participant by the Company or the
Reinvestment Agent.
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<PAGE>
ELECTION TO PARTICIPATE OR TERMINATE PARTICIPATION
Stockholders of the Company who purchase Shares in this offering may
become Participants in the Reinvest ment Plan by making a written election to
participate on their Subscription Agreements at the time they subscribe for
Shares. Any other stockholder who receives a copy of this Prospectus or a
separate prospectus relating solely to the Reinvestment Plan and who has not
previously elected to participate in the Reinvestment Plan may so elect at any
time by written notice to the Board of Directors of such stockholder's desire to
participate in the Reinvestment Plan. Participation in the Reinvestment Plan
will commence with the next Distribution made after receipt of the Participant's
notice, provided it is received at least ten days prior to the record date for
such Distribution. Subject to the preceding sentence, the election to
participate in the Reinvestment Plan will apply to all Distributions
attributable to the fiscal quarter in which the stockholder made such written
election to participate in the Reinvestment Plan and to all fiscal quarters
thereafter, whether made (i) upon subscription or subsequently for stockholders
who participate in this offering, or (ii) upon receipt of a separate prospectus
relating solely to the Reinvestment Plan for stockholders who do not participate
in this offering. Participants will be able to terminate their participation in
the Reinvestment Plan at any time without penalty by delivering written notice
to the Board of Directors ten business days before the end of a fiscal quarter.
A Participant who chooses to terminate participation in the
Reinvestment Plan must terminate his or her entire participation in the
Reinvestment Plan and will not be allowed to terminate in part. If a Participant
terminates his or her participation the Reinvestment Agent will send him or her
a check in payment for any fractional Shares in his or her account based on the
then market price of the Shares and the record books of the Company will be
revised to reflect the ownership records of his or her whole Shares. There are
no fees associated with a Participant's terminating his or her interest in the
Reinvestment Plan. A Participant in the Reinvestment Plan who terminates his or
her interest in the Reinvestment Plan will be allowed to participate in the
Reinvestment Plan again by notifying the Reinvestment Agent and completing any
required forms.
The Board of Directors reserves the right to prohibit Qualified Plans
from participating in the Reinvestment Plan if such participation would cause
the underlying assets of the Company to constitute "plan assets" of Qualified
Plans. See "The Offering -- ERISA Considerations."
FEDERAL INCOME TAX CONSIDERATIONS
Stockholders subject to federal taxation who elect to participate in
the Reinvestment Plan may incur a tax liability for Distributions allocated to
them even though they have elected not to receive their Distributions in cash
but rather to have their Distributions held pursuant to the Reinvestment Plan.
Specifically, stockholders will be treated as if they have received the
Distribution from the Company and then applied such Distribution to purchase
Shares in the Reinvestment Plan. A stockholder designating a Distribution for
reinvestment will be taxed on the amount of such Distribution as ordinary income
to the extent such Distribution is from current or accumulated earnings and
profits, unless the Company has designated all or a portion of the Distribution
as a capital gain dividend. In such case, such designated portion of the
Distribution will be taxed as long-term capital gain.
AMENDMENTS AND TERMINATION
The Company reserves the right to renew, extend, or amend any aspect of
the Reinvestment Plan without the consent of stockholders, provided that notice
of the amendment is sent to Participants at least 30 days prior to the effective
date thereof. The Company also reserves the right to terminate the Reinvestment
Plan for any reason at any time by ten days' prior written notice of termination
to all Participants.
REDEMPTION OF SHARES
At any time during which the Company is not engaged in a public
offering and prior to such time, if any, as Listing occurs, any stockholder who
purchases Shares in this offering or otherwise from the Company or who has held
Shares for not less than one year (other than the Advisor) may present all or
any portion equal to at least 25% of such Shares to the Company for redemption
at any time, in accordance with the procedures outlined herein. At such time,
the Company may, at its option, subject to the conditions described below,
redeem such Shares presented for redemption for cash to the extent it has
sufficient net proceeds ("Reinvestment Proceeds") from the sale of Shares under
the Reinvest ment Plan. There is no assurance that there will be Reinvestment
Proceeds available for redemption and, accordingly, a stockholder's Shares may
not be redeemed. The full amount of Reinvestment Proceeds attributable to any
quarter will be used to redeem Shares presented for redemption during such
quarter. If the full amount of Reinvestment Proceeds available for any given
quarter exceeds the amount necessary for such redemptions, the remaining amount
shall be held for subsequent redemptions unless such amount is sufficient to
acquire an additional Property (directly or through a Joint Venture) or to
invest in additional Mortgage Loans, or is used to repay outstanding
indebtedness. In that event, the Company may use all or a portion of such amount
to acquire one or more additional Properties, to invest in one or more
additional Mortgage Loans or to repay such outstanding indebtedness, provided
that the Company (or, if applicable, the Joint Venture) enters into a binding
contract to purchase such Property or Properties or invests in such Mortgage
Loan or Mortgage Loans, or uses such amount to repay outstanding indebtedness,
prior to payment of the next Distribution and the Company's receipt of requests
for redemption of Shares. If the full amount of Reinvestment Proceeds for any
given quarter is insufficient to fund all of the requested redemptions, the
Company will redeem the Shares presented for redemption in order of receipt.
A stockholder (other than a resident of Nebraska) who wishes to have
his or her Shares redeemed must mail or deliver a written request on a form
provided by the Company and executed by the stockholder, its trustee or
authorized agent, to the Company. Nebraska stockholders must deliver the same
type of request to a broker-dealer registered in Nebraska and must have his or
her Shares redeemed through such broker-dealer, who will communicate directly
with the Company. Within 30 days following the Company's receipt of the
stockholder's request, the Company will forward to such stockholder the
documents necessary to effect the redemption, including any signature guarantee
the Company may require. The Company will effect such redemption for the
calendar quarter provided that the Company receives the properly completed
redemption documents relating to the Shares to be redeemed from the stockholder
at least one calendar month prior to the last day of the current calendar
quarter and has sufficient Reinvestment Proceeds to redeem such Shares. The
effective date of any redemption will be the last date during a quarter during
which the Company receives the properly completed redemption documents. As a
result, the Company anticipates that, assuming sufficient Reinvestment Proceeds,
the effective date of redemptions will be no later than thirty days after the
quarterly determination of the availability of Reinvestment Proceeds.
Upon the Company's receipt of notice for redemption of Shares, the
redemption price will be on such terms as the Reinvestment Agent shall
determine. It is not anticipated that there will be a market for the Shares
before Listing occurs (although liquidity is not assured thereby). The
redemption plan will terminate, and the Company no longer shall accept Shares
for redemption, if and when Listing occurs. See "Risk Factors -- Investment
Risks -- Lack of Liquidity of Shares." Accordingly, in determining the "market
price" of the Shares for this purpose, it is expected that the purchase price
for Shares purchased from stockholders will be determined by reference to the
following factors, as well as any others deemed relevant or appropriate by the
Reinvestment Agent: (i) the price at which Shares have been purchased by
stockholders, either pursuant to the Reinvestment Plan or outside of the
Reinvestment Plan (to the extent the Company has information regarding the
prices paid for Shares
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<PAGE>
purchased outside the Reinvestment Plan), (ii) the annual statement of Share
valuation provided to certain stockholders (see "Reports to Stockholders"), and
(iii) the price at which stockholders are willing to sell their Shares. Shares
purchased during any particular period of time therefore may be purchased at
varying prices. The Board of Directors will announce any price adjustment and
the time period of its effectiveness as part of its regular communications with
stockholders. Any Shares acquired pursuant to a redemption will be retired and
no longer available for issuance by the Company.
A stockholder may present fewer than all his or her Shares to the
Company for redemption, provided, however, that (i) the minimum number of Shares
which must be presented for redemption shall be at least 25% of his or her
Shares, and (ii) if such stockholder retains any Shares, he or she must retain
at least 250 Shares (100 Shares for an IRA, Keogh Plan or pension plan).
The Directors, in their sole discretion, may amend or suspend the
redemption plan at any time they determine that such amendment or suspension is
in the best interest of the Company. The Directors may suspend the redemption of
Shares if (i) they determine, in their sole discretion, that such redemption
impairs the capital or the operations of the Company; (ii) they determine, in
their sole discretion, that an emergency makes such redemption not reasonably
practical; (iii) any governmental or regulatory agency with jurisdiction over
the Company so demands for the protection of the stockholders; (iv) they
determine, in their sole discretion, that such redemption would be unlawful; (v)
they determine, in their sole discretion, that such redemption, when considered
with all other redemptions, sales, assignments, transfers and exchanges of
Shares in the Company, could cause direct or indirect ownership of Shares of the
Company to become concentrated to an extent which would prevent the Company from
qualifying as a REIT under the Code; or (vi) such other reasons as the
Directors, in their sole discretion, deem to be in the best interest of the
Company. For a discussion of the tax treatment of such redemptions, see "Federal
Income Tax Considerations -- Taxation of Stockholders."
BUSINESS
GENERAL
The Company has been formed primarily to acquire Properties to be
leased on a long-term (generally, 10 to 20 years, plus renewal options for an
additional 10 to 20 years), "triple-net" basis. With proceeds of this offering,
the Company intends to purchase primarily fast-food, family-style, and
casual-dining restaurant Properties and limited service, extended stay and full
service hotel Properties. "Triple-net" means that the tenant generally will be
responsible for repairs, maintenance, property taxes, utilities, and insurance.
Some hotel Property leases may, however, obligate the tenant to fund, in
addition to its lease payment, a capital expenditures reserve fund up to a
pre-determined amount. Money in that fund may be used by the tenant, with the
approval of the Company, to pay for capital expenditures. The Company may be
responsible for capital expenditures in excess of the amounts in the reserve
fund, and the tenant generally is responsible for replenishing the reserve fund
and to pay a specified return on the amount of capital expenditures paid for by
the Company in excess of amounts in the reserve fund. Management believes that
the combination of restaurant and hotel Properties will benefit the Company and
its investors by enabling the Company to take advantage of attractive investment
opportunities in the growing restaurant and hotel industries and by providing
the Company with increased diversification of its investments. The Properties
may consist of land and building, the land underlying the building with the
building owned by the tenant or a third party, and the building only with the
land owned by a third party. The Company may provide Mortgage Loans to operators
of Restaurant Chains and Hotel Chains secured by real estate owned by the
operators. To a lesser extent, the Company also intends to offer Secured
Equipment Leases to operators of Restaurant Chains and Hotel Chains pursuant to
which the Company will finance, through loans or direct financing leases, the
Equipment.
The Properties, which typically will be freestanding and will be
located across the United States, will be leased to operators of Restaurant
Chains and Hotel Chains to be selected by the Advisor and approved by the Board
of Directors. Each Property acquisition and Mortgage Loan will be submitted to
the Board of Directors for approval. Properties purchased by the Company are
expected to be leased under arrangements generally requiring base annual rent
equal to a specified percentage of the Company's cost of purchasing a particular
Property, with automatic rent increases, as well as percentage rent based on
gross sales above specified levels. See "Description of Leases -- Computation of
Lease Payments," below.
The Company has not specified any percentage of Net Offering Proceeds
to be invested in either restaurant or hotel Properties. To the extent the
Company invests in restaurant Properties, it is expected that those will be
Properties of selected Restaurant Chains that are national and regional
restaurant chains, primarily fast-food, family-style, and casual-dining chains.
Fast-food restaurants feature quality food and quick service, which often
includes drive-through service, and offer a variety of menu items such as
hamburgers, steaks, seafood, chili, pizza, pasta dishes, chicken, hot and cold
sandwiches, and salads. Family-style restaurants feature services that generally
are associated with full-service restaurants, such as full table service and
cooked-to-order food, but at more moderate prices. The casual-dining (or dinner
house) concept features a variety of popular contemporary foods, full table
service, moderate prices, and surroundings that are appealing to families. The
casual-dining segment of the restaurant industry, like the family-style segment,
features services that generally are associated with the full-service restaurant
category. According to forecasts appearing in the January 1, 1997 issue of
Restaurants and Institutions, it is projected that the casual-dining segment of
full-service restaurant sales will experience 3.8% real growth in sales this
year, with sales predicted to reach $49 billion. The top 15 casual-dining chains
by sales have a total of 2,977 restaurants throughout the United States.
The restaurant industry is one of the largest industries in the United
States in volume of sales and number of employees (more than 9 million persons)
and includes fast-food outlets, cafeterias, lunchrooms, convenience stores,
family-style restaurants, casual-dining facilities, full-service restaurants,
and contract and industrial feeders. By the year 2000, food service sales are
expected to exceed $392 billion. Industry publications project that restaurant
industry sales will increase from $173.7 billion in 1985 to $320 billion in
1997. Restaurant industry sales for 1996 are projected to be $307.6 billion. In
1996, nominal growth, which is comprised of real growth and inflationary growth,
was 4.6% and is estimated to be 4.2% in 1997. Real growth of the restaurant
industry in 1996 was 1.7%, and industry analysts currently estimate that the
restaurant industry will achieve 1.4% real growth in 1997; however, according to
the National Restaurant Association, fast-food restaurants should outpace the
industry average for real growth, with a projected 2.5% increase over 1996.
Sales in this segment of the restaurant industry are projected to be $103.5
billion for 1997.
The Company may invest in the fast-food, family-style, and
casual-dining segments of the restaurant industry, the most rapidly growing
segments in recent years. According to the National Restaurant Association, 51%
of adults eat at a quick-service restaurant and 42% of adults patronize a
moderately-priced family restaurant at least once each week. In addition, the
National Restaurant Association indicates that Americans spend approximately 43
cents of every food dollar on dining away from home. Surveys published in
Restaurant Business indicate that families with children choose quick-service
restaurants four out of every five times they dine out. Additionally, according
to The Wall Street Journal (May 11, 1992), the average American spends $19,791
on fast-food in a lifetime. Further, according to Nation's Restaurant News, the
100 largest restaurant chains are posting an average of 7.2% growth in their
systemwide sales figures for 1995. Casual-theme dining concepts are among the
chains showing the strongest growth. In 1995, the sandwich segment experienced
sales growth of 6.98% over 1994 figures, and, the casual-dining segment
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experienced systemwide sales growth in 1995 of 12.99%, compared to 14.6% in
1994. Management believes that the Company will have the opportunity to
participate in this growth through the ownership of Properties leased to
operators of the Restaurant Chains.
The fast-food, family-style and casual-dining segments of the
restaurant industry have demonstrated their ability to adapt to changes in
consumer preferences, such as health and dietary issues, decreases in the
disposable income of consumers and environmental awareness, through various
innovative techniques, including special value pricing and promotions, increased
advertising, menu changes featuring low-calorie, low-cholesterol menu items, and
new packaging and energy conservation techniques.
The table set forth below provides information with respect to certain
Restaurant Chains in which Affiliates of the Company (consisting of a listed
public REIT, an unlisted public REIT, 18 public partnerships and 8 private
partnerships) have invested, as of December 31, 1996:
<TABLE>
<CAPTION>
Approximate Aggregate
Dollars Invested Percentage of Number of
Restaurant Chain by Affiliates Dollars Invested Prior Programs
---------------- ---------------- --------------
<S> <C>
Golden Corral $129,405,000 17.5% 26
Burger King 101,548,000 13.8% 25
Denny's 90,327,000 12.2% 20
Jack in the Box 68,332,000 9.3% 14
Hardee's 58,599,000 7.9% 13
Shoney's 33,517,000 4.5% 12
Long John Silver's 32,029,000 4.3% 6
Wendy's 29,344,000 4.0% 15
Boston Market 26,142,000 3.5% 7
TGI Friday's 21,508,000 2.9% 8
Checkers 21,263,000 2.9% 7
IHOP 18,992,000 2.6% 2
Perkins 16,311,000 2.2% 9
Pizza Hut 13,916,000 1.9% 8
KFC 13,642,000 1.9% 10
Popeyes 9,990,000 1.4% 8
Taco Bell 6,428,000 0.9% 5
Arby's 5,573,000 0.8% 5
Ponderosa 3,210,000 0.5% 3
</TABLE>
In addition to acquiring restaurant Properties, the Company may invest
a limited amount of Net Offering Proceeds in "co-branded" facilities, which are
restaurant facilities combined with another facility, such as a service station
or convenience store.
The Company may also invest Net Offering Proceeds in Properties of
selected national and regional limited service, extended stay and full service
Hotel Chains. The Company believes that attractive opportunities exist to
acquire limited service and extended stay hotels serving the economy to moderate
pricing segments and full service hotels serving the moderate and upscale
pricing segments of the hotel industry. According to Smith Travel Research, a
leading provider of lodging industry statistical research, the hotel industry
has been steadily improving its financial performance over the last several
years and that by year end 1996, the industry had experienced annual increases
in demand, occupancy, room rates and profitability for five consecutive years.
Also according to Smith Travel Research. the industry reached its highest
absolute level of pre-tax profit in its history at $11.5 billion (for 1996), a
35% increase over 1995. Growth in room demand exceeded the growth in new room
supply for each year from 1992 through 1996 and industry-wide occupancy
increased from a 20 year low of 61.8% in 1991 to 65.2% in 1996. The average
daily room rate also increased 5.9% in 1996, from $65.81 in 1995 to $69.66 in
1996, resulting in eight consecutive years of room rate growth.
According to the American Hotel & Motel Association, in 1995 there were
46,000 hotel properties which included over 3.5 million hotel rooms recording
over $72 billion in sales. The hotel industry employed over 1.1 million people
on a full or part time basis, paying over $16.3 billion in wages and salaries.
Hotels are a vital part of travel and tourism. In the United States, the tourism
industry, which globally is the world's largest industry, is currently ranked
third behind auto sales and retail food sales, and ranked second in terms of
employment behind health services. Nationally, 14% of total hotel rooms
available are located in urban areas, 35% in suburban areas, 34% in highway
locations, 6% in airport areas, and the remaining 11% in resort locations.
Leisure travelers comprise 25% hotel industry demand for occupied rooms,
transient business provides 30%, while 25% comes from conference attendees and
the remaining 20% is from other personal and family demand.
The Company may acquire limited service, extended stay or full service
hotel Properties. Limited service hotels generally minimize non-guest room space
and offer limited food service such as complimentary continental breakfasts and
do not have restaurant or lounge facilities on-site. Extended stay hotels
generally contain guest suites with a kitchen area and living area separate from
the bedroom. Extended stay hotels vary with respect to providing on-site
restaurant facilities. Full service hotels generally have conference or meeting
facilities and on-site food and beverage facilities.
Management intends to structure the Company's investments to allow it
to participate, to the maximum extent possible, in any sales growth in the
restaurant and hotel industries, as reflected in the Properties that it owns.
The Company therefore intends to generally structure its leases with percentage
rent requirements which are based on gross sales of the particular business over
specified levels located on the Property. Gross sales may increase even absent
real growth because increases in the costs typically are passed on to the
consumers through increased prices, and increased prices are reflected in gross
sales. In an effort to provide regular cash flow to the Company, the Company
intends to generally structure its leases to provide a minimum level of rent,
with automatic increases in the minimum rent, which is payable regardless of the
amount of gross sales at a particular Property. The Company also will endeavor
to maximize growth and minimize risks associated with ownership and leasing of
real estate that operates in these industry segments through careful selection
and screening of its tenants (as described in "Standards for Investment" below)
in order to reduce risks of default; monitoring statistics relating to
restaurant and hotel chains and continuing to develop relation ships in the
industry in order to reduce certain risks associated with investment in real
estate. See "Standards for Investment" below for a description of the standards
which the Board of Directors will employ in selecting Restaurant Chains, Hotel
Chains and particular Properties for investment.
Management expects to acquire Properties in part with a view to
diversification among Restaurant Chains and Hotel Chains and in the geographic
location of the Properties. There are no restrictions on the geographic area or
areas within the United States in which Properties
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acquired by the Company may be located. It is anticipated that the Properties
acquired by the Company will be located in various states and regions within the
United States.
The Company believes that freestanding, "triple-net" leased properties
of the type in which the Company will generally invest are attractive to tenants
because freestanding properties typically offer high visibility to passing
traffic, ease of access from a busy thoroughfare, tenant control over the site
to set hours of operation and maintenance standards and distinctive building
designs conductive to customer name recognition.
The Company may provide Mortgage Loans, generally for the purchase of
buildings by tenants that lease the underlying land from the Company. However,
because it prefers to focus on investing in Properties, which have the potential
to appreciate, the Company currently expects to provide Mortgage Loans in the
aggregate amount of approximately 5% to 10% of Gross Proceeds. Mortgage Loans
will be secured by property owned by the borrower. The Company expects that the
interest rate and terms (generally, 10 to 20 years) of the Mortgage Loans will
be similar to those of its leases.
The Company also intends to offer Secured Equipment Leases to operators
of Restaurant Chains and Hotel Chains. The Secured Equipment Leases will consist
primarily of leases, of and loans for the purchase of, Equipment. As of the date
of this Prospectus, the Company has neither identified any prospective operators
of Restaurant Chains or Hotel Chains that will participate in such financing
arrangements nor negotiated any specific terms of a Secured Equipment Lease. The
Company cannot predict terms and conditions of the Secured Equipment Leases,
although the Company expects that the Secured Equipment Leases will (i) have
terms that equal or exceed the useful life of the subject Equipment (although
such terms will not exceed 7 years), (ii) in the case of the leases, include an
option for the lessee to acquire the subject Equipment at the end of the lease
term for a nominal fee, (iii) include a stated interest rate, and (iv) in the
case of the leases, provide that the Company and the lessees will each treat the
Secured Equipment Leases as loans secured by personal property for federal
income tax purposes. See "Federal Income Tax Considerations -- Characterization
of Secured Equipment Leases." In addition, the Company expects that each of the
Secured Equipment Leases will be secured by the Equipment to which it relates.
Payments received from lessees under Secured Equipment Leases will be treated as
payments of principal and interest. All Secured Equipment Leases will be
negotiated by the Advisor and approved by the Board of Directors including a
majority of the Independent Directors.
The Company will borrow money to acquire Assets and to pay certain
fees. The Company intends to encumber assets in connection with the borrowing.
The Company plans to obtain a revolving Line of Credit in an amount up to
$45,000,000, and may, in addition, also obtain Permanent Financing. The Board of
Directors anticipates that the aggregate amount of any Permanent Financing, if
obtained, will not exceed 30% of the Company's total assets. The Permanent
Financing would be used to acquire Assets and pay a fee of 4.5% of any Permanent
Financing, excluding amounts to fund Secured Equipment Leases, as Acquisition
Fees, to the Advisor. The Line of Credit may be repaid with offering proceeds,
working capital or Permanent Financing. The Line of Credit and Permanent
Financing are the only source of funds for making Secured Equipment Leases and
for paying the Secured Equipment Lease Servicing Fee. The Company has engaged in
preliminary discussions with potential lenders but has not yet received a
commitment for the Line of Credit or any Permanent Financing and there is no
assurance that the Company will obtain the Line of Credit or any Permanent
Financing on satisfactory terms.
As of the date of this Prospectus, the Company had not entered into any
arrangements that create a reasonable probability that the Company will purchase
any Property or enter into any Mortgage Loan or Secured Equipment Lease.
Moreover, no Properties have been definitively selected for acquisition nor have
any Mortgage Loan borrowers or Secured Equipment Lease lessees or borrowers been
specifically identified.
The Company has undertaken to supplement this Prospectus during the
offering period to disclose the acquisition of Properties at such time as the
Company believes that a reasonable probability exists that any such Property
will be acquired by the Company. Based upon the experience and acquisition
methods of the Affiliates of the Company and the Advisor this normally will
occur, with regard to acquisition of Properties, as of the date on which (i) a
commit ment letter is executed by a proposed lessee, (ii) a satisfactory credit
underwriting for the proposed lessee has been completed, and (iii) a
satisfactory site inspection has been completed. The initial disclosure of any
proposed acquisition, however, cannot be relied upon as an assurance that the
Company ultimately will consummate such proposed acquisition or that the
information provided concerning the proposed acquisition will not change between
the date of such supple ment and the actual purchase or extension of financing.
The terms of any borrowing by the Company will also be disclosed by supplement
following receipt by the Company of an acceptable commitment letter from a
potential lender.
If the minimum number of 2,500,000 Shares ($2,500,000 in Gross
Proceeds) is sold, the Company will acquire no more than two restaurant
Properties, will not acquire any hotel Properties and will have reduced
diversification of its investments. Acquisition of a restaurant Property
generally involves an investment in land and building of approximately $400,000
to $1,250,000, although higher or lower figures for individual Properties are
possible. Based on the past experience of management and the Advisor in
acquiring similar restaurant properties and in light of current market
conditions, the Company could (i) invest in only restaurant Properties, in which
case it could acquire between 140 and 160 restaurant Properties, or (ii) invest
in only hotel Properties, in which case it could acquire between 8 to 42 hotel
Properties or (iii) invest in both restaurant and hotel Properties, although in
this instance the number of restaurant Properties and hotel Properties would
vary significantly depending upon the value of the hotel Properties acquired.
Assuming that the Net Offering Proceeds are divided evenly between restaurant
and hotel Properties, as to which there is no assurance, the Company could
invest in approximately 70 to 80 restaurant Properties and 4 to 21 hotel
Properties. In certain cases, the Company may become a co-venturer in a Joint
Venture that will own the Property. In each such case, the Company's cost to
purchase an interest in such Property will be less than the total purchase price
and the Company therefore will be able to acquire interests in a greater number
of Properties. The Company may also borrow to acquire Assets. See "Business --
Borrowing." Management estimates that approximately 30% to 50% of the Company's
investment in a restaurant Property generally will be for the cost of land, and
50% to 70% generally will be for the cost of the building. For a hotel Property,
management estimates that 10% to 20% of the Company's investment will be for
cost of land and 80% to 90% for the cost of the building. See "Joint Venture
Arrangements" below and "Risk Factors -- Investment Risks -- Possible Lack of
Diversification."
Management cannot estimate the number of Mortgage Loans that may be
entered into. The Company may also borrow money to make Mortgage Loans.
Although management cannot estimate the number of Secured Equipment
Leases that may be entered into, it expects to fund the Secured Equipment Lease
program from the proceeds of the Line of Credit or Permanent Financing in an
amount not to exceed 10% of Gross Proceeds and management has undertaken,
consistent with its objective of qualifying as a REIT for federal income tax
purposes, to ensure that the total value of all Secured Equipment Leases will
not exceed 25% of the Company's total assets, and that Secured Equipment Leases
to a single lessee, in the aggregate, will not exceed 5% of total assets.
SITE SELECTION AND ACQUISITION OF PROPERTIES
GENERAL. It is anticipated that the Restaurant Chains and Hotel Chains
selected by the Advisor, and as approved by the Board of Directors, will have
full-time staffs engaged in site selection and evaluation. All new sites must be
approved by the Restaurant Chains or Hotel Chains. The
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Restaurant Chains and Hotel Chains generally conduct or require the submission
of studies which typically include such factors as traffic patterns, population
trends, commercial and industrial development, office and institutional
development, residential development, per capita or household median income, per
capita or household median age, and other factors. The Restaurant Chains and
Hotel Chains also will review and approve all proposed tenants and business
sites. The Restaurant Chains and Hotel Chains or the operators are expected to
make their site evaluations and analyses, as well as financial information
regarding proposed tenants, available to the Company.
The Board of Directors, on behalf of the Company, will elect to
purchase and lease Properties based principally on an examination and evaluation
by the Advisor of the potential value of the site, the financial condition and
business history of the proposed tenant, the demographics of the area in which
the property is located or to be located, the proposed purchase price and
proposed lease terms, geographic and market diversification, and potential sales
expected to be generated by the business located on the property. In addition,
the potential tenant must meet at least the minimum standards established by a
Restaurant Chain or Hotel Chain for its operators. The Advisor also will perform
an independent break-even analysis of the potential profitability of a property
using historical data and other data developed by the Company and provided by
the Restaurant Chains or Hotel Chains.
Although the Restaurant Chains and Hotel Chains that are selected by
the Advisor will have approved each tenant and each Property, the Board of
Directors will exercise its own judgment as to, and will be solely responsible
for, the ultimate selection of both tenants and Properties. Therefore, some of
the properties approved by a Restaurant Chain or Hotel Chain may not be
purchased by the Company.
In each Property acquisition, it is anticipated that the Advisor will
negotiate the lease agreement with the tenant. In certain instances, the Advisor
may negotiate an assignment of an existing lease, in which case the terms of the
lease may vary substantially from the Company's standard lease terms, if the
Board of Directors, based on the recommendation of the Advisor, determines that
the terms of an acquisition and lease of a Property, taken as a whole, are
favorable to the Company. It is expected that the structure of the long-term
"triple-net" lease agreements, which generally provide for monthly rental
payments with automatic increases in base rent at specified times during the
lease terms and/or a percentage of gross sales over specified levels, will
increase the value of the Properties and provide an inflation hedge. See
"Description of Leases" below for a discussion of the anticipated terms of the
Company's leases. In connection with a Property acquisition, in the event the
tenant does not enter into a Secured Equipment Lease with the Company, the
tenant will provide at its own expense all Equipment necessary to operate the
Company's Property as a restaurant or hotel. Generally, a tenant either pays
cash or obtains a loan from a third party to purchase such items. If the tenant
obtains such a loan, the tenant will own this personal property subject to the
tenant's obligations under its loan. In the experience of the Affiliates of the
Company and the Advisor, there may be rare circumstances in which a tenant
defaults under such a loan, in which event the lender may attempt to remove the
personal property from the building, resulting in the Property becoming
inoperable until new Equipment can be purchased and installed. In order to
prevent repossession of this personal property by the lender, and only on an
interim basis in order to preserve the value of a Property, the Company may
elect (but only to the extent consistent with the Company's objective of
qualifying as a REIT) to use Company reserves to purchase this personal property
from the lender, generally at a discount for the remaining unpaid balance under
the tenant's loan. The Company then would expect, consistent with the Company's
objective of qualifying as a REIT, to resell the personal property to a new
tenant in connection with the transfer of the lease to that tenant.
Some lease agreements will be negotiated to provide the tenant with the
opportunity to purchase the Property under certain conditions, generally either
at a price not less than fair market value (determined by appraisal or
otherwise) or through a right of first refusal to purchase the Property. In
either case, the lease agreements will provide that the tenant may exercise
these rights only to the extent consistent with the Company's objective of
qualifying as a REIT. See "Sale of Properties, Mortgage Loans and Secured
Equipment Leases" below and "Federal Income Tax Considerations --
Characterization of Leases."
The purchase of each Property will be supported by an appraisal of the
real estate prepared by an independent appraiser. The Advisor, however, will
rely on its own independent analysis and not on such appraisals in determining
whether or not to recommend that the Company acquire a particular property. The
purchase price of each such Property, plus any Acquisition Fees paid by the
Company in connection with such purchase, will not exceed the Property's
appraised value. (In connection with the acquisition of a Property which is to
be constructed or renovated, the comparison of the purchase price and the
appraised value of such Property ordinarily will be based on the "when
constructed" price and value of such Property.) It should be noted that
appraisals are estimates of value and should not be relied upon as measures of
true worth or realizable value. Each appraisal will be maintained in the
Company's records for at least five years and will be available for inspection
and duplication by any stockholder.
The titles to Properties purchased by the Company will be insured by
appropriate title insurance policies and/or abstract opinions consistent with
normal practices in the jurisdictions in which the Properties are located.
CONSTRUCTION AND RENOVATION. In some cases, construction or renovation
will be required after the purchase contract has been entered into, but before
the total purchase price has been paid. In connection with the acquisition of
Properties that are to be constructed or renovated and as to which the Company
will own both the land and the building or building only, the Company generally
will advance funds for construction or renovation costs, as they are incurred,
pursuant to a development agreement with the developer. The developer may be the
tenant or an Affiliate of the Company. An Affiliate may serve as a developer and
enter into the development agreement with the Company if the transaction is
approved by a majority of the Directors, including a majority of the Independent
Directors. The Company believes that the ability to have an Affiliate capable of
serving as the developer provides the Company an advantage by enhancing its
relationship with key tenants and by giving it access to tenant opportunities at
an earlier stage of the development cycle. As a result, the Company believes it
has a greater number of opportunities for investment presented to it than it
might otherwise have and it is able to obtain better terms by negotiating the
terms of its investment at an earlier stage in the development cycle when there
are fewer competitive alternatives to the tenant.
The developer will enter into all construction contracts and will
arrange for and coordinate all aspects of the construction or renovation of the
property improvements. The developer will be responsible for the construction
or renovation of the building improvements, although it may employ co-developers
or sub-agents in fulfilling its responsibilities under the development
agreement. All general contractors performing work in connection with such
building improvements must provide a payment and performance bond or other
satisfactory form of guarantee of performance. All construction and renovation
will be performed or supervised by persons or entities acceptable to the
Advisor. The Company will be obligated, as construction or renovation costs are
incurred, to make the remaining payments due as part of the purchase price for
the Properties, provided that the construction or renovation conforms to
definitive plans, specifications, and costs approved by the Advisor and the
Board of Directors and embodied in the construction contract.
Under the terms of the development agreement, the Company generally
will advance its funds on a monthly basis to meet construction draw requests of
the developer. The Company, in general, only will advance its funds to meet the
developer's draw requests upon receipt of an inspection report and a
certification of draw requests from an inspecting architect or engineer suitable
to the Company, and the Company may retain a portion of any advance until
satisfactory completion of the project. The certification generally must be
supported by color photographs showing the construction work completed as of the
date of inspection. The total amount of the funds advanced to the developer
(including the purchase price of the land plus closing costs and certain other
costs) generally will not exceed the maximum amount specified in the development
agreement. Such maximum amount will be based on the Company's estimate of the
costs of such construction or renovation.
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In some cases, construction or renovation will be required before the
Company has acquired the Property. In this situation, the Company may have made
a deposit on the Property in cash or by means of a letter of credit. The
renovation or construction may be made by an Affiliate or a third party. The
Company may permit the proposed developer to arrange for a bank or another
lender, including an Affiliate, to provide construction financing to the
developer. In such cases, the lender may seek assurance from the Company that it
has sufficient funds to pay to the developer the full purchase price of the
Property upon completion of the construction or renovation. In the event that
the Company segregates funds as assurance to the lender of its ability to
purchase the Property, the funds will remain the property of the Company, and
the lender will have no rights with respect to such funds upon any default by
the developer under the development agreement or under the loan agreement with
such lender, or if the closing of the purchase of the Property by the Company
does not occur for any reason, unless the transaction is supported by a letter
of credit in favor of the lender.
Under the development agreement, the developer generally will be
obligated to complete the construction or renovation of the building
improvements within a specified period of time from the date of the development
agreement, which generally will be between 4 to 5 months for restaurant
Properties and between 8 to 12 months for hotel Proper ties. If the construction
or renovation is not completed within that time and the developer fails to
remedy this default within 10 days after notice from the Company, the Company
will have the option to grant the developer additional time to complete the
construction, to take over construction or renovation of the building
improvements, or to terminate the development agreement and require the
developer to purchase the Property at a price equal to the sum of (i) the
Company's purchase price of the land, including all fees, costs, and expenses
paid by the Company in connection with its purchase of the land, (ii) all fees,
costs, and expenses disbursed by the Company pursuant to the development
agreement for construction of the building improvements, and (iii) the Company's
"construction financing costs." The "construction financing costs" of the
Company is an amount equal to a return, at the annual percentage rate used in
calculating the minimum annual rent under the lease, on all Company payments and
disbursements described in clauses (i) and (ii) above.
The Company also generally will enter into an indemnification and put
agreement (the "Indemnity Agreement") with the developer. The Indemnity
Agreement will provide for certain additional rights to the Company unless
certain conditions are met. In general, these conditions are (i) the
developer's acquisition of all permits, approvals, and consents necessary to
permit commencement of construction or renovation of the building improvements
within a specified period of time after the date of the Indemnity Agreement
(normally, 60 days), or (ii) the completion of construction or renovation of
the building as evidenced by the issuance of a certificate of occupancy, within
a specified period of time after the date of the Indemnity Agreement. If such
conditions are not met, the Company will have the right to grant the
developer additional time to satisfy the conditions or to require the developer
to purchase the Property from the Company at a purchase price equal to the total
amount disbursed by the Company in connection with the acquisition and
construction or renovation of the Property (including closing costs), plus an
amount equal to the return described in item (iii) of the preceding paragraph.
Failure of the developer to purchase the Property from the Company upon
demand by the Company under the circumstances specified above will entitle the
Company to declare the developer in default under the lease and to declare each
guarantor in default under any guarantee of the developer's obligations to the
Company.
In certain situations where construction or renovation is required for
a Property, the Company will pay a negotiated maximum amount upon completion of
construction or renovation rather than providing financing to the developer,
with such amount generally based on the developer's costs and fees related to
such construction or renovation.
Affiliates of the Company also may provide construction financing to
the developer of a Property. In addition, the Company may purchase from an
Affiliate of the Company a Property that has been constructed or renovated by
the Affiliate. Any fees paid to Affiliates of the Company in connection with the
financing, construction or renovation of a Property acquired by the Company will
be considered Acquisition Fees and will be subject to approval by a majority of
the Board of Directors, including a majority of the Independent Directors, not
otherwise interested in the transaction. See "Management Compensation" and
"Conflicts of Interest -- Certain Conflict Resolution Procedures." Any such fees
will be included in the cost of the Property and, therefore, will be included in
the calculation of base rent.
In all situations where construction or renovation of a Property is
required, the Company also will have the right to review the tenant's books,
records, and agreements during and following completion of construction to
verify actual costs.
INTERIM ACQUISITIONS. The Affiliates of the Advisor regularly have
opportunities to acquire properties of a type suitable for acquisition by the
Company as a result of their existing relationships and past experience with
various Restaurant Chains, Hotel Chains and their operators. See "General"
above. These acquisitions often must be made within a relatively short period of
time, occasionally at a time when the Company may be unable to make the
acquisition. In an effort to address these situations and preserve the
acquisition opportunities of the Company (and other entities with which the
Company is affiliated), the Advisor and its Affiliates maintain lines of credit
which enable them to acquire these properties on an interim basis and
temporarily own them for the purpose of facilitating their acquisition by the
Company (or other entities with which the Company is affiliated). At such time
as a Property acquired on an interim basis is determined to be suitable for
acquisition by the Company, the interim owner of the Property will sell its
interest in the Property to the Company at a price equal to the lesser of its
cost (which includes carrying costs and, in instances in which an Affiliate of
the Company has provided real estate brokerage services in connection with the
initial purchase of the Property, indirectly includes fees paid to an Affiliate
of the Company) to purchase such interest in the Property or the Property's
appraised value, provided that a majority of Directors, including a majority of
the Independent Directors, determine that the acquisition is fair and reasonable
to the Company. See "Conflicts of Interest -- Certain Conflict Resolution
Procedures." Appraisals of Properties acquired from such interim owners will be
obtained in all cases.
ACQUISITION SERVICES. Acquisition services performed by the Advisor may
include, but are not limited to, site selection and/or approval; review and
selection of tenants and negotiation of lease agreements and related documents;
monitoring Property acquisitions; and the processing of all final documents
and/or procedures to complete the acquisition of Properties and the
commencement of tenant occupancy and lease payments.
The Company will pay the Advisor a fee of 4.5% of the Total Proceeds as
Acquisition Fees. See "Management Compensation." The total of all Acquisition
Fees and Acquisition Expenses shall be reasonable and shall not exceed an amount
equal to 6% of the Real Estate Asset Value of a Property, or in the case of a
Mortgage Loan, 6% of the funds advanced, unless a majority of the Board of
Directors, including a majority of the Independent Directors, not otherwise
interested in the transaction approves fees in excess of these limits subject to
a determination that the transaction is commercially competitive, fair and
reasonable to the Company. The total of all Acquisition Fees payable to all
persons or entities will not exceed the compensation customarily charged in
arm's-length transactions by others rendering similar services as an ongoing
activity in the same geographical location and for comparable types of
properties.
The Advisor engages counsel to perform legal services, and such counsel
also may provide legal services to the Company in connection with the
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acquisition of Properties. The legal fees payable to such counsel by the Company
will not exceed those generally charged for similar services.
STANDARDS FOR INVESTMENT IN PROPERTIES
SELECTION OF RESTAURANT CHAINS AND HOTEL CHAINS. The selection of
Restaurant Chains and Hotel Chains by the Advisor, as approved by the Board of
Directors, will be based on an evaluation of the operations of restaurants in
the Restaurant Chains or hotels in the Hotel Chains, the number of restaurants
or hotels operated, the relationship of average gross sales to the average
capital costs of a restaurant or the relationship of average revenue per
available room to the average capital cost per room of a hotel, the relative
competitive position among the same type of restaurants or hotels offering
similar types of products, name recognition, and market penetration. The
Restaurant Chains and Hotel Chains will not be affiliated with the Advisor, the
Company or an Affiliate.
SELECTION OF PROPERTIES AND TENANTS. In making investments in
Properties, the Advisor will consider relevant real property and financial
factors, including the condition, use, and location of the Property,
income-producing capacity, the prospects for long-term appreciation, the
relative success of the Restaurant Chain or Hotel Chain in the geographic area
in which the Property is located, and the management capability and financial
condition of the tenant. The Company will obtain an independent appraisal for
each Property it purchases. In selecting tenants, the Advisor will consider the
prior experience of the tenant, the net worth of the tenant, past operating
results of other restaurants or hotels currently or previously operated by the
tenant, and the tenant's prior experience in managing restaurants or hotels
within a particular Restaurant Chain or Hotel Chain.
In selecting specific Properties within a particular Restaurant Chain
or Hotel Chain and in selecting lessees for the Company's Properties, the
Advisor, as approved by the Board of Directors, will apply the following minimum
standards.
1. Each Property will be in what the Advisor believes is a prime
business location.
2. Base (or minimum) annual rent will provide a specified minimum
return on the Company's cost of purchasing and, if applicable, developing the
Property, and the lease also will generally provide for automatic increases in
base rent at specified times during the lease term and for payment of percentage
rent based on gross sales over specified levels.
3. The initial lease term typically will be at least 10 to 20 years.
4. The Company will reserve the right to approve or reject any tenant
and site selected by a Restaurant Chain or Hotel Chain.
5. In evaluating prospective tenants, the Company will examine, among
other factors, the tenant's ranking in its market segment, trends in per
property sales, overall changes in consumer preferences, and the tenant's
ability to adapt to changes in market and competitive conditions, the tenant's
historical financial performance, and its current financial condition.
6. In general, the Company will not acquire a Property if the Board of
Directors, including a majority of the Independent Directors, determines that
the acquisition would adversely affect the Company in terms of geographic,
property type or chain diversification.
DESCRIPTION OF PROPERTIES
Although the Advisor has not yet selected any Properties for
investment, it is expected that any Properties purchased by the Company will
conform generally to the following specifications of size, cost, and type of
land and buildings.
RESTAURANT PROPERTIES. Lot sizes generally range from 25,000 to 60,000
square feet depending upon building size and local demographic factors.
Restaurants located on land within shopping centers will be freestanding and may
be located on smaller parcels if sufficient common parking is available.
Restaurant sites purchased by the Company will be in locations zoned for
commercial use which have been reviewed for traffic patterns and volume of
traffic. There is substantial competition for quality sites; accordingly, land
costs may be high and are generally expected to range from $150,000 to $500,000,
although the cost of the land for particular Properties may be higher or lower
in some cases.
The restaurant buildings generally will be rectangular and constructed
from various combinations of stucco, steel, wood, brick, and tile. Building
sizes generally will range from 2,500 to 6,000 square feet, with the larger
restaurants having greater seating and equipment areas. Building and site
preparation costs vary depending upon the size of the building and the site and
the area in which the restaurant Property is located. It is estimated that
building and site preparation costs generally will range from $250,000 to
$1,250,000 for each restaurant Property.
HOTEL PROPERTIES. Lot sizes generally range in size up to 10 acres
depending on product, market and design considerations, and are available at a
broad range of pricing. It is anticipated that hotel sites purchased by the
Company will generally be in primary or secondary urban, suburban, airport,
highway or resort markets which have been evaluated for past and future
anticipated lodging demand trends. The hotel buildings generally will be low to
mid rise construction. The Company may acquire limited service, extended stay or
full service hotel Properties. Limited service hotels generally minimize
non-guest room space and offer limited food service such as complimentary
continental breakfasts and do not have restaurant or lounge facilities on-site.
Extended stay hotels generally contain guest suites with a kitchen area and
living area separate from the bedroom. Extended stay hotels vary with respect to
providing on-site restaurant facilities. Full service hotels generally have
conference or meeting facilities and on-site food and beverage facilities.
RESTAURANT AND HOTEL PROPERTIES. Either before or after construction or
renovation, the Properties to be acquired by the Company will be one of a
Restaurant Chain's or Hotel Chain's approved designs. Prior to purchase of all
Properties, other than those purchased prior to completion of construction, the
Company will receive a copy of the certificate of occupancy issued by the local
building inspector or other governmental authority which permits the use of the
Property as a restaurant or hotel, and shall receive a certificate from the
Restaurant Chain or Hotel Chain to the effect that (i) the Property is
operational and (ii) the Property and the tenant are in compliance with all of
the chain's requirements, including, but not limited to, building plans and
specifications approved by the chain. The Company also will receive a
certificate of occupancy for each Property for which construction has not been
completed at the time of purchase, prior to the Company's payment of the final
installment of the purchase price for the Property.
Generally, Properties to be acquired by the Company will consist of
both land and building, although in a number of cases the Company may acquire
only the land underlying the building with the building owned by the tenant or a
third party, and also may acquire the building only with the land owned by a
third party. In general, the Properties will be freestanding and surrounded by
paved parking areas. Buildings are suitable for conversion to various uses,
although modifications will be required prior to use for other operations. In
the case of hotel Properties, the properties may include Equipment.
A tenant generally will be required by the lease agreement to make such
capital expenditures as may be reasonably necessary to refurbish buildings,
premises, signs, and equipment so as to comply with the tenant's obligations
under the franchise agreement to reflect the current commercial image of its
Restaurant Chain or Hotel Chain. These capital expenditures generally will be
paid by the tenant during the term of the lease. Some hotel Property leases may,
however, obligate the tenant to fund, in addition to its lease payment, a
capital expenditures reserve fund up to a pre-determined amount. Money in that
fund may be used by the tenant, with the approval of the Company, to pay for
capital expenditures. The Company may be responsible for capital expenditures in
excess of the amounts in the reserve fund, and the tenant generally is
responsible for replenishing the reserve fund and to pay a specified return on
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the amount of capital expenditures paid for by the Company in excess of amounts
in the reserve fund.
DESCRIPTION OF PROPERTY LEASES
THE TERMS AND CONDITIONS OF ANY LEASE ENTERED INTO BY THE COMPANY WITH
REGARD TO A PROPERTY MAY VARY FROM THOSE DESCRIBED BELOW. The Advisor in all
cases will use its best efforts to obtain terms at least as favorable as those
described below. If the Board of Directors determines, based on the
recommendation of the Advisor, that the terms of an acquisition and lease of a
Property, taken as a whole, are favorable to the Company, the Board of Directors
may, in its sole discretion, cause the Company to enter into leases with terms
which are substantially different than the terms described below, but only to
the extent consistent with the Company's objective of qualifying as a REIT. In
making such determination, the Advisor will consider such factors as the type
and location of the Property, the creditworthiness of the tenant, the purchase
price of the Property, the prior performance of the tenant, and the prior
business experience of management of the Company and the Company's Affiliates
with a Restaurant Chain or Hotel Chain, or the operator.
GENERAL. In general, the leases are expected to be "triple-net" leases,
which means that the tenants generally will be required to pay for all repairs,
maintenance, property taxes, utilities, and insurance. The tenants also will be
required to pay for special assessments, sales and use taxes, and the cost of
any renovations permitted under the leases. The Company will be the lessor under
each lease except in certain circumstances in which it may be a party to a Joint
Venture which will own the Property. In those cases, the Joint Venture, rather
than the Company, will be the lessor, and all references in this section to the
Company as lessor therefore should be read accordingly. See "Joint Venture
Arrangements" below.
TERM OF LEASES. It presently is anticipated that Properties will be
leased for an initial term of 10 to 20 years with up to four, five-year renewal
options. The minimum rental payment under the renewal option generally is
expected to be greater than that due for the final lease year of the initial
term of the lease. Upon termination of the lease, the tenant will surrender
possession of the Property to the Company, together with any improvements made
to the Property during the term of the lease, except that for Properties in
which the Company owns only the building and not the underlying land, the owner
of the land may assume ownership of the building.
COMPUTATION OF LEASE PAYMENTS. During the initial term of the lease,
the tenant will pay the Company, as lessor, minimum annual rent equal to a
specified percentage of the Company's cost of purchasing the Property.
Typically, the leases provide for automatic increases in the minimum annual rent
at predetermined intervals during the term of the lease. In the case of
acquisition of Properties that are to be constructed or renovated pursuant to a
develop ment agreement, the Company's costs of purchasing the Property will
include the purchase price of the land, including all fees, costs, and expenses
paid by the Company in connection with its purchase of the land, and all fees,
costs, and expenses disbursed by the Company for construction of building
improvements. See "Site Selection and Acquisition of Properties -- Construction
and Renovation" above. In addition to minimum annual rent, the tenant will
generally pay the Company "percentage rent." Percentage rent is generally
computed as a percentage of the gross sales above a specified level at a
particular Property.
In the case of Properties in which the Company owns only the building,
the Company will structure its leases to have recovered its investment in the
building by the expiration of the lease.
ASSIGNMENT AND SUBLEASE. In general, it is expected that no lease may
be assigned or subleased without the Company's prior written consent (which may
not be unreasonably withheld) except to a tenant's corporate franchisor,
corporate affiliate or subsidiary, a successor by merger or acquisition, or, in
certain cases, another franchisee, if such assignee or subtenant agrees to
operate the same type of restaurant or hotel on the premises, but only to the
extent consistent with the Company's objective of qualifying as a REIT. The
leases set forth certain factors (such as the financial condition of the
proposed tenant or subtenant) that are deemed to be a reasonable basis for the
Company's refusal to consent to an assignment or sublease. In addition, the
Company may refuse to permit any assignment or sublease that would jeopardize
the Company's continued qualification as a REIT. The original tenant generally
will remain fully liable, however, for the performance of all tenant obligations
under the lease following any such assignment or sublease unless the Company
agrees in writing to release the original tenant from its lease obligations.
ALTERATIONS TO PREMISES. A tenant generally will have the right,
without the prior written consent of the Company and at the tenant's own
expense, to make certain improvements, alterations or modifications to the
Property. Under certain leases, the tenant, at its own expense, may make certain
immaterial structural improvements (with a cost of up to $10,000) without the
prior consent of the Company. Certain leases may require the tenant to post a
payment and performance bond for any structural alterations with a cost in
excess of a specified amount.
RIGHT OF TENANT TO PURCHASE. It is anticipated that if the Company
wishes at any time to sell a Property pursuant to a bona fide offer from a third
party, the tenant of that Property will have the right to purchase the Property
for the same price, and on the same terms and conditions, as contained in the
offer. In certain cases, the tenant also may have a right to purchase the
Property seven to 20 years after commencement of the lease at a purchase price
equal to the greater of (i) the Property's appraised value at the time of the
tenant's purchase, or (ii) a specified amount, generally equal to the Company's
purchase price of the Property, plus a predetermined percentage (generally, 15%
to 20%) of such purchase price. See "Federal Income Tax Considerations --
Characterization of Leases."
SUBSTITUTION OF PROPERTIES. Under certain leases, the tenant of a
Property, at its own expense and with the Company's prior written consent, may
be entitled to operate another form of approved restaurant or hotel on the
Property as long as such approved restaurant or hotel has an operating history
which reflects an ability to generate gross sales and potential sales growth
equal to or greater than that experienced by the tenant in operating the
original restaurant or hotel.
In addition, it is anticipated that certain restaurant Property leases
will provide the tenant with the right, to the extent consistent with the
Company's objective of qualifying as a REIT, to offer the substitution of
another property selected by the tenant in the event that (i) the Property that
is the subject of the lease is not producing percentage rent pursuant to the
terms of the lease, and (ii) the tenant determines that the Property has become
uneconomic (other than as a result of an insured casualty loss or condemnation)
for the tenant's continued use and occupancy in its business operation and the
tenant's board of directors has determined to close and discontinue use of the
Property. The tenant's determination that a Property has become uneconomic is to
be made in good faith based on the tenant's reasonable business judgment after
comparing the results of operations of the Property to the results of operations
at the majority of other properties then operated by the tenant. If either of
these events occurs, the tenant will have the right to offer the Company the
opportunity to exchange the Property for another property (the "Substituted
Property") with a total cost for land and improvements thereon (including
overhead, construction interest, and other related charges) equal to or greater
than the cost of the Property to the Company.
Generally, the Company will have 30 days following receipt of the
tenant's offer for exchange of the Property to accept or reject such offer. In
the event that the Company requests an appraisal of the Substituted Property, it
will have at least ten days following receipt of the appraisal to accept or
reject the offer. If the Company accepts such offer, (i) the Substituted
Property will be exchanged for the Property in a transaction designed and
intended to qualify as a "like-kind exchange" within the meaning of section 1031
of the Code with respect to the Company and (ii) the lease of the Property will
be amended to (a) provide for minimum rent in an amount equal to the sum
determined by multiplying the cost of the Substituted Property by the Property
lease rate and (b) provide for the number of five-year lease renewal options
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sufficient to permit the tenant, at its option, to continue its occupancy of the
Substituted Property for up to 35 years from the date on which the exchange is
made. The Company will pay the tenant the excess, if any, of the cost of the
Substituted Property over the cost of the Property. If the substitution does
not take place within a specified period of time after the tenant makes the
offer to exchange the Property for the Substituted Property, either party
thereafter will have the right not to proceed with the substitution. If the
Company rejects the Substituted Property offered by the tenant, the tenant is
generally required to offer at least three additional alternative properties for
the Company's acceptance or rejection. If the Company rejects all Substituted
Properties offered to it pursuant to the lease, or otherwise fails or refuses to
consummate a substitution for any reason other than the tenant's failure to
fulfill the conditions precedent to the exchange, then the tenant will be
entitled to terminate the lease on the date scheduled for such exchange by
purchasing the Property from the Company for a price equal to the then-fair
market value of the Property.
Neither the tenant nor any of its subsidiaries, licensees,
concessionaires, or sublicensees or any other affiliate will be permitted to use
the original Property as a restaurant or other business of the same type and
style for at least one year after the closing of the original Property. In
addition, in the event the tenant or any of its affiliates sells the Property
within twelve months after the Company acquires the Substituted Property, the
Company will receive, to the extent consistent with its objective of qualifying
as a REIT, from the proceeds of the sale the amount by which the selling price
exceeds the cost of the Property to the Company.
SPECIAL CONDITIONS. Certain leases may provide that the Company will
not be permitted to own or operate, directly or indirectly, another Property of
the same or similar type as the leased Property that is or will be located
within a specified distance of the leased Property.
INSURANCE, TAXES, MAINTENANCE, AND REPAIRS. Tenants of restaurant
Properties generally will be required, under the terms of the leases, to
maintain, for the benefit of the Company and the tenant, casualty insurance in
an amount not less than the full replacement value of the building and other
permanent improvements (or a percent of such value in the case of certain
leases, but in no case less than 90%), as well as liability insurance, generally
in an amount not less than $2,000,000 for each location and event. Tenants of
hotel Properties will be required, under the terms of the leases, to maintain,
for the benefit of the Company and the tenant, insurance that is commercially
reasonable given the size, location and nature of the Property. All tenants,
other than those tenants with a substantial net worth, generally also will be
required to obtain "rental value" or "business interruption" insurance to cover
losses due to the occurrence of an insured event for a specified period,
generally six to twelve months. In general, no lease will be entered into
unless, in the opinion of the Advisor, as approved by the Board of Directors,
the insurance required by the lease adequately insures the Property.
All of the restaurant Property leases are expected to require that the
tenant pay all taxes and assessments, maintenance, repair, utility, and
insurance costs applicable to the real estate and permanent improvements.
Tenants will be required to maintain such Properties in good order and repair.
Such tenants generally will be required to maintain the Property and repair any
damage to the Property, except damage occurring during the last 24 to 48 months
of the lease term (as extended), which in the opinion of the tenant renders the
Property unsuitable for occupancy, in which case the tenant will have the right
instead to pay the insurance proceeds to the Company and terminate the lease.
The nature of the obligations of hotel Property tenants for maintenance and
repairs of the Properties will vary depending upon individual lease
negotiations. In some instances, the Company may be obligated to make repairs
and fund capital improvements. In these instances, the lease will adjust the
lease payments so that the economic terms would be the same as if the tenant
were responsible to make repairs and fund capital improvements.
The restaurant Property tenant generally will be required to repair the
Property in the event that less than a material portion of the Property (for
example, more than 20% of the building or more than 40% of the land) is taken
for public or quasi-public use. The Company's leases generally will provide
that, in the event of any condemnation of the restaurant Property that does not
give rise to an option to terminate the lease or in the event of any
condemnation which does give rise to an option to terminate the lease and the
tenant elects not to terminate, the Company will remit to the tenant the award
from such condemnation and the tenant will be required to repair and restore the
Property. To the extent that the award exceeds the estimated costs of restoring
or repairing the Property, the tenant is required to deposit such excess amount
with the Company. Until a specified time (generally, ten days) after the tenant
has restored the premises and all improvements thereon to the same condition as
existed immediately prior to such condemnation insofar as is reasonably
possible, a "just and proportionate" amount of the minimum annual rent will be
abated from the date of such condemnation. In addition, the minimum annual rent
will be reduced in proportion to the reduction in the then rental value of the
premises or the fair market value of the premises after the condemnation in
comparison with the rental value or fair market value prior to such
condemnation.
EVENTS OF DEFAULT. The leases generally are expected to provide that
the following events, among others, will constitute a default under the lease:
(i) the insolvency or bankruptcy of the tenant, provided that the tenant may
have the right, under certain circumstances, to cure such default, (ii) the
failure of the tenant to make timely payment of rent or other charges due and
payable under the lease, if such failure continues for a specified period of
time (generally, five to 30 days) after notice from the Company of such failure,
(iii) the failure of the tenant to comply with any of its other obligations
under the lease (for example, the discontinuance of operations of the leased
Property) if such failure continues for a specified period of time (generally,
ten to 45 days), (iv) a default under or termination of the franchise agreement
between the tenant and its franchisor, (v) in cases where the Company enters
into a development agreement relating to the construction or renovation of a
building, a default under the development agreement or the Indemnity Agreement
or the failure to establish the minimum annual rent at the end of the
development period, and (vi) in cases where the Company has entered into other
leases with the same tenant, a default under such lease.
Upon default by the tenant, the Company generally will have the right
under the lease and under most state laws to evict the tenant, re-lease the
Property to others, and hold the tenant responsible for any deficiency in the
minimum lease payments. Similarly, if the Company determined not to re-lease the
Property, it could sell the Property. (Unless required to do so by the lease or
its investment objectives, however, the Company does not intend to sell any
Property prior to five to ten years after the commencement of the lease on such
Property. See "Right of Tenant to Purchase" above.) In the event that a lease
requires the tenant to make a security deposit, the Company will have the right
under the lease to apply the security deposit, upon default by the tenant,
towards any payments due from the defaulting tenant. In general, the tenant will
remain liable for all amounts due under the lease to the extent not paid from a
security deposit or by a new tenant.
In the event that a tenant defaults under a lease with the Company, the
Company either will attempt to locate a replacement operator acceptable to the
Restaurant Chain or Hotel Chain involved or will discontinue operation of the
restaurant or hotel. In lieu of obtaining a replacement operator, some
Restaurant Chains and Hotel Chains may have the option and may elect to operate
the restaurants or hotels themselves. The Company will have no obligation to
operate the restaurants or hotels, and no Restaurant Chain or Hotel Chain will
be obligated to permit the Company or a replace ment operator to operate the
restaurants or hotels.
JOINT VENTURE ARRANGEMENTS
The Company may enter into a Joint Venture to own and operate a
Property with various unaffiliated persons or entities or with another program
formed by the principals of the Company or the Advisor or their Affiliates, if a
majority of the Directors, including a majority of the Independent Directors,
not otherwise interested in the transaction determine that the investment in the
Joint Venture is fair and reasonable to the Company and on substantially the
same terms and conditions as those to be received by the co-venturer or
co-venturers. The Company may take more or less than a 50% interest in any Joint
Venture, subject to obtaining the requisite approval of the Directors. See "Risk
Factors -- Real Estate and Financing Risks -- Risks of Joint Investment in
Properties."
Under the terms of each Joint Venture agreement, the Company and each
joint venture partner will be jointly and severally liable for all debts,
obligations, and other liabilities of the Joint Venture, and the Company and
each joint venture partner will have the power to bind each other with any
actions they take within the scope of the Joint Venture's business. In addition,
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it is expected that the Advisor or its Affiliates will be entitled to
reimbursement, at cost, for actual expenses incurred by the Advisor or its
Affiliates on behalf of the Joint Venture. Joint Ventures entered into to
purchase and hold a Property for investment generally will have an initial term
of 10 to 20 years (generally the same term as the initial term of the lease for
the Property in which the Joint Venture invests), and, after the expiration of
the initial term, will continue in existence from year to year unless terminated
at the option of either joint venturer or unless terminated by an event of
dissolution. Events of dissolution will include the bankruptcy, insolvency, or
termination of any co-venturer, sale of the Property owned by the Joint Venture,
mutual agreement of the Company and its joint venture partner to dissolve the
Joint Venture, and the expiration of the term of the Joint Venture. The Joint
Venture agreement typically will restrict each venturer's ability to sell,
transfer, or assign its joint venture interest without first offering it for
sale to its co-venturer. In addition, in any Joint Venture with another program
sponsored by the Advisor or its Affiliates, where such arrangements are entered
into for the purpose of purchasing and holding Properties for investment, in the
event that one party desires to sell the Property and the other party does not
desire to sell, either party will have the right to trigger dissolution of the
Joint Venture by sending a notice to the other party. The notice will establish
the price and terms for the sale or purchase of the other party's interest in
the Joint Venture to the other party. The Joint Venture agreement will grant the
receiving party the right to elect either to purchase the other party's interest
on the terms set forth in the notice or to sell its own interest on such terms.
The following paragraphs describe the allocations and distributions
under the expected terms of the joint venture agreement for any Joint Venture in
which the Company and its co-venturer each have a 50% ownership interest. In any
other case, the allocations and distributions are expected to be similar to
those described below, except that allocations and distributions which are
described below as being made 50% to each co-venturer will instead be made in
proportion to each co-venturer's respective ownership interest.
Under the terms of each joint venture agreement, operating profits and
losses generally will be allocated 50% to each co-venturer. Profits from the
sale or other disposition of Joint Venture property first will be allocated to
any co-venturers with negative capital account balances in proportion to such
balances until such capital accounts equal zero, and thereafter 50% to each
co-venturer. Similarly, losses from the sale or other disposition of Joint
Venture property first will be allocated to joint venture partners with positive
capital account balances in proportion to such balances until such capital
accounts equal zero, and thereafter 50% to each co-venturer. Notwithstanding any
other provisions in the Joint Venture agreement, income, gain, loss, and
deductions with respect to any contributed property will be shared in a manner
which takes into account the variation between the basis of such property and
its fair market value at the time of contribution in accordance with section
704(c) of the Code.
Net cash flow from operations of the Joint Venture will be distributed
50% to each joint venture partner. Any liquidation proceeds, after paying joint
venture debts and liabilities and funding reserves for contingent liabilities,
will be distributed first to the joint venture partners with positive capital
account balances in proportion to such balances until such balances equal zero,
and thereafter 50% to each joint venture partner.
In order that the allocations of Joint Venture income, gain, loss, and
deduction provided in Joint Venture agreements may be respected for federal
income tax purposes, it is expected that any Joint Venture agreement (i) will
contain a "qualified income offset" provision, (ii) will prohibit allocations of
loss or deductions to the extent such allocation would cause or increase an
"Adjusted Capital Account Deficit," and (iii) will require (a) that capital
accounts be maintained for each joint venture partner in a manner which complies
with Treasury Regulation e1.704-1(b)(2)(iv) and (b) that distributions of
proceeds from the liquidation of a partner's interest in the Joint Venture
(whether or not in connection with the liquidation of the Joint Venture) be made
in accordance with the partner's positive capital account balance. See "Federal
Income Tax Considerations -- Investment in Joint Ventures."
Prior to entering into any Joint Venture arrangement with any
unaffiliated co-venturer (or the principals of any unaffiliated co-venturer),
the Company will confirm that such person or entity has demonstrated to the
satisfaction of the Company that requisite financial qualifications are met.
The Company may acquire Properties from time to time by entering into a
limited partnership with sellers of such Properties pursuant to which the
seller, as owner, would receive partnership interests convertible at a later
date into Common Stock of the Company. The Company would be the general partner
of such a partnership. This structure would enable a property owner to transfer
property without incurring immediate tax liability, and therefore could allow
the Company to acquire Properties on more favorable terms than otherwise.
MORTGAGE LOANS
The Company may provide Mortgage Loans to operators of Restaurant
Chains or Hotel Chains, or their affiliates, to enable them to acquire the
building and improvements on real property. Generally, in these cases, the
Company will acquire the underlying land and will enter into a long-term ground
lease for the Property with the borrower as tenant. The Mortgage Loans will be
secured by the building and improvements on the land.
Generally, management believes the interest rate and terms of these
transactions are substantially the same as those of the Company's Property
leases. The borrower will be responsible for all of the expenses of owning the
property, as with the "triple-net" leases, including expenses for insurance and
repairs and maintenance. Management expects the Mortgage Loans will be fully
amortizing loans over a period of 10 to 20 years (generally, the same term as
the initial term of the Property leases), with payments of principal and
interest due monthly. In addition, management expects the interest rate charged
under the terms of the Mortgage Loan will be fixed over the term of the loan and
generally will be comparable to, or slightly lower than, lease rates charged to
tenants for the Properties.
The Company may combine leasing and financing in connection with a
Property. For example, it may make a Mortgage Loan with respect to the building
and lease the underlying land to the borrower. Management believes that the
combined leasing and financing structure provides the benefit of allowing the
Company to receive, on a fixed income basis, the return of its initial
investment in each financed building, which is generally a depreciating asset,
plus interest. At the same time, the Company retains ownership of the underlying
land, which may appreciate in value, thus providing an opportunity for a capital
gain on the sale of the land. In such cases, in which the borrower is also the
tenant under a Property lease for the underlying land, if the borrower does not
elect to exercise its purchase option to acquire the Property under the terms of
the lease, the building and improvements on the Property will revert to the
Company at the end of term of the lease, including any renewal periods. If the
borrower does elect to exercise its purchase option as the tenant of the
underlying land, the Company will generally have the option of selling the
Property at the greater of fair market value or cost plus a specified
percentage.
The Company will not make or invest in Mortgage Loans unless an
appraisal is obtained concerning the property that secures the Mortgage Loan.
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Mortgage indebtedness on any property shall not exceed such property's appraised
value. In cases in which the majority of the Independent Directors so determine,
and in all cases in which the Mortgage Loan involves the Advisor, Directors, or
Affiliates, such appraisal must be obtained from an independent expert
concerning the underlying property. Such appraisal shall be maintained in the
Company's records for at least five years, and shall be available for inspection
and duplication by any stockholder. In addition to the appraisal, a mortgagee's
or owner's title insurance policy or commitment as to the priority of the
mortgage or condition of the title must be obtained.
Management believes that the criteria for investing in Mortgage
Loans are substantially the same as those involved in the Company's investments
in Properties; therefore, the Company will use the same underwriting criteria as
described above in "Business -- Standards for Investment in Properties." In
addition, the Company will not make or invest in Mortgage Loans on any one
property if the aggregate amount of all mortgage loans outstanding on the
property, including the loans of the Company, would exceed an amount equal to
85% of the appraised value of the property as determined by appraisal unless
substantial justification exists because of the presence of other underwriting
criteria. For purposes of this limitation, the aggregate amount of all mortgage
loans outstanding on the property, including the loans of the Company, shall
include all interest (excluding contingent participation in income and/or
appreciation in value of the mortgaged property), the current payment of which
may be deferred pursuant to the terms of such loans, to the extent that deferred
interest on each loan exceeds 5% per annum of the principal balance of the loan.
Further, the Company will not make or invest in any Mortgage Loans that
are subordinate to any mortgage, other indebtedness or equity interest of the
Advisor, the Directors, or Affiliates of the Company. The Company currently
expects to provide Mortgage Loans in the aggregate principal amount of
approximately 5% to 10% of Gross Proceeds.
MANAGEMENT SERVICES
The Advisor will provide management services relating to the Company,
the Properties, the Mortgage Loans, and the Secured Equipment Lease program
pursuant to an Advisory Agreement between it and the Company. Under this
agreement, the Advisor will be responsible for assisting the Company in
negotiating leases, Mortgage Loans and Secured Equipment Leases, collecting
rental, Mortgage Loan and Secured Equipment Lease payments, evaluating various
options in connection with the securitization of Mortgage Loans and investing in
a securitization vehicle, inspecting the Properties and the tenants' books and
records, and responding to tenant inquiries and notices. The Advisor also will
provide information to the Company about the status of the leases, the
Properties, the Mortgage Loans, the Line of Credit, the Permanent Financing and
the Secured Equipment Leases. In exchange for these services, the Advisor will
be entitled to receive certain fees from the Company. For supervision of the
Properties and Mortgage Loans, the Advisor will receive the Asset Management
Fee, which, generally, is payable monthly in an amount equal to one-twelfth of
.60% of Real Estate Asset Value and the outstanding principal amount of the
Mortgage Loans, as of the end of the preceding month. For negotiating Secured
Equipment Leases and supervising the Secured Equipment Lease program, the
Advisor will receive, upon entering into each lease, a Secured Equipment Lease
Servicing Fee, payable out of the proceeds of the borrowings, equal to 2% of the
purchase price of the Equipment subject to each Secured Equipment Lease. See
"Management Compensation."
BORROWING
The Company will borrow money to acquire Assets and to pay certain
related fees. The Company intends to encumber Assets in connection with any
borrowing. The Company plans to obtain a revolving Line of Credit in an amount
up to $45,000,000, and may, in addition, also obtain Permanent Financing. The
Line of Credit may be repaid with offering proceeds, working capital or
Permanent Financing. The Line of Credit and Permanent Financing are the only
source of funds for making Secured Equipment Leases and for paying the Secured
Equipment Lease Servicing Fee. The Company has engaged in preliminary
discussions with potential lenders but has not yet received a commitment for
the Line of Credit or any Permanent Financing and there is no assurance that the
Company will obtain the Line of Credit or any Permanent Financing on
satisfactory terms.
Management believes that any financing obtained during the offering
period, will allow the Company to make investments in Assets that the Company
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otherwise would be forced to delay until it raised a sufficient amount of
proceeds from the sale of Shares. By eliminating this delay the Company will
also eliminate the risk that these investments will no longer be available, or
the terms of the investment will be less favorable, when the Company has raised
sufficient offering proceeds. Alternatively, Affiliates of the Advisor could
make such investments, pending receipt by the Company of sufficient offering
proceeds, in order to preserve the investment opportunities for the Company.
However, Assets acquired by the Company in this manner would be subject to
closing costs both on the original purchase by the Affiliate and on the
subsequent purchase by the Company, which would increase the amount of expenses
associated with the acquisition of Assets and reduce the amount of offering
proceeds available for investment in income-producing assets. Management
believes that the use of borrowings will enable the Company to reduce or
eliminate the instances in which the Company will be required to pay duplicate
closing costs, which may be substantial in certain states.
Similarly, management believes that the borrowings, if obtained, will
benefit the Company by allowing it to take advantage of its ability to borrow at
favorable interest rates. Specifically, the Company intends to structure the
terms of any financing so that the lease rates for Properties acquired and the
interest rates for Mortgage Loans and Secured Equipment Leases made with the
loan proceeds will exceed the interest rate payable on the financing. To the
extent that the Company is able to structure the financing on these terms, the
Company will increase its net revenues. In addition, the use of financing will
increase the diversification of the Company's portfolio by allowing it to
acquire more Assets than would be possible using only the Gross Proceeds from
the offering.
As a result of existing relationships between Affiliates of the Advisor
and certain financing sources, the Company may have the opportunity to obtain
financing at more favorable interest rates than the Company could otherwise
obtain. In connection with any financing obtained by the Company as a result of
any such relationship, the Company will pay a loan origination fee to the
Affiliate. In addition, certain lenders may require, as a condition of providing
financing to the Company, that the Affiliate with which the lender has an
existing relationship act as a loan servicing agent. In connection with any such
arrangement the Company will pay a loan servicing fee to the Affiliate. Any loan
origination fee or loan servicing fee paid to an Affiliate of the Company is
subject to the approval by a majority of the Board of Directors (including a
majority of the Independent Directors) not otherwise interested in the
transaction as fair and reasonable to the Company and on terms not less
favorable to the Company than those available from unaffiliated third parties
and not less favorable than those available from the Advisor or its Affiliates
in transactions with unaffiliated third parties. See "Conflicts of Interest --
Certain Conflict Resolution Procedures."
The Company may also borrow funds for the purpose of preserving its
status as a REIT. For example, the Company may borrow to the extent necessary to
permit the Company to make Distributions required in order to enable the Company
to qualify as a REIT for federal income tax purposes; however, the Company will
not borrow for the purpose of returning Invested Capital to the stockholders
unless necessary to eliminate corporate-level tax to the Company. The aggregate
borrowing of the Company, secured and unsecured, shall be reasonable in relation
to Net Assets of the Company and shall be reviewed by the Board of Directors at
least quarterly. The Board of Directors anticipates that the Line of Credit will
be in the amount of $45,000,000 and that the aggregate amount of the Permanent
Financing will not exceed 30% of the Company's total assets. However, in
accordance with the Company's Articles of Incorporation, the maximum amount of
borrowing in relation to Net Assets, in the absence of a satisfactory showing
that a higher level of borrowing is appropriate, shall not exceed 300% of Net
Assets. Any excess in borrowing over such 300% level shall occur only with
approval by a majority of the Independent Directors and will be disclosed and
explained to stockholders in the first quarterly report of the Company prepared
after such approval occurs.
SALE OF PROPERTIES, MORTGAGE LOANS AND SECURED EQUIPMENT LEASES
For the first five to ten years after the commencement of the offering,
the Company intends, to the extent consistent with the Company's objective of
qualifying as a REIT, to reinvest in additional Properties or Mortgage Loans any
proceeds of the Sale of a Property or a Mortgage Loan that are not required to
be distributed to stockholders in order to preserve the Company's REIT status
for federal income tax purposes. The Company may also use such proceeds to
reduce its outstanding indebtedness. Similarly, and to the extent consistent
with REIT qualification, the Company plans to use the proceeds of the Sale of a
Secured Equipment Lease to fund additional Secured Equipment Leases, or to
reduce its outstanding indebtedness on the borrowings. At or prior to the end of
such ten-year period, the Company intends to provide stockholders of the Company
with liquidity of their investment, either in whole or in part, through Listing
(although liquidity cannot be assured thereby) or by commencing orderly sales of
the Company's assets. If Listing occurs, the Company intends to use any Net
Sales Proceeds not required to be distributed to stockholders in order to
preserve the Company's status as a REIT to reinvest in additional Properties,
Mortgage Loans and Secured Equipment Leases or to repay outstanding
indebtedness. If Listing does not occur within ten years after the commencement
of the offering, the Company thereafter will undertake the orderly liquidation
of the Company and the Sale of the Company's assets and will distribute any Net
Sales Proceeds to stockholders. In addition, the Company will not sell any
assets if such Sale would not be consistent with the Company's objective of
qualifying as a REIT.
In deciding the precise timing and terms of Property Sales, the Advisor
will consider factors such as national and local market conditions, potential
capital appreciation, cash flows, and federal income tax considerations. The
terms of certain leases, however, may require the Company to sell a Property at
an earlier time if the tenant exercises its option to purchase a Property after
a specified portion of the lease term has elapsed. See "Business -- Description
of Leases -- Right of Tenant to Purchase." The Company will have no obligation
to sell all or any portion of a Property at any particular time, except as may
be required under property or joint venture purchase options granted to certain
tenants. In connection with Sales of Properties by the Company, purchase money
obligations may be taken by the Company as part payment of the sales price. The
terms of payment will be affected by custom in the area in which the Property is
located and by prevailing economic conditions. When a purchase money obligation
is accepted in lieu of cash upon the Sale of a Property, the Company will
continue to have a mortgage on the Property and the proceeds of the Sale will be
realized over a period of years rather than at closing of the Sale.
The Company does not anticipate selling the Secured Equipment Leases
prior to expiration of the lease term, except in the event that the Company
undertakes orderly liquidation of its assets. In addition, the Company does not
anticipate selling any Mortgage Loans prior to the expiration of the loan term,
except in the event (i) the Company owns the Property (land only) underlying the
building improvements which secure the Mortgage Loan and the Sale of the
Property occurs, or (ii) the Company undertakes an orderly Sale of its assets.
FRANCHISE REGULATION
Many states regulate the franchise or license relationship between a
tenant/franchisee and a franchisor. The Company will not be an Affiliate of any
franchisor, and is not currently aware of any states in which the relationship
between the Company as lessor and the tenant will be subjected to those
regulations, but it will comply with such regulations in the future, if so
required. Restaurant Chains and Hotel Chains which franchise their operations
are subject to regulation by the Federal Trade Commission.
COMPETITION
The restaurant and hotel businesses are characterized by intense
competition. The operators of the restaurants and hotels located on the
Properties will compete with independently owned restaurants and hotels,
restaurants and hotels which are part of local or regional chains, and
restaurants and hotels in other well-known national chains, including those
offering different types of food and accommodations.
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Many successful fast-food, family-style, and casual-dining restaurants
are located in "eating islands," which are areas to which people tend to return
frequently and within which they can diversify their eating habits, because in
many cases local competition may enhance the restaurant's success instead of
detracting from it. Fast-food, family-style, and casual-dining restaurants
frequently experience better operating results when there are other restaurants
in the same area. Similarly, many successful hotel "pockets" have developed in
areas of concentrated lodging demand, such as airports, urban office parks and
resort areas where this gathering promotes credibility to the market as a
lodging destination and accords the individual properties efficiencies such as
area transportation, visibility and the promotion of other support amenities.
The Company will be in competition with other persons and entities both
to locate suitable Properties to acquire and to locate purchasers for its
Properties. The Company also will compete with other financing sources such as
banks, mortgage lenders, and sale/leaseback companies for suitable Properties,
tenants, Mortgage Loan borrowers and Equipment tenants.
REGULATION OF MORTGAGE LOANS AND SECURED EQUIPMENT LEASES
The Mortgage Loan and Secured Equipment Lease programs may be subject
to regulation by federal, state and local authorities and subject to various
laws and judicial and administrative decisions imposing various requirements and
restrictions, including among other things, regulating credit granting
activities, establishing maximum interest rates and finance charges, requiring
disclosures to customers, governing secured transactions and setting collection,
repossession, claims handling procedures and other trade practices. In addition,
certain states have enacted legislation requiring the licensing of mortgage
bankers or other lenders and these requirements may affect the Company's ability
to effectuate its Mortgage Loan and Secured Equipment Lease program.
Commencement of operations into these or other jurisdictions may be dependent
upon a finding of financial responsibility, character and fitness of the
Company. The Company may determine not to make Mortgage Loans or enter into
Secured Equipment Leases in any jurisdiction in which it believes the Company
has not complied in all material respects with applicable requirements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OF THE COMPANY
The Company has been formed recently and has no operating history.
Since leases generally will be entered into on a "triple-net" basis, the Company
does not expect, although it has the right, to maintain a reserve for operating
expenses. The Company's Properties, Mortgage Loans and Secured Equipment Leases
will not be readily marketable and their value may be affected by general market
conditions. Nevertheless, management believes that capital and revenues of the
Company will be sufficient to fund the Company's anticipated investments,
proposed operations, and cash Distributions to the stockholders.
Until the Company sells a minimum of 250,000 Shares ($2,500,000), all
proceeds of the offering of its Shares will be held in escrow. After the sale of
the minimum number of Shares of the Company, the proceeds will be deposited in
the Company's general accounts, and, thereafter, the Company intends to commence
its acquisition of suitable Properties and its investment in Mortgage Loans.
Pending investment in suitable Properties and Mortgage Loans, Company
funds will be invested in short-term, highly liquid U.S. Government securities
or in other short-term, highly liquid investments with appropriate safety of
principal. In addition, it is anticipated that the proceeds of the Line of
Credit or any Permanent Financing will be obtained from lenders from time to
time as funds are needed to purchase Assets. Management anticipates that after
the Company has invested in Assets, Company revenues sufficient to pay operating
expenses, provide cash Distributions to the stockholders and service debt will
be derived from the lease and mortgage payments paid to the Company by the
tenants and borrowers.
The Company's primary investment objectives are to preserve, protect,
and enhance the Company's assets while (i) making distributions commencing in
the initial year of Company operations; (ii) obtaining fixed income through the
receipt of base rent, and increasing the Company's income (and distributions)
and providing protection against inflation through automatic increases in base
rent and receipt of percentage rent, and obtaining fixed income through the
receipt of payments from Mortgage Loans and Secured Equipment Leases; (iii)
qualifying as a REIT for federal income tax purposes; and (iv) providing
stockholders of the Company with liquidity of their investment within five to
ten years after commencement of the offering, either in whole or in part,
through (a) Listing, or (b) the commencement of orderly sales of the Company's
assets, and distribution of the proceeds thereof (outside the ordinary course of
business and consistent with its objective of qualifying as a REIT).
LIQUIDITY AND CAPITAL RESOURCES
The Company will use Net Offering Proceeds (Gross Proceeds less fees
and expenses of the offering) from this offering to purchase Properties and to
invest in Mortgage Loans. See "Investment Objectives and Policies." In addition,
the Company intends to borrow money to acquire Assets and to pay certain related
fees. The Company intends to encumber Assets in connection with such borrowing.
The Company plans to obtain a revolving Line of Credit in an
amount up to $45,000,000, and may, in addition, also obtain Permanent Financing.
The Line of Credit may be repaid with offering proceeds, working capital or
Permanent Financing. Although the Board of Directors anticipates that the
Line of Credit will be in the amount of $45,000,000 and that the aggregate
amount of any Permanent Financing will not exceed 30% of the Company's total
assets, the maximum amount the Company may borrow, absent a satisfactory showing
that a higher level of borrowing is appropriate as approved by a majority of the
Independent Directors, is 300% of the Company's Net Assets. The Company has
engaged in preliminary discussions with potential lenders but has not yet
received a commitment for the Line of Credit or any Permanent Financing and
there is no assurance that the Company will obtain the Line of Credit or any
Permanent Financing on satisfactory terms.
As of the date of this Prospectus, the Company had not entered into any
arrangements creating a reasonable probability that a Property would be acquired
by the Company or that a particular Mortgage Loan or Secured Equipment Lease
would be funded. The number of Properties to be acquired and the number of
Mortgage Loans to be invested in by the Company will depend upon the amount of
Net Offering Proceeds available and the amount of funds borrowed to acquire
Properties and make Mortgage Loans. The number of Secured Equipment Leases to be
offered is currently undetermined, but the Company will fund the Secured
Equipment Leases with the proceeds from the Line of Credit or Permanent
Financing, and the Company has undertaken, consistent with its objective of
qualifying as a REIT for federal income tax purposes, to ensure that the value
of the Secured Equipment Leases, in the aggregate, will not exceed 25% of the
Company's total assets and that the value of the Secured Equipment Leases to a
single lessee, in the aggregate, will not exceed 5% of the Company's total
assets. Management is not aware of any material trends, favorable or
unfavorable, in either capital resources or the outlook for long-term cash
generation, nor does management expect any material changes in the availability
and relative cost of such capital resources, other than as referred to in this
Prospectus.
Management expects that the cash to be generated from operations will
be adequate to pay operating expenses and to make Distributions to stockholders.
RESULTS OF OPERATIONS
As of the initial date of this Prospectus, no significant operations
had commenced because the Company was in its development stage. No operations
will commence until such time as the Company has sold at least 250,000 Shares
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<PAGE>
($2,500,000). Management is not aware of any known trends or uncertainties,
other than national economic conditions, which may reasonably be expected to
have a material impact, favorable or unfavorable, on revenues or income from the
acquisition and operations of real properties, other than those referred to in
this Prospectus.
There currently are no material changes being considered in the
objectives and policies of the Company as set forth in this Prospectus.
MANAGEMENT
GENERAL
The Company will operate under the direction of the Board of Directors,
the members of which are accountable to the Company as fiduciaries. As required
by applicable regulations, a majority of the Independent Directors and a
majority of the Directors have reviewed and ratified the Articles of
Incorporation and have adopted the Bylaws.
The Company currently has five Directors; it may have no fewer than
three Directors and no more than 15. Directors will be elected annually, and
each Director will hold office until the next annual meeting of stockholders or
until his successor has been duly elected and qualified. There is no limit on
the number of times that a Director may be elected to office. Although the
number of Directors may be increased or decreased as discussed above, a decrease
shall not have the effect of shortening the term of any incumbent Director.
Any Director may resign at any time and may be removed with or without
cause by the stockholders upon the affirmative vote of at least a majority of
all the Shares outstanding and entitled to vote at a meeting called for this
purpose. The notice of such meeting shall indicate that the purpose, or one of
the purposes, of such meeting is to determine if a Director shall be removed.
FIDUCIARY RESPONSIBILITY OF THE BOARD OF DIRECTORS
The Board of Directors will be responsible for the management and
control of the affairs of the Company; however, the Board of Directors will
retain the Advisor to manage the Company's day-to-day affairs and the
acquisition and disposition of investments, subject to the supervision of the
Board of Directors.
The Directors are not required to devote all of their time to the
Company and are only required to devote such of their time to the affairs of the
Company as their duties require. The Board of Directors will meet quarterly in
person or by telephone, or more frequently if necessary. It is not expected that
the Directors will be required to devote a substantial portion of their time to
discharge their duties as directors. Consequently, in the exercise of their
fiduciary responsibilities, the Directors will rely heavily on the Advisor. In
this regard, the Advisor, in addition to the Directors, will have a fiduciary
duty to the Company.
The Directors will establish written policies on investments and
borrowings and will monitor the administrative procedures, investment
operations, and performance of the Company and the Advisor to assure that such
policies are in the best interest of the stockholders and are fulfilled. Until
modified by the Directors, the Company will follow the policies on investments
set forth in this Prospectus. See "Investment Objectives and Policies."
The Independent Directors are responsible for reviewing the fees and
expenses of the Company at least annually or with sufficient frequency to
determine that the total fees and expenses of the Company are reasonable in
light of the Company's investment performance, Net Assets, Net Income, and the
fees and expenses of other comparable unaffiliated real estate investment
trusts. This determination shall be reflected in the minutes of the meetings of
the Board of Directors. For purposes of this determination, Net Assets are the
Company's total assets (other than intangibles), calculated at cost before
deducting depreciation or other non-cash reserves, less total liabilities, and
computed at least quarterly on a basis consistently applied. Such determination
will be reflected in the minutes of the meetings of the Board of Directors. In
addition, a majority of the Independent Directors and a majority of Directors
not otherwise interested in the transaction must approve each transaction with
the Advisor or its Affiliates. The Board of Directors also will be responsible
for reviewing and evaluating the performance of the Advisor before entering into
or renewing an advisory agreement. The Independent Directors shall determine
from time to time and at least annually that compensa tion to be paid to the
Advisor is reasonable in relation to the nature and quality of services to be
performed and shall supervise the performance of the Advisor and the
compensation paid to it by the Company to determine that the provisions of the
Advisory Agreement are being carried out. Specifically, the Independent
Directors will consider factors such as the amount of the fee paid to the
Advisor in relation to the size, composition and performance of the Company's
investments, the success of the Advisor in generating appropriate investment
opportunities, rates charged to other comparable REITs and other investors by
advisors performing similar services, additional revenues realized by the
Advisor and its Affiliates through their relationship with the Company, whether
paid by the Company or by others with whom the Company does business, the
quality and extent of service and advice furnished by the Advisor, the perfor-
mance of the investment portfolio of the Company and the quality of the
portfolio of the Company relative to the investments generated by the Advisor
for its own account. Such review and evaluation will be reflected in the minutes
of the meetings of the Board of Directors. The Board of Directors shall
determine that any successor Advisor possesses sufficient qualifications to (i)
perform the advisory function for the Company and (ii) justify the compensation
provided for in its contract with the Company.
The liability of the officers and Directors while serving in such
capacity is limited in accordance with the Articles of Incorporation and
applicable law. See "Summary of the Articles of Incorporation and Bylaws $
Limitation of Director and Officer Liability."
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and executive officers of the Company are listed below:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
<S> <C>
James M. Seneff, Jr. 50 Director, Chairman of the Board, and Chief Executive Officer
Robert A. Bourne 50 Director and President
G. Richard Hostetter 57 Independent Director
J. Joseph Kruse 64 Independent Director
Richard C. Huseman 58 Independent Director
Charles A. Muller 38 Executive Vice President
John T. Walker 38 Executive Vice President
Jeanne A. Wall 38 Executive Vice President
Lynn E. Rose 48 Secretary and Treasurer
</TABLE>
JAMES M. SENEFF, JR. Director, Chairman of the Board, and Chief
Executive Officer. Mr. Seneff currently holds the position of Chairman of the
Board, Chief Executive Officer and director of CNL Real Estate Advisors, Inc.,
the advisor to the Company. Mr. Seneff also serves as Chairman of the Board,
Chief Executive Officer and a director of CNL American Properties Fund, Inc. and
CNL Fund Advisors, Inc. Mr. Seneff is a principal stockholder of CNL Group,
Inc., a diversified real estate company, and has served as its Chairman of the
Board of Directors, director, and Chief Executive Officer since its formation in
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<PAGE>
1980. CNL Group, Inc. is the parent company of CNL Securities Corp., which is
acting as the Managing Dealer in this offering, CNL Investment Company, CNL Fund
Advisors, Inc. and CNL Real Estate Advisors, Inc. Mr. Seneff has been Chief
Executive Officer, a director and registered principal of CNL Securities Corp.
since its formation in 1979. Mr. Seneff also has held the position of President
and a director of CNL Management Company, a registered investment advisor, since
its formation in 1976, has served as Chief Executive Officer and Chairman of the
Board of CNL Investment Company, and Chief Executive Officer and Chairman of the
Board of Commercial Net Lease Realty, Inc. since 1992, has served as Chief
Executive Officer and Chairman of the Board of CNL Realty Advisors, Inc. since
its inception in 1991, and has held the position of Chief Executive Officer and
a director of CNL Institutional Advisors, Inc., a registered investment advisor,
since its inception in 1990. Mr. Seneff previously served on the Florida State
Commission on Ethics and is a former member and past Chairman of the State of
Florida Investment Advisory Council, which recommends to the Florida Board of
Administration investments for various Florida employee retirement funds. The
Florida Board of Administration, Florida's principal investment advisory and
money management agency, oversees the investment of more than $40 billion of
retirement funds. Since 1971, Mr. Seneff has been active in the acquisition,
development, and management of real estate projects and, directly or through an
affiliated entity, has served as a general partner or joint venturer in over 100
real estate ventures involved in the financing, acquisition, construction, and
rental of restaurants, office buildings, apartment complexes, hotels, and other
real estate. Included in these real estate ventures are approximately 65
privately offered real estate limited partnerships with investment objectives
similar to one or more of the Company's investment objectives, in which Mr.
Seneff, directly or through an affiliated entity, serves or has served as a
general partner. Mr. Seneff received his degree in Business Administration from
Florida State University in 1968.
ROBERT A. BOURNE. Director and President. Mr. Bourne currently holds
the position of President and director of CNL Real Estate Advisors, Inc., the
advisor to the Company. Mr. Bourne also serves as President and a director of
CNL American Properties Fund, Inc. and CNL Fund Advisors, Inc. Mr. Bourne is
President and Treasurer of CNL Group, Inc., President, a director, and a
registered principal of CNL Securities Corp. (the Managing Dealer of this
offering), President and a director of CNL Investment Company, and President,
Chief Investment Officer and a director of CNL Institutional Advisors, Inc., a
registered investment advisor. Mr. Bourne also has served as President and a
director from July 1992 to February 1996, and has served as Vice Chairman of the
Board of Directors, Secretary and Treasurer since February 1996, of Commercial
Net Lease Realty, Inc. In addition, Mr. Bourne served as President of CNL Realty
Advisors, Inc. from 1991 to February 1996, and has served as a director of CNL
Realty Advisors, Inc. since 1991, and as Treasurer and Vice Chairman since
February 1996. Upon graduation from Florida State University in 1970, where he
received a B.A. in Accounting, with honors, Mr. Bourne worked as a certified
public accountant and, from September 1971 through December 1978 was employed by
Coopers & Lybrand, Certified Public Accountants, where he held the position of
tax manager beginning in 1975. From January 1979 until June 1982, Mr. Bourne was
a partner in the accounting firm of Cross & Bourne and from July 1982 through
January 1987 he was a partner in the accounting firm of Bourne & Rose, P.A.,
Certified Public Accountants. Mr. Bourne, who joined CNL Securities Corp. in
1979, has participated as a general partner or joint venturer in over 100 real
estate ventures involved in the financing, acquisition, construction, and rental
of restaurants, office buildings, apartment complexes, hotels, and other real
estate. Included in these real estate ventures are approximately 64 privately
offered real estate limited partnerships with investment objectives similar to
one or more of the Company's investment objectives, in which Mr. Bourne,
directly or through an affiliated entity, serves or has served as a general
partner.
G. RICHARD HOSTETTER, ESQ. Independent Director. Mr. Hostetter also
serves as a director of CNL American Properties Fund, Inc. Mr. Hostetter was
associated with the law firm of Miller and Martin from 1966 through 1989, the
last ten years of such association as a senior partner. As a lawyer, he served
for more than 20 years as counsel for various corporate real estate groups,
fast-food companies and public companies, including The Krystal Company,
resulting in his extensive participation in transactions involving the sale,
lease, and sale/leaseback of approximately 250 restaurant units. Mr. Hostetter
graduated from the University of Georgia and received his J.D. from Emory Law
School in 1966. He is licensed to practice law in Tennessee and Georgia. From
1989 to date, Mr. Hostetter has served as President and General Counsel of
Mills, Ragland & Hostetter, Inc., the corporate general partner of MRH, L.P., a
holding company involved in corporate acquisitions, in which he also is a
general and limited partner.
J. JOSEPH KRUSE. Independent Director. Mr. Kruse also serves as a
director of CNL American Properties Fund, Inc. From 1993 to the present, Mr.
Kruse has been President and Chief Executive Officer of Kruse & Co., Inc., a
merchant banking company engaged in real estate. Formerly, Mr. Kruse was a
Senior Vice President with Textron, Inc. for twenty years, and then served as
Senior Vice President at G. William Miller & Co., a firm founded by the former
Chairman of the Federal Reserve Board and the Treasury Secretary. Mr. Kruse was
responsible for evaluations of commercial real estate and retail shopping mall
projects and continues to serve of counsel to the firm. Mr. Kruse received a
Bachelors of Science in Education degree from the University of Florida in 1957
and a Masters of Science in Administration in 1958 from Florida State
University. He also graduated from the Advanced Management Program of the
Harvard Graduate School of Business.
RICHARD C. HUSEMAN. Independent Director. Mr. Huseman also serves as
a director of CNL American Properties Fund, Inc. Mr. Huseman is presently a
professor in the College of Business Administration, and from 1990 through 1995,
served as the Dean of the College of Business Administration of the University
of Central Florida. He has served as a consultant in the area of managerial
strategies to a number of Fortune 500 corporations, including IBM, AT&T, and 3M,
as well as to several branches of the U.S. government, including the U.S.
Department of Health and Human Services, the U.S. Department of Justice, and the
Internal Revenue Service. Mr. Huseman received a B.A. from Greenville College
in 1961 and an M.A. and a Ph.D. from the University of Illinois in 1963 and
1965, respectively.
CHARLES A. MULLER. Executive Vice President. Mr. Muller joined CNL
Group, Inc. in October 1996 and is responsible for the planning and
implementation of CNL's interest in hotel industry investments, including
acquisitions, development, project analysis and due diligence. Mr. Muller joined
CNL Group, Inc. following more than 15 years of broadbased hotel industry
experience. From 1993 to 1996, Mr. Muller served as a Director of Operations for
Tishman Hotel Corporation where he was responsible for the company's market
review and valuation analysis efforts. At Tishman, Mr. Muller played a
significant role in the development of a new 600-room golf resort in Puerto
Rico, and was active in several project management, asset management and
development assignments. From 1989 to 1993, Mr. Muller served as a Development
Manager for Wyndham Hotels & Resorts where he was responsible for new business
development and company growth through acquisitions, development and management
contracts. At Wyndham, Mr. Muller was also responsible for market review and
feasibility analysis efforts in markets across the United States and the
Caribbean for Wyndham Garden Hotels. Prior to joining Wyndham, Mr. Muller worked
for Pannell Kerr Forster as a hotel industry consultant and spent four years
with AIRCOA (currently Richfield Hospitality) where he was responsible for
capital expenditure planning, property renovations and construction management.
From 1981 through 1985, Mr. Muller held several management positions in hotel
operations. Mr. Muller received a Bachelor of Science degree in Hotel
Administration from Cornell University in 1981 and currently serves on the
Market, Finance and Investment Analysis Committee of the American Hotel & Motel
Association.
JOHN T. WALKER. Executive Vice President. Mr. Walker joined CNL
Group, Inc. in September 1994, as Senior Vice President, responsible for
Research and Development. He currently serves as the Executive Vice President
of CNL Real Estate Advisors, Inc., the advisor to the Company. Mr. Walker is
also Chief Operating Officer and Executive Vice President of CNL American
Properties Fund, Inc. and CNL Fund Advisors, Inc. From May 1992 to
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<PAGE>
May 1994, he was Executive Vice President for Finance and Administration and
Chief Financial Officer of Z Music, Inc., a cable television network which was
subsequently acquired by Gaylord Entertainment, where he was responsible for
overall financial and administrative management and planning. From January 1990
through April 1992, Mr. Walker was Chief Financial Officer of the First Baptist
Church in Orlando, Florida. From April 1984 through December 1989, he was a
partner in the accounting firm of Chastang, Ferrell & Walker, P.A., where he was
the partner in charge of audit and consulting services, and from 1981 to 1984,
Mr. Walker was a Senior Consultant/Audit Senior at Price Waterhouse. Mr. Walker
is a Cum Laude graduate of Wake Forest University with a B.S. in Accountancy and
is a certified public accountant.
JEANNE A. WALL. Executive Vice President. Ms. Wall serves as
Executive Vice President of CNL Real Estate Advisors, Inc., the advisor to the
Company. Ms. Wall is also Executive Vice President of CNL American Properties
Fund, Inc. and CNL Fund Advisors, Inc. Ms. Wall has served as Chief Operating
Officer of CNL Investment Company and of CNL Securities Corp. since November
1994 and previously served as Executive Vice President of CNL Investment Company
since January 1991. In 1984, Ms. Wall joined CNL Securities Corp. as its
Partnership Administrator. In 1985, Ms. Wall became Vice President of CNL
Securities Corp. and, in 1987, she became a Senior Vice President of CNL
Securities Corp. In this capacity, Ms. Wall serves as national marketing and
sales director and oversees the national marketing plan for the CNL investment
programs. In addition, Ms. Wall oversees partnership administration and
investor services for programs offered through participating brokers. Ms. Wall
also has served as Senior Vice President of CNL Institutional Advisors, Inc., a
registered investment advisor, from 1990 to 1993, as Vice President of CNL
Realty Advisors, Inc. since its inception in 1991, and as Vice President of
Commercial Net Lease Realty, Inc. since 1992. Ms. Wall holds a B.A. in Business
Administration from Linfield College and is a registered principal of CNL
Securities Corp. Ms. Wall currently serves as a trustee on the Board of the
Investment Program Association and on the Direct Participation Program committee
for the National Association of Securities Dealers.
LYNN E. ROSE. Secretary and Treasurer. Ms. Rose serves as Secretary,
Treasurer and a director of CNL Real Estate Advisors, Inc., the advisor to the
Company. Ms. Rose is also Secretary and Treasurer of CNL American Properties
Fund, Inc. and Secretary, Treasurer and a director of CNL Fund Advisors, Inc.
Ms. Rose, a certified public accountant, has served as Secretary of CNL Group,
Inc. since 1987, as Chief Financial Officer of CNL Group, Inc., since December
1993, and served as Controller of CNL Group, Inc. from 1987 until December 1993.
In addition, Ms. Rose has served as Chief Financial Officer and Secretary of CNL
Securities Corp. since July 1994. She has served as Chief Operating Officer,
Vice President and Secretary of CNL Corporate Services, Inc. since November
1994. Ms. Rose also has served as Chief Financial Officer and Secretary of CNL
Institutional Advisors, Inc. since its inception in 1990 as Secretary and a
director of CNL Realty Advisors, Inc. since its inception in 1991, and as
Treasurer of CNL Realty Advisors, Inc. from 1991 to February 1996. In addition,
Ms. Rose served as Secretary and Treasurer of Commercial Net Lease Realty, Inc.
from 1992 to February 1996. Ms. Rose also currently serves as Secretary for
approximately 50 additional corporations. Ms. Rose oversees the management
information services, administration, legal compliance, accounting, tenant
compliance, and reporting for over 250 corporations, partnerships and joint
ventures. Prior to joining CNL, Ms. Rose was a partner with Robert A. Bourne in
the accounting firm of Bourne & Rose, P.A., Certified Public Accountants. Ms.
Rose holds a B.A. in Sociology from the University of Central Florida. She was
licensed as a certified public accountant in 1979.
INDEPENDENT DIRECTORS
Under the Articles of Incorporation, a majority of the Board of
Directors must consist of Independent Directors, except for a period of 90 days
after the death, removal or resignation of an Independent Director. The
Independent Directors shall nominate replacements for vacancies in the
Independent Director positions. An Independent Director may not, directly or
indirectly (including through a member of his immediately family), own any
interest in, be employed by, have any present business or professional
relationship with, serve as an officer or director of the Advisor or its
Affiliates, or serve as a director of more than three REITs organized by the
Advisor or its Affiliates. Except to carry out the responsibilities of a
Director, an Independent Director may not perform material services for the
Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has a standing Audit Committee, the members of which are
selected by the full Board of Directors each year. The Audit Committee makes
recommendations to the Board of Directors in accordance with those of the
independent accountants of the Company. The Board of Directors shall review with
such accounting firm the scope of the audit and the results of the audit upon
its completion.
At such time, if any, as the Shares are listed on a national securities
exchange or over-the-counter market, the Company will form a Compensation
Committee, the members of which will be selected by the full Board of Directors
each year.
At least a majority of the members of each committee of the Company's
Board of Directors must be Independent Directors.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Each Director is entitled to receive $6,000 annually for serving on the
Board of Directors, as well as fees of $750 per meeting attended ($375 for each
telephonic meeting in which the Director participates), including committee
meetings. No executive officer or Director of the Company has received a bonus
from the Company. The Company will not pay any compensation to the officers and
Directors of the Company who also serve as officers and directors of the
Advisor.
MANAGEMENT COMPENSATION
For a description of the types, recipients, methods of computation, and
estimated amounts of all compensation, fees, and distributions to be paid
directly or indirectly by the Company to the Advisor, Managing Dealer, and their
Affiliates, see "Management Compensation."
THE ADVISOR AND THE ADVISORY AGREEMENT
THE ADVISOR
CNL Real Estate Advisors, Inc. is a Florida corporation organized in
January 1997 to provide management, advisory and administrative services. The
Company entered into the Advisory Agreement with the Advisor effective
____________, 1997. CNL Real Estate Advisors, Inc., as Advisor, has a fiduciary
responsibility to the Company and the stockholders.
The directors and officers of the Advisor are as follows:
<TABLE>
<S> <C>
James M. Seneff, Jr. .................. Chairman of the Board, Chief Executive Officer, and Director
Robert A. Bourne ...................... President and Director
Charles A. Muller...................... Executive Vice President
John T. Walker ........................ Executive Vice President
Jeanne A. Wall ........................ Executive Vice President
Lynn E. Rose .......................... Secretary, Treasurer and Director
</TABLE>
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<PAGE>
The backgrounds of these individuals are described above under
"Management -- Directors and Executive Officers."
The Advisor employs personnel, in addition to the directors and
executive officers listed above, who have extensive experience in selecting and
managing restaurant properties similar to the Properties.
The Advisor currently owns 20,000 Shares. The Advisor may not sell
these Shares while the Advisory Agreement is in effect, although the Advisor may
transfer such Shares to Affiliates. Neither the Advisor, a Director, or any
Affiliate may vote or consent on matters submitted to the stockholders regarding
removal of, or any transaction between the Company and the Advisor, Directors,
or an Affiliate. In determining the requisite percentage in interest of Shares
necessary to approve a matter on which the Advisor, Directors, and any Affiliate
may not vote or consent, any Shares owned by any of them will not be included.
THE ADVISORY AGREEMENT
Under the terms of the Advisory Agreement, the Advisor has
responsibility for the day-to-day operations of the Company, administers the
Company's bookkeeping and accounting functions, serves as the Company's
consultant in connection with policy decisions to be made by the Board of
Directors, manages the Company's Properties and Mortgage Loans, administers the
Company's Secured Equipment Lease program and renders other services as the
Board of Directors deems appropriate. The Advisor is subject to the supervision
of the Company's Board of Directors and has only such functions as are delegated
to it.
The Company will reimburse the Advisor for all of the costs it incurs
in connection with the services it provides to the Company, including, but not
limited to: (i) Organizational and Offering Expenses, which are defined to
include expenses attributable to preparing the documents relating to this
offering, the formation and organization of the Company, qualification of the
Shares for sale in the states, escrow arrangements, filing fees and expenses
attributable to selling the Shares, (ii) Selling Commissions, advertising
expenses, expense reimbursements, and legal and accounting fees, (iii) the
actual cost of goods and materials used by the Company and obtained from
entities not affiliated with the Advisor, including brokerage fees paid in
connection with the purchase and sale of securities, (iv) administrative
services (including personnel costs; provided, however that no reimbursement
shall be made for costs of personnel to the extent that such personnel perform
services in transactions for which the Advisor receives a separate fee, at the
lesser of actual cost or 90% of the competitive rate charged by unaffiliated
persons providing similar goods and services in the same geographic location),
(v) Acquisition Expenses, which are defined to include expenses related to the
selection and acquisition of Properties, for goods and services provided by the
Advisor at the lesser of actual cost or 90% of the competitive rate charged by
unaffiliated persons providing similar goods and services in the same geographic
location), and (vi) expenses related to negotiating and servicing the Mortgage
Loans and Secured Equipment Leases.
The Company shall not reimburse the Advisor at the end of any fiscal
quarter for Operating Expenses that, in the four consecutive fiscal quarters
then ended (the "Expense Year") exceed the greater of 2% of Average Invested
Assets or 25% of Net Income (the "2%/25% Guidelines") for such year. Within 60
days after the end of any fiscal quarter of the Company for which total
Operating Expenses for the Expense Year exceed the 2%/25% Guidelines, the
Advisor shall reimburse the Company the amount by which the total Operating
Expenses paid or incurred by the Company exceed the 2%/25% Guidelines.
The Company will not reimburse the Advisor or its Affiliates for
services for which the Advisor or its Affiliates are entitled to compensation in
the form of a separate fee.
Pursuant to the Advisory Agreement, the Advisor is entitled to receive
certain fees and reimbursements, as listed in "Management -- Management
Compensation." The Subordinated Incentive Fee payable to the Advisor under
certain circumstances if Listing occurs may be paid, at the option of the
Company, in cash, in Shares, by delivery of a promissory note payable to the
Advisor, or by any combination thereof. In the event the Subordinated Incentive
Fee is paid to the Advisor following Listing, no Performance Fee, as described
below, will be paid to the Advisor under the Advisory Agreement nor will any
additional share of Net Sales Proceeds be paid to the Advisor. The total of all
Acquisition Fees and any Acquisition Expenses payable to the Advisor and its
Affiliates shall be reasonable and shall not exceed an amount equal to 6% of the
Real Estate Asset Value of a Property, or in the case of a Mortgage Loan, 6% of
the funds advanced, unless a majority of the Board of Directors, including a
majority of the Independent Directors not otherwise interested in the
transaction, approves fees in excess of this limit subject to a determination
that the transaction is commercially competitive, fair and reasonable to the
Company. The Acquisition Fees payable in connection with the selection or
acquisition of any Property shall be reduced to the extent that, and if
necessary to limit, the total compensa tion paid to all persons involved in the
acquisition of such Property to the amount customarily charged in arm's-length
transactions by other persons or entities rendering similar services as an
ongoing public activity in the same geographical location and for comparable
types of Properties, and to the extent that other acquisition fees, finder's
fees, real estate commissions, or other similar fees or commissions are paid by
any person in connection with the transaction.
If the Advisor or a CNL Affiliate performs services that are outside of
the scope of the Advisory Agreement, compensation is at such rates and in such
amounts as are agreed to by the Advisor and the Independent Directors of the
Company.
Further, if Listing occurs, the Company automatically will become a
perpetual life entity. At such time, the Company and the Advisor will negotiate
in good faith a fee structure appropriate for an entity with a perpetual life,
subject to approval by a majority of the Independent Directors. In negotiating a
new fee structure, the Independent Directors shall consider all of the factors
they deem relevant. These are expected to include, but will not necessarily be
limited to: (i) the amount of the advisory fee in relation to the asset value,
composition, and profitability of the Company's portfolio; (ii) the success of
the Advisor in generating opportunities that meet the investment objectives of
the Company; (iii) the rates charged to other REITs and to investors other than
REITs by advisors that perform the same or similar services; (iv) additional
revenues realized by the Advisor and its Affiliates through their relationship
with the Company, including loan administration, underwriting or broker
commissions, servicing, engineering, inspection and other fees, whether paid by
the Company or by others with whom the Company does business; (v) the quality
and extent of service and advice furnished by the Advisor; (vi) the performance
of the investment portfolio of the Company, including income, conservation or
appreciation of capital, and number and frequency of problem investments; and
(vii) the quality of the Property, Mortgage Loan and Secured Equipment Lease
portfolio of the Company in relationship to the investments generated by the
Advisor for its own account. The Board of Directors, including a majority of the
Independent Directors, may not approve a new fee structure that, in its
judgment, is more favorable to the Advisor than the current fee structure.
The Advisory Agreement, which was entered into by the Company with the
unanimous approval of the Board of Directors, including the Independent
Directors, expires one year after the date of execution, on ______, 1998,
subject to successive one-year renewals upon mutual consent of the parties. In
the event that a new Advisor is retained, the previous Advisor will cooperate
with the Company and the Directors in effecting an orderly transition of the
advisory functions. The Board of Directors (including a majority of the
Independent Directors) shall approve a successor Advisor only upon a
determination that the Advisor possesses sufficient qualifications to perform
the advisory functions for the Company and that the compensation to be received
by the new Advisor pursuant to the new Advisory Agreement is justified.
The Advisory Agreement may be terminated without cause or penalty by
- 52 -
<PAGE>
either party, or by the mutual consent of the parties (by a majority of the
Independent Directors of the Company or a majority of the directors of the
Advisor, as the case may be), upon 60 days' prior written notice. At that time,
the Advisor shall be entitled to receive the Performance Fee if performance
standards satisfactory to a majority of the Board of Directors, including a
majority of the Independent Directors, when compared to (a) the performance of
the Advisor in comparison with its performance for other entities, and (b) the
performance of other advisors for similar entities, have been met. If Listing
has not occurred, the Performance Fee, if any, shall equal 10% of the amount, if
any, by which (i) the appraised value of the assets of the Company on the date
of termination of the Advisory Agreement (the "Termination Date"), less the
amount of all indebtedness secured by the assets of the Company, plus the total
Distributions made to stockholders from the Company's inception through the
Termination Date, exceeds (ii) Invested Capital plus an amount equal to the
Stockholders' 8% Return from inception through the Termination Date. The Advisor
shall be entitled to receive all accrued but unpaid compensation and expense
reimbursements in cash within 30 days of the Termination Date. All other amounts
payable to the Advisor in the event of a termination shall be evidenced by a
promissory note and shall be payable from time to time. The Performance Fee
shall be paid in 12 equal quarterly installments without interest on the unpaid
balance, provided, however, that no payment will be made in any quarter in which
such payment would jeopardize the Company's REIT status, in which case any such
payment or payments will be delayed until the next quarter in which payment
would not jeopardize REIT status. Notwithstanding the preceding sentence, any
amounts which may be deemed payable at the date the obligation to pay the
Performance Fee is incurred which relate to the appreciation of the Company's
assets shall be an amount which provides compensation to the terminated Advisor
only for that portion of the holding period for the respective assets during
which such terminated Advisor provided services to the Company. If Listing
occurs, the Performance Fee, if any, payable thereafter will be as negotiated
between the Company and the Advisor. The Advisor shall not be entitled to
payment of the Performance Fee in the event the Advisory Agreement is terminated
because of failure of the Company and the Advisor to establish a fee structure
appropriate for a perpetual-life entity at such time, if any, as the Shares
become listed on a national securities exchange or over-the-counter market. The
Performance Fee, to the extent payable at the time of Listing, will not be paid
in the event that the Subordinated Incentive Fee is paid.
The Advisor has the right to assign the Advisory Agreement to an
Affiliate subject to approval by the Independent Directors of the Company. The
Company has the right to assign the Advisory Agreement to any successor to all
of its assets, rights, and obligations.
The Advisor will not be liable to the Company or its stockholders or
others, except by reason of acts constituting bad faith, fraud, misconduct, or
negligence, and will not be responsible for any action of the Board of Directors
in following or declining to follow any advice or recommendation given by it.
The Company has agreed to indemnify the Advisor with respect to acts or
omissions of the Advisor undertaken in good faith, in accordance with the
foregoing standards and pursuant to the authority set forth in the Advisory
Agreement. Any indemnification made to the Advisor may be made only out of the
net assets of the Company and not from stockholders.
PRIOR PERFORMANCE INFORMATION
The information presented in this section represents the historical
experience of certain real estate programs organized by certain officers and
directors of the Advisor. PRIOR PUBLIC PROGRAMS HAVE INVESTED ONLY IN
RESTAURANT PROPERTIES AND HAVE NOT INVESTED IN HOTEL PROPERTIES. INVESTORS IN
THE COMPANY SHOULD NOT ASSUME THAT THEY WILL EXPERIENCE RE TURNS, IF ANY,
COMPARABLE TO THOSE EXPERIENCED BY INVESTORS IN SUCH PRIOR PUBLIC REAL ESTATE
PROGRAMS. INVESTORS WHO PURCHASE SHARES IN THE COMPANY WILL NOT THEREBY ACQUIRE
ANY OWNERSHIP INTEREST IN ANY PARTNERSHIPS OR CORPORATIONS TO WHICH THE
FOLLOWING INFORMATION RELATES.
Two Directors of the Company, Robert A. Bourne and James M. Seneff,
Jr., individually or with others have served as general partners of 85 and 86
real estate limited partnerships, respectively, including the 18 publicly
offered CNL Income Fund partnerships, and as directors and officers of CNL
American Properties Fund, Inc., which purchased restaurant properties similar to
those to be acquired by the Company, listed in the table below. None of these
limited partnerships or the unlisted REIT has been audited by the IRS. Of
course, there is no guarantee that the Company will not be audited. Based on an
analysis of the operating results of the prior partnerships, the general
partners of these partnerships believe that each of such partnerships has met or
is meeting its principal investment objectives in a timely manner.
CNL Realty Corporation, which was organized as a Florida corporation in
November 1985 and whose sole stockholders are Messrs. Bourne and Seneff,
currently serves as the corporate general partner with Messrs. Bourne and Seneff
as individual general partners of 18 CNL Income Fund limited partnerships, all
of which were organized to invest in fast-food, family-style and in the case of
two of the partnerships, casual-dining restaurant properties similar to those
that the Company intends to acquire and have investment objectives similar to
those of the Company. In addition, Messrs. Bourne and Seneff currently serve as
directors and officers of CNL American Properties Fund, Inc., an unlisted public
REIT, which was organized to invest in fast-food, family-style and casual-dining
restaurant properties, mortgage loans and secured equipment leases similar to
those that the Company intends to invest in and has investment objectives
similar to those of the Company. As of December 31, 1996, the 18 partnerships
and the unlisted REIT had raised a total of $727,668,964 from a total of 55,054
investors, and had invested in 762 fast-food, family-style and casual-dining
restaurant properties. Certain additional information relating to the offerings
and investment history of the 18 public partnerships and the unlisted public
REIT is set forth below.
<TABLE>
<CAPTION>
Date 90% of
Number of Net
Limited Proceeds Fully
Maximum Partnership Invested or
Name of Offering Units or Committed to
Entity Amount (1) Date Closed Shares Sold Investment (2)
- ------- ---------- ------------- -------------- -----------------
<S> <C>
CNL Income $15,000,000
Fund, Ltd. (30,000 units) December 31, 1986 30,000 December 1986
CNL Income $25,000,000
Fund II, Ltd. (50,000 units) August 21, 1987 50,000 November 1987
- 53 -
<PAGE>
CNL Income $25,000,000
Fund III, Ltd. (50,000 units) April 29, 1988 50,000 June 1988
CNL Income $30,000,000
Fund IV, Ltd. (60,000 units) December 6, 1988 60,000 February 1989
CNL Income $25,000,000
Fund V, Ltd. (50,000 units) June 7, 1989 50,000 December 1989
CNL Income $35,000,000
Fund VI, Ltd. (70,000 units) January 19, 1990 70,000 May 1990
CNL Income $30,000,000
Fund VII, Ltd. (30,000,000 units) August 1, 1990 30,000,000 January 1991
CNL Income $35,000,000
Fund VIII, Ltd. (35,000,000 units) March 7, 1991 35,000,000 September 1991
CNL Income $35,000,000
Fund IX, Ltd. (3,500,000 units) September 6, 1991 3,500,000 November 1991
CNL Income $40,000,000
Fund X, Ltd. (4,000,000 units) March 18, 1992 4,000,000 June 1992
CNL Income $40,000,000
Fund XI, Ltd. (4,000,000 units) September 28, 1992 4,000,000 September 1992
CNL Income $45,000,000
Fund XII, Ltd. (4,500,000 units) March 15, 1993 4,500,000 July 1993
CNL Income $40,000,000
Fund XIII, Ltd. (4,000,000 units) August 26, 1993 4,000,000 August 1993
CNL Income $45,000,000
Fund XIV, Ltd. (4,500,000 units) February 22, 1994 4,500,000 May 1994
CNL Income $40,000,000
Fund XV, Ltd. (4,000,000 units) September 1, 1994 4,000,000 December 1994
CNL Income $45,000,000
Fund XVI, Ltd. (4,500,000 units) June 12, 1995 4,500,000 August 1995
CNL Income $30,000,000
Fund XVII, Ltd. (3,000,000 units) September 19, 1996 3,000,000 December 1996
CNL Income Fund $35,000,000
XVIII, Ltd (3,500,000 units) (3) (3) (3)
CNL American $165,000,000
Properties Fund, (16,500,000 shares)(5) (4) (4) (4)
Inc.
- ---------------------
</TABLE>
(1) The amount stated includes the exercise by the general partners of each
partnership of their option to increase by $5,000,000 the maximum size
of the offering of CNL Income Fund, Ltd., CNL Income Fund II, Ltd., CNL
Income Fund III, Ltd., CNL Income Fund IV, Ltd., CNL Income Fund VI,
Ltd., CNL Income Fund VIII, Ltd., CNL Income Fund X, Ltd., CNL Income
Fund XII, Ltd., CNL Income Fund XIV, Ltd., CNL Income Fund XVI, Ltd.
and CNL Income Fund XVIII, Ltd.
(2) For a description of the property acquisitions by these entities during
the last ten years, see the table set forth on the following page.
(3) As of December 31, 1996, CNL Income Fund XVIII, Ltd., which is offering
a maximum of 3,500,000 limited partner ship units ($35,000,000), had
received subscriptions totaling $8,421,815 (842,182 units). As of such
date, CNL Income Fund XVIII, Ltd. had purchased two properties.
(4) As of December 31, 1996, CNL American Properties Fund, Inc., which was
offering a maximum of 15,000,000 shares of common stock ($150,000,000),
excluding 1,500,000 shares ($15,000,000, available to investors
participating in the distribution reinvestment plan, from its initial
offering, had received subscriptions totaling $139,247,149 (13,924,715
shares), including $591,765 (59,177 shares) through the reinvestment
plan. As of such date, CNL American Properties Fund, Inc. had
purchased 94 properties. On February 6, 1997, the initial offering
closed upon receipt of subscriptions totaling $150,591,765 (15,059,177
shares), including $591,765 (59,177 shares) through the reinvestment
plan.
- 54 -
<PAGE>
(5) Following the completion of the initial offering on February 6, 1997,
CNL American Properties Fund, Inc. commenced a subsequent offering of
up to 27,500,000 shares of common stock.
As of December 31, 1996, Mr. Seneff and Mr. Bourne, directly or through
affiliated entities, also joint general partners of 65 nonpublic real estate
limited partnerships. The had served as offerings of 63 of these 65 nonpublic
limited partnerships had terminated as of December 31, 1996. These 63
partnerships raised a total of $164,419,266 from approximately 4,111 investors,
and purchased, directly or through participation in a joint venture or limited
partnership, interests in a total of 200 projects as of December 31, 1996. These
200 projects consist of 19 apartment projects (comprising 11% of the total
amount raised by all 63 partnerships), 13 office buildings (comprising 5% of the
total amount raised by all 63 partnerships), 154 fast-food or family-style
restaurant property and business investments (comprising 69% of the total amount
raised by all 63 partnerships), one condominium development (comprising .5% of
the total amount raised by all 63 partnerships), four hotels/motels (comprising
5% of the total amount raised by all 63 partnerships), seven commercial/retail
properties (comprising 9% of the total amount raised by all 63 partnerships),
and two tracts of undeveloped land (comprising .5% of the total amount raised by
all 63 partnerships). The offering of the two remaining nonpublic limited
partnerships (offerings aggregating $16,550,000) had raised $4,675,000 from 95
investors (approximately 58.6% of the total offering amount) as of December 31,
1996.
Mr. Bourne also has served, without Mr. Seneff, as a general partner of
one additional nonpublic real estate limited partnership program which raised a
total of $600,000 from 13 investors and purchased, through participation in a
limited partnership, one apartment building located in Georgia with a purchase
price of $1,712,000.
Mr. Seneff also has served, without Mr. Bourne, as a general partner of
two additional nonpublic real estate limited partnerships which raised a total
of $240,000 from 12 investors and purchased two office buildings with an
aggregate purchase price of $928,390. Both of the office buildings are located
in Florida.
Of the 83 real estate limited partnerships whose offerings had closed
as of December 31, 1996 (including 17 CNL Income Fund limited partnerships) in
which Mr. Seneff and/or Mr. Bourne serve or have served as general partners in
the past ten years, 35 invested in restaurant properties leased on a
"triple-net" basis, including six which also invested in franchised restaurant
businesses (accounting for approximately 93% of the total amount raised by all
83 real estate limited partnerships).
The following table sets forth summary information, as of December 31,
1996 regarding property acquisitions during the ten preceding years by the 18
limited partnerships and the one unlisted REIT that, either individually or
through a joint venture or partnership arrangement, acquired restaurant
properties and that have investment objectives similar to those of the Company.
<TABLE>
<CAPTION>
Name of Type of Method of Type of
Entity Property Location Financing Program
------ -------- ---------- ---------- ------------
<S> <C>
CNL Income 20 fast-food or AL , AZ, CA, FL, All cash Public
Fund, Ltd. family-style GA, LA, MD, OK,
restaurants TX, VA
CNL Income 43 fast-food or AL , AZ, CO, FL, All cash Public
Fund II, Ltd. family-style GA, IL, IN, LA,
restaurants MI, MN, MO, NC,
NM, OH, TX, WY
CNL Income 32 fast-food or AZ , CA, FL, GA, All cash Public
Fund III, Ltd. family-style IA, IL, IN, KS,
restaurants KY, MD, MI, MN,
MO, NE, OK, TX
CNL Income 44 fast-food or AL , DC, FL, GA, All cash Public
Fund IV, Ltd. family-style IL, IN, KS, MA,
restaurants MD, MI, MS, NC,OH,
PA, TN, TX, VA
CNL Income 30 fast-food or FL , GA, IL, IN, All cash Public
Fund V, Ltd. family-style MI, NH, NY, OH,
restaurants SC, TN, TX, UT,
WA
- 55 -
<PAGE>
CNL Income 46 fast-food or AR , AZ, FL, IN, All cash Public
Fund VI, Ltd. family-style MA, MI, MN, NC,
restaurants NE, NM, NY, OH,
OK, PA, TN, TX,
VA, WY
CNL Income 46 fast-food or AZ , CO, FL, GA, All cash Public
Fund VII, Ltd. family-style IN, LA, MI, MN,
restaurants OH, SC, TN, TX,
UT, WA
CNL Income 40 fast-food or AZ , FL, IN, LA, All cash Public
Fund VIII, Ltd. family-style MI, MN, NC, NY,
restaurants OH, TN, TX, VA
CNL Income 41 fast-food or AL , FL, GA, IL, All cash Public
Fund IX, Ltd. family-style IN, LA, MI, MN,
restaurants MS, NC, NH, NY,
OH, SC, TN, TX
CNL Income 4 9 fast-food or AL , CA, CO, FL, All cash Public
Fund X, Ltd. family-style ID, IL, LA, MI,
restaurants MO, MT, NC, NH,
NM, NY, OH, PA,
SC, TN, TX
CNL Income 39 fast-food or AL, AZ, CA, CO, All cash Public
Fund XI, Ltd. family-style CT, FL, KS, LA,
restaurants MA, MI, MS, NC,
NH, NM, OH, OK,
PA, SC, TX, VA,
WA
CNL Income 49 fast-food or AL, AZ, CA, FL, All cash Public
Fund XII, Ltd. family-style GA, LA, MO, MS,
restaurants NC, NM, OH, SC,
TN, TX, WA
CNL Income 48 fast-food or AL, AR, AZ, CA, All cash Public
Fund XIII, Ltd. family-style CO, FL, GA, IN,
restaurants KS, LA, MD, NC,
OH, PA, SC, TN,
TX, VA
CNL Income 61 fast-food or AL, AZ, CO, FL, All cash Public
Fund XIV, Ltd. family-style GA, KS, LA, MN,
restaurants MO, MS, NC, NJ,
NV, OH, SC, TN,
TX, VA
CNL Income 53 fast-food or CA, FL, GA, KS, All cash Public
Fund XV, Ltd. family-style KY, MN, MO, MS,
restaurants NC, NJ, NM, OH,
OK, PA, SC, TN,
TX, VA
- 56 -
<PAGE>
CNL Income 44 fast-food or AZ, CA, CO, DC, All cash Public
Fund XVI, Ltd. family-style FL, GA, ID, IN,
restaurants KS, MN, MO, NC,
NM, NV, OH, TN,
TX, UT, WI
CNL Income 24 fast-food, CA, FL, GA, IL, All cash Public
Fund XVII, Ltd. family-style or IN, MI, NC, NV,
casual- dining OH, SC, TN, TX
restaurant
properties
CNL Income Fund 2 fast-food, NC , TX All cash Public
XVIII, Ltd. family-style or
casual-dining
restaurant
properties
CNL American 94 fast-food, CA, CT, DE, FL, All cash Public
Properties Fund, family-style or GA, IA, IL, IN,
Inc. casual-dining MI, MN, MO, NE,
restaurants NJ, NM, OH, OK,
OR, TN, TX, WV
</TABLE>
- --------------------------------------------------------------
A more detailed description of the acquisitions by real estate limited
partnerships and the unlisted REIT sponsored by Messrs. Bourne and Seneff is set
forth in prior performance Table VI, included in Part II of the registration
statement filed with the Securities and Exchange Commission for this offering. A
copy of Table VI is available to stockholders from the Company upon request,
free of charge. In addition, upon request to the Company, the Company will
provide, without charge, a copy of the most recent Annual Report on Form 10-K
filed with the Securities and Exchange Commission for CNL Income Fund, Ltd., CNL
Income Fund II, Ltd., CNL Income Fund III, Ltd., CNL Income Fund IV, Ltd., CNL
Income Fund V, Ltd., CNL Income Fund VI, Ltd., CNL Income Fund VII, Ltd., CNL
Income Fund VIII, Ltd., CNL Income Fund IX, Ltd., CNL Income Fund X, Ltd., CNL
Income Fund XI, Ltd., CNL Income Fund XII, Ltd., CNL Income Fund XIII, Ltd., CNL
Income Fund XIV, Ltd., CNL Income Fund XV, Ltd., CNL Income Fund XVI, Ltd., CNL
Income Fund XVII, Ltd., CNL Income Fund XVIII, Ltd. and CNL American Properties
Fund, Inc. as well as a copy, for a reasonable fee, of the exhibits filed with
such reports.
In order to provide potential purchasers of Shares in the Company with
information to enable them to evaluate the prior experience of the Messrs.
Seneff and Bourne as general partners of real estate limited partnerships and as
directors and officers of the unlisted REIT, including those set forth in the
foregoing table, certain financial and other information concerning those
limited partnerships and the unlisted REIT with investment objectives similar to
one or more of the Company's investment objectives is provided in the Prior
Performance Tables included as Exhibit C. Information about the previous public
partnerships, the offerings of which became fully subscribed between January
1992 and December 1996, is included therein. Potential stockholders are
encouraged to examine the Prior Performance Tables attached as Exhibit C (in
Table III), which include information as to the operating results of these prior
partner ships, for more detailed information concerning the experience of
Messrs. Seneff and Bourne.
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
The Company's primary investment objectives are to preserve, protect,
and enhance the Company's assets while (i) making Distributions commencing in
the initial year of Company operations; (ii) obtaining fixed income through the
receipt of base rent, and increasing the Company's income (and Distributions)
and providing protection against inflation through automatic increases in base
rent and receipt of percentage rent, and obtaining fixed income through the
receipt of payments on Mortgage Loans and Secured Equipment Leases; (iii)
qualifying and remaining qualified as a REIT for federal income tax purposes;
and (iv) providing stockholders of the Company with liquidity of their
investment, either in whole or in part, within five to ten years after
commencement of the offering, through (a) Listing, or, (b) if Listing does not
occur within ten years after commencement of the offering, the commencement of
orderly Sales of the Company's assets, outside the ordinary course of business
and consistent with its objective of qualifying as a REIT, and distribution of
the proceeds thereof. The sheltering from tax of income from other sources is
not an objective of the Company. If the Company is successful in achieving its
investment and operating objectives, the stockholders (other than tax-exempt
entities) are likely to recognize taxable income in each year. While there is no
order of priority intended in the listing of the Company's objectives,
stockholders should realize that the ability of the Company to meet these
objectives may be severely handicapped by any lack of diversification of the
Company's investments and the terms of the leases.
The Company intends to meet its objectives through its investment
policies of (i) purchasing carefully selected, well-located Properties and
<PAGE>
- 57 -
leasing them on a "triple-net" basis (which means that the tenant will be
responsible for paying the cost of all repairs, maintenance, property taxes, and
insurance) to operators of Restaurant Chains and Hotel Chains under leases
generally requiring the tenant to pay both base annual rental (including
automatic increases in base rent) and percentage rent based on gross sales, and
(ii) offering Mortgage Loans and Secured Equipment Leases to tenants and
operators of Restaurant Chains and Hotel Chains.
In accordance with its investment policies, the Company intends to
invest in Properties whose tenants are franchisors or franchisees of one of the
Restaurant Chains or Hotel Chains to be selected by the Company, based upon
recommendations by the Advisor. Although there is no limit on the number of
properties of a particular Restaurant Chain or Hotel Chain which the Company may
acquire, the Company currently does not expect to acquire a Property if the
Board of Directors, including a majority of the Independent Directors,
determines that the acquisition would adversely affect the Company in terms of
geographic, property type or chain diversification. Potential Mortgage Loan
borrowers and Secured Equipment Lease lessees or borrowers will similarly be
operators of Restaurant Chains and Hotel Chains selected by the Company,
following the Advisor's recommendations. The Company has undertaken, consistent
with its objective of qualifying as a REIT for federal income tax purposes, to
ensure that the value of all Secured Equipment Leases, in the aggregate, will
not exceed 25% of the Company's total assets, while Secured Equipment Leases to
any single lessee or borrower, in the aggregate, will not exceed 5% of the
Company's total assets. It is intended that investments will be made in
Properties, Mortgage Loans and Secured Equipment Leases in various locations in
an attempt to achieve diversification and thereby minimize the effect of changes
in local economic conditions and certain other risks. The extent of such
diversification, however, depends in part upon the amount raised in the
offering. See "Estimated Use of Proceeds" and "Risk Factors -- Investment Risks
- -- Possible Lack of Diversification." For a more complete description of the
manner in which the structure of the Company's business, including its
investment policies, will facilitate the Company's ability to meet its
investment objectives, See "Business."
The investment objectives of the Company may not be changed without the
approval of stockholders owning a majority of the shares of outstanding Common
Stock. The Bylaws of the Company require the Independent Directors to review the
Company's investment policies at least annually to determine that the policies
are in the best interests of the stockholders. The determination shall be set
forth in the minutes of the Board of Directors along with the basis for such
determination. The Directors (including a majority of the Independent Directors)
have the right, without a stockholder vote, to alter the Company's investment
policies but only to the extent consistent with the Company's investment
objectives and investment limitations. See "Certain Investment Limitations,"
below.
CERTAIN INVESTMENT LIMITATIONS
In addition to other investment restrictions imposed by the Directors
from time to time, consistent with the Company's objective of qualifying as a
REIT, the Articles of Incorporation or the Bylaws provide for the following
limitations on the Company's investments.
1. Not more than 10% of the Company's total assets shall be invested in
unimproved real property or mortgage loans on unimproved real property. For
purposes of this paragraph, "unimproved real property" does not include any
Property under construction, under contract for development or planned for
development within one year.
2. The Company shall not invest in commodities or commodity future
contracts. This limitation is not intended to apply to interest rate futures,
when used solely for hedging purposes.
3. The Company shall not invest in or make mortgage loans unless an
appraisal is obtained concerning the underlying property. Mortgage indebtedness
on any property shall not exceed such property's appraised value. In cases in
which the majority of Independent Directors so determine, and in all cases in
which the mortgage loan involves the Advisor, Directors, or Affiliates, such
appraisal must be obtained from an independent expert concerning the underlying
property. Such appraisal shall be maintained in the Company's records for at
least five years, and shall be available for inspection and duplication by any
stockholder. In addition to the appraisal, a mortgagee's or owner's title
insurance policy or commitment as to the priority of the mortgage or condition
of the title must be obtained. The Company may not invest in real estate
contracts of sale otherwise known as land sale contracts.
4. The Company may not make or invest in mortgage loans, including
construction loans, on any one Property if the aggregate amount of all mortgage
loans outstanding on the Property, including the loans of the Company, would
exceed an amount equal to 85% of the appraised value of the Property as
determined by appraisal unless substantial justification exists because of the
presence of other underwriting criteria. For purposes of this subsection, the
"aggregate amount of all mortgage loans outstanding on the Property, including
the loans of the Company" shall include all interest (excluding contingent
participation in income and/or appreciation in value of the mortgaged property),
the current payment of which may be deferred pursuant to the terms of such
loans, to the extent that deferred interest on each loan exceeds 5% per annum of
the principal balance of the loan.
5. Invest in indebtedness ("Junior Debt") secured by a mortgage on
real property which is subordinate to the lien or other indebtedness ("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 Net Assets. The value
of all investments in Junior Debt of the Company which does not meet the
aforementioned requirements is limited to 10% of the Company's tangible assets
(which is included within the 25% limitation).
6. Engage in any short sale, or borrow, on an unsecured basis, if
such borrowing will result in an asset coverage of less than 300%, except that
such borrowing limitation shall not apply to a first mortgage trust. "Asset
coverage", for the purpose of this section, means the ratio which the value of
the total assets of an issuer, less all liabilities and indebtedness except
indebtedness for unsecured borrowings, bears to the aggregate amount of all
unsecured borrowings of such issuer.
<PAGE>
- 58 -
7. Unless at least 80% of the Company's tangible assets are comprised of
Properties or first mortgage loans, the Company may not incur any indebtedness
which would result in an aggregate amount of indebtedness in excess of 300% of
Net Assets.
8. The Company may not make or invest in any mortgage loans that are
subordinate to any mortgage, other indebtedness or equity interest of the
Advisor, the Directors, or Affiliates of the Company.
9. The Company will not invest in equity securities unless a majority
of the Directors (including a majority of Independent Directors) not otherwise
interested in such transaction approve the transaction as being fair,
competitive, and commercially reasonable and determine that the transaction will
not jeopardize the Company's ability to qualify and remain qualified as a REIT.
Investments in entities affiliated with the Advisor, a Director, the Company, or
Affiliates thereof are subject to the restrictions on joint venture investments.
In addition, the Company shall not invest in any security of any entity holding
investments or engage in activities prohibited by the Company's Articles of
Incorporation.
10. The Company will not issue (i) equity securities redeemable solely
at the option of the holder (except that stockholders may offer their Shares to
the Company as described under "Redemption of Shares,"); (ii) debt securities
unless the historical debt service coverage (in the most recently completed
fiscal year), as adjusted for known charges, is sufficient to service that
higher level of debt properly; (iii) Shares on a deferred payment basis or under
similar arrangements; (iv) non-voting or assessable securities; or (v) options,
warrants, or similar evidences of a right to buy its securities (collectively,
"Options") unless (1) issued to all of its stockholders ratably, (2) as part of
a financing arrangement, or (3) as part of a stock option plan available to
Directors, officers, or employees of the Company or the Advisor. Options may not
be issued to the Advisor, Directors or any Affiliate thereof except on the same
terms as such Options are sold to the general public. Options may be issued to
persons other than the Advisor, Directors or any Affiliate thereof but not at
exercise prices less than the fair market value of the underlying securities on
the date of grant and not for consideration that in the judgment of the
Independent Directors has a market value less than the value of such Option on
the date of grant. Options issuable to the Advisor, Directors or any Affiliate
thereof shall not exceed 10% of the outstanding Shares on the date of grant.
11. A majority of the Directors shall authorize the consideration to be
paid for each Property, based on the fair market value of the Property. If a
majority of the Independent Directors determine, or if the Property is acquired
from the Advisor, a Director, or Affiliates thereof, such fair market value
shall be determined by a qualified independent real estate appraiser selected by
the Independent Directors.
12. The Company will not engage in underwriting or the agency
distribution of securities issued by others or in trading, as compared to
investment activities.
13. The Company will not invest in real estate contracts of sale unless
such contracts of sale are in recordable form and appropriately recorded in the
chain of title.
14. The Company will not invest in any foreign currency or bullion or
engage in short sales.
15. The Company will not issue senior securities except notes to banks
and other lenders and preferred shares.
16. The Company will not make loans to the Advisor or its Affiliates.
17. The Company will not operate so as to be classified as an
"investment company" under the Invest ment Company Act of 1940, as amended.
18. The Company will not make any investment that the Company believes
will be inconsistent with its objective of qualifying as a REIT.
The foregoing limitations may not be modified or eliminated without the
approval of a majority of the shares of outstanding Common Stock.
Except as set forth above or elsewhere in this Prospectus the Company
does not intend to issue senior securities; borrow money; make loans to other
persons; invest in the securities of other issuers for the purpose of exercising
control; underwrite securities of other issuers; engage in the purchase and sale
(or turnover) of investments; offer securities in exchange for property,
repurchase or otherwise reacquire its shares or other securities; or make annual
or other reports to security holders. The Company evaluates investments in
Mortgage Loans on an individual basis and does not have a standard turnover
policy with respect to such investments.
DISTRIBUTION POLICY
GENERAL
In order to qualify as a REIT for federal income tax purposes, among
other things, the Company must make distributions each taxable year (not
including any return of capital for federal income tax purposes) equal to at
least 95% of its real estate investment trust taxable income, although the Board
of Directors, in its discretion, may increase that percentage as it deems
appropriate. See "Federal Income Tax Considerations -- Taxation of the Company
- -- Distribution Requirements." The declaration of Distributions is within the
discretion of the Board of Directors and depends upon the Company's
distributable funds, current and projected cash requirements, tax considerations
and other factors.
DISTRIBUTIONS
The Company intends to make regular Distributions to stockholders. To
the extent consistent with the Company's objective of qualifying as a REIT, it
is anticipated that the first Distributions will be paid not later than the
close of the first full calendar quarter after the first release of funds from
escrow to the Company. Distributions will be made to those stockholders who are
stockholders as of the record date selected by the Directors. Distributions will
be declared monthly during the offering period, declared monthly during any
subsequent offering, paid on a quarterly basis during an offering period, and
declared and paid quarterly thereafter. The Company is required to distribute
annually at least 95% of its real estate investment trust taxable income to
maintain its objective of qualifying as a REIT. Generally, income distributed
will not be taxable to the Company under federal income tax laws if the Company
complies with the provisions relating to qualification as a REIT. If the cash
available to the Company is insufficient to pay such Distributions, the Company
may obtain the necessary funds by borrowing, issuing new securities, or selling
assets. These methods of obtaining funds could affect future Distributions by
increasing operating costs. To the extent that Distributions to stockholders
exceed earnings and profits, such amounts constitute a return capital for
federal income tax purposes, although such Distributions will not reduce
stockholders' aggregate Invested Capital. Distributions in kind shall not be
permitted, except for distributions of readily marketable securities;
<PAGE>
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distributions of beneficial interests in a liquidating trust established for the
dissolution of the Company and the liquidation of its assets in accordance with
the terms of the Articles of Incorporation; or distributions of in-kind property
as long as the Directors (i) advise each stockholder of the risks associated
with direct ownership of the property; (ii) offer each stockholder the election
of receiving in-kind property distributions; and (iii) distribute in-kind
property only to those stockholders who accept the Directors' offer.
Distributions will be made at the discretion of the Directors,
depending primarily on net cash from operations (which includes cash received
from tenants except to the extent that such cash represents a return of
principal in regard to the lease of a Property consisting of building only,
distributions from joint ventures, and interest income from lessees of Equipment
and borrowers under Mortgage Loans, less expenses paid) and the general
financial condition of the Company, subject to the obligation of the Directors
to cause the Company to qualify and remain qualified as a REIT for federal
income tax purposes. The Company intends to increase Distributions in accordance
with increases in net cash from operations.
SUMMARY OF THE
ARTICLES OF INCORPORATION AND BYLAWS
GENERAL
The Company is organized as a corporation under the laws of the State
of Maryland. As a Maryland corpora tion, the Company is governed by the Maryland
General Corporation Law. Maryland corporate law deals with a variety of matters
regarding Maryland corporations, including liabilities of the Company,
stockholders, directors, and officers, the amendment of the Articles of
Incorporation, and mergers of a Maryland corporation with other entities. Since
many matters are not addressed by Maryland corporate law, it is customary for a
Maryland corporation to address these matters through provisions in its Articles
of Incorporation.
The Articles of Incorporation and the Bylaws of the Company contain
certain provisions that could make it more difficult to acquire control of the
Company by means of a tender offer, a proxy contest, or otherwise. These
provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of the Company to negotiate first with its Board of Directors.
The Company believes that these provisions increase the likelihood that
proposals initially will be on more attractive terms than would be the case in
their absence and facilitate negotiations which may result in improvement of the
terms of an initial offer.
The Articles of Incorporation also permit Listing by the Board of
Directors after completion or termination of this offering.
The discussion below sets forth material provisions of governing laws,
instruments and guidelines applicable to the Company. For more complete
provisions, reference is made to the Maryland General Corporation Law, the
guidelines for REITs published by the North American Securities Administrators
Association and the Company's Articles of Incorporation and Bylaws.
DESCRIPTION OF CAPITAL STOCK
The Company has authorized a total of 126,000,000 shares of capital
stock, consisting of 60,000,000 shares of Common Stock, $.01 par value per
share, 3,000,000 shares of Preferred Stock ("Preferred Stock"), and 63,000,000
additional shares of excess stock ("Excess Shares"), $.01 par value per share.
Of the 63,000,000 Excess Shares, 60,000,000 are issuable in exchange for Common
Stock and 3,000,000 are issuable in exchange for Preferred Stock as described
below at "-- Restriction of Ownership." The Company currently has 20,000 shares
of Common Stock outstanding and no Preferred Stock or Excess Shares outstanding.
The Board of Directors may determine to engage in future offerings of Common
Stock of up to the number of unissued authorized shares of Common Stock
available.
The Company will not issue share certificates except to stockholders
who make a written request to the Company. Each stockholder's investment will be
recorded on the books of the Company, and information concerning the
restrictions and rights attributable to Shares (whether in connection with an
initial issuance or a transfer) will be sent to the stockholder receiving Shares
in connection with an issuance or transfer. A stockholder wishing to transfer
his or her Shares will be required to send only an executed form to the Company,
and the Company will provide the required form upon a stockholder's request. The
executed form and any other required documentation must be received by the
Company at least one calendar month prior to the last date of the current
quarter. Subject to restrictions in the Articles of Incorporation, transfers of
Shares shall be effective, and the transferee of the Shares will be recognized
as the holder of such Shares as of the first day of the following quarter on
which the Company receives properly executed documentation. Stockholders who
are residents of New York may not transfer fewer than 250 shares at any time.
Stockholders have no preemptive rights to purchase or subscribe for
securities that the Company may issue subsequently. Each Share is entitled to
one vote per Share, and Shares do not have cumulative voting rights. The
Stockholders are entitled to Distributions in such amounts as may be declared by
the Board of Directors from time to time out of funds legally available for such
payments and, in the event of liquidation, to share ratably in any assets of the
Company remaining after payment in full of all creditors.
All of the Shares offered hereby will be fully paid and nonassessable
when issued.
The Articles of Incorporation authorize the Board of Directors to
designate and issue from time to time one or more classes or series of Preferred
Shares without stockholder approval. The Board of Directors may determine the
relative rights, preferences, and privileges of each class or series of
Preferred Stock so issued. Because the Board of Directors has the power to
establish the preferences and rights of each class or series of Preferred Stock,
it may afford the holders of any series or class of Preferred Stock preferences,
powers, and rights senior to the rights of holders of Common Stock; however, the
voting rights for each share of Preferred Stock shall not exceed voting rights
which bear the same relationship to the voting rights of the Shares as the
consideration paid to the Company for each share of Preferred Stock bears to the
book value of the Shares on the date that such Preferred Stock is issued. The
issuance of Preferred Stock could have the effect of delaying or preventing a
change in control of the Company. The Board of Directors has no present plans to
issue any Preferred Stock.
Similarly, the voting rights per share of equity securities of the
Company (other than the publicly held equity securities of the Company) sold in
a private offering shall not exceed the voting rights which bear the same
relationship to the voting rights of the publicly held equity securities as the
consideration paid to the Company for each privately offered Company share bears
to the book value of each outstanding publicly held equity security. The Board
of Directors currently has no plans to offer equity securities of the Company in
a private offering.
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<PAGE>
For a description of the characteristics of the Excess Shares, which
differ from Common Stock and Preferred Stock in a number of respects, including
voting and economic rights, see "Restriction of Ownership," below.
BOARD OF DIRECTORS
The Articles of Incorporation provide that the number of Directors of
the Company cannot be less than three nor more than 15. A majority of the Board
of Directors will be Independent Directors. See "Management -- Independent
Directors." Each Director, other than a Director elected to fill the unexpired
term of another Director, will be elected at each annual meeting or at any
special meeting of the stockholders called for that purpose, by a majority of
the shares of Common Stock present in person or by proxy and entitled to vote.
Independent Directors will nominate replacements for vacancies among the
Independent Directors. Under the Articles of Incorporation, the term of office
for each Director will be one year, expiring each annual meeting of
stockholders; however, nothing in the Articles of Incorporation prohibits a
director from being reelected by the stockholders. The Directors may not (a)
amend the Articles of Incorporation, except for amendments which do not
adversely affect the rights, preferences and privileges of stockholders; (b)
sell all or substantially all of the Company's assets other than in the ordinary
course of business or in connection with liquidation and dissolution; (c) cause
the merger or other reorganization of the Company; or (d) dissolve or liquidate
the Company, other than before the initial investment in property. The Directors
may establish such committees as they deem appropriate (provided that the
majority of the members of each committee are Independent Directors).
STOCKHOLDER MEETINGS
An annual meeting will be held for the purpose of electing Directors
and for the transaction of such other business as may come before the meeting,
and will be held not less than 30 days after delivery of the annual report.
Under the Company's Bylaws, a special meeting of stockholders may be called by
the chief executive officer, a majority of the Directors, or a majority of the
Independent Directors. Special meetings of the stockholders also shall be called
by an officer of the Company upon the written request of stockholders holding in
the aggregate not less than 10% of the outstanding Common Stock entitled to vote
at such meeting. Upon receipt of such a written request, either in person or by
mail, stating the purpose or purposes of the meeting, the Company shall provide
all stockholders, within ten days of receipt of the written request, written
notice, either in person or by mail, of a meeting and its purpose. Such meeting
will be held not less than fifteen nor more than sixty days after distribution
of the notice, at a time and place specified in the request, or if none is
specified, at a time and place convenient to stockholders.
At any meeting of stockholders, each stockholder is entitled to one
vote per share of Common Stock owned of record on the applicable record date. In
general, the presence in person or by proxy of 50% of the shares of Common Stock
then outstanding shall constitute a quorum, and the majority vote of the shares
of Common Stock present in person or by proxy will be binding on all the
stockholders of the Company.
ADVANCE NOTICE FOR STOCKHOLDER NOMINATIONS FOR
DIRECTORS AND PROPOSALS OF NEW BUSINESS
The Bylaws of the Company require notice at least 60 days and not more
than 90 days before the anniversary of the prior annual meeting of stockholders
in order for a stockholder to (a) nominate a Director, or (b) propose new
business other than pursuant to the notice of the meeting or by or on behalf of
the Directors. The Bylaws contain a similar notice requirement in connection
with nominations for Directors at a special meeting of stockholders called for
the purpose of electing one or more Directors. Accordingly, failure to comply
with the notice provisions will make stockholders unable to nominate Directors
or propose new business.
AMENDMENTS TO THE ARTICLES OF INCORPORATION
Pursuant to the Company's Articles of Incorporation, the Directors can
amend the Articles of Incorporation by a two-thirds majority from time to time
if necessary in order to qualify initially or in order to continue to qualify as
a REIT. Except as set forth above, the Articles of Incorporation may be amended
only by the affirmative vote of a majority, and, in some cases a two-thirds
majority, of the shares of Common Stock outstanding and entitled to vote. The
stockholders may vote to amend the Articles of Incorporation, terminate or
dissolve the Company or remove one or more Directors without necessity for
concurrence by the Board of Directors.
MERGERS, COMBINATIONS, AND SALE OF ASSETS
A merger, combination, sale, or other disposition of all or
substantially all of the Company's assets other than in the ordinary course of
business must be approved by the Directors and a majority of the shares of
Common Stock outstanding and entitled to vote. In addition, any such transaction
involving an Affiliate of the Company or the Advisor also must be approved by a
majority of the Directors (including a majority of the Independent Directors)
not otherwise interested in such transaction as fair and reasonable to the
Company and on terms and conditions not less favorable to the Company than those
available from unaffiliated third parties.
TERMINATION OF THE COMPANY AND REIT STATUS
The Articles of Incorporation provide for the voluntary termination and
dissolution of the Company by the affirmative vote of a majority of the shares
of Common Stock outstanding and entitled to vote at a meeting called for that
purpose. In addition, the Articles of Incorporation permit the stockholders to
terminate the status of the Company as a REIT under the Code only by the
affirmative vote of the holders of a majority of the shares of Common Stock
outstanding and entitled to vote.
Under the Articles of Incorporation, the Company automatically will
terminate and dissolve on December 31, 2007, unless Listing occurs, in which
event the Company automatically will become a perpetual life entity.
RESTRICTION OF OWNERSHIP
To qualify as a REIT under the Code (i) not more than 50% of the value
of the REIT's outstanding stock may be owned, directly or indirectly (applying
certain attribution rules), by five or fewer individuals (as defined in the Code
to include certain entities) during the last half of a taxable year, (ii) the
REIT's stock must be beneficially owned (without reference to any attribution
rules) 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; and (iii)
certain other requirements must be satisfied. See "Federal Income Tax
Considerations -- Taxation of the Company."
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<PAGE>
To ensure that the Company satisfies these requirements, the Articles
of Incorporation restrict the direct or indirect ownership (applying certain
attribution rules) of shares of Common Stock and Preferred Stock by any Person
(as defined in the Articles of Incorporation) to no more than 9.8% of the
outstanding shares of such Common Stock or 9.8% of any series of Preferred
Shares (the "Ownership Limit"). However, the Articles of Incorporation provide
that this Ownership Limit may be modified, either entirely or with respect to
one or more Persons, by a vote of a majority of the Directors, if such
modification does not jeopardize the Company's status as a REIT. As a condition
of such modification, the Board of Directors may require opinions of counsel
satisfactory to it and/or an undertaking from the applicant with respect to
preserving the status of the Company as a REIT.
It is the responsibility of each Person (as defined in the Articles of
Incorporation) owning (or deemed to own) more than 5% of the outstanding shares
of Common Stock or any series of outstanding Preferred Stock to give the Company
written notice of such ownership. In addition, to the extent deemed necessary by
the Directors, the Company can demand that each stockholder disclose to the
Company in writing all information regarding the Beneficial and Constructive
Ownership (as such terms are defined in the Articles of Incorporation) of the
Common Stock and Preferred Stock.
If the ownership, transfer or acquisition of shares of Common or
Preferred Stock, or change in capital structure of the Company or other event or
transaction would result in (i) any Person owning (applying certain attribution
rules) Common Stock or Preferred Stock in excess of the Ownership Limit, (ii)
fewer than 100 Persons owning the Common Stock and Preferred Stock, (iii) the
Company being "closely held" within the meaning of section 856(h) of the Code,
or (iv) the Company failing any of the gross income requirements of section
856(c) of the Code or otherwise failing to qualify as a REIT, then the
ownership, transfer, or acquisition, or change in capital structure or other
event or transaction that would have such effect will be void as to the
purported transferee or owner, and the purported transferee or owner will not
have or acquire any rights to the Common Stock and/or Preferred Stock, as the
case may be, to the extent required to avoid such a result. Common Stock or
Preferred Stock owned, transferred or proposed to be transferred in excess of
the Ownership Limit or which would otherwise jeopardize the Company's status as
a REIT will automatically be converted to Excess Shares. A holder of Excess
Shares is not entitled to Distributions, voting rights, and other benefits with
respect to such shares except for the right to payment of the purchase price for
the shares (or, in the case of a devise or gift or similar event which results
in the issuance of Excess Shares, the fair market value at the time of such
devise or gift or event) and the right to certain distributions upon
liquidation. Any Distribution paid to a proposed transferee or holder of Excess
Shares shall be repaid to the Company upon demand. Excess Shares shall be
subject to repurchase by the Company at its election. The purchase price of any
Excess Shares shall be equal to the lesser of (a) the price paid in such
purported transaction (or, in the case of a devise or gift or similar event
resulting in the issuance of Excess Shares, the fair market value at the time of
such devise or gift or event), or (b) the fair market value of such Shares on
the date on which the Company or its designee determines to exercise its
repurchase right. If the foregoing transfer restrictions are determined to be
void or invalid by virtue of any legal decision, statute, rule or regulation,
then the purported transferee of any Excess Shares may be deemed, at the option
of the Company, to have acted as an agent on behalf of the Company in acquiring
such Excess Shares and to hold such Excess Shares on behalf of the Company.
For purposes of the Articles of Incorporation, the term "Person" shall
mean an individual, corporation, partnership, estate, trust (including a trust
qualified under Section 401(a) or 501(c)(17) of the Code), a portion of a trust
permanently set aside to be used exclusively for the purposes described in
Section 642(c) of the Code, association, private foundation within the meaning
of Section 509(a) of the Code, joint stock company or other entity, or a group
as that term is used for purposes of Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended; but does not include (i) CNL Real Estate Advisors,
Inc., during the period ending on December 31, 1997, or (ii) an underwriter
which participated in a public offering of Shares for a period of sixty (60)
days following the purchase by such under writer of Shares therein, provided
that the foregoing exclusions shall apply only if the ownership of such Shares
by CNL Real Estate Advisors, Inc. or an underwriter would not cause the Company
to fail to qualify as a REIT by reason of being "closely held" within the
meaning of Section 856(a) of the code or otherwise cause the Company to fail to
qualify as a REIT.
RESPONSIBILITY OF DIRECTORS
Directors serve in a fiduciary capacity and shall have a fiduciary duty
to the stockholders of the Company, which duty shall include a duty to supervise
the relationship of the Company with the Advisor. See "Management--Fiduciary
Responsibilities of the Board of Directors."
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to Maryland corporate law and the Company's Articles of
Incorporation, the Company is required to indemnify and hold harmless a present
or former Director, officer, Advisor, or Affiliate and may indemnify and hold
harmless a present or former employee or agent of the Company (the "Indemnitee")
against any or all losses or liabilities reasonably incurred by the Indemnitee
in connection with or by reason of any act or omission performed or omitted to
be performed on behalf of the Company while a Director, officer, Advisor,
Affiliate, employee, or agent and in such capacity, provided, that the
Indemnitee has determined, in good faith, that the act or omission which caused
the loss or liability was in the best interests of the Company. The Company will
not indemnify or hold harmless the Indemnitee if: (i) the loss or liability was
the result of negligence or misconduct, or if the Indemnitee is an Independent
Director, the loss or liability was the result of gross negligence or willful
misconduct, (ii) the act or omission was material to the loss or liability and
was committed in bad faith or was the result of active or deliberate dishonesty,
(iii) the Indemnitee actually received an improper personal benefit in money,
property, or services, (iv) in the case of any criminal proceed ing, the
Indemnitee had reasonable cause to believe that the act or omission was
unlawful, or (v) in a proceeding by or in the right of the Company, the
Indemnitee shall have been adjudged to be liable to the Company. In addition,
the Company will not provide indemnification for any loss or liability arising
from an alleged violation of federal or state securities laws unless one or more
of the following conditions are met: (i) there has been a successful
adjudication on the merits of each count involving alleged securities law
violations as to the particular Indemnitee; (ii) such claims have been dismissed
with prejudice on the merits by a court of competent jurisdiction as to the
particular Indemnitee; or (iii) a court of competent jurisdiction approves a
settlement of the claims against a particular Indemnitee and finds that
indemnification of the settlement and the related costs should be made, and the
court considering the request for indemnification has been advised of the
position of the Securities and Exchange Commission and of the published position
of any state securities regulatory authority in which securities of the Company
were offered or sold as to indemnification for violations of securities laws.
Pursuant to its Articles of Incorporation, the Company is required to pay or
reimburse reasonable expenses incurred by a present or former Director, officer,
Advisor or Affiliate and may pay or reimburse reasonable expenses incurred by
any other Indemnitee in advance of final disposition of a proceeding if the
following are satisfied: (i) the Indemnitee was made a party to the proceeding
by reasons of his or her service as a Director, officer, Advisor, Affiliate,
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employee or agent of the Company, (ii) the Indemnitee provides the Company with
written affirmation of his or her good faith belief that he or she has met the
standard of conduct necessary for indemnification by the Company as authorized
by the Articles of Incorporation, (iii) the Indemnitee provides the Company with
a written agreement to repay the amount paid or reimbursed by the Company,
together with the applicable legal rate of interest thereon, if it is ultimately
determined that the Indemnitee did not comply with the requisite standard of
conduct, and (iv) the legal proceeding was initiated by a third party who is not
a stockholder or, if by a stockholder of the Company acting in his or her
capacity as such, a court of competent jurisdiction approves such advancement.
The Company's Articles of Incorporation further provide that any
indemnification, payment, or reimbursement of the expenses permitted by the
Articles of Incorporation will be furnished in accordance with the procedures in
Section 2-418 of the Maryland General Corporation Law.
Any indemnification may be paid only out of Net Assets of the Company,
and no portion may be recoverable from the stockholders.
There are certain defenses under Maryland law available to the
Directors, officers and the Advisor in the event of a stockholder action against
them. One such defense is the "business judgment rule." A Director, officer or
the Advisor can argue that he or she performed the action giving rise to the
stockholder's action in good faith and in a manner he or she 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 Directors, officers 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.
However, the Directors, officers and the Advisor may not invoke the business
judgment rule to further limit the rights of the stockholders to access records
as provided in the Articles of Incorporation.
The Company will enter into indemnification agreements with each of the
Company's officers and Directors. The indemnification agreements will require,
among other things, that the Company indemnify its officers and Directors to the
fullest extent permitted by law, and advance to the officers and Directors all
related expenses, subject to reimbursement if it is subsequently determined
that indemnification is not permitted. In accordance with this agreement, the
Company must indemnify and advance all expenses reasonably incurred by officers
and Directors seeking to enforce their rights under the indemnification
agreements. The Company also must cover officers and Directors under the
Company's directors' and officers' liability insurance. Although these
indemnification agreements offer substantially the same scope of coverage
afforded by the indemnification provisions in the Articles of Incorporation and
the Bylaws, it provides greater assurance to Directors and officers that
indemnification will be available because these contracts cannot be modified
unilaterally by the Board of Directors or by the stockholders.
REMOVAL OF DIRECTORS
Under the Articles of Incorporation, a Director may resign or be
removed with or without cause by the affirmative vote of a majority of the
capital stock of the Company outstanding and entitled to vote.
INSPECTION OF BOOKS AND RECORDS
The Advisor will keep, or cause to be kept, on behalf of the Company,
full and true books of account on an accrual basis of accounting, in accordance
with generally accepted accounting principles. All of such books of account,
together with all other records of the Company, including a copy of the Articles
of Incorporation and any amendments thereto, will at all times be maintained at
the principal office of the Company, and will be open to inspection, examina-
tion, and, for a reasonable charge, duplication upon reasonable notice and
during normal business hours by a stockholder or his agent.
As a part of its books and records, the Company will maintain at its
principal office an alphabetical list of names of stockholders, along with their
addresses and telephone numbers and the number of Shares held by each
stockholder. Such list shall be updated at least quarterly and shall be
available for inspection at the Company's home office by a stockholder or his or
her designated agent upon such stockholder's request. Such list also shall be
mailed to any stockholder requesting the list within 10 days of a request. The
copy of the stockholder list shall be printed in alphabetical order, on white
paper, and in readily readable type size that is not smaller than 10-point type.
The Company may impose a reasonable charge for expenses incurred in reproducing
such list. The list may not be sold or used for commercial purposes.
If the Advisor or Directors neglect or refuse to exhibit, produce or
mail a copy of the stockholder list as requested, the Advisor and the Directors
shall be liable to any stockholder requesting the list for the costs, including
attorneys' fees, incurred by that stockholder for compelling the production of
the stockholder list. It shall be a defense that the actual purpose and reason
for the requests for inspection or for a copy of the stockholder list is to
secure such list of stockholders 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 stockholder relative to the affairs
of the Company. The Company may require the stockholder requesting the
stockholder list to represent that the list is not requested for a commercial
purpose unrelated to the stockholder's interest in the Company. The remedies
provided by the Articles of Incorporation to stockholders requesting copies of
the stockholder list are in addition to, and do not in any way limit, other
remedies available to stockholders under federal law, or the law of any state.
RESTRICTIONS ON "ROLL-UP" TRANSACTIONS
In connection with a proposed Roll-Up Transaction, which, in general
terms, is any transaction involving the acquisition, merger, conversion, or
consolidation, directly or indirectly, of the Company and the issuance of
securities of a Roll-Up Entity that would be created or would survive after the
successful completion of the Roll-Up Transaction, an appraisal of all Properties
shall be obtained from an Independent Expert. In order to qualify as an
Independent Expert for this purpose(s), the person or entity shall have no
material current or prior business or personal relationship with the Advisor or
Directors and shall be engaged to a substantial extent in the business of
rendering opinions regarding the value of assets of the type held by the
Company. The Properties shall be appraised on a consistent basis, and the
appraisal shall be based on the evaluation of all relevant information and shall
indicate the value of the Properties as of a date immediately prior to the
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announcement of the proposed Roll-Up Transaction. The appraisal shall assume an
orderly liquidation of Properties over a 12-month period. The terms of the
engagement of such Independent Expert shall clearly state that the engagement is
for the benefit of the Company and the stockholders. A summary of the
independent appraisal, indicating all material assumptions underlying the
appraisal, shall be included in a report to stockholders in connection with a
proposed Roll-Up Transaction. In connection with a proposed Roll-Up Transaction
which has not been approved by at least two-thirds of the stockholders, the
person sponsoring the Roll-Up Transaction shall offer to stockholders who vote
against the proposal the choice of:
(i) accepting the securities of the Roll-Up Entity offered in the
proposed Roll-Up Transaction; or
(ii) one of the following:
(A) remaining stockholders of the Company and preserving their
interests therein on the same terms and conditions as existed
previously; or
(B) receiving cash in an amount equal to the stockholder's pro
rata share of the appraised value of the net
assets of the Company.
The Company is prohibited from participating in any proposed Roll-Up
Transaction:
(i) which would result in the stockholders having democracy rights in
the Roll-Up Entity that are less than those provided in the Company's Articles
of Incorporation, Sections 8.1, 8.2, 8.4, 8.5, 8.6 and 9.1 and described
elsewhere in this Prospectus, including rights with respect to the election and
removal of Directors, annual reports, annual and special meetings, amendment of
the Articles of Incorporation, and dissolution of the Company. (See "Description
of Capital Stock" and "Stockholder Meetings," above);
(ii) which includes provisions that would operate as a material
impediment to, or frustration of, 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), or which would limit the ability
of an investor to exercise the voting rights of its securities of the Roll-Up
Entity on the basis of the number of shares held by that investor;
(iii) in which investor's rights to access of records of the Roll-Up
Entity will be less than those provided in Sections 8.4 and 8.5 of the Company's
Articles of Incorporation and described in "Inspection of Books and Records,"
above; or
(iv) in which any of the costs of the Roll-Up Transaction would be
borne by the Company if the Roll-Up Transaction is not approved by the
stockholders.
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following is a summary of the material federal income tax
consequences of the ownership of Shares of the Company, prepared by Shaw Pittman
Potts & Trowbridge, as Counsel. This discussion is based upon the laws,
regulations, and reported judicial and administrative rulings and decisions in
effect as of the date of this Prospectus, all of which are subject to change,
retroactively or prospectively, and to possibly differing interpretations. This
discussion does not purport to deal with the federal income or other tax
consequences applicable to all investors in light of their particular investment
or other circumstances, or to all categories of investors, some of whom may be
subject to special rules (including, for example, insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United
States). No ruling on the federal, state or local tax considerations relevant to
the operation of the Company, or to the purchase, ownership or disposition of
the Shares, has been requested from the Internal Revenue Service (the "IRS" or
the "Service") or other tax authority. Counsel has rendered certain opinions
discussed herein and believes that if the Service were to challenge the conclu-
sions of Counsel, such conclusions should prevail in court. However, opinions of
counsel are not binding on the Service or on the courts, and no assurance can be
given that the conclusions reached by Counsel would be sustained in court.
Prospective investors should consult their own tax advisors in determining the
federal, state, local, foreign and other tax consequences to them of the
purchase, ownership and disposition of the Shares of the Company, the tax
treatment of a REIT and the effect of potential changes in applicable tax laws.
TAXATION OF THE COMPANY
GENERAL. The Company expects to elect to be taxed as a REIT for federal
income tax purposes, as defined in Sections 856 through 860 of the Code,
commencing with its taxable year ending December 31, 1997. The Company believes
that it will be organized and will operate in such a manner as to qualify as a
REIT, and the Company intends to continue to operate in such a manner, but no
assurance can be given that it will operate in a manner so as to qualify or
remain qualified as a REIT. The provisions of the Code pertaining to REITs are
highly technical and complex. Accordingly, this summary is qualified in its
entirety by the applicable Code sections, rules and regulations issued
thereunder, and administrative and judicial interpretations thereof.
If the Company qualifies for taxation as a REIT, it generally will not
be subject to federal corporate income tax on its net income that is currently
distributed to holders of Shares. This treatment substantially eliminates the
"double taxation" (at the corporate and stockholder levels) that generally
results from an investment in a corporation. However, the Company will be
subject to federal income tax in the following circumstances. First, the Company
will be taxed at regular corporate rates on any undistributed real estate
investment trust taxable income, including undistributed net capital gains.
Second, under certain circumstances, the Company may be subject to the
alternative minimum tax on its items of tax preference. Third, if the Company
has net income from foreclosure property, it will be subject to tax on such
income at the highest corporate rate. Foreclosure property generally means real
property (and any personal property incident to such real property) which is
acquired as a result of a default either on a lease of such property or on
indebtedness which such property secured and with respect to which an
appropriate election is made. Fourth, if the Company has net income derived from
prohibited transactions, such income will be subject to a 100% tax. A prohibited
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transaction generally includes a sale or other disposition of property (other
than foreclosure property) that is held primarily for sale to customers in the
ordinary course of business. Fifth, if the Company should fail to satisfy the
75% gross income test or the 95% gross income test (as discussed below), but has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the 75% or
95% test. Sixth, if, during each calendar year, the Company fails to distribute
at least the sum of (i) 85% of its real estate investment trust ordinary income
for such year; (ii) 95% of its real estate investment trust capital gain net
income for such year; and (iii) any undistributed taxable income from prior
periods, the Company will be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed.
If the Company fails to qualify as a REIT for any taxable year and
certain relief provisions do not apply, the Company will be subject to federal
income tax (including alternative minimum tax) as an ordinary corporation on its
taxable income at regular corporate rates without any deduction or adjustment
for distributions to holders of Shares. To the extent that the Company would, as
a consequence, be subject to tax liability for any such taxable year, the amount
of cash available for satisfaction of its liabilities and for distribution to
holders of Shares would be reduced. Distributions made to holders of Shares
generally would be taxable as ordinary income to the extent of current and
accumulated earnings and profits and, subject to certain limitations, would be
eligible for the corporate dividends received deduction, but there can be no
assurance that any such Distributions would be made. The Company would not be
eligible to elect REIT status for the four taxable years after the taxable year
it failed to qualify as a REIT, unless its failure to qualify was due to
reasonable cause and not willful neglect and certain other requirements were
satisfied.
OPINION OF COUNSEL. Based upon representations made by officers of the
Company with respect to relevant factual matters, upon the existing Code
provisions, rules and regulations promulgated thereunder (including proposed
regulations) and reported administrative and judicial interpretations thereof,
upon Counsel's independent review of such documents as Counsel deemed relevant
in the circumstances and upon the assumption that the Company will operate in
the manner described in this Prospectus, Counsel has advised the Company that,
in its opinion, commencing with the Company's taxable year ending December 31,
1997, the Company will be organized in conformity with the requirements for
qualification as a REIT, and the Company's proposed method of operation will
enable it to meet the requirements for qualification as a REIT. It must be
emphasized, however, that the Company's ability to qualify and remain qualified
as a REIT is dependent upon actual operating results and future actions by and
events involving the Company and others, and no assurance can be given that the
actual results of the Company's operations and future actions and events will
enable the Company to satisfy in any given year the requirements for
qualification and taxation as a REIT.
REQUIREMENTS FOR QUALIFICATION AS A REIT. As discussed more fully
below, the Code defines a REIT as a corporation, trust or association (i) which
is managed by one or more trustees or directors; (ii) the beneficial ownership
of which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) which would be taxable, but for Sections 856 through
860 of the Code, as a domestic corporation; (iv) which is neither a financial
institution nor an insurance company; (v) the beneficial ownership of which is
held (without reference to any rules of attribution) by 100 or more persons;
(vi) which is not closely held as defined in section 856(h) of the Code; and
(vii) which meets certain other tests regarding the nature of its assets and
income and the amount of its distributions.
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the assets and gross
income (as defined in the Code) of the partnership attributed to the REIT shall
retain the same character as in the hands of the partnership for purposes of
Section 856 of the Code, including satisfying the gross income tests and the
asset tests described below. Thus, the Company's proportionate share of the
assets, liabilities and items of income of any Joint Venture, as described in
"Business -- Joint Venture Arrangements," will be treated as assets, liabilities
and items of income of the Company for purposes of applying the asset and gross
income tests described herein.
OWNERSHIP TESTS. The ownership requirements for qualification as a REIT
are that (i) during the last half of each taxable year not more than 50% in
value of the REIT's outstanding shares may be owned, directly or indirectly
(applying certain attribution rules), by five or fewer individuals (or certain
entities as defined in the Code) and (ii) there must be at least 100
stockholders (without reference to any attribution rules) on at least 335 days
of such 12-month taxable year (or a proportionate number of days of a short
taxable year). These two requirements do not apply to the first taxable year for
which an election is made to be treated as a REIT. In order to meet these
requirements for subsequent taxable years, or to otherwise obtain, maintain, or
reestablish REIT status, the Articles of Incorporation generally prohibit any
person or entity from actually, constructively or beneficially acquiring or
owning (applying certain attribution rules) more than 9.8% of the outstanding
Common Stock or 9.8% of any series of outstanding Preferred Stock. Among other
provisions, the Articles of Incorporation empower the Board of Directors to
redeem, at its option, a sufficient number of Shares to bring the ownership of
Shares of the Company in conformity with these requirements or to assure
continued conformity with such requirements.
Under the Articles of Incorporation, each holder of Shares is required,
upon demand, to disclose to the Board of Directors in writing such information
with respect to actual, constructive or beneficial ownership of Shares of the
Company as the Board of Directors deems necessary to comply with provisions of
the Code applicable to the Company or the provisions of the Articles of
Incorporation, or the requirements of any other appropriate taxing authority.
Certain Treasury regulations govern the method by which the Company is required
to demonstrate compliance with these stock ownership requirements and the
failure to satisfy such regulations could cause the Company to fail to qualify
as a REIT. The Company has represented that it expects to meet these stock
ownership requirements for each taxable year and it will be able to demonstrate
its compliance with these requirements.
ASSET TESTS. At the end of each quarter of a REIT's taxable year, at
least 75% of the value of its total assets must consist of "real estate assets,"
cash and cash items (including receivables) and certain government securities.
The balance of a REIT's assets generally may be invested without restriction,
except that holdings of securities not within the 75% class of assets generally
must not, with respect to any issuer, exceed 5% of the value of the REIT's
assets or 10% of the issuer's outstanding voting securities. The term "real
estate assets" includes real property, interests in real property, leaseholds of
land or improvements thereon, and mortgages on the foregoing and any property
attributable to the temporary investment of new capital (but only if such
property is stock or a debt instrument and only for the one-year period
beginning on the date the REIT receives such capital). When a mortgage is
secured by both real property and other property, it is considered to constitute
a mortgage on real property to the extent of the fair market value of the real
property when the REIT is committed to make the loan (or, in the case of a
construction loan, the reasonably estimated cost of construction). Initially,
the bulk of the Company's assets will be real property. However, the Company
will also hold the Secured Equipment Leases. Counsel is of the opinion, based on
certain assumptions, that the Secured Equip ment Leases will be treated as loans
secured by personal property for federal income tax purposes. See "Federal
Income Tax Considerations -- Characterization of the Secured Equipment Leases."
Therefore, the Secured Equipment Leases will not qualify as "real estate
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assets." However, the Company has represented that at the end of each quarter
the value of the Secured Equipment Leases, together with any personal property
owned by the Company, will in the aggregate represent less than 25% of the
Company's total assets and that the value of the Secured Equipment Leases
entered into with any particular tenant will represent less than 5% of the
Company's total assets. No independent appraisals will be acquired to support
this representation, and Counsel, in rendering its opinion as to the
qualification of the Company as a REIT, is relying on the conclusions of the
Company and its senior management as to the relative values of its assets. There
can be no assurance however, that the IRS may not contend that either (i) the
value of the Secured Equipment Leases entered into with any particular tenant
represents more than 5% of the Company's total assets, or (ii) the value of the
Secured Equipment Leases, together with any personal property owned by the
Company, exceeds 25% of the Company's total assets.
As indicated in "Business -- Joint Venture Arrangements," the Company
may participate in Joint Ventures. If a Joint Venture were classified, for
federal income tax purposes, as an association taxable as a corporation rather
than as a partnership, the Company's ownership of a 10% or greater interest in
the Joint Venture would cause the Company to fail to meet the requirement that
it not own 10% or more of an issuer's voting securities. However, Counsel is of
the opinion, based on certain assumptions, that any Joint Ventures will
constitute partnerships for federal income tax purposes. See "Federal Income Tax
Considerations -- Investment in Joint Ventures."
INCOME TESTS. A REIT also must meet three separate tests with respect
to its sources of gross income for each taxable year.
(a) THE 75 PERCENT AND 95 PERCENT TESTS. In general, at least 75% of a
REIT's gross income for each taxable year must be from "rents from real
property," interest on obligations secured by mortgages on real property, gains
from the sale or other disposition of real property and certain other sources,
including "qualified temporary investment income." For these purposes,
"qualified temporary investment income" means any income (i) attributable to a
stock or debt instrument purchased with the proceeds received by the REIT in
exchange for stock (or certificates of beneficial interest) in such REIT (other
than amounts received pursuant to a distribution reinvestment plan) or in a
public offering of debt obligations with a maturity of at least five years and
(ii) received or accrued during the one-year period beginning on the date the
REIT receives such capital. In addition, a REIT must derive at least 95% of its
gross income for each taxable year from any combination of the items of income
which qualify under the 75% test, from dividends and interest, and from gains
from the sale, exchange or other disposition of certain stock and securities.
Initially, the bulk of the Company's income will be derived from rents
with respect to the Properties. Rents from Properties received by the Company
qualify as "rents from real property" in satisfying these two tests only if
several conditions are met. First, the rent must not be based in whole or in
part, directly or indirectly, on the income or profits of any person. An amount
received or accrued generally will not be excluded from the term "rents from
real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Second, the Code provides that rents received
from a tenant will not qualify as "rents from real property" if the REIT, or a
direct or indirect owner of 10% or more of the REIT owns, directly or
constructively, 10% or more of such tenant (a "Related Party Tenant"). Third, if
rent attributable to personal property leased in connection with a lease of real
property is greater than 15% of the total rent received under the lease, then
the portion of rent attributable to such personal property will not qualify as
"rents from real property." Finally, for rents to qualify as "rents from real
property," a REIT generally must not operate or manage the property or furnish
or render services to the tenants of such property, other than through an
independent contractor from whom the REIT derives no revenue, except that a REIT
may directly perform services which are "usually or customarily rendered" in
connection with the rental of space for occupancy, other than services which are
considered to be rendered to the occupant of the property.
The Company has represented with respect to its leasing of the
Properties that it will not (i) charge rent for any Property that is based in
whole or in part on the income or profits of any person (except by reason of
being based on a percentage or percentages of receipts or sales, as described
above); (ii) charge rent that will be attributable to personal property in an
amount greater than 15% of the total rent received under the applicable lease;
(iii) directly perform services considered to be rendered to the occupant of a
Property or which are not usually or customarily furnished or rendered in
connection with the rental of real property; or (iv) enter into any lease with a
Related Party Tenant. Specifically, the Company expects that virtually all of
its income will be derived from leases of the type described in "Business --
Description of Leases," and it does not expect such leases to generate income
that would not qualify as rents from real property for purposes of the 75% and
95% income tests.
In addition, the Company will be paid interest on the Mortgage Loans.
All interest income qualifies under the 95% gross income test. If a Mortgage
Loan is secured by both real property and other property, all the interest on it
will nevertheless qualify under the 75% gross income test if the amount of the
loan did not exceed the fair market value of the real property at the time of
the loan commitment. The Company has represented that this will always be the
case. Therefore, in the opinion of Counsel, income generated through the
Company's investments in Mortgage Loans will be treated as qualifying income
under the 75% gross income test.
The Company will also receive payments under the terms of the Secured
Equipment Leases. Although the Secured Equipment Leases will be structured as
leases or loans, Counsel is of the opinion that, subject to certain assumptions,
they will be treated as loans secured by personal property for federal income
tax purposes. See "Federal Income Tax Considerations -- Characterization of the
Secured Equipment Leases." If the Secured Equipment Leases are treated as loans
secured by personal property for federal income tax purposes then, the portion
of the payments under the terms of the Secured Equipment Leases that represent
interest, rather than a return of capital for federal income tax purposes, will
not satisfy the 75% gross income test (although it will satisfy the 95% gross
income test). The Company believes, however, that the aggregate amount of such
non-qualifying income will not cause the Company to exceed the limits on
non-qualifying income under the 75% gross income test.
If, contrary to the opinion of Counsel, the Secured Equipment Leases
are treated as true leases, rather than as loans secured by personal property
for federal income tax purposes, the payments under the terms of the Secured
Equipment Leases would be treated as rents from personal property. Rents from
personal property will satisfy either the
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75% or 95% gross income tests if they are received in connection with a lease of
real property and the rent attributable to the personal property does not exceed
15% of the total rent received from the tenant in connection with the lease.
However, if rents attributable to personal property exceed 15% of the total rent
received from a particular tenant, then the portion of the total rent
attributable to personal property will not satisfy either the 75% or 95% gross
income tests.
If, notwithstanding the above, the Company fails to satisfy one or both
of the 75% or 95% tests for any taxable year, it may still qualify as a REIT if
(i) such failure is due to reasonable cause and not willful neglect; (ii) it
reports the nature and amount of each item of its income on a schedule attached
to its tax return for such year; and (iii) the reporting of any incorrect
information is not due to fraud with intent to evade tax. However, even if these
three requirements are met and the Company is not disqualified as a REIT, a
penalty tax would be imposed by reference to the amount by which the Company
failed the 75% or 95% test (whichever amount is greater).
(b) THE 30 PERCENT TEST. In addition to the 75% and 95% tests for each
taxable year, a REIT must derive less than 30% of its gross income from the sale
or other disposition of (i) real property held for less than four years (other
than foreclosure property or property involuntarily or compulsorily converted
through destruction, condemnation or similar events); (ii) stock or securities
held for less than one year; and (iii) property sold or otherwise disposed of in
a prohibited transaction. The Company has represented that it does not expect
that it will recognize gross income of a type, in an amount or at a time which
would cause it to fail the 30% test. As noted above, the Company plans, if
Listing does not occur within ten years after the commencement of this offering,
to commence with the orderly Sale of its Properties and distribute the proceeds
thereof. In the event of such a Sale of Properties, it is possible that income
derived from the Sale could be treated as income from prohibited transactions
and taken into account in applying the 30% gross income test. The Company
believes that at the time any of the Properties are sold none of the Properties
will be primarily held for sale to customers and that any sale of the Properties
will not be in the ordinary course of business. However, whether property is
held primarily for sale to customers in the ordinary course of business depends
on the facts and circumstances in effect from time to time, including those
related to a particular property. In addition, no assurance can be given that
the Company can (a) comply with certain safe-harbor provisions of the Code which
provide that certain sales do not constitute prohibited transactions or (b)
avoid owning property that may be characterized as property held primarily for
sale to customers in the ordinary course of business.
(c) THE IMPACT OF DEFAULT UNDER THE SECURED EQUIPMENT LEASES. In
applying the gross income tests to the Company, it is necessary to consider the
impact that a default under one or more of the Secured Equipment Leases would
have on the Company's ability to satisfy such tests. A default under one or more
of the Secured Equipment Leases would result in the Company directly holding the
Equipment securing such leases for federal income tax purposes. In the event of
a default, the Company may choose to either lease or sell such Equipment.
However, any income resulting from a rental or sale of Equipment not
incidental to the rental or sale of real property would not qualify under the
75% and 95% gross income tests, and any income from a sale of such assets would
count as gain from the sale of assets for purposes of the 30% gross income test.
In addition, in certain circumstances, income derived from a sale or other
disposition of Equipment could be considered "net income from prohibited
transactions," subject to a 100% tax. The Company does not, however,
anticipate that its income from the rental or sale of Equipment would be
material in any taxable year.
DISTRIBUTION REQUIREMENTS. A REIT must distribute to its stockholders
for each taxable year ordinary income dividends in an amount equal to at least
(a) 95% of the sum of (i) its "real estate investment trust taxable income"
(before deduction of dividends paid and excluding any net capital gains) and
(ii) the excess of net income from foreclosure property over the tax on such
income, minus (b) certain excess non-cash income. Real estate investment trust
taxable income generally is the taxable income of a REIT computed as if it were
an ordinary corporation, with certain adjustments. Distributions must be made in
the taxable year to which they relate or, if declared before the timely filing
of the REIT's tax return for such year and paid not later than the first regular
dividend payment after such declaration, in the following taxable year.
The Company has represented that it intends to make Distributions to
stockholders that will be sufficient to meet the 95% distribution requirement.
Under some circumstances, however, it is possible that the Company may not have
sufficient funds from its operations to make cash Distributions to satisfy the
95% distribution requirement. For example, in the event of the default or
financial failure of one or more tenants or lessees, the Company might be
required to continue to accrue rent for some period of time under federal income
tax principles even though the Company would not currently be receiving the
corresponding amounts of cash. Similarly, under federal income tax principles,
the Company might not be entitled to deduct certain expenses at the time those
expenses are incurred. In either case, the Company's cash available for making
Distributions might not be sufficient to satisfy the 95% distribution
requirement. If the cash available to the Company is insufficient, the Company
might raise cash in order to make the Distributions by borrowing funds, issuing
new securities or selling assets. If the Company ultimately were unable to
satisfy the 95% distribution requirement, it would fail to qualify as a REIT
and, as a result, would be subject to federal income tax as an ordinary
corporation without any deduction or adjustment for dividends paid to holders of
the Shares. If the Company fails to satisfy the 95% distribution requirement, as
a result of an adjustment to its tax returns by the Service, under certain
circumstances, it may be able to rectify its failure by paying a "deficiency
dividend" (plus a penalty and interest) within 90 days after such adjustment.
This deficiency dividend will be included in the Company's deductions for
dividends paid for the taxable year affected by such adjustment. However, the
deduction for a deficiency dividend will be denied, if any part of the
adjustment resulting in the deficiency is attributable to fraud with intent to
evade tax or to willful failure to timely file an income tax return.
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TAXATION OF STOCKHOLDERS
TAXABLE DOMESTIC STOCKHOLDERS. For any taxable year in which the
Company qualifies as a REIT for federal income tax purposes, Distributions made
by the Company to its stockholders that are United States persons (generally,
any person other than a nonresident alien individual, a foreign trust or estate
or a foreign partnership or corporation) generally will be taxed as ordinary
income. Amounts received by such United States persons that are properly desig-
nated as capital gain dividends by the Company generally will be taxed as
long-term capital gain, without regard to the period for which such person has
held its Shares, to the extent that they do not exceed the Company's actual net
capital gain for the taxable year. Corporate stockholders may be required to
treat up to 20% of certain capital gains dividends as ordinary income. Such
ordinary income and capital gain are not eligible for the dividends received
deduction allowed to corporations. Distributions to such United States persons
in excess of the Company's current or accumulated earnings and profits will be
considered first a tax-free return of capital for federal income tax purposes,
reducing the tax basis of each stockholder's Shares, and then, to the extent the
Distribution exceeds each stockholder's basis, a gain realized from the sale of
Shares. The Company will notify each stockholder as to the portions of each
Distribution which, in its judgment, constitute ordinary income, capital gain or
return of capital for federal income tax purposes. Any Distribution that is (i)
declared by the Company in October, November or December of any calendar year
and payable to stockholders of record on a specified date in such months and
(ii) actually paid by the Company in January of the following year, shall be
deemed to have been received by each stockholder on December 31 of such calendar
year and, as a result, will be includable in gross income of the stockholder for
the taxable year which includes such December 31. Stockholders who elect to
participate in the Reinvestment Plan will be treated as if they received a cash
Distribution from the Company and then applied such Distribution to purchase
Shares in the Reinvestment Plan. Stockholders may not deduct on their income tax
returns any net operating or net capital losses of the Company.
Upon the sale or other disposition of the Company's Shares, a
stockholder generally will recognize capital gain or loss equal to the
difference between the amount realized on the sale or other disposition and the
adjusted basis of the Shares involved in the transaction. Such gain or loss will
be long-term capital gain or loss if, at the time of sale or other disposition,
the Shares involved have been held for more than one year. In addition, if a
stockholder receives a capital gain dividend with respect to Shares which he has
held for six months or less at the time of sale or other disposition, any loss
recognized by the stockholder will be treated as long-term capital loss to the
extent of the amount of the capital gain dividend that was treated as long-term
capital gain.
Generally, the redemption of Shares by the Company will result in
recognition of ordinary income by the stockholder unless the stockholder
completely terminates or substantially reduces his or her interest in the
Company. A redemption of Shares for cash will be treated as a distribution that
is taxable as a dividend to the extent of the Company's current or accumulated
earnings and profits at the time of the redemption under Section 302 of the Code
unless the redemption (a) results in a "complete termination" of the
stockholder's interest in the Company under Section 302(b)(3) of the Code, (b)
is "substantially disproportionate" with respect to the stockholder under
Section 302(b)(2) of the Code, or (c) is "not essentially equivalent to a
dividend" with respect to the stockholder under Section 302(b)(1) of the Code.
Under Code Section 302(b)(2) a redemption is considered "substantially
disproportionate" if the percentage of the voting stock of the corporation owned
by a stockholder immediately after the redemption is less than eighty percent of
the percentage of the voting stock of the corporation owned by such stockholder
immediately before the redemption. In determining whether the redemption is not
treated as a dividend, Shares considered to be owned by a stockholder by reason
of certain constructive ownership rules set forth in Section 318 of the Code, as
well as Shares actually owned, must generally be taken into account. A
distribution to a stockholder will be "not essentially equivalent to a dividend"
if its results in a "meaningful reduction" in the stockholder's interest in the
Company. The Service has published a ruling indicating that a redemption which
results in a reduction in the proportionate interest in a corporation (taking
into account the Section 318 constructive ownership rules) of a stockholder
whose relative stock interest is minimal (an interest of less than 1% should
satisfy this requirement) and who exercises no control over the corporation's
affairs should be treated as being "not essentially equivalent to a dividend."
If the redemption is not treated as a dividend, the redemption of the
Shares for cash will result in taxable gain or loss equal to the difference
between the amount of cash received and the stockholder's tax basis in the
Shares redeemed. Such gain or loss would be capital gain or loss if the Shares
were held as a capital asset and would be long-term capital gain or loss if the
holding period for the Shares exceeds one year.
The Company will report to its U.S. stockholders and the Service the
amount of dividends paid or treated as paid during each calendar year, and the
amount of tax withheld, if any. Under the backup withholding rules, a stock
holder may be subject to backup withholding at the rate of 31% with respect to
dividends paid unless such holder (a) is a corporation or comes within certain
other exempt categories and, when required, demonstrates this fact or (b)
provides a taxpayer identification number, certifies as to no loss of exemption
from backup withholding, and otherwise complies with applicable requirements of
the backup withholding rules. A stockholder that does not provide the Company
with a correct taxpayer identification number may also be subject to penalties
imposed by the Service. Any amount paid to the Service as backup withholding
will be creditable against the stockholder's income tax liability. In addition,
the Company may be required to withhold a portion of capital gain dividends to
any stockholders who fail to certify their non-foreign status to the Company.
See "Foreign Stockholders" below.
The state and local income tax treatment of the Company and its
stockholders may not conform to the federal income tax treatment described
above. As a result, stockholders should consult their own tax advisors for an
explanation of how other state and local tax laws would affect their investment
in Shares.
TAX-EXEMPT STOCKHOLDERS. Dividends paid by the Company to a stockholder
that is a tax-exempt entity generally will not constitute "unrelated business
taxable income" ("UBTI") as defined in Section 512(a) of the Code, provided that
the tax-exempt entity has not financed the acquisition of its Shares with
"acquisition indebtedness" within the meaning of Section 514(c) of the Code and
the Shares are not otherwise used in an unrelated trade or business of the
tax-exempt entity.
Notwithstanding the foregoing, qualified trusts that hold more than 10%
(by value) of the shares of certain REITs may be required to treat a certain
percentage of such REIT's distributions as UBTI. This requirement will apply
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only if (i) treating qualified trusts holding REIT shares as individuals would
result in a determination that the REIT is "closely held" within the meaning of
Section 856(h)(1) of the Code and (ii) the REIT is "predominantly held" by
qualified trusts. A REIT is predominantly held if either (i) a single qualified
trust holds more than 25% by value of the REIT interests or (ii) one or more
qualified trusts, each owning more than 10% by value of the REIT interests, hold
in the aggregate more than 50% of the REIT interests. The percentage of any REIT
dividend treated as UBTI is equal to the ratio of (a) the UBTI earned by the
REIT (treating the REIT as if it were a qualified trust and therefore subject to
tax on UBTI) to (b) the total gross income (less certain associated expenses) of
the REIT. A DE MINIMIS exception applies where the ratio set forth in the
preceding sentence is less than 5% for any year. For these purposes, a qualified
trust is any trust described in Section 401(a) of the Code and exempt from tax
under Section 501(a) of the Code. The restrictions on ownership of Shares in
the Articles of Incorporation will prevent application of the provisions
treating a portion of REIT distributions as UBTI to tax-exempt entities
purchasing Shares in the Company, absent a waiver of the restrictions by the
Board of Directors. See "Summary of the Articles of Incorporation and Bylaws --
Restriction of Ownership."
Assuming that there is no waiver of the restrictions on ownership of
Shares in the Articles of Incorporation and that a tax-exempt stockholder does
not finance the acquisition of its Shares with "acquisition indebtedness" within
the meaning of Section 514(c) of the Code or otherwise use its Shares in an
unrelated trade or business, in the opinion of Counsel the distributions of the
Company with respect to such tax-exempt stockholder will not constitute UBTI.
The tax discussion of distributions by qualified retirement plans,
IRAs, Keogh plans and other tax-exempt entities is beyond the scope of this
discussion, and such entities should consult their tax adviser regarding such
questions.
FOREIGN STOCKHOLDERS. The rules governing United States federal income
taxation of nonresident alien individuals, foreign corporations, foreign
participants and other foreign stockholders (collectively, "Non-U.S.
Stockholders") are complex, and no attempt will be made herein to provide more
than a summary of such rules. The following discussion assumes that the income
from investment in the Shares will not be effectively connected with the
Non-U.S. Stockholders' conduct of a United States trade or business. Prospective
Non-U.S. Stockholders should consult with their own tax advisors to determine
the impact of federal, state and local laws with regard to an investment in
Shares, including any reporting requirements. Non-U.S. Stockholders will be
admitted as stockholders with the approval of the Advisor.
Dividends that are not attributable to gain from sales or exchanges by
the Company of United States real property interests and not designated by the
Company as capital gain dividends will be treated as ordinary income to the
extent that they are made out of current and accumulated earnings and profits of
the Company. Such dividends ordinarily will be subject to a withholding tax
equal to 30% of the gross amount of the dividend, unless an applicable tax
treaty reduces or eliminates that tax. The Company expects to withhold U.S.
income tax at the rate of 30% on the gross amount of any such dividends paid to
a Non-U.S. Stockholder unless (i) a lower treaty rate applies and the Non-U.S.
Stockholder has filed the required IRS Form 1001 with the Company or (ii) the
Non-U.S. Stockholder files an IRS Form 4224 with the Company claiming that the
dividend is effectively connected income. Dividends in excess of the Company's
current and accumulated earnings and profits will not be taxable to a
stockholder to the extent that such dividends paid do not exceed the adjusted
basis of the stockholder's Shares, but rather will reduce the adjusted basis of
such Shares. To the extent that dividends in excess of current and accumulated
earnings and profits exceed the adjusted basis of a Non-U.S. Stockholders'
Shares, such dividends will give rise to tax liability if the Non-U.S.
Stockholder would otherwise be subject to tax on any gain from the sale or
disposition of the Shares, as described below. If it cannot be determined at the
time a dividend is paid whether or not such dividend will be in excess of
current and accumulated earnings and profits, the dividends will be subject to
withholding at the rate of 30%. However, a Non-U.S. Stockholder may seek a
refund of such amounts from the IRS if it is subsequently determined that such
dividend was, in fact, in excess of the Company's current and accumulated
earnings and profits.
For any year in which the Company qualifies as a REIT, dividends that
are attributable to gain from sales or exchanges by the Company of United States
real property interests will be taxed to a Non-U.S. Stockholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980, as
amended ("FIRPTA"). Under FIRPTA, dividends attributable to gain from sales of
United States real property interests are taxed to a Non-U.S. Stockholder as if
such gain were effectively connected with a United States business. Non-U.S.
Stockholders would thus be taxed at the normal capital gain rates applicable to
U.S. Stockholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals). Also,
dividends subject to FIRPTA may be subject to a 30% branch profits tax in the
hands of a foreign corporate stockholder not entitled to treaty exemption. The
Company is required by applicable Treasury Regulations to withhold 35% of any
distribution that could be designated by the Company as a capital gain dividend.
This amount is creditable against the Non-U.S. Stockholders' FIRPTA tax
liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of Shares
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by foreign persons. It is currently anticipated that the Company
will be a "domestically controlled REIT," and in such case the sale of Shares
would not be subject to taxation under FIRPTA. However, gain not subject to
FIRPTA nonetheless will be taxable to a Non-U.S. Stockholder if (i) investment
in the Shares is treated as "effectively connected" with the Non-U.S.
Stockholders' U.S. trade or business, in which case the Non-U.S. Stockholder
will be subject to the same treatment as U.S. Stockholders with respect to such
gain or (ii) the Non-U.S. Stockholder is a nonresident alien individual who was
present in the United States for 183 days or more during the taxable year and
either the individual has a "tax home" in the United States or the gain is
attributable to an office or other fixed place of business maintained by the
individual in the United States, in which case the nonresident alien individual
will be subject to a 30% tax on capital gains from sales of Shares. If the gain
on the sale of Shares were to be subject to taxation under FIRPTA, the Non-U.S.
Stockholder would be subject to the same treatment as U.S. Stockholders with
respect to such gain (subject to applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien individuals),
and the purchaser of the Shares would be required to withhold and remit to the
Service 10% of the purchase price.
STATE AND LOCAL TAXES
The Company and its shareholders may be subject to state and local
taxes in various states and localities in which it or they transact business,
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own property, or reside. The tax treatment of the Company and the stockholders
in such jurisdictions may differ from the federal income tax treatment described
above. Consequently, prospective stockholders should consult their own tax
advisors regarding the effect of state and local tax laws upon an investment in
the Common Stock of the Company.
CHARACTERIZATION OF PROPERTY LEASES
The Company will purchase both new and existing Properties and lease
them to franchisees or corporate franchisors pursuant to leases of the type
described in "Business -- Description of Property Leases." The ability of the
Company to claim certain tax benefits associated with ownership of the
Properties, such as depreciation, depends on a determination that the lease
transactions engaged in by the Company are true leases, under which the Company
is the owner of the leased Property for federal income tax purposes, rather than
a conditional sale of the Property or a financing transaction. A determination
by the Service that the Company is not the owner of the Properties for federal
income tax purposes may have adverse consequences to the Company, such as the
denying of the Company's depreciation deductions. Moreover, a denial of the
Company's depreciation deductions could result in a determination that the
Company's Distributions to stockholders were insufficient to satisfy the 95%
distribution requirement for qualification as a REIT. However, as discussed
above, if the Company has sufficient cash, it may be able to remedy any past
failure to satisfy the distribution requirements by paying a "deficiency
dividend" (plus a penalty and interest). See "Distribution Requirements,"
above. Furthermore, in the event that the Company were determined not to be the
owner of a particular Property, in the opinion of Counsel the income that the
Company would receive pursuant to the recharacterized lease would constitute
interest qualifying under the 95% and 75% gross income tests by reason of being
interest on an obligation secured by a mortgage on an interest in real property,
because the legal ownership structure of such Property will have the effect of
making the building serve as collateral for the debt obligation.
The characterization of transactions as leases, conditional sales, or
financings has been addressed in numerous cases. The courts have not identified
any one factor as being determinative of whether the lessor or the lessee of
property is to be treated as the owner. Judicial decisions and pronouncements of
the Service with respect to the characterization of transactions as either
leases, conditional sales, or financing transactions have made it clear that the
characterization of leases for tax purposes is a question which must be decided
on the basis of a weighing of many factors, and courts have reached different
conclusions even where characteristics of two lease transactions were
substantially similar.
While certain characteristics of the leases anticipated to be entered
into by the Company suggest the Company might not be the owner of the
Properties, such as the fact that such leases are "triple-net" leases, a
substantial number of other characteristics indicate the bona fide nature of
such leases and that the Company will be the owner of the Proper ties. For
example, under the types of leases described in "Business -- Description of
Leases," the Company will bear the risk of substantial loss in the value of the
Properties, since the Company will acquire its interests in the Properties with
an equity investment, rather than with nonrecourse indebtedness. Further, the
Company, rather than the tenant, will benefit from any appreciation in the
Properties, since the Company will have the right at any time to sell or
transfer its Properties, subject to the tenant's right to purchase the property
at a price not less than the Property's fair market value (determined by
appraisal or otherwise).
Other factors that are consistent with the ownership of the Properties
by the Company are (i) the tenants are liable for repairs and to return the
Properties in reasonably good condition; (ii) insurance proceeds generally are
to be used to restore the Properties and, to the extent not so used, belong to
the Company; (iii) the tenants agree to subordinate their interests in the
Properties to the lien of any first mortgage upon delivery of a nondisturbance
agreement and agree to attorn to the purchaser upon any foreclosure sale; and
(iv) based on the Company's representation that the Properties can reasonably be
expected to have at the end of their lease terms (generally a maximum of 30 to
40 years) a fair market value of at least 20% of the Company's cost and a
remaining useful life of at least 20% of their useful lives at the beginning of
the leases, the Company has not relinquished the Properties to the tenants for
their entire useful lives, but has retained a significant residual interest in
them. Moreover, the Company will not be primarily dependent upon tax benefits in
order to realize a reasonable return on its investments.
Concerning the Properties for which the Company owns the buildings and
the underlying land, on the basis of the foregoing, assuming (i) the Company
leases the Properties on substantially the same terms and conditions described
in "Business -- Description of Leases," and (ii) as is represented by the
Company, the residual value of the Properties remaining after the end of their
lease terms (including all renewal periods) may reasonably be expected to be at
least 20% of the Company's cost of such Properties, and the remaining useful
lives of the Properties after the end of their lease terms (including all
renewal periods) may reasonably be expected to be at least 20% of the
Properties' useful lives at the beginning of their lease terms, it is the
opinion of Counsel that the Company will be treated as the owner of the Proper
ties for federal income tax purposes and will be entitled to claim depreciation
and other tax benefits associated with such ownership. In the case of Properties
for which the Company does not own the underlying land, Counsel cannot opine
that such transactions will be characterized as leases.
CHARACTERIZATION OF SECURED EQUIPMENT LEASES
The Company will purchase Equipment and lease it to franchisees or
corporate franchisors pursuant to leases of the type described in "Business --
General." The ability of the Company to qualify as a REIT depends on a
determination that the Secured Equipment Leases are financing arrangements,
under which the lessees acquire ownership of the Equipment for federal income
tax purposes. If the Secured Equipment Leases are instead treated as true
leases, the Company may be unable to satisfy the income tests for REIT
qualification. See "Federal Income Tax Considerations -- Taxation of the Company
- -- Income Tests."
While certain characteristics of the Secured Equipment Leases to be
entered into by the Company suggest that the Company retains ownership of the
Equipment, such as the fact that certain of the Secured Equipment Leases are
structured as leases, with the Company retaining title to the Equipment, a
substantial number of other characteristics indicate that the Secured Equipment
Leases are financing arrangements and that the lessees are the owners of the
Equipment for federal income tax purposes. For example, under the types of
Secured Equipment Leases described in "Business -- General," the lease term will
equal or exceed the useful life of the Equipment, and the lessee will have the
option to purchase the Equipment at the end of the lease term for a nominal sum.
Moreover, under the terms of the Secured Equipment Leases, the Company and the
lessees will each agree to treat the Secured Equipment Leases as loans secured
by personal property, rather than leases, for tax purposes.
On the basis of the foregoing, assuming (i) the Secured Equipment
Leases are made on substantially the same terms and conditions described in
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"Business -- General," and (ii) as represented by the Company, each of the
Secured Equipment Leases will have a term that equals or exceeds the useful life
of the Equipment subject to the lease, it is the opinion of Counsel that the
Company will not be treated as the owner of the Equipment that is subject to the
Secured Equipment Leases for federal income tax purposes and that the Company
will be able to treat the Secured Equipment Leases as loans secured by personal
property. Counsel's opinion that the Company will be organized in conformity
with the requirements for qualification as a REIT is based, in part, on the
assumption that each of the Secured Equipment Leases will conform to the
conditions outlined in clauses (i) and (ii) of the preceding sentence.
INVESTMENT IN JOINT VENTURES
As indicated in "Business -- Joint Venture Arrangements," the Company
may participate in Joint Ventures which own and lease Properties. Assuming that
the Joint Ventures have the characteristics described in "Business -- Joint
Venture Arrangements," and are operated in the same manner that the Company
operates with respect to Proper ties that it owns directly, it is the opinion of
Counsel that (i) the Joint Ventures will be treated as partnerships, as defined
in Sections 7701(a)(2) and 761(a) of the Code and not as associations taxable as
corporations, and that the Company will be subject to tax as a partner pursuant
to Sections 701-761 of the Code and (ii) all material allocations to the Company
of income, gain, loss and deduction as provided in the Joint Venture agreements
and as discussed in the Prospectus will be respected under Section 704(b) of the
Code. The Company has represented that it will not become a participant in any
Joint Venture unless the Company has first obtained advice of Counsel that the
Joint Venture will constitute a partnership for federal income tax purposes and
that the allocations to the Company contained in the Joint Venture agreement
will be respected.
If, contrary to the opinion of Counsel, a Joint Venture were to be
treated as an association taxable as a corporation, the Company would be treated
as a stockholder for tax purposes and would not be treated as owning a pro rata
share of the Joint Venture's assets. In addition, the items of income and
deduction of the Joint Venture would not pass through to the Company. Instead,
the Joint Venture would be required to pay income tax at regular corporate tax
rates on its net income, and distributions to partners would constitute
dividends that would not be deductible in computing the Joint Venture's taxable
income. Moreover, a determination that a Joint Venture is taxable as a
corporation could cause the Company to fail to satisfy the asset tests for
qualification as a REIT. See "Asset Tests" and "Income Tests," above.
REPORTS TO STOCKHOLDERS
The Company will furnish each stockholder with its audited annual
report within 120 days following the close of each fiscal year. These annual
reports will contain the following: (i) financial statements, including a
balance sheet, statement of operations, statement of stockholders' equity, and
statement of cash flows, prepared in accordance with generally accepted
accounting principals which are audited and reported on by independent certified
public accountants; (ii) the ratio of the costs of raising capital during the
period to the capital raised; (iii) the aggregate amount of advisory fees and
the aggregate amount of other fees paid to the Advisor and any Affiliate of the
Advisor by the Company and including fees or charges paid to the Advisor and any
Affiliate of the Advisor by third parties doing business with the Company; (iv)
the Operating Expenses of the Company, stated as a percentage of the Average
Invested Assets (the average of the aggregate book value of the assets of the
Company, for a specified period, invested, directly or indirectly, in equity
interests in and loans secured by real estate, 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) and as a percentage
of its Net Income; (v) a report from the Independent Directors that the policies
being followed by the Company are in the best interest of its stockholders and
the basis for such determination; (vi) separately stated, full disclosure of all
material terms, factors and circumstances surrounding any and all transactions
involving the Company, Directors, Advisor and any Affiliate thereof occurring in
the year for which the annual report is made, and the Independent Directors
shall be specifically charged with a duty to examine and comment in the report
on the fairness of such transactions; and (vii) Distributions to the
stockholders for the period, identifying the source of such Distributions and if
such information is not available at the time of the distribution, a written
explanation of the relevant circumstances will accompany the Distributions (with
the statement as to the source of Distributions to be sent to stockholders not
later than 60 days after the end of the fiscal year in which the distribution
was made).
Within 75 days following the close of each Company fiscal year, each
stockholder that is a Qualified Plan will be furnished with an annual statement
of Share valuation to enable it to file annual reports required by ERISA as they
relate to its investment in the Company. The statement will report an estimated
value of each Share, prior to the termination of the offering, of $10 per Share
and, after the termination of the offering, based on (i) appraisal updates
performed by the Company based on a review of the existing appraisal and lease
of each Property, focusing on a re-examination of the capitalization rate
applied to the rental stream to be derived from that Property; and (ii) a review
of the outstanding Mortgage Loans and Secured Equipment Leases focusing on a
determination of present value by a re-examination of the capitalization rate
applied to the stream of payments due under the terms of each Mortgage Loan and
Secured Equipment Leases. The Company may elect to deliver such reports to all
stockholders. Stockholders will not be forwarded copies of appraisals or
updates. In providing such reports to stockholders, neither the Company nor its
Affiliates thereby make any warranty, guarantee, or representation that (i) the
stockholders or the Company, upon liquidation, will actually realize the
estimated value per Share, or (ii) the stockholders will realize the estimated
net asset value if they attempt to sell their Shares.
If the Company is required by the Securities Exchange Act of 1934, as
amended, to file quarterly reports with the Securities and Exchange Commission
on Form 10-Q, stockholders will be furnished with a summary of the information
contained in each such report within 60 days after the end of each fiscal
quarter. Such summary information generally will include a balance sheet, a
quarterly statement of income, and a statement of cash flows, and any other
pertinent information regarding the Company and its activities during the
quarter. Stockholders also may receive a copy of any Form 10-Q upon request to
the Company. If the Company is not subject to this filing requirement,
stockholders will be furnished with a semi-annual report within 60 days after
each six-month period containing information similar to that contained in the
quarterly report but applicable to such six-month period.
Stockholders and their duly authorized representatives are entitled to
inspect and copy, at their expense, the books and records of the Company at all
times during regular business hours, upon reasonable prior notice to the
Company, at the location where such reports are kept by the Company.
Stockholders, upon request and at their expense, may obtain full information
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regarding the financial condition of the Company, a copy of the Company's
federal, state, and local income tax returns for each fiscal year of the
Company, and, subject to certain confidentiality requirements, a list containing
the name, address, and Shares held by each stockholder.
The fiscal year of the Company will be the calendar year.
The Company's federal tax return (and any applicable state income tax
returns) will be prepared by the accountants regularly retained by the Company.
Appropriate tax information will be submitted to the stockholders within 30 days
following the end of each fiscal year of the Company. A specific reconciliation
between GAAP and income tax information will not be provided to the
stockholders; however, such reconciling information will be available in the
office of the Company for inspection and review by any interested stockholder.
THE OFFERING
GENERAL
A minimum of 250,000 Shares ($2,500,000) and a maximum of 15,000,000
Shares ($150,000,000) are being offered at a purchase price of $10.00 per share.
In addition, the Company has registered an additional 1,500,000 Shares
($15,000,000) available only to stockholders who receive a copy of this
Prospectus and who elect to participate in the Reinvestment Plan. Any
participation in such plan by a person who becomes a stockholder otherwise than
by participating in this offering will require solicitation under a separate
prospectus. See "Summary of Reinvestment Plan." The Board of Directors may
determine to engage in future offerings of Common Stock of up to the number of
unissued authorized shares of Common Stock available following termination of
this offering.
A minimum investment of 250 Shares ($2,500) is required. IRAs, Keogh
plans, and pension plans must make a minimum investment of at least 100 Shares
($1,000), except for Iowa tax-exempt investors who must make a minimum
investment of 250 Shares ($2,500). For Minnesota investors only, IRAs and
qualified plans must make a minimum investment of 200 Shares ($2,000). In
addition, Nebraska, New York, and North Carolina investors must make a minimum
investment of 500 Shares ($5,000). Any investor who makes the required minimum
investment may purchase additional Shares in increments of one Share. Maine
investors, however, may not purchase additional Shares in amounts less than the
applicable minimum investment except at the time of the initial subscription or
with respect to Shares purchased pursuant to the Reinvestment Plan. See "The
Offering -- General," "The Offering -- Subscription Procedures," and "Summary of
Reinvestment Plan."
No Shares will be sold and the offering will terminate unless
subscriptions for at least 250,000 Shares ($2,500,000) have been obtained within
one year after the date of this Prospectus. If such minimum amount is sold, the
Company may, in its sole discretion, and without prior notice to the
subscribers, elect to extend the offering for up to an additional one year
thereafter (in states that permit such an extension). Until subscription funds
for the Company total $2,500,000, the funds will be held in escrow by SouthTrust
Asset Management Company of Florida, N.A., and interest earned on such funds
will accrue to the benefit of subscribers. Pursuant to the requirements the
Commissioner of Securities of the State of Pennsylvania, subscriptions from
Pennsylvania residents may not be released from escrow, or included in
determining whether the $2,500,000 minimum for the Company has been reached,
until subscriptions for Shares totaling at least $8,250,000 have been received
from all sources. Subscription amounts with all interest due will
be returned in the event that subscriptions aggregating $2,500,000 are not
received within one year after the commence ment of the offering.
PLAN OF DISTRIBUTION
The Shares will be offered to the public on a "best efforts" basis
(which means that no one is guaranteeing that any minimum amount will be sold)
through the Soliciting Dealers, who will be members of the National Association
of Securities Dealers, Inc. (the "NASD") or other persons or entities exempt
from broker-dealer registration, and the Managing Dealer. The Soliciting Dealers
will use their best efforts during the offering period to find eligible persons
who desire to subscribe for the purchase of Shares from the Company. Both James
M. Seneff, Jr. and Robert A. Bourne are Affiliates and licensed principals of
the Managing Dealer, and the Advisor is an Affiliate of the Managing Dealer.
Prior to a subscriber's admission to the Company as a stockholder,
funds paid by such subscriber will be deposited in an interest-bearing escrow
account with SouthTrust Asset Management Company of Florida, N.A. The Company,
within 30 days after the date a subscriber is admitted to the Company, will pay
to such subscriber the interest (generally calculated on a daily basis) actually
earned on such subscriber's funds. After the initial admission of stock holders
to the Company in connection with the sale of at least 250,000 Shares, interest
will be payable only to those subscribers whose funds have been held in escrow
by such bank for at least 20 days. Stockholders otherwise are not entitled to
interest earned on Company funds or to receive interest on their Invested
Capital. See "Escrow Arrangements" below.
Subject to the provisions for reduced Selling Commissions described
below, the Company will pay the Managing Dealer an aggregate of 7.5% of the
Gross Proceeds as Selling Commissions. The Managing Dealer shall reallow fees of
up to 7% to the Soliciting Dealers with respect to Shares sold by them. In
addition, the Company will pay the Managing Dealer, as an expense allowance, a
marketing support and due diligence expense reimbursement fee equal to 0.5% of
Gross Proceeds. The Managing Dealer, in its sole discretion, may reallow to any
Soliciting Dealer all or any portion of this fee based on such factors as the
number of Shares sold by such Soliciting Dealer, the assistance, if any, of such
Soliciting Dealer in marketing the offering, and bona fide due diligence
expenses incurred. Stockholders who elect to participate in the Reinvestment
Plan will be charged Selling Commissions and the marketing support and due
diligence fee on Shares purchased for their accounts on the same basis as
investors who purchase Shares in the offering. See "Summary of Reinvestment
Plan."
A registered principal or representative of the Managing Dealer or a
Soliciting Dealer, employees, officers, and Directors of the Company, or
employees, officers and directors of the Advisor, any of their Affiliates and
any Plan established exclusively for the benefit of such persons or entities may
purchase Shares net of 7% commissions, at a per Share purchase price of $9.30.
Clients of an investment adviser registered under the Investment Advisers Act of
1940, as amended, who have been advised by such adviser on an ongoing basis
regarding investments other than in the Company, and who are not being charged
by such adviser or its Affiliates, through the payment of commissions or
otherwise, for the advice rendered by such adviser in connection with the
purchase of the Shares, may purchase the Shares net of 7% commissions. In
addition, Soliciting Dealers that have a contractual arrangement with their
clients for the payment of fees which is consistent with accepting Selling
Commissions, in their sole discretion, may elect not to accept any Selling
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Commissions offered by the Company for Shares that they sell. In that event,
such Shares shall be sold to the investor net of all Selling Commissions, at a
per Share purchase price of $9.30. In connection with the purchases of certain
minimum numbers of Shares, the amount of Selling Commissions otherwise payable
to the Managing Dealer or a Soliciting Dealer shall be reduced in accordance
with the following schedule:
<TABLE>
<CAPTION>
Reallowed Commissions on Sales Per Share
Dollar Amount Purchase Price
of Shares Purchased Per Share Percent Dollar Amount
<S> <C>
$10 -- $249,990 $10.00 7.0% $0.70
$250,000 -- $499,990 $9.90 6.0% $0.60
$500,000 -- $999,990 $9.70 4.0% $0.40
$1,000,000 -- $1,499,990 $9.60 3.0% $0.30
$1,500,000 or more $9.50 2.0% $0.20
</TABLE>
For example, if an investor purchases 100,000 Shares, the investor
could pay as little as $960,000 rather than $1,000,000 for the Shares, in which
event the Selling Commissions on the sale of such Shares would be $35,000 ($0.35
per Share). The net proceeds to the Company will not be affected by such
discounts.
Subscriptions may be combined for the purpose of determining the volume
discounts in the case of subscriptions made by any "purchaser," provided all
such Shares are purchased through the same Soliciting Dealer or through the
Managing Dealer. The volume discount will be prorated among the separate
subscribers considered to be a single "purchaser." Shares purchased pursuant to
the Reinvestment Plan on behalf of a Participant in the Reinvestment Plan will
not be combined with other subscriptions for Shares by the investor in
determining the volume discount to which such investor may be entitled. See
"Summary of Reinvestment Plan." Further subscriptions for Shares will not be
combined for purposes of the volume discount in the case of subscriptions by any
"purchaser" who subscribes for additional Shares subsequent to the purchaser's
initial purchase of Shares.
Any request to combine more than one subscription must be made in
writing in a form satisfactory to the Company and must set forth the basis for
such request. Any such request will be subject to verification by the Managing
Dealer that all of such subscriptions were made by a single "purchaser." If a
"purchaser" does not reduce the per Share purchase price, the excess purchase
price over the discounted purchase price will be returned to the actual separate
subscribers for Shares.
For purposes of such volume discounts, "purchaser" includes (i) an
individual, his or her spouse, and their children under the age of 21, who
purchase the Shares for his or her or their own accounts, and all pension or
trust funds established by each such individual; (ii) a corporation,
partnership, association, joint-stock company, trust fund, or any organized
group of persons, whether incorporated or not (provided that the entities
described in this clause (ii) must have been in existence for at least six
months before purchasing the Shares and must have formed such group for a
purpose other than to purchase the Shares at a discount); (iii) an employee's
trust, pension, profit-sharing, or other employee benefit plan qualified under
Section 401 of the Code; and (iv) all pension, trust, or other funds maintained
by a given bank. In addition, the Company, in its sole discretion, may aggregate
and combine separate subscriptions for Shares received during the offering
period from (i) the Managing Dealer or the same Soliciting Dealer, (ii)
investors whose accounts are managed by a single investment adviser registered
under the Investment Advisers Act of 1940, (iii) investors over whose accounts a
designated bank, insurance company, trust company, or other entity exercises
discretionary investment responsibility, or (iv) a single corporation,
partnership, trust association, or other organized group of persons, whether
incorporated or not, and whether such subscriptions are by or for the benefit of
such corporation, partnership, trust association, or group. Except as provided
in this paragraph, subscriptions will not be cumulated, combined, or aggregated.
Any reduction in commissions will reduce the effective purchase price
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per Share to the investor involved but will not alter the net proceeds payable
to the Company as a result of such sale. All investors will be deemed to have
contributed the same amount per Share to the Company whether or not the investor
receives a discount. Accordingly, for purposes of Distributions, investors who
pay reduced commissions will receive higher returns on their investments in the
Company as compared to investors who do not pay reduced commissions.
In connection with the sale of Shares, certain registered principals or
representatives of the Managing Dealer may perform wholesaling functions for
which they will receive compensation payable by the Managing Dealer in an
aggregate amount not in excess of one percent of Gross Proceeds. The first 0.5%
of Gross Proceeds of any such fee will be paid from the 7.5% of Gross Proceeds
payable to the Managing Dealer as Selling Commissions. In addition, the Advisor
and its Affiliates, including the Managing Dealer and its registered principals
or representatives, may incur due diligence fees and other expenses, including
expenses related to sales seminars and wholesaling activities, a portion of
which may be paid by the Company.
The Company or its Affiliates also may provide incentive items for
registered representatives of the Managing Dealer and the Soliciting Dealers,
which in no event shall exceed an aggregate of $100 per annum per participating
salesperson. In the event other incentives are provided to registered
representatives of the Managing Dealer or the Soliciting Dealers, they will be
paid only in cash, and such payments will be made only to the Managing Dealer or
the Soliciting Dealers rather than to their registered representatives. Any such
sales incentive program must first have been submitted for review by the NASD,
and must comply with Rule 2710(c)(6)(B)(xii). Costs incurred in connection with
such sales incentive programs, if any, will be considered underwriting compensa
tion. See "Estimated Use of Proceeds."
The Company will also reimburse the Managing Dealer and the Soliciting
Dealers for bona fide due diligence expenses and certain expenses as incurred in
connection with the offering.
The total amount of underwriting compensation, including commissions
and reimbursement of expenses, paid in connection with the offering will not
exceed 10.5% of Gross Proceeds.
The Managing Dealer and the Soliciting Dealers severally will indemnify
the Company and its officers and Directors, the Advisor and its officers and
directors and their Affiliates, against certain liabilities, including
liabilities under the Securities Act of 1933.
SUBSCRIPTION PROCEDURES
PROCEDURES APPLICABLE TO ALL SUBSCRIPTIONS. In order to purchase
Shares, the subscriber must complete and execute the Subscription Agreement. Any
subscription for Shares must be accompanied by cash or check payable to
"SouthTrust Asset Management Company of Florida, N.A., Escrow Agent" (or to the
Company after subscription funds are released from escrow), in the amount of
$10.00 per Share. See "Escrow Arrangements" below. Certain Soliciting Dealers
who have "net capital," as defined in the applicable federal securities
regulations, of $250,000 or more may instruct their customers to make their
checks for Shares for which they have subscribed payable directly to the
Soliciting Dealer. In such case, the Soliciting Dealer will issue a check made
payable to the order of the Escrow Agent for the aggregate amount of the
subscription proceeds.
Each subscription will be accepted or rejected by the Company within 30
days after its receipt, and no sale of Shares shall be completed until at least
five business days after the date on which the subscriber receives a copy of
this Prospectus. If a subscription is rejected, the funds will be returned to
the subscriber within ten business days after the date of such rejection,
without interest and without deduction. A form of the Subscription Agreement is
set forth as Exhibit D to this Prospectus. The subscription price of each Share
is payable in full upon execution of the Subscription Agreement. A subscriber
whose subscription is accepted shall be sent a confirmation of his or her
purchase.
The Advisor and each Soliciting Dealer who sells Shares on behalf of
the Company have the responsibility to make every reasonable effort to determine
that the purchase of Shares is appropriate for an investor and that the
requisite suitability standards are met. See "Suitability Standards and How to
Subscribe -- Suitability Standards." In making this determination, the
Soliciting Dealers will rely on relevant information provided by the investor,
including information as to the investor's age, investment objectives,
investment experience, income, net worth, financial situation, other
investments, and any other pertinent information. Each investor should be aware
that determining suitability is the responsibility of the Soliciting Dealer.
The Advisor and each Soliciting Dealer shall maintain records of the
information used to determine that an investment in the Shares is suitable and
appropriate for an investor. The Advisor and each Soliciting Dealer shall
maintain these records for at least six years.
Subscription payments will be released from escrow promptly after the
receipt by the Company of subscriptions for a minimum of 250,000 Shares
(excluding subscriptions of Pennsylvania investors). Persons whose subscriptions
are accepted prior to the release of such payments from escrow will be admitted
as stockholders within 15 days after such release of payments. Thereafter,
subscribers will be admitted as stockholders not later than the last day of the
calendar month following acceptance of their subscriptions.
PROCEDURES APPLICABLE TO NON-TELEPHONIC ORDERS. Each Soliciting Dealer
receiving a subscriber's check made payable solely to the bank escrow agent
(where, pursuant to such Soliciting Dealer's internal supervisory procedures,
internal supervisory review must be conducted at the same location at which
subscription documents and checks are received from subscribers), will deliver
such checks to the Managing Dealer no later than the close of business of the
first business day after receipt of the subscription documents by the Soliciting
Dealer except that, in any case in which the Soliciting Dealer maintains a
branch office, and, pursuant to a Soliciting Dealer's internal supervisory
procedures, final internal supervisory review is conducted at a different
location, the branch office shall transmit the subscription documents and check
to the Soliciting Dealer conducting such internal supervisory review by the
close of business on the first business day following their receipt by the
branch office and the Soliciting Dealer shall review the subscription documents
and subscriber's check to ensure their proper execution and form and, if they
are acceptable, transmit the check to the Managing Dealer by the close of
business on the first business day after the check is received by the Soliciting
Dealer. The Managing Dealer will transmit the check to the Escrow Agent by no
later than the close of business on the first business day after the check is
received from the Soliciting Dealer.
PROCEDURES APPLICABLE TO TELEPHONIC ORDERS. Certain Soliciting Dealers
may permit investors to subscribe for Shares by telephonic order to the
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Soliciting Dealer. There are no additional fees associated with telephonic
orders. Subscribers who wish to subscribe for Shares by telephonic order to the
Soliciting Dealer may complete the telephonic order either by delivering a check
in the amount necessary to purchase the Shares to be covered by the subscription
agreement to the Soliciting Dealer or by authorizing the Soliciting Dealer to
pay the purchase price for the Shares to be covered by the subscription
agreement from funds available in an account maintained by the Soliciting Dealer
on behalf of the subscriber. A subscriber must specifically authorize the
registered representative and branch manager to execute the subscription
agreement on behalf of the subscriber and must already have made or agreed to
make payment for the Shares covered by the subscription agreement.
To the extent that customers of any Soliciting Dealer wish to subscribe
and pay for Shares with funds held by or to be deposited with those firms, then
such firms shall, subject to Rule 15c2-4 promulgated under the Securities
Exchange Act of 1934, either (i) upon receipt of an executed subscription
agreement or direction to execute a subscription agreement on behalf of a
customer, to forward the offering price for the Shares covered by the
subscription agreement on or before the close of business of the first business
day following receipt or execution of a subscription agreement by such firms to
the Managing Dealer (except that, in any case in which the Soliciting Dealer
maintains a branch office, and, pursuant to a Soliciting Dealer's internal
supervisory procedures, final internal supervisory review is conducted at a
different location, the branch office shall transmit the subscription documents
and subscriber's check to the Soliciting Dealer conducting such internal
supervisory review by the close of business on the first business day following
their receipt by the branch office and the Soliciting Dealer shall review the
subscription documents and subscriber's check to ensure their proper execution
and form and, if they are acceptable, transmit the check to the Managing Dealer
by the close of business on the first business day after the check is received
by the Soliciting Dealer), or (ii) to solicit indications of interest in which
event (a) such Soliciting Dealers must subsequently contact the customer
indicating interest to confirm the interest and give instructions to execute and
return a subscription agreement or to receive authorization to execute the
subscription agreement on the customer's behalf, (b) such Soliciting Dealers
must mail acknowledgments of receipt of orders to each customer confirming
interest on the business day following such confirmation, (c) such Soliciting
Dealers must debit accounts of such customers on the fifth business day (the
"debit date") following receipt of the confirmation referred to in (a), and (d)
such Soliciting Dealers must forward funds to the Managing Dealer in accordance
with the procedures and on the schedule set forth in clause (i) of this
sentence. If the procedure in (ii) is adopted, subscribers' funds are not
required to be in their accounts until the debit date. The Managing Dealer will
transmit the check to the Escrow Agent by no later than the close of business on
the first business day after the check is received from the Soliciting Dealer.
Investors, however, who are residents of Florida, Iowa, Maine,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Mexico,
North Carolina, Ohio, Oregon, South Dakota, Tennessee or Washington must
complete and sign the Subscription Agreement in order to subscribe for Shares
and, therefore, may not subscribe for Shares by telephone. Representatives of
Soliciting Dealers who accept telephonic orders will execute the Subscription
Agreement on behalf of investors who place such orders. All investors who
telephonically subscribe for Shares will receive, with confirmation of their
subscription, a second copy of the Prospectus.
Residents of California, Oklahoma, and Texas who telephonically
subscribe for Shares will have the right to rescind such subscriptions within
ten days from receipt of the confirmation. Such investors who do not rescind
their subscriptions within such ten-day period shall be deemed to have assented
to all of the terms and conditions of the Subscription Agreement.
ADDITIONAL SUBSCRIPTION PROCEDURES. Investors who have questions or who
wish to place orders for Shares by telephone or to participate in the
Reinvestment Plan should contact their Soliciting Dealer. Certain Soliciting
Dealers do not permit telephonic subscriptions or participation in the
Reinvestment Plan. See "Summary of Reinvestment Plan." The form of Subscription
Agreement for certain Soliciting Dealers who do not permit telephonic
subscriptions or participation in the Reinvestment Plan differs slightly from
the form attached hereto as Exhibit D, primarily in that it will eliminate one
or both of these options.
Investors who wish to establish an IRA for the purpose of investing
solely in Shares may do so by completing, in addition to the Subscription
Agreement, the special IRA account form attached hereto as a part of Exhibit D
appointing Franklin Bank, N.A., an unaffiliated bank, to act as their IRA
custodian. The custodian will not have the authority to vote any of the Shares
held in an IRA except in accordance with written instructions from the
beneficiary of the IRA, although it will hold the Shares on behalf of the
beneficiary and make distributions and, at the direction and in the discretion
of the beneficiary, investments in Shares or in other securities issued by
Affiliates of the Advisor. The custodian will not have authority at any time to
make investments through any such IRA on behalf of the beneficiary if the
investments do not constitute Shares or other securities issued by Affiliates of
the Advisor. The investors will not be required to pay any initial or annual
fees in connection with any such IRA. The fees for establishing and maintaining
all such IRAs will be paid by the Advisor initially and annually up to an
aggregate amount of $5,000, and by the Company above such amount.
ESCROW ARRANGEMENTS
Subscription proceeds will be received in trust and deposited in a
separate account with SouthTrust Asset Management Company of Florida, N.A. (the
"Bank"). No Shares will be sold by the Company, no commissions or fees will be
paid by it, and the initial admission of investors of the Company will not take
place unless subscriptions have been accepted for at least 250,000 Shares
($2,500,000) and subscription funds from investors who place telephonic orders
have been on deposit with the Bank for at least 15 days from the date written
confirmation is mailed to the investor by the Managing Dealer. If subscriptions
for at least $2,500,000 have not been received, accepted, and paid for within
one year from the initial date of this Prospectus, all funds received will be
promptly repaid in full, with any interest earned thereon. In addition,
California and Florida investors only will have the right, as provided in the
attached form of Subscription Agreement, to withdraw their subscription funds if
subscribers for at least $2,500,000 have not been accepted by the Company within
six months after the initial date of this Prospectus and the Company elects at
that time not to terminate the offering.
The Escrow Agreement between the Company and the Bank provides that
escrowed funds will be invested by the Bank in an interest-bearing account with
the power of investment in short-term, highly liquid securities issued or
guaranteed by the U.S. Government, other investments permitted under Rule 15c2-4
of the Securities Exchange Act of 1934, as amended, or, upon receipt of
subscription proceeds for at least 250,000 Shares (provided that subscription
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funds from investors who place telephonic orders have been on deposit with the
Bank for at least 15 days), in other short-term, highly liquid investments with
appropriate safety of principal. Such subscription funds will be released
periodically (at least once per month) upon admission of stockholders to the
Company.
The interest, if any, earned on subscription proceeds prior to their
release from escrow, within 30 days after the date a subscriber is admitted to
the Company as a stockholder, will be distributed to each subscriber. After the
initial admission of stockholders to the Company in connection with the sale of
at least 250,000 Shares, interest will be payable only to those subscribers
whose funds have been held in escrow by the Bank for at least 20 days.
Stockholders will not otherwise be entitled to interest earned on Company funds
or to receive interest on their Invested Capital.
ERISA CONSIDERATIONS
THE FOLLOWING IS A SUMMARY OF MATERIAL CONSIDERATIONS ARISING UNDER THE
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA") AND THE
PROHIBITED TRANSACTION PROVISIONS OF SECTION 4975 OF THE CODE THAT MAY BE
RELEVANT TO PROSPECTIVE INVESTORS. THIS DISCUSSION DOES NOT PURPORT TO DEAL WITH
ALL ASPECTS OF ERISA OR THE CODE THAT MAY BE RELEVANT TO PARTICULAR INVESTORS IN
LIGHT OF THEIR PARTICULAR CIRCUMSTANCES. A PROSPECTIVE INVESTOR THAT IS AN
EMPLOYEE BENEFIT PLAN SUBJECT TO ERISA, A TAX-QUALIFIED RETIREMENT PLAN, AN IRA,
OR A GOVERNMENTAL, CHURCH, OR OTHER PLAN THAT IS EXEMPT FROM ERISA IS ADVISED TO
CONSULT ITS OWN LEGAL ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING
UNDER APPLICABLE PROVISIONS OF ERISA, THE CODE, AND STATE LAW WITH RESPECT TO
THE PURCHASE, OWNERSHIP, OR SALE OF THE SHARES BY SUCH PLAN OR IRA.
FIDUCIARY DUTIES AND PROHIBITED TRANSACTIONS. A fiduciary of a pension,
profit-sharing, retirement or other employee benefit plan subject to ERISA (an
"ERISA Plan") should consider the fiduciary standards under ERISA in the context
of the ERISA Plan's particular circumstances before authorizing an investment of
any portion of the ERISA Plan's assets in the Common Stock. Accordingly, such
fiduciary should consider (i) whether the investment satisfies the
diversification requirements of Section 404(a)(1)(C) of ERISA; (ii) whether the
investment is in accordance with the documents and instruments governing the
ERISA Plan as required by Section 404(a)(1)(D) of ERISA; (iii) whether the
investment is prudent under Section 404(a)(1)(B) of ERISA; and (iv) whether the
investment is solely in the interests of the ERISA Plan participants and
beneficiaries and for the exclusive purpose of providing benefits to the ERISA
Plan participants and beneficiaries and defraying reasonable administrative
expenses of the ERISA Plan as required by Section 404(a)(1)(A) of ERISA.
In addition to the imposition of fiduciary standards, ERISA and Section
4975 of the Code prohibit a wide range of transactions between an ERISA Plan, an
IRA, or certain other plans (collectively, a "Plan") and persons who have
certain specified relationships to the Plan ("parties in interest" within the
meaning of ERISA and "disqualified persons" within the meaning of the Code).
Thus, a Plan fiduciary or person making an investment decision for a Plan also
should consider whether the acquisition or the continued holding of the Shares
might constitute or give rise to a direct or indirect prohibited transaction.
PLAN ASSETS. The prohibited transaction rules of ERISA and the Code
apply to transactions with a Plan and also to transactions with the "plan
assets" of the Plan. The "plan assets" of a Plan include the Plan's interest in
an entity in which the Plan invests and, in certain circumstances, the assets of
the entity in which the Plan holds such interest. The term "plan assets" is not
specifically defined in ERISA or the Code, nor, as of the date hereof, has it
been interpreted definitively by the courts in litigation. On November 13, 1986,
the United States Department of Labor, the governmental agency primarily
responsible for administering ERISA, adopted a final regulation (the "DOL
Regulation") setting out the standards it will apply in determining whether an
equity investment in an entity will cause the assets of such entity to
constitute "plan assets." The DOL Regulation applies for purposes of both ERISA
and Section 4975 of the Code.
Under the DOL Regulation, if a Plan acquires an equity interest in an
entity, which equity interest is not a "publicly-offered security," the Plan's
assets generally would include both the equity interest and an undivided
interest in each of the entity's underlying assets unless certain specified
exceptions apply. The DOL Regulation defines a publicly-offered security as a
security that is "widely held," "freely transferable," and either part of a
class of securities registered under Section 12(b) or 12(g) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or sold pursuant to an
effective registration statement under the Securities Act (provided the
securities are registered under the Exchange Act within 120 days after the end
of the fiscal year of the issuer during which the offering occurred). The Shares
are being sold in an offering registered under the Securities Act of 1933, as
amended, and will be registered within the relevant time period under Section
12(b) of the Exchange Act.
The DOL Regulation provides that a security is "widely held" only if it
is part of a class of securities that is owned by 100 or more investors
independent of the issuer and of one another. However, a class of securities
will not fail to be "widely held" solely because the number of independent
investors falls below 100 subsequent to the initial public offering as a result
of events beyond the issuer's control. The Company expects the Shares to be
"widely held" upon completion of the offering.
The DOL Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all the
relevant facts and circumstances. The DOL Regulation further provides that when
a security is part of an offering in which the minimum investment is $10,000 or
less, as is the case with this offering, certain restrictions ordinarily will
not affect, alone or in combination, the finding that such securities are freely
transferable. The Company believes that the restrictions imposed under the
Articles of Incorporation on the transfer of the Common Stock are limited to
restrictions on transfer generally permitted under the DOL Regulation and are
not likely to result in the failure of the Common Stock to be "freely
transferable." See "Summary of the Articles of Incorporation and Bylaws $
Restriction on Ownership." The DOL Regulation only establishes a presumption in
favor of a finding of free transferability and, therefore, no assurance can be
given that the Department of Labor and the U.S. Treasury Department would not
reach a contrary conclusion with respect to the Common Stock.
Assuming that the Shares will be "widely held" and "freely
transferable," the Company believes that the Shares will be publicly-offered
securities for purposes of the DOL Regulation and that the assets of the Company
will not be deemed to be "plan assets" of any Plan that invests in the Shares.
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DETERMINATION OF OFFERING PRICE
The offering price per Share was determined by the Company based upon
the estimated costs of investing in the Properties and the Mortgage Loans, the
fees to be paid to the Advisor and its Affiliates, as well as fees to third
parties, and the expenses of this offering.
SUPPLEMENTAL SALES MATERIAL
Shares are being offered only through this Prospectus. In addition to
this Prospectus, the Company may use certain sales materials in connection with
this offering, although only when accompanied or preceded by the delivery of
this Prospectus. No sales material may be used unless it has first been approved
in writing by the Company. As of the date of this Prospectus, it is anticipated
that the following sales material will be authorized for use by the Company in
connection with this offering: (i) a brochure entitled CNL American Realty Fund,
Inc.; (ii) a fact sheet describing the general features of the Company; (iii) a
cover letter transmitting the Prospectus; (iv) a summary description of the
offering; (v) a slide presentation; (vi) broker updates; (vii) an audio cassette
presentation; (viii) a video presentation; (ix) an electronic media
presentation; (x) a cd-rom presentation; (xi) a script for telephonic marketing;
(xii) seminar advertisements and invitations; and (xiii) certain third-party
articles. All such materials will be used only by registered broker-dealers
which are members of the NASD. The Company also may respond to specific
questions from Soliciting Dealers and prospective investors. Additional
materials relating to the offering may be made available to Soliciting Dealers
for their internal use.
LEGAL OPINIONS
The legality of the Shares being offered hereby has been passed upon
for the Company by Shaw, Pittman, Potts & Trowbridge. Statements made under
"Risk Factors -- Federal Income Tax Risks" and "Federal Income Tax
Considerations" have been reviewed by Shaw, Pittman, Potts & Trowbridge, who
have given their opinion that such statements as to matters of law are correct
in all material respects. Shaw, Pittman, Potts & Trowbridge serves as securities
and tax counsel to the Company and to the Advisor and certain of their
Affiliates. Certain members of the firm have invested in prior programs
sponsored by the Affiliates of the Company in aggregate amounts which do not
exceed one percent of the amounts sold by any such program, and members of the
firm also may invest in the Company.
EXPERTS
The audited balance sheet and statement of stockholder's equity of the
Company as of December 31, 1996, and for the period June 12, 1996 (date of
inception) through December 31, 1996, included in this Prospectus, have been
included herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
A Registration Statement has been filed with the Securities and
Exchange Commission with respect to the securities offered hereby. This
Prospectus does not contain all information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. The information so omitted may be obtained from
the principal office of the Commission in Washington, D.C., upon payment of the
fee prescribed by the Commission, or examined at the principal office of the
Commission without charge. The Commission maintains a Web site located at
http://www.sec.gov. that contains information regarding registrants that file
electronically with the Commission.
DEFINITIONS
"ACQUISITION EXPENSES" means any and all expenses incurred by the
Company, the Advisor, or any Affiliate of either in connection with the
selection or acquisition of any Property or the making of any Mortgage Loan,
whether or not acquired, including, without limitation, legal fees and expenses,
travel and communication expenses, costs of appraisals, nonrefundable option
payments on property not acquired, accounting fees and expenses, and title
insurance.
"ACQUISITION FEES" means any and all fees and commissions, exclusive of
Acquisition Expenses, paid by any person or entity to any other person or entity
(including any fees or commissions paid by or to any Affiliate of the Company or
the Advisor) in connection with making or investing in Mortgage Loans or the
purchase, develop ment or construction of a Property, including, without
limitation, real estate commissions, acquisition fees, finder's fees, selection
fees, development fees, construction fees, nonrecurring management fees,
consulting fees, loan fees, points, the Secured Equipment Lease Servicing Fee,
or any other fees or commissions of a similar nature. Excluded shall be
development fees and construction fees paid to any person or entity not
affiliated with the Advisor in connection with the actual development and
construction of any Property.
"ADVISOR" means CNL Real Estate Advisors, Inc., a Florida corporation,
any successor advisor to the Company, or any person or entity to which CNL Real
Estate Advisors, Inc. or any successor advisors subcontracts substantially all
of its functions.
"ADVISORY AGREEMENT" means the Advisory Agreement between the Company
and the Advisor, pursuant to which the Advisor will act as the advisor to the
Company and provide specified services to the Company.
"AFFILIATE" means (i) any person or entity directly or indirectly
through one or more intermediaries controlling, controlled by, or under common
control with another person or entity; (ii) any person or entity directly or
indirectly owning, controlling, or holding with power to vote ten percent (10%)
or more of the outstanding voting
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securities of another person or entity; (iii) any officer, director, partner, or
trustee of such person or entity; (iv) any person ten percent (10%) or more of
whose outstanding voting securities are directly or indirectly owned, controlled
or held, with power to vote, by such other person; and (v) if such other person
or entity is an officer, director, partner, or trustee of a person or entity,
the person or entity for which such person or entity acts in any such capacity.
"ARTICLES OF INCORPORATION" means the Articles of Incorporation, as the
same may be amended from time to time, of the Company.
"ASSET MANAGEMENT FEE" means the fee payable to the Advisor for
day-to-day professional management services in connection with the Company and
its investments in Properties and Mortgage Loans pursuant to the Advisory
Agreement.
"ASSETS" means Properties, Mortgage Loans and Secured Equipment Leases,
collectively.
"AVERAGE INVESTED ASSETS" means, for a specified period, the average of
the aggregate book value of the assets of the Company invested, directly or
indirectly, in equity interests in and loans secured by real estate 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.
"BANK" means SouthTrust Asset Management Company of Florida, N.A.,
escrow agent for the offering.
"BOARD OF DIRECTORS" means the Directors of the Company.
"BYLAWS" means the bylaws of the Company.
"CNL" means CNL Group, Inc., the parent company of the Advisor and the
Managing Dealer.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMON STOCK" means the common stock, par value $.01 per share, of the
Company.
"COMPETITIVE REAL ESTATE COMMISSION" means a real estate or brokerage
commission for the purchase or sale of property which is reasonable, customary,
and competitive in light of the size, type, and location of the property. The
total of all real estate commissions paid by the Company to all persons and
entities (including the subordinated real estate disposition fee payable to the
Advisor) in connection with any Sale of one or more of the Company's Properties
shall not exceed the lesser of (i) a Competitive Real Estate Commission or (ii)
six percent of the gross sales price of the Property or Properties.
"COUNSEL" means tax counsel to the Company.
"DIRECTOR" means a member of the Board of Directors of the Company.
"DISTRIBUTIONS" means any distributions of money or other property by
the Company to owners of Shares, including distributions that may constitute a
return of capital for federal income tax purposes.
"EQUIPMENT" means the furniture, fixtures and equipment used at
Restaurant Chains and Hotel Chains.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA PLAN" means a pension, profit-sharing, retirement, or other
employee benefit plan subject to ERISA.
"EXCESS SHARES" means the excess shares exchanged for shares of Common
Stock or Preferred Stock, as the case may be, transferred or proposed to be
transferred in excess of the Ownership Limit or which would otherwise jeopardize
the Company's status as a REIT under the Code.
"FRONT-END FEES" means fees and expenses paid by any person or entity
to any person or entity for any services rendered in connection with the
organization of the Company and investing in Properties and Mortgage Loans,
including Selling Commissions, marketing support and due diligence expense
reimbursement fees, Organizational and Offering Expenses, Acquisition Expenses
and Acquisition Fees paid out of Gross Proceeds, and any other similar fees,
however designated. During the term of the Company, Front-End Fees shall not
exceed 20% of Gross Proceeds.
"GROSS PROCEEDS" means the aggregate purchase price of all Shares sold
for the account of the Company through the offering, without deduction for
Selling Commissions, volume discounts, the marketing support and due diligence
expense reimbursement fee or Organization and Offering Expenses. For the purpose
of computing Gross Proceeds, the purchase price of any Share for which reduced
Selling Commissions are paid to the Managing Dealer or a Soliciting Dealer
(where net proceeds to the Company are not reduced) shall be deemed to be
$10.00.
"HOTEL CHAINS" means the national and regional hotel chains, primarily
limited service, extended stay and full service hotel chains, to be selected by
the Advisor, and who themselves or their franchisees will either (i) lease
Properties purchased by the Company, (ii) become borrowers under Mortgage Loans,
or (iii) become lessees or borrowers under Secured Equipment Leases.
"INDEPENDENT DIRECTOR" means a Director who is not and within the last
two years has not been directly or indirectly associated with the Advisor by
virtue of (i) ownership of an interest in the Advisor or its Affiliates, (ii)
employment by the Advisor or its Affiliates, (iii) service as an officer or
director of the Advisor or its Affiliates, (iv) the performance of services,
other than as a Director, for the Company, (v) service as a director or trustee
of more than three real estate investment trusts advised by the Advisor, or (vi)
maintenance of a material business or professional relationship with the Advisor
or any of its Affiliates. An indirect relationship shall include circumstances
in which a Director's spouse, parents, children, siblings, mothers- or
fathers-in-law or sons- or daughters-in-law, or brothers- or sisters-in-law is
or has been associated with the Advisor, any of its affiliates, or the Company.
A business or professional relationship is considered material if the gross
revenue derived by the Director from the Advisor and Affiliates exceeds 5% of
either the Company's annual gross revenue during either of the last two years or
the Director's net worth on a fair market value basis.
"INDEPENDENT EXPERT" means a person or entity with no material current
or prior business or personal relationship with the Advisor or the Directors and
who is engaged to a substantial extent in the business of render ing opinions
regarding the value of assets of the type held by the Company.
"INVESTED CAPITAL" means the amount calculated by multiplying the total
number of Shares purchased by stockholders by the issue price, reduced by the
portion of any Distribution that is attributable to Net Sales Proceeds and by
any amounts paid by the Company to repurchase Shares pursuant to the plan for
redemption of Shares.
"IRA" means an Individual Retirement Account.
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"IRS" means the Internal Revenue Service.
"JOINT VENTURES" means the joint venture or general partnership
arrangements in which the Company is a co-venturer or general partner which are
established to acquire Properties.
"LEVERAGE" means the aggregate amount of indebtedness of the Company
for money borrowed (including purchase money mortgage loans) outstanding at any
time, both secured and unsecured.
"LISTING" means the listing of the Shares of the Company on a national
securities exchange or over-the-counter market.
"LINE OF CREDIT" means a line of credit in an amount up to $45,000,000,
the proceeds of which will be used to acquire Properties and make Mortgage Loans
and Secured Equipment Leases and to pay the Secured Equipment Lease Servicing
Fee. The Line of Credit may be in addition to any Permanent Financing.
"MANAGING DEALER" means CNL Securities Corp., an Affiliate of the
Advisor, or such other person or entity selected by the Board of Directors to
act as the managing dealer for the offering. CNL Securities Corp. is a member
of the National Association of Securities Dealers, Inc.
"MORTGAGE LOANS" means, in connection with mortgage financing provided
by the Company, notes or other evidences of indebtedness or obligations which
are secured or collateralized by real estate owned by the borrower.
"NET ASSETS" means the total assets of the Company (other than
intangibles) at cost before deducting depreciation or other non-cash reserves
less total liabilities, calculated quarterly by the Company, on a basis
consistently applied.
"NET INCOME" means for any period, the total revenues applicable to
such period, less the total expenses applicable to such period excluding
additions to reserves for depreciation, bad debts, or other similar non-cash
reserves; provided, however, Net Income for purposes of calculating total
allowable Operating Expenses (as defined herein) shall exclude the gain from the
sale of the Company's assets.
"NET OFFERING PROCEEDS" means Gross Proceeds less (i) Selling
Commissions, (ii) Organizational and Offering Expenses, and (iii) the marketing
support and due diligence expense reimbursement fee.
"NET SALES PROCEEDS" means, in the case of a transaction described in
clause (i)(A) of the definition of Sale, the proceeds of any such transaction
less the amount of all real estate commissions and closing costs paid by the
Company. In the case of a transaction described in clause (i)(B) of such
definition, Net Sales Proceeds means the proceeds of any such transaction less
the amount of any legal and other selling expenses incurred in connection with
such transaction. In the case of a transaction described in clause (i)(C) of
such definition, Net Sales Proceeds means the proceeds of any such transaction
actually distributed to the Company from the Joint Venture. In the case of a
transaction or series of transactions described in clause (i)(D) of the
definition of Sale, Net Sales Proceeds means the proceeds of any such
transaction less the amount of all commissions and closing costs paid by the
Company. In the case of a transaction described in clause (ii) of the definition
of Sale, Net Sales Proceeds means the proceeds of such transaction or series of
transactions less all amounts generated thereby and reinvested in one or more
Properties within 180 days thereafter and less the amount of any real estate
commissions, closing costs, and legal and other selling expenses incurred by or
allocated to the Company in connection with such transaction or series of
transactions. Net Sales Proceeds shall also include, in the case of any lease of
a Property consisting of a building only, any Mortgage Loan or any Secured
Equipment Lease, any amounts from tenants, borrowers or lessees that the Company
determines, in its discretion, to be economically equivalent to proceeds of a
Sale. Net Sales Proceeds shall not include, as determined by the Company in its
sole discretion, any amounts reinvested in one or more Properties, Mortgage
Loans or Secured Equipment Leases, to repay outstanding indebtedness, or to
establish reserves.
"OPERATING EXPENSES" includes all costs and expenses incurred by the
Company, as determined under generally accepted accounting principles, which in
any way are related to the operation of the Company or to Company business,
including (a) advisory fees, (b) the Soliciting Dealer Servicing Fee, (c) the
Asset Management Fee, (d) the Performance Fee, and (e) the Subordinated
Incentive Fee, but excluding (i) the expenses of raising capital such as
Organizational and Offering Expenses, legal, audit, accounting, underwriting,
brokerage, listing, registration, and other fees, printing and other such
expenses, and tax incurred in connection with the issuance, distribution,
transfer, registration, and Listing of the Shares, (ii) interest payments, (iii)
taxes, (iv) non-cash expenditures such as depreciation, amortization, and bad
debt reserves, (v) the Advisor's subordinated 10% share of Net Sales Proceeds,
and (vi) Acquisition Fees and Acquisition Expenses, real estate commissions on
the sale of property and other expenses connected with the acquisition and
ownership of real estate interests, mortgage loans, or other property (such as
the costs of foreclosure, insurance premiums, legal services, maintenance,
repair, and improvement of property).
"ORGANIZATIONAL AND OFFERING EXPENSES" means any and all costs and
expenses, other than Selling Commissions, the 0.5% marketing support and due
diligence expense reimbursement fee, and the Soliciting Dealer Servicing Fee
incurred by the Company, the Advisor or any Affiliate of either in connection
with the formation, qualification, and registration of the Company and the
marketing and distribution of Shares, including, without limitation, the
following: legal, accounting, and escrow fees; printing, amending,
supplementing, mailing, and distributing costs; filing, registration, and
qualification fees and taxes; telegraph and telephone costs; and all advertising
and marketing expenses, including the costs related to investor and
broker-dealer sales meetings. The Organizational and Offering Expenses paid by
the Company in connection with the formation of the Company, together with all
Selling Commissions, the 0.5% marketing support and due diligence reimbursement
fee, and the Soliciting Dealer Servicing Fee incurred by the Company will not
exceed thirteen percent (13%) of the proceeds raised in connection with this
offering.
"OWNERSHIP LIMIT" means, with respect to shares of Common Stock and
Preferred Stock, the percent limitation placed on the ownership of Common Stock
and Preferred Stock by any one Person (as defined in the Articles of
Incorporation). As of the initial date of this Prospectus, the Ownership Limit
is 9.8% of the outstanding Common Stock and 9.8% of the outstanding Preferred
Stock.
"PARTICIPANTS" means those stockholders who elect to participate in the
Reinvestment Plan.
"PERFORMANCE FEE" means the fee payable to the Advisor under certain
circumstances if certain performance standards have been met and the
Subordinated Incentive Fee has not been paid.
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"PERMANENT FINANCING" means financing to acquire Assets, to pay the
Secured Equipment Lease Servicing Fee to pay a fee of 4.5% of any Permanent
Financing, excluding amounts to fund Secured Equipment Leases, as Acquisition
Fees, and, possibly, to refinance outstanding amounts on the Line of Credit.
Permanent Financing may be in addition to any borrowing under the Line of
Credit.
"PLAN" means ERISA Plans, IRAs, Keogh plans, stock bonus plans, and
certain other plans.
"PREFERRED STOCK" means any class or series of preferred stock of the
Company that may be issued in accordance with the terms of the Articles of
Incorporation and applicable law.
"PROPERTIES" means (i) the real properties, including the buildings
located thereon and with respect to hotel Properties, including Equipment, (ii)
the real properties only, or (iii) the buildings only, which are acquired by the
Company and with respect to hotel Properties, including Equipment, either
directly or through joint venture arrangements or other partnerships.
"PROSPECTUS" means the final prospectus included in the Company's
Registration Statement filed with the Securities and Exchange Commission,
pursuant to which the Company will offer Shares to the public, as the same may
be amended or supplemented from time to time after the effective date of such
Registration Statement.
"QUALIFIED PLANS" means qualified pension, profit-sharing, and stock
bonus plans, including Keogh plans and IRAs.
"REAL ESTATE ASSET VALUE" means the amount actually paid or allocated
to the purchase, development, construction or improvement of a Property,
exclusive of Acquisition Fees and Acquisition Expenses.
"REINVESTMENT AGENT" or "AGENT" means the independent agent, which
currently is MMS Escrow and Transfer Agency, Inc., for Participants in the
Reinvestment Plan.
"REINVESTMENT PLAN" means the Reinvestment Plan, in the form attached
hereto as Exhibit A.
"REINVESTMENT PROCEEDS" means net proceeds available from the sale of
Shares under the Reinvestment Plan to redeem Shares or, under certain
circumstances, to invest in additional Properties or Mortgage Loans.
"REIT" means real estate investment trust, as defined pursuant to
Sections 856 through 860 of the Code.
"RELATED PARTY TENANT" means a related party tenant, as defined
pursuant to Section 856(d)(2)(B) of the Code.
"RESTAURANT CHAINS" means the national and regional restaurant chains,
primarily fast-food, family-style, and casual-dining chains, to be selected by
the Advisor, and who themselves or their franchisees will either (i) lease
Properties purchased by the Company, (ii) become borrowers under Mortgage Loans,
or (iii) become lessees or borrowers of Secured Equipment Leases.
"ROLL-UP ENTITY" means a partnership, real estate investment trust,
corporation, trust, or similar entity that would be created or would survive
after the successful completion of a proposed Roll-Up Transaction.
"ROLL-UP TRANSACTION" means a transaction involving the acquisition,
merger, conversion, or consolidation, 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 listed on a
national securities exchange or the National Association of Securities Dealers
Automated Quotation National Market System for at least 12 months; 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 stockholder voting rights, the term of existence
of the Company, compensation to the Advisor, or the investment objectives of the
Company.
"SALE" (i) means any transaction or series of transactions whereby: (A)
the Company sells, grants, transfers, conveys, or relinquishes its ownership of
any Property or portion thereof, including the lease of any Property consisting
of the building only, and including any event with respect to any Property which
gives rise to a significant amount of insurance proceeds or condemnation awards;
(B) the Company sells, grants, transfers, conveys, or relinquishes its ownership
of all or substantially all of the interest of the Company in any Joint Venture
in which it is a co-venturer or partner; (C) any Joint Venture in which the
Company as a co-venturer or partner sells, grants, transfers, conveys, or
relinquishes its ownership of any Property or portion thereof, including any
event with respect to any Property which gives rise to insurance claims or
condemnation awards or, (D) the Company sells, grants, conveys or relinquishes
its interest in any Mortgage Loan or Secured Equipment Lease or portion thereof,
including any event with respect to any Mortgage Loan or Secured Equipment Lease
which gives rise to a significant amount of insurance proceeds or similar
awards, but (ii) shall not include any transaction or series of transactions
specified in clause (i)(A), (i)(B) or (i)(C) above in which the proceeds of such
transaction or series of transactions are reinvested in one or more Properties
within 180 days thereafter.
"SECURED EQUIPMENT LEASES" means the Equipment financing made available
by the Company to operators of Restaurant Chains and Hotel Chains pursuant to
which the Company will finance, through loans or direct financing leases, the
Equipment.
"SECURED EQUIPMENT LEASE SERVICING FEE" means the fee payable to the
Advisor by the Company out of the proceeds of the Line of Credit or Permanent
Financing for negotiating Secured Equipment Leases and supervising the Secured
Equipment Lease program equal to 2% of the purchase price of the Equipment
subject to each Secured Equipment Lease and paid upon entering into such lease
or loan.
"SELLING COMMISSIONS" means any and all commissions payable to
underwriters, managing dealers, or other broker-dealers in connection with the
sale of Shares as described in the Prospectus, including, without limitation,
commissions payable to CNL Securities Corp.
"SHARES" means the up to 16,500,000 shares of Common Stock of the
Company to be sold in the offering.
"SOLICITING DEALER SERVICING FEE" means an annual fee of .20% of
Invested Capital on December 31 of each year following the year in which the
offering terminates, payable to the Managing Dealer, which, in its sole
discretion, in turn may reallow all or a portion of such fee to the Soliciting
Dealers whose clients hold Shares on such date.
"SOLICITING DEALERS" means those broker-dealers that are members of the
National Association of Securities Dealers, Inc., or that are exempt from
broker-dealer registration, and that, in either case, enter into participating
broker or other agreements with the Managing Dealer to sell Shares.
"SPONSOR" means any Person directly or indirectly instrumental in
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organizing, wholly or in part, the Company or any person who will control,
manage or participate in the management of the Company, and any Affiliate of
such Person. Not included is any Person whose only relationship with the Company
is that of an independent property manager of Company assets, and whose only
compensation is as such. Sponsor does not include independent third parties such
as attorneys, accountants, and underwriters whose only compensation is for
professional services. A Person may also be deemed a Sponsor of the Company by:
1. taking the initiative, directly or indirectly, in founding
or organizing the business or enterprise of the Company, either alone or in
conjunction with one or more other Persons;
2. receving a material participation in the Company in
connection with the founding or organizing of the business of the Company, in
consideration of services or property, or both services and property;
3. having a substantial number of relationships and contacts
with the Company;
4. possessing significant rights to control Company
properties;
5. receiving fees for providing services to the Company which
are paid on a basis that is not customary in the industry; or
6. providing goods or services to the Company on a basis which
was not negotiated at arms length with the Company.
"STOCKHOLDERS' 8% RETURN," as of each date, shall mean an aggregate
amount equal to an 8% cumulative, noncompounded, annual return on Invested
Capital.
"SUBSCRIPTION AGREEMENT" means the Subscription Agreement in the form
attached hereto as Exhibit D.
"SUBORDINATED INCENTIVE FEE" means the fee payable to the Advisor under
certain circumstances if the Shares are listed on a national securities
exchange or over-the-counter market.
"TERMINATION DATE" means the date of termination of the Advisory
Agreement.
"TOTAL PROCEEDS" means Gross Proceeds, loan proceeds from Permanent
Financing and amounts outstanding on the Line of Credit, if any, at the time of
Listing, but excluding loan proceeds used to finance Secured Equipment Leases.
"TRIPLE-NET LEASE" generally means a Property lease pursuant to which
the tenant is responsible for property costs associated with ongoing operations,
including repairs, maintenance, property taxes, utilities and insurance.
"UNIMPROVED REAL PROPERTY" means Property in which the Company has an
equity interest that is not acquired for the purpose of producing rental or
other operating income, that has no development or construction in process and
for which no development or construction is planned, in good faith, to commence
within one year.
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<PAGE>
EXHIBIT A
FORM OF
REINVESTMENT PLAN
<PAGE>
FORM OF
REINVESTMENT PLAN
CNL AMERICAN REALTY FUND, INC., a Maryland corporation (the "Company"),
pursuant to its Articles of Incorporation, adopted a Reinvestment Plan (the
"Reinvestment Plan") on the terms and conditions set forth below.
1. REINVESTMENT OF DISTRIBUTIONS. MMS Escrow and Transfer
Agency, Inc., the agent (the "Reinvestment Agent") for participants (the
"Participants") in the Reinvestment Plan, will receive all cash distributions
made by the Company with respect to shares of common stock of the Company
(the "Shares") owned by each Participant (collectively, the
"Distributions"). The Reinvestment Agent will apply such Distributions as
follows:
(a) At anytime that the Company is engaged in an
offering of Shares, the Reinvestment Agent will invest
Distributions in Shares acquired from the managing dealer or
participating brokers for the offering at the public offering
price per Share, or $10.00 per Share. During such period,
commissions and the marketing support and due diligence fee equal
to 0.5% of the total amount raised from sale of the Shares will be
reallowed to the broker who made the initial sale of Shares to the
Participant at the same rate as for initial purchases.
(b) At anytime that the Company is not engaged in an
offering of Shares, the Reinvestment Agent will purchase Shares
from any additional shares which the Company elects to register
with the Securities and Exchange Commission (the "SEC") for the
Reinvestment Plan, at a per Share price equal to the fair market
value of the Shares determined by (i) quarterly appraisal updates
performed by the Company based on a review of the existing appraisal
and lease of each Property, focusing on a re-examination of the
capitalization rate applied to the rental stream to be derived
from that Property; and (ii) a review of the outstanding Mortgage
Loans and Secured Equipment Leases focusing on a determination
of present value by a re-examination of the capitalization rate
applied to the stream of payments due under the terms of each
Mortgage Loan and Secured Equipment Lease. The
capitalization rate used by the Company and, as a result, the
price per Share paid by Participants in the Reinvestment Plan prior
to Listing will be determined by the Advisor in its sole discretion.
The factors that the Advisor will use to determine the
capitalization rate include (i) its experience in selecting,
acquiring and managing properties similar to the Properties;
(ii) an examination of the conditions in the market; and
(iii) capitalization rates in use by private appraisers, to
the extent that the Advisor deems such factors appropriate, as well
as any other factors that the Advisor deems relevant or
appropriate in making its determination. The Company's internal
accountants will then convert the most recent quarterly balance
sheet of the Company from a "GAAP" balance sheet to a "fair
market value" balance sheet. Based on the "fair market value"
balance sheet, the internal accountants will then assume a sale of
the Company's assets and the liquidation of the Company in
accordance with its constitutive documents and applicable law
and compute the appropriate method of distributing the cash
available after payment of reasonable liquidation expenses,
including closing costs typically associated with the sale of
assets and shared by the buyer and seller, and the creation of
reasonable reserves to provide for the payment of any
contingent liabilities. Upon listing of the Shares on a
national securities exchange or over-the-counter market, the
Reinvestment Agent may purchase Shares either through such market
or directly from the Company pursuant to a registration statement
relating to the Reinvestment Plan, in either case at a per Share
price equal to the then-prevailing market price on the national
securities exchange or over-the-counter market on which the Shares
are listed at the date of purchase by the Reinvestment Agent.
(c) For each Participant, the Reinvestment Agent
will maintain a record which shall reflect for each fiscal
quarter the Distributions received by the Reinvestment Agent on
behalf of such Participant. The Reinvestment Agent will use the
aggregate amount of Distributions to all Participants for each
fiscal quarter to purchase Shares for the Participants. If the
aggregate amount of Distributions to Participants
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<PAGE>
exceeds the amount required to purchase all Shares then available
for purchase, the Reinvestment Agent will purchase all available
Shares and will return all remaining Distributions to the
Participants within 30 days after the date such Distributions are
made. The purchased Shares will be allocated among the Participants
based on the portion of the aggregate Distributions received by
the Reinvestment Agent on behalf of each Participant, as
reflected in the records maintained by the Reinvestment Agent.
The ownership of the Shares purchased pursuant to the
Reinvestment Plan shall be reflected on the books of the Company.
(d) Distributions shall be invested by the
Reinvestment Agent in Shares promptly following the payment date
with respect to such Distributions to the extent Shares are
available. If sufficient Shares are not available, Distributions
shall be invested on behalf of the Participants in one or more
interest-bearing accounts in Franklin Bank, N.A., Southfield,
Michigan, or in another commercial bank approved by the Company
which is located in the continental United States and has assets
of at least $100,000,000, until Shares are available for
purchase, provided that any Distributions that have not been
invested in Shares within 30 days after such Distributions are
made by the Company shall be returned to Participants.
(e) The allocation of Shares among Participants
may result in the ownership of fractional Shares, computed to
four decimal places.
(f) Distributions attributable to Shares purchased
on behalf of the Participants pursuant to the Reinvestment Plan
will be reinvested in additional Shares in accordance with the
terms hereof.
(g) No certificates will be issued to a Participant
for Shares purchased on behalf of the Participant pursuant to the
Reinvestment Plan. Participants in the Reinvestment Plan will
receive statements of account in accordance with Paragraph 7
below.
2. ELECTION TO PARTICIPATE. Any stockholder who
participates in the public offering of Shares and who has received a copy
of the final prospectus included in the Company's registration statement
on Form S-11 filed with the SEC may elect to participate in and purchase
Shares through the Reinvestment Plan at any time by written notice to the
Company and would not need to receive a separate prospectus relating solely to
the Reinvestment Plan. A person who becomes a stockholder otherwise than by
participating in the public offering of Shares may purchase Shares through
the Reinvestment Plan only after receipt of a separate prospectus relating
solely to the Reinvestment Plan. Participation in the Reinvestment Plan will
commence with the next Distribution made after receipt of the Participant's
notice, provided it is received more than ten days prior to the last day
of the fiscal month or quarter, as the case may be, to which such
Distribution relates. Subject to the preceding sentence, regardless of the
date of such election, a shareholder will become a Participant in the
Reinvestment Plan effective on the first day of the fiscal month (prior to
termination of the offering of Shares) or fiscal quarter (after termination
of the offering of Shares) following such election, and the election will
apply to all Distributions attributable to the fiscal quarter or month (as
the case may be) in which the shareholder makes such written election to
participate in the Reinvestment Plan and to all fiscal quarters or
months thereafter.
3. DISTRIBUTION OF FUNDS. In making purchases for
Participants' accounts, the Reinvestment Agent may commingle Distributions
attributable to Shares owned by Participants in the Reinvestment Plan.
4. PROXY SOLICITATION. The Reinvestment Agent will
distribute to Participants proxy solicitation material received by it from
the Company which is attributable to Shares held in the Reinvestment Plan.
The Reinvestment Agent will vote any Shares that it holds for the account of a
Participant in accordance with the Participant's written instructions. If a
Participant gives a proxy to person(s) representing the Company covering
Shares registered in the Participant's name, such proxy will be deemed to be
an instruction to the Reinvestment Agent to vote the full Shares in the
Participant's account in like manner. If a Participant does not direct the
Reinvestment Agent as to how the Shares should be voted and does not give a
proxy to person(s) representing the Company covering these Shares, the
Reinvestment Agent will not vote said Shares.
A-2
<PAGE>
5. ABSENCE OF LIABILITY. Neither the Company nor the
Reinvestment Agent shall have any responsibility or liability as to the value
of the Company's Shares, any change in the value of the Shares acquired for the
Participant's account, or the rate of return earned on, or the value of, the
interest-bearing accounts, in which Distributions are invested. Neither the
Company nor the Reinvestment Agent shall be liable for any act done in good
faith, or for any good faith omission to act, including, without limitation,
any claims of liability (a) arising out of the failure to terminate a
Participant's participation in the Reinvestment Plan upon such Participant's
death prior to receipt of notice in writing of such death and the expiration of
15 days from the date of receipt of such notice and (b) with respect to the
time and the prices at which Shares are purchased for a Participant.
NOTWITHSTANDING THE FOREGOING, LIABILITY UNDER THE FEDERAL SECURITIES LAWS
CANNOT BE WAIVED. Similarly, the Company and the Reinvestment Agent have
been advised that in the opinion of certain state securities
commissioners, indemnification is also considered contrary to public
policy and therefore unenforceable.
6. SUITABILITY.
(a) Within 60 days prior to the end of each fiscal
year, CNL Securities Corp., the managing dealer of the offering
("CSC"), will mail to each Participant a participation agreement
(the "Participation Agreement"), in which the Participant
will be required to represent that there has been no material change
in the Participant's financial condition and confirm that the
representations made by the Participant in the Subscription
Agreement (a form of which shall be attached to the Participation
Agreement) are true and correct as of the date of the
Participation Agreement, except as noted in the Participation
Agreement or the attached form of Subscription Agreement.
(b) Each Participant will be required to return the
executed Participation Agreement to CSC within 30 days after
receipt. In the event that a Participant fails to respond to
CSC or return the completed Participation Agreement on or
before the fifteenth (15th) day after the beginning of the fiscal
year following receipt of the Participation Agreement, the
Participant's Distribution for the first fiscal quarter of that
year will be sent directly to the Participant and no Shares will
be purchased on behalf of the Participant for that fiscal quarter
and, subject to (c) below, any fiscal quarters thereafter,
until CSC receives an executed Participation Agreement from the
Participant.
(c) If a Participant fails to return the executed
Participation Agreement to CSC prior to the end of the second
fiscal quarter for any year of the Participant's participation
in the Reinvestment Plan, the Participant's participation
in the Reinvestment Plan shall be terminated in accordance
with Paragraph 11 below.
(d) Each Participant shall notify CSC in the event
that, at any time during his participation in the Reinvestment
Plan, there is any material change in the Participant's financial
condition or inaccuracy of any representation under the Subscription
Agreement.
(e) For purposes of this Paragraph 6, a material
change shall include any anticipated or actual decrease in net
worth or annual gross income or any other change in circumstances
that would cause the Participant to fail to meet the
suitability standards set forth in the Company's Prospectus.
7. REPORTS TO PARTICIPANTS. Within 60 days after the end
of each fiscal quarter, the Reinvestment Agent will mail to each
Participant a statement of account describing, as to such Participant, the
Distributions received during the quarter, the number of Shares purchased
during the quarter, the per Share purchase price for such Shares, the total
administrative charge to such Participant, and the total Shares purchased
on behalf of the Participant pursuant to the Reinvestment Plan. Each
statement shall also advise the Participant that, in accordance with
Paragraph 6(d) hereof, he is required to notify CSC in the event that there is
any material change in his financial condition or if any representation
under the Subscription Agreement becomes inaccurate.
A-3
<PAGE>
8. ADMINISTRATIVE CHARGES, COMMISSIONS, AND PLAN EXPENSES.
The Company shall be responsible for all administrative changes and expenses
charged by the Reinvestment Agent. The administrative charge for each
Participant for each fiscal quarter shall be the lesser of 5% of the amount
reinvested for the Participant or $2.50, with a minimum charge of $.50.
Any interest earned on Distributions will be paid to the Company to defray
costs relating to the Reinvestment Plan. Additionally, in connection with any
Shares purchased from the Company both prior to and after the termination of
the public offering of the Shares, the Company will pay to CSC selling
commissions of 7.5%, a marketing support and due diligence expense
reimbursement fee of .5%, and, in the event that proceeds of the sale of Shares
pursuant to the Reinvestment Plan are used to acquire Properties or to
invest in Mortgage Loans, will pay to CNL Fund Advisors, Inc. acquisition
fees of 4.5% of the purchase price of the Shares sold pursuant to the
Reinvestment Plan.
9. NO DRAWING. No Participant shall have any right to draw
checks or drafts against his account or give instructions to the Company or
the Reinvestment Agent except as expressly provided herein.
10. TAXES. Taxable Participants may incur a tax liability for
Distributions made with respect to such Participant's Shares, even though
they have elected not to receive their Distributions in cash but rather to have
their Distributions held in their account under the Reinvestment Plan.
11. TERMINATION.
(a) A Participant may terminate his participation in
the Reinvestment Plan at any time by written notice to the
Company. To be effective for any Distribution, such notice
must be received by the Company at least ten business days prior
to the last day of the fiscal month or quarter to which
such Distribution relates.
(b) The Company or the Reinvestment Agent may
terminate a Participant's individual participation in the
Reinvestment Plan, and the Company may terminate the Reinvestment
Plan itself at any time by ten days' prior written notice mailed to
a Participant, or to all Participants, as the case may be, at
the address or addresses shown on their account or such more
recent address as a Participant may furnish to the Company in
writing.
(c) After termination of the Reinvestment Plan or
termination of a Participant's participation in the Reinvestment
Plan, the Reinvestment Agent will send to each Participant (i) a
statement of account in accordance with Paragraph 7 hereof, and
(ii) a check for (a) the amount of any Distributions in
the Participant's account that have not been reinvested in Shares,
and (b) the value of any fractional Shares standing to the credit
of a Participant's account based on the market price of the
Shares. The record books of the Company will be revised to reflect
the ownership of record of the Participant's full Shares and any
future Distributions made after the effective date of the
termination will be sent directly to the former Participant.
12. NOTICE. Any notice or other communication required or
permitted to be given by any provision of this Reinvestment Plan shall be in
writing and addressed to Investor Services Department, CNL Securities
Corp., 400 East South Street, Suite 500, Orlando, Florida 32801, if to the
Company, or to 1845 Maxwell, Suite 101, Troy, Michigan 48084-4510, if to the
Reinvestment Agent, or such other addresses as may be specified by
written notice to all Participants. Notices to a Participant may be given by
letter addressed to the Participant at the Participant's last address of
record with the Company. Each Participant shall notify the Company promptly in
writing of any change of address.
13. AMENDMENT. The terms and conditions of this Reinvestment
Plan may be amended or supplemented by an agreement between the Reinvestment
Agent and the Company at any time, including but not limited to an amendment
to the Reinvestment Plan to add a voluntary cash contribution feature or to
substitute a new Reinvestment Agent to act as agent for the Participants
or to increase the administrative charge payable to the Reinvestment
A-4
<PAGE>
Agent, by mailing an appropriate notice at least 30 days prior to the
effective date thereof to each Participant at his last address of record;
provided, that any such amendment must be approved by a majority of the
Independent Directors of the Company. Such amendment or supplement shall be
deemed conclusively accepted by each Participant except those Participants
from whom the Company receives written notice of termination prior to the
effective date thereof.
14. GOVERNING LAW. THIS REINVESTMENT PLAN AND A
PARTICIPANT'S ELECTION TO PARTICIPATE IN THE REINVESTMENT PLAN SHALL BE
GOVERNED BY THE LAWS OF THE STATE OF FLORIDA.
A-5
<PAGE>
EXHIBIT B
FINANCIAL INFORMATION
<PAGE>
INDEX TO FINANCIAL STATEMENTS
CNL AMERICAN REALTY FUND, INC.
(A Development Stage Maryland Corporation)
Page
Report of Independent Accountants B-2
Financial Statements:
Balance Sheets at March 31, 1997 (unaudited) and
December 31, 1996 B-3
Statements of Stockholder's Equity for the quarter
ended March 31, 1997 (unaudited) and the period
June 12, 1996 (date of inception) through
December 31, 1996 B-4
Notes to Financial Statements B-5
B-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
CNL American Realty Fund, Inc.
We have audited the accompanying balance sheet of CNL American Realty
Fund, Inc. (a development stage company) as of December 31, 1996, and the
related statement of stockholder's equity for the period June 12, 1996 (date of
inception) through December 31, 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 CNL American Realty
Fund, Inc. as of December 31, 1996, and the changes in stockholder's equity for
the period June 12, 1996 (date of inception) through December 31, 1996 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
February 21, 1997
B-2
<PAGE>
CNL AMERICAN REALTY FUND, INC.
(A Development Stage Maryland Corporation)
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
1997 December 31,
ASSETS (Unaudited) 1996
<S> <C>
Cash $ 2,050 $ 2,084
Deferred offering costs 634,884 596,106
-------- --------
$636,934 $598,190
======== ========
LIABILITIES AND
STOCKHOLDER'S EQUITY
Accrued offering costs:
Due to related parties $436,934 $386,561
Due to others - 11,629
-------- --------
436,934 398,190
-------- --------
Stockholder's equity:
Common stock, $.01 par value;
100,000 shares authorized,
20,000 shares issued and
outstanding 200 200
Capital in excess of par value 199,800 199,800
-------- --------
200,000 200,000
-------- --------
$636,934 $598,190
======== ========
</TABLE>
See accompanying notes to financial statements.
B-3
<PAGE>
CNL AMERICAN REALTY FUND, INC.
(A Development Stage Maryland Corporation)
STATEMENTS OF STOCKHOLDER'S EQUITY
Quarter Ended March 31, 1997 (Unaudited) and
June 12, 1996 (Date of Inception)
through December 31, 1996
<TABLE>
<CAPTION>
Common stock Capital in
Number Par excess of
of shares value par value Total
<S> <C>
Balance, June 12, 1996
(Date of Inception) - $ - $ - $ -
Cash received from sale of
common stock to related
party 20,000 200 199,800 200,000
------ ---- -------- --------
Balance, December 31, 1996 20,000 200 199,800 200,000
Cash received from sale of
common stock - - - -
------ ---- -------- -------
Balance, March 31, 1997 20,000 $200 $199,800 $200,000
====== ==== ======== ========
</TABLE>
See accompanying notes to financial statements.
B-4
<PAGE>
CNL AMERICAN REALTY FUND, INC.
(A Development Stage Maryland Corporation)
NOTES TO FINANCIAL STATEMENTS
Quarter Ended March 31, 1997 (Unaudited) and
June 12, 1996 (Date of Inception)
through December 31, 1996
1. Organization:
CNL American Realty Fund, Inc. (the "Company") was organized in
Maryland on June 12, 1996. The Company intends to file a registration
statement on Form S-11 with the Securities and Exchange Commission with
respect to a public offering (the "Offering") of 16,500,000 shares of
common stock, 1,500,000 shares of which will be available only to
stockholders who elect to participate in the Company's reinvestment
plan (the "Reinvestment Plan") (Note 3).
The Company intends to invest the proceeds from its public offering,
after deducting offering expenses, in hotel properties to be leased to
operators of national and regional limited service, extended stay and
full service hotel chains (the "Hotel Chains") and in restaurant
properties to be leased to operators of selected national and regional
fast-food, family-style and casual dining restaurant chains (the
"Restaurant Chains"). The Company may also provide mortgage financing
(the "Mortgage Loans"). The Company also intends to offer furniture,
fixture and equipment financing ("Secured Equipment Leases") to
operators of Hotel Chains and Restaurant Chains.
The Company is in the development stage and has not begun operations.
2. Income Taxes:
The Company intends to make an election to be taxed as a real estate
investment trust ("REIT") under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended, commencing with its taxable
year ending December 31, 1997. If the Company qualifies for taxation as
a REIT, the Company generally will not be subject to federal corporate
income tax to the extent it distributes its REIT taxable income to its
stockholders, so long as it distributes at least 95 percent of its REIT
taxable income. REITs are subject to a number of other organizational
and operational requirements. Even if the Company qualifies for
taxation as a REIT, it may be subject to certain state and local taxes
on its income and property, and federal income and excise taxes on its
undistributed income.
B-5
<PAGE>
CNL AMERICAN REALTY FUND, INC.
(A Development Stage Maryland Corporation)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Quarter Ended March 31, 1997 (Unaudited) and
June 12, 1996 (Date of Inception)
through December 31, 1996
3. Reinvestment Plan:
The Company has adopted a Reinvestment Plan pursuant to which
stockholders may elect to have the full amount of their cash
distributions from the Company reinvested in additional shares of
common stock of the Company.
The Offering includes 1,500,000 shares of common stock for purchase
through the Reinvestment Plan.
4. Deferred Offering Costs:
The Company has and will continue to incur certain costs in connection
with the Offering, including filing fees, legal, accounting, marketing
and printing costs and escrow fees, which will be deducted from the
gross proceeds of the Offering. Certain preliminary costs incurred
prior to raising capital have been and will be advanced by an affiliate
of the Company.
5. Capitalization:
At March 31, 1997 and December 31, 1996, the Company was authorized to
issue 100,000 shares of common stock, all of one class, with a par
value of $.01 per share. The Company plans to amend the Articles of
Incorporation to increase the authorized number of shares of common
stock and to authorize the issuance of two additional classes of stock,
preferred stock and excess stock, to accomplish the Offering.
7. Related Party Arrangements:
Certain affiliates of the Company will receive fees and compensation in
connection with the Offering, and the acquisition, management, and sale
of the assets of the Company.
7. Related Party Arrangements:
Amounts due to CNL Fund Advisors, Inc., the sole stockholder of the
Company at December 31, 1996, totalling $386,561 at December 31, 1996,
consisted of expenditures incurred on behalf of the Company of $357,896
and accounting and administrative services in connection with the
offering of $28,665.
B-6
<PAGE>
CNL AMERICAN REALTY FUND, INC.
(A Development Stage Maryland Corporation)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Quarter Ended March 31, 1997 (Unaudited) and
June 12, 1996 (Date of Inception)
through December 31, 1996
7. Related Party Arrangements - Continued:
On June 12, 1996 (date of inception), CNL Fund Advisors, Inc.
contributed $200,000 in cash to the Company and became its
sole stockholder. In February 1997, CNL Real Estate Advisors,
Inc. purchased the Company's outstanding common stock from CNL
Fund Advisors, Inc. and became the sole stockholder of the
Company.
Amounts due to CNL Real Estate Advisors, Inc., CNL Fund
Advisors, Inc. and their affiliates consisted of the following
at:
<TABLE>
<CAPTION>
March 31,
1997 December 31,
(Unaudited) 1996
<S> <C>
Expenditures incurred
on behalf of the
Company $399,464 $357,896
Accounting and admini-
strative services 37,470 28,665
-------- --------
$436,934 $386,561
======== ========
</TABLE>
B-7
EXHIBIT C
PRIOR PERFORMANCE TABLES
<PAGE>
EXHIBIT C
PRIOR PERFORMANCE TABLES
The information in this Exhibit C contains certain relevant summary
information concerning certain prior public programs sponsored by two of the
Company's principals (who also serve as the Chairman of the Board and President
of the Company) and their Affiliates (the "Prior Public Programs") which like
the Company, were formed to invest in restaurant properties leased on a
triple-net basis to operators of national and regional fast-food and
family-style restaurant chains similar to those in which the Company may invest.
No Prior Public Programs sponsored by the Company's Affiliates have invested in
hotel properties leased on a triple-net basis to operators of national and
regional limited-service, extended-stay and full-service hotel chains.
A more detailed description of the acquisitions by the Prior Public
Programs is set forth in Part II of the registration statement filed with the
Securities and Exchange Commission for this Offering and is available from the
Company upon request, without charge. In addition, upon request to the Company,
the Company will provide, without charge, a copy of the most recent Annual
Report on Form 10-K filed with the Securities and Exchange Commission for CNL
Income Fund, Ltd., CNL Income Fund II, Ltd., CNL Income Fund III, Ltd., CNL
Income Fund IV, Ltd., CNL Income Fund V, Ltd., CNL Income Fund VI, Ltd., CNL
Income Fund VII, Ltd., CNL Income Fund VIII, Ltd., CNL Income Fund IX, Ltd., CNL
Income Fund X, Ltd., CNL Income Fund XI, Ltd., CNL Income Fund XII, Ltd., CNL
Income Fund XIII, Ltd., CNL Income Fund XIV, Ltd., CNL Income Fund XV, Ltd., CNL
Income Fund XVI, Ltd., CNL Income Fund XVII, Ltd. and CNL Income Fund XVIII,
Ltd., as well as a copy, for a reasonable fee, of the exhibits filed with such
reports.
The investment objectives of the Prior Public Programs generally
include preservation and protection of capital, the potential for increased
income and protection against inflation, and potential for capital appreciation,
all through investment in restaurant properties. In addition, the investment
objectives of the Prior Public Programs included making partially tax-sheltered
distributions.
STOCKHOLDERS SHOULD NOT CONSTRUE INCLUSION OF THE FOLLOWING TABLES AS
IMPLYING THAT THE COMPANY WILL HAVE RESULTS COMPARABLE TO THOSE REFLECTED IN
SUCH TABLES. DISTRIBUTABLE CASH FLOW, FEDERAL INCOME TAX DEDUCTIONS, OR OTHER
FACTORS COULD BE SUBSTANTIALLY DIFFERENT. STOCKHOLDERS SHOULD NOTE THAT, BY
ACQUIRING SHARES IN THE COMPANY, THEY WILL NOT BE ACQUIRING ANY INTEREST IN ANY
PRIOR PUBLIC PROGRAMS.
Description of Tables
The following Tables are included herein:
Table I - Experience in Raising and Investing Funds
Table II - Compensation to Sponsor
Table III - Operating Results of Prior Programs
Table V - Sales or Disposal of Properties
Unless otherwise indicated in the Tables, all information contained in
the Tables is as of December 31, 1996. The following is a brief description of
the Tables:
Table I - Experience in Raising and Investing Funds
Table I presents information on a percentage basis showing the
experience of two of the principals of the Company and their Affiliates in
raising and investing funds for the Prior Public Programs, the offerings of
which became fully subscribed between January 1992 and December 1996.
C-1
<PAGE>
The Table sets forth information on the offering expenses incurred and
amounts available for investment expressed as a percentage of total dollars
raised. The Table also shows the percentage of property acquisition cost
leveraged, the date the offering commenced, and the time required to raise funds
for investment.
Table II - Compensation to Sponsor
Table II provides information, on a total dollar basis, regarding
amounts and types of compensation paid to the general partners of the Prior
Public Programs.
The Table indicates the total offering proceeds and the portion of such
offering proceeds paid or to be paid to two of the principals of the Company and
their Affiliates in connection with the Prior Public Programs, the offerings of
which became fully subscribed between January 1992 and December 1996. The Table
also shows the amounts paid to two of the principals of the Company and their
Affiliates from cash generated from operations and from cash generated from
sales or refinancing by each of the Prior Public Programs on a cumulative basis
commencing with inception and ending December 31, 1996.
Table III - Operating Results of Prior Programs
Table III presents a summary of operating results for the period from
inception through December 31, 1996, of the Prior Public Programs, the offerings
of which became fully subscribed between January 1992 and December 1996.
The Table includes a summary of income or loss of the Prior Public
Programs, which are presented on the basis of generally accepted accounting
principles ("GAAP"). The Table also shows cash generated from operations, which
represents the cash generated from operations of the properties of the Prior
Public Programs, as distinguished from cash generated from other sources
(special items). The section of the Table entitled "Special Items" provides
information relating to cash generated from or used by items which are not
directly related to the operations of the properties of the Prior Public
Programs, but rather are related to items of a partnership nature. These items
include proceeds from capital contributions of limited partners and
disbursements made from these sources of funds, such as syndication and
organizational costs, acquisition of the properties and other costs which are
related more to the organization of the partnership and the acquisition of
properties than to the actual operations of the partnerships.
The Table also presents information pertaining to investment income,
returns of capital on a GAAP basis, cash distributions from operations, sales
and refinancing proceeds expressed in total dollar amounts as well as
distributions and tax results on a per $1,000 investment basis.
Table IV - Results of Completed Programs
Table IV is omitted from this Exhibit C because none of the directors
of the Company or their Affiliates has been involved in completed programs which
made investments similar to those of the Company.
Table V - Sales or Disposal of Properties
Table V provides information regarding the sale or disposal of
properties owned by the Prior Public Programs between January 1992 and December
1996.
The Table includes the selling price of the property, the cost of the
property, the date acquired and the date of sale.
C-2
<PAGE>
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income CNL Income
Fund X, Fund XI, Fund XII, Fund XIII, Fund XIV,
Ltd. Ltd. Ltd. Ltd. Ltd.
----------- ----------- ----------- ----------- -----------
<S> <C>
Dollar amount offered $40,000,000 $40,000,000 $45,000,000 $40,000,000 $45,000,000
=========== =========== =========== =========== ===========
Dollar amount raised 100.0% 100.0% 100.0% 100.0% 100.0%
----------- ----------- ----------- ----------- -----------
Less offering expenses:
Selling commissions
and discounts (8.5) (8.5) (8.5) (8.5) (8.5)
Organizational expenses (3.0) (3.0) (3.0) (3.0) (3.0)
Marketing support and
due diligence expense
reimbursement fees
(includes amounts
reallowed to
unaffiliated
entities) (0.5) (0.5) (0.5) (0.5) (0.5)
----------- ----------- ----------- ----------- -----------
(12.0) (12.0) (12.0) (12.0) (12.0)
----------- ----------- ----------- ----------- -----------
Reserve for operations -- -- -- -- --
----------- ----------- ----------- ----------- ----------
Percent available for
investment 88.0% 88.0% 88.0% 88.0% 88.0%
=========== =========== =========== =========== ===========
Acquisition costs:
Cash down payment 83.0% 83.0% 83.0% 82.5% 82.5%
Acquisition fees paid
to affiliates 5.0 5.0 5.0 5.5 5.5
Loan costs -- -- -- -- --
----------- ----------- ----------- ----------- ----------
Total acquisition costs 88.0% 88.0% 88.0% 88.0% 88.0%
=========== =========== =========== =========== ===========
Percent leveraged
(mortgage financing
divided by total
acquisition costs) -- -- -- -- --
Date offering began 9/09/91 3/18/92 9/29/92 3/31/93 8/27/93
Length of offering (in
months) 6 6 6 5 6
Months to invest 90% of
amount available for
investment measured
from date of offering 7 6 11 10 11
</TABLE>
Note 1: Pursuant to a Registration Statement on Form S-11 under the
Securities Act of 1933, as amended, effective March 29, 1995, CNL
American Properties Fund, Inc. registered for sale $165,000,000 of
shares of common stock (the "Shares"). The offering of Shares of CNL
American Properties Fund, Inc. commenced April 19, 1995.
Note 2: Pursuant to a Registration Statement on Form S-11 under the Securities
Act of 1933, as amended, effective August 11, 1995, CNL Income Fund
XVII, Ltd. and CNL Income Fund XVIII, Ltd. each registered for sale
$30,000,000 of units of limited partnership interest (the "Units"). The
offering of Units of CNL Income Fund XVII, Ltd. commenced September 2,
1995. Pursuant to the Registration Statement, the offering of Units of
CNL Income Fund XVIII, Ltd. could not commence until the offering of
Units of CNL Income Fund XVII, Ltd. had terminated. CNL Income Fund
XVII, Ltd. terminated its offering of Units on September 19, 1996, at
which time subscriptions for an aggregate 3,000,000 Units ($30,000,000)
had been received. Upon the termination of the offering of Units of
CNL Income Fund XVII, Ltd., CNL Income Fund XVIII, Ltd. commenced its
offering to the public of 3,500,000 Units ($35,000,000).
C-3
<PAGE>
<TABLE>
<CAPTION>
CNL Income CNL Income CNL American CNL Income CNL Income
Fund XV, Fund XVI, Properties Fund, Fund XVII, Fund XVIII,
Ltd. Ltd. Inc. Ltd. Ltd.
(Note 1) (Note 2)
----------- ----------- ------------- ----------- -----------
<S> <C>
Dollar amount offered $40,000,000 $45,000,000 $30,000,000
=========== =========== ===========
Dollar amount raised 100.0% 100.0% 100.0%
----------- ----------- -----------
Less offering expenses:
Selling commissions
and discounts (8.5) (8.5) (8.5)
Organizational expenses (3.0) (3.0) (3.0)
Marketing support and
due diligence expense
reimbursement fees
(includes amounts
reallowed to
unaffiliated
entities) (0.5) (0.5) (0.5)
----------- ----------- -----------
(12.0) (12.0) (12.0)
----------- ----------- -----------
Reserve for operations -- -- --
----------- ----------- ----------
Percent available for
investment 88.0% 88.0% 88.0%
=========== =========== ===========
Acquisition costs:
Cash down payment 82.5% 82.5% 83.5%
Acquisition fees paid
to affiliates 5.5 5.5 4.5
Loan costs -- -- --
----------- ----------- ----------
Total acquisition costs 88.0% 88.0% 88.0%
=========== =========== ===========
Percent leveraged
(mortgage financing
divided by total
acquisition costs) -- -- --
Date offering began 2/23/94 9/02/94 09/02/95
Length of offering (in
months) 6 9 12
Months to invest 90% of
amount available for
investment measured
from date of offering 10 11 15
</TABLE>
C-4
<PAGE>
TABLE II
COMPENSATION TO SPONSOR
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income CNL Income
Fund X, Fund XI, Fund XII, Fund XIII, Fund XIV,
Ltd. Ltd. Ltd. Ltd. Ltd.
----------- ------------ ------------ ------------ -----------
<S> <C>
Date offering commenced 9/09/91 3/18/92 9/29/92 3/31/93 8/27/93
Dollar amount raised $40,000,000 $40,000,000 $45,000,000 $40,000,000 $45,000,000
=========== =========== =========== =========== ===========
Amount paid to sponsor from
proceeds of offering:
Selling commissions and
discounts 3,400,000 3,400,000 3,825,000 3,400,000 3,825,000
Real estate commissions - - - - -
Acquisition fees 2,000,000 2,000,000 2,250,000 2,200,000 2,475,000
Marketing support and
due diligence expense
reimbursement fees
(includes amounts
reallowed to
unaffiliated entities) 200,000 200,000 225,000 200,000 225,000
----------- ----------- ----------- ----------- -----------
Total amount paid to sponsor 5,600,000 5,600,000 6,300,000 5,800,000 6,525,000
=========== =========== =========== =========== ===========
Dollar amount of cash generated
from operations before
deducting payments to
sponsor:
1996 3,790,298 3,734,852 4,089,655 3,494,528 3,841,163
1995 3,603,470 3,758,271 3,928,473 3,482,461 3,823,939
1994 3,828,234 3,574,474 3,933,486 3,232,046 2,897,432
1993 3,499,905 3,434,512 3,320,549 1,148,550 329,957
1992 3,141,123 1,525,462 63,401 - -
1991 204,240 - - - -
1990 - - - - -
1989 - - - - -
1988 - - - - -
1987 - - - - -
1986 - - - - -
1985 - - - - -
1984 - - - - -
1983 - - - - -
1982 - - - - -
1981 - - - - -
1980 - - - - -
1979 - - - - -
1978 - - - - -
Amount paid to sponsor from operations
(administrative, accounting and
management fees):
1996 94,496 133,138 137,966 126,947 134,867
1995 76,108 106,086 109,111 103,083 114,095
1994 42,741 76,533 84,524 83,046 84,801
1993 38,999 78,926 73,789 27,003 8,220
1992 39,505 30,237 2,031 - -
1991 2,834 - - - -
1990 - - - - -
1989 - - - - -
1988 - - - - -
1987 - - - - -
1986 - - - - -
1985 - - - - -
1984 - - - - -
1983 - - - - -
1982 - - - - -
1981 - - - - -
1980 - - - - -
1979 - - - - -
1978 - - - - -
Dollar amount of property sales and
refinancing before deducting payments to
sponsor:
Cash 1,057,386 1,044,750 1,640,000 836,411 3,196,603
Notes - - - - -
Amount paid to sponsors
from property sales and
refinancing:
Real estate commissions - - - - -
Incentive fees - - - - -
Other - - - - -
</TABLE>
Note 1: During the year ended December 31, 1995, CNL Income Fund X, Ltd.
received proceeds of $7,200 for a small parcel of land as a result of
an easement relating to a certain property.
Note 2: Pursuant to a Registration Statement on Form S-11 under the Securities
Act of 1933, as amended, effective March 29, 1995, CNL American
Properties Fund, Inc. registered for sale $165,000,000 of shares of
common stock (the "Shares"). The offering of Shares of CNL American
Properties Fund, Inc. commenced April 19, 1995. As of December 31,
1996, CNL American Properties Fund, Inc. had sold 13,924,715 Shares,
representing subscription proceeds of $139,247,149 from the offering,
including 59,177 Shares ($591,765) through the distribution
reinvestment plan, and 94 properties had been acquired. From
commencement of the offering through December 31, 1996, total selling
commissions and discounts were $10,443,536, marketing support and due
diligence expense reimbursement fees were $696,236, and acquisition
fees were $6,266,122, for a total amount paid to sponsor of
$17,405,894. CNL American Properties Fund, Inc. had cash generated
from operations for the period June 1, 1995 (the date funds were
originally released from escrow) through December 31, 1996, of
$5,980,999. CNL American Properties Fund, Inc. made payments of
$709,471 to the sponsor from operations for this period.
C-5
<PAGE>
<TABLE>
<CAPTION>
CNL Income CNL Income CNL American CNL Income CNL Income
Fund XV, Fund XVI, Properties Fund, Fund XVII, Fund XVIII,
Ltd. Ltd. Inc. Ltd. Ltd.
(Note 2) (Note 3)
----------- ------------ ------------ ------------ -----------
<S> <C>
Date offering commenced 2/23/94 9/02/94 09/02/95
Dollar amount raised $40,000,000 $45,000,000 $30,000,000
=========== =========== ===========
Amount paid to sponsor from
proceeds of offering:
Selling commissions and
discounts 3,400,000 3,825,000 2,550,000
Real estate commissions - - -
Acquisition fees 2,200,000 2,475,000 1,350,000
Marketing support and
due diligence expense
reimbursement fees
(includes amounts
reallowed to
unaffiliated entities) 200,000 225,000 150,000
----------- ----------- -----------
Total amount paid to sponsor 5,800,000 6,525,000 4,050,000
=========== =========== ===========
Dollar amount of cash generated
from operations before
deducting payments to
sponsor:
1996 3,557,073 3,911,609 1,340,159
1995 3,361,477 2,619,840 11,671
1994 1,154,454 212,171 -
1993 - - -
1992 - - -
1991 - - -
1990 - - -
1989 - - -
1988 - - -
1987 - - -
1986 - - -
1985 - - -
1984 - - -
1983 - - -
1982 - - -
1981 - - -
1980 - - -
1979 - - -
1978 - - -
Amount paid to sponsor from operations
(administrative, accounting and
management fees):
1996 122,391 157,883 107,211
1995 122,107 138,445 2,659
1994 37,620 7,023 -
1993 - - -
1992 - - -
1991 - - -
1990 - - -
1989 - - -
1988 - - -
1987 - - -
1986 - - -
1985 - - -
1984 - - -
1983 - - -
1982 - - -
1981 - - -
1980 - - -
1979 - - -
1978 - - -
Dollar amount of property sales and
refinancing before deducting payments to
sponsor:
Cash 3,312,297 775,000 -
Notes - - -
Amount paid to sponsors
from property sales and
refinancing:
Real estate commissions - - -
Incentive fees - - -
Other - - -
</TABLE>
Note 3: Pursuant to a Registration Statement on Form S-11 under the Securities
Act of 1933, as amended, effective August 11, 1995, CNL Income Fund
XVII, Ltd. and CNL Income Fund XVIII, Ltd. each registered for sale
$30,000,000 of units of limited partnership interest (the "Units"). The
offering of Units of CNL Income Fund XVII, Ltd. commenced September 2,
1995. Pursuant to the Registration Statement, the offering of Units of
CNL Income Fund XVIII, Ltd. could not commence until the offering of
Units of CNL Income Fund XVII, Ltd. had terminated. CNL Income Fund
XVII, Ltd. terminated its offering of Units on September 19, 1996, at
which time subscriptions for an aggregate 3,000,000 Units ($30,000,000)
had been received. Upon the termination of the offering of Units of
CNL Income Fund XVII, Ltd., CNL Income Fund XVIII, Ltd. commenced its
offering to the public of 3,500,000 Units ($35,000,000). As of
December 31, 1996, CNL Income Fund XVIII, Ltd. had sold 842,182 Units,
representing $8,421,815 of capital contributed by limited partners, and
two properties had been acquired. From commencement of the offering
through December 31, 1996, total selling commissions and discounts
were $715,854, due diligence expense reimbursement fees were $42,109,
and acquisition fees were $378,982, for a total amount paid to sponsor
of $1,136,945. CNL Income Fund XVIII, Ltd. had cash generated from
operations for the period October 11, 1996 (the date funds were
originally released from escrow) through December 31, 1996, of $24,769.
CNL Income Fund XVIII, Ltd. made payments of $2,980 to the sponsor from
operations for this period.
C-6
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND X, LTD.
<TABLE>
<CAPTION>
1990
(Note 1) 1991 1992 1993
------------ ------------ ------------ ------------
<S> <C>
Gross revenue $ 0 $ 80,723 $ 2,985,620 $ 3,729,533
Equity in earnings of unconsolidated
joint venture 0 0 184,425 273,564
Profit from sale of properties 0 0 0 0
Interest income 0 77,424 149,051 35,072
Less: Operating expenses 0 (7,078) (147,094) (178,294)
Interest expense 0 0 0 0
Depreciation and amortization 0 (5,603) (261,058) (215,143)
Minority interest in income of
consolidated joint venture 0 0 (4,902) (8,159)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 145,466 2,906,042 3,636,573
============ ============ ============ ============
Taxable income
- from operations 0 187,164 2,652,037 2,936,325
============ ============ ============ ============
- from gain on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 5) 0 201,406 3,101,618 3,460,906
Cash generated from sales (Note 4) 0 0 0 0
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 201,406 3,101,618 3,460,906
Less: Cash distributions to investors
(Note 6)
- from operating cash flow 0 (163,012) (2,760,446) (2,659,655)
- from sale of properties 0 0 0 0
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 38,394 341,172 801,251
Special items (not including sales and
refinancing):
Limited partners' capital
contributions 0 19,972,663 20,027,337 0
General partners' capital
contributions 1,000 0 0 0
Organization costs 0 (10,000) 0 0
Syndication costs 0 (1,942,339) (1,880,824) 0
Acquisition of land and buildings 0 (7,317,942) (12,095,378) (316)
Investment in direct financing
leases 0 (3,024,796) (8,018,153) (46,364)
Investment in joint ventures 0 0 (3,687,069) 0
Return of capital from joint
ventures 0 0 0 0
Deposit received for sale of land
and building 0 0 0 0
Increase in other assets (78) (482,466) 0 0
Reimbursement of syndication and
acquisition costs paid on behalf
of CNL Income Fund X, Ltd. by
related parties 0 (815,938) (313,196) (544)
Distributions to holder of minority
interest 0 0 (5,729) (5,543)
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 922 6,417,576 (5,631,840) 748,484
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 17 70 73
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) 0 0 0 0
============ ============ ============ ============
C-7
<PAGE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C>
Gross revenue $ 3,710,792 $ 3,544,446 $ 3,541,053
Equity in earnings of unconsolidated
joint venture 271,512 267,799 278,371
Profit from sale of properties 0 67,214 0
Interest income 46,456 72,600 61,108
Less: Operating expenses (138,507) (189,230) (202,098)
Interest expense 0 0 0
Depreciation and amortization (208,941) (201,696) (207,959)
Minority interest in income of
consolidated joint venture (8,471) (9,066) (8,663)
------------ ------------ ------------
Net income - GAAP basis 3,672,841 3,552,067 3,461,812
============ ============ ============
Taxable income
- from operations 3,212,304 2,956,800 3,059,004
============ ============ ============
- from gain on sale 0 50,819 0
============ ============ ============
Cash generated from operations
(Notes 2 and 5) 3,785,493 3,527,362 3,695,802
Cash generated from sales (Note 4) 0 1,057,386 0
Cash generated from refinancing 0 0 0
------------ ------------ ------------
Cash generated from operations, sales
and refinancing 3,785,493 4,584,748 3,695,802
Less: Cash distributions to investors
(Note 6)
- from operating cash flow (3,500,017) (3,527,362) (3,640,003)
- from sale of properties 0 0 0
- from cash flow from prior period 0 (172,641) 0
------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 285,476 884,745 55,799
Special items (not including sales and
refinancing):
Limited partners' capital
contributions 0 0 0
General partners' capital
contributions 0 0 0
Organization costs 0 0 0
Syndication costs 0 0 0
Acquisition of land and buildings 0 (359,506) (978)
Investment in direct financing
leases 0 (566,097) (1,542)
Investment in joint ventures 0 0 (108,952)
Return of capital from joint
ventures 0 0 0
Deposit received for sale of land
and building 0 69,000 0
Increase in other assets 0 0 0
Reimbursement of syndication and
acquisition costs paid on behalf
of CNL Income Fund X, Ltd. by
related parties 0 0 0
Distributions to holder of minority
interest (7,909) (7,998) (7,697)
------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 277,567 20,144 (63,370)
============ ============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 80 73 76
============ ============ ============
- from recapture 0 0 0
============ ============ ============
Capital gain (loss) 0 1 0
============ ============ ============
C-8
<PAGE>
TABLE III - CNL INCOME FUND X, LTD. (continued)
<CAPTION>
1990
(Note 1) 1991 1992 1993
------------ ------------ ------------ ------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 13 73 66
- from capital gain 0 0 0 0
- from investment income from
prior period 0 0 0 0
- from return of capital (Note 3) 0 2 0 0
------------ ------------ ------------ ------------
Total distributions on GAAP basis
(Note 6) 0 15 73 66
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 15 73 66
- from cash flow from prior
period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on cash basis
(Note 6) 0 15 73 66
============ ============ ============ ============
Total cash distributions as a
percentage of original $1,000
investment (Notes 7 and 8) 0.00% 5.75% 7.38% 8.75%
Total cumulative cash distributions
per $1,000 investment from inception 0 15 88 154
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) (Note 4) N/A 100% 100% 100%
C-9
<PAGE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 88 87 86
- from capital gain 0 2 0
- from investment income from
prior period 0 4 5
- from return of capital (Note 3) 0 0 0
------------ ------------ ------------
Total distributions on GAAP basis
(Note 6) 88 93 91
============ ============ ============
Source (on cash basis)
- from sales 0 0 0
- from refinancing 0 0 0
- from operations 88 88 91
- from cash flow from prior
period 0 5 0
------------ ------------ ------------
Total distributions on cash basis
(Note 6) 88 93 91
============ ============ ============
Total cash distributions as a
percentage of original $1,000
investment (Notes 7 and 8) 9.06% 9.10% 9.10%
Total cumulative cash distributions
per $1,000 investment from inception 242 335 426
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) (Note 4) 100% 99% 100%
</TABLE>
Note 1: Pursuant to a registration statement on Form S-11 under the Securities
Act of 1933, as amended, CNL Income Fund X, Ltd. ("CNL X") and CNL
Income Fund IX, Ltd. each registered for sale $35,000,000 units of
limited partnership interests ("Units"). The offering of Units of CNL
Income Fund IX, Ltd. commenced March 20, 1991. Pursuant to the
registration statement, CNL X's offering of Units could not commence
until the offering of Units of CNL Income Fund IX, Ltd. was terminated.
CNL Income Fund IX, Ltd. terminated its offering of Units on September
6, 1991, at which time the maximum offering proceeds of $35,000,000 had
been received. Upon the termination of the offering of Units of CNL
Income Fund IX, Ltd., CNL X commenced its offering of Units.
Activities through September 24, 1991, were devoted to organization of
the partnership and operations had not begun.
Note 2: Cash generated from operations includes cash received from tenants,
plus distributions from joint ventures, less cash paid for expenses,
plus interest received.
Note 3: Cash distributions presented above as a return of capital on a GAAP
basis represent the amount of cash distributions in excess of
accumulated net income on a GAAP basis. Accumulated net income includes
deductions for depreciation and amortization expense and income from
certain non-cash items. This amount is not required to be presented as
a return of capital except for purposes of this table, and CNL Income
Fund X, Ltd. has not treated this amount as a return of capital for any
other purpose.
Note 4: In August 1995, CNL Income Fund X, Ltd. sold one of its properties
and received net sales proceeds of $1,050,186. In September 1995, the
partnership reinvested $928,122 in an additional property. In addition,
in January 1996, the partnership reinvested the remaining net sales
proceeds in an additional property as tenants-in-common with affiliates
of the general partners.
Note 5: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included in
the financial statements of CNL Income Fund X, Ltd.
Note 6: As a result of the partnership's change in investor services agents in
1993, distributions are now declared at the end of each quarter and
paid in the following quarter. Since this table generally presents
distributions on a cash basis (rather than amounts declared),
distributions on a cash basis for 1993 only reflect payments for three
quarters. Distributions declared for the quarters ended December 31,
1993, 1994 and 1995, are reflected in the 1994, 1995 and 1996 columns,
respectively, for distributions on a cash basis due to the payment of
such distributions in January 1994, 1995 and 1996, respectively. As a
result of 1994, 1995 and 1996 distributions being presented on a cash
basis, distributions declared and unpaid as of December 31, 1994, 1995
and 1996 are not included in the 1994, 1995 and 1996 totals,
respectively.
Note 7: On December 31, 1994, 1995 and 1996, CNL Income Fund X, Ltd. declared a
special distribution of cumulative excess operating reserves equal to
.25%, .10% and .10%, respectively, of the total invested capital.
Accordingly, the total yield for 1994, 1995 and 1996 was 9.06%, 9.10%
and 9.10%, respectively.
Note 8: Total cash distributions as a percentage of original $1,000 investment
are calculated based on actual distributions declared for the period.
(See Note 6 above)
Note 9: Certain data for columns representing less than 12 months have been
annualized.
C-10
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XI, LTD.
<TABLE>
<CAPTION>
1991
(Note 1) 1992 1993 1994
------------ ------------ ------------ ------------
<S> <C>
Gross revenue $ 0 $ 1,269,086 $ 3,831,648 $ 3,852,107
Equity in earnings of unconsolidated
joint ventures 0 33,367 121,059 119,370
Profit from sale of properties 0 0 0 0
Interest income 0 150,535 24,258 30,894
Less: Operating expenses 0 (63,390) (206,987) (179,717)
Interest expense 0 0 0 0
Depreciation and amortization 0 (180,631) (469,127) (481,226)
Minority interests in income of
consolidated joint ventures 0 (23,529) (68,399) (68,936)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 1,185,438 3,232,452 3,272,492
============ ============ ============ ============
Taxable income
- from operations 0 1,295,104 2,855,026 2,947,445
============ ============ ============ ============
- from gain on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 4) 0 1,495,225 3,355,586 3,497,941
Cash generated from sales (Note 5) 0 0 0 0
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 1,495,225 3,355,586 3,497,941
Less: Cash distributions to investors
(Note 6)
- from operating cash flow 0 (1,205,030) (2,495,002) (3,400,001)
- from sale of properties 0 0 0 0
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 290,195 860,584 97,940
Special items (not including sales and
refinancing):
Limited partners' capital
contributions 0 40,000,000 0 0
General partners' capital
contributions 1,000 0 0 0
Minority interests' capital
contributions 0 426,367 0 0
Organization costs 0 (10,000) 0 0
Syndication costs 0 (3,922,875) 0 0
Acquisition of land and buildings 0 (26,428,556) (276,157) 0
Investment in direct financing
leases 0 (6,716,561) (276,206) 0
Increase in restricted cash 0 0 0 0
Investment in joint ventures 0 (1,658,925) (772) 0
Reimbursement of syndication and
acquisition costs paid on behalf
of CNL Income Fund XI, Ltd. by
related parties 0 (1,011,487) (900) 0
Increase in other assets 0 (122,024) 0 0
Distributions to holders of minority
interests 0 (17,467) (51,562) (57,641)
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 1,000 828,667 254,987 40,299
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 45 71 73
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) 0 0 0 0
============ ============ ============ ============
C-11
<PAGE>
<CAPTION>
1995 1996
------------ ------------
<S> <C>
Gross revenue $ 3,820,990 $ 3,877,311
Equity in earnings of unconsolidated
joint ventures 118,384 118,211
Profit from sale of properties 0 213,685
Interest income 51,192 51,381
Less: Operating expenses (237,126) (247,569)
Interest expense 0 0
Depreciation and amortization (481,226) (478,198)
Minority interests in income of
consolidated joint ventures (70,038) (70,116)
----------- -----------
Net income - GAAP basis 3,202,176 3,464,705
=========== ===========
Taxable income
- from operations 2,985,221 2,965,514
=========== ===========
- from gain on sale 0 0
=========== ===========
Cash generated from operations
(Notes 2 and 4) 3,652,185 3,601,714
Cash generated from sales (Note 5) 0 1,044,750
Cash generated from refinancing 0 0
----------- -----------
Cash generated from operations, sales
and refinancing 3,652,185 4,646,464
Less: Cash distributions to investors
(Note 6)
- from operating cash flow (3,500,023) (3,540,024)
- from sale of properties 0 0
- from cash flow from prior period 0 0
----------- -----------
Cash generated (deficiency) after cash
distributions 152,162 1,106,440
Special items (not including sales and
refinancing):
Limited partners' capital
contributions 0 0
General partners' capital
contributions 0 0
Minority interests' capital
contributions 0 0
Organization costs 0 0
Syndication costs 0 0
Acquisition of land and buildings 0 0
Investment in direct financing
leases 0 0
Increase in restricted cash 0 (1,044,750)
Investment in joint ventures 0 0
Reimbursement of syndication and
acquisition costs paid on behalf
of CNL Income Fund XI, Ltd. by
related parties 0 0
Increase in other assets 0 0
Distributions to holders of minority
interests (54,227) (58,718)
------------ ------------
Cash generated (deficiency) after cash
distributions and special items 97,935 2,972
============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 74 73
============ ============
- from recapture 0 0
============ ============
Capital gain (loss) 0 0
============ ============
C-12
<PAGE>
TABLE III - CNL INCOME FUND XI, LTD. (continued)
<CAPTION>
1991
(Note 1) 1992 1993 1994
------------ ------------ ------------ ------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 41 62 81
- from capital gain 0 0 0 0
- from investment income from
prior period 0 0 0 4
- from return of capital (Note 3) 0 1 0 0
------------ ------------ ------------ ------------
Total distributions on GAAP basis
(Note 6) 0 42 62 85
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 42 62 85
- from cash flow from prior
period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on cash basis
(Note 6) 0 42 62 85
============ ============ ============ ============
Total cash distributions as a
percentage of original $1,000
investment (Notes 7 and 8) 0.00% 6.17% 8.31% 8.56%
Total cumulative cash distributions
per $1,000 investment from inception 0 42 104 189
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) (Note 5) N/A 100% 100% 100%
C-13
<PAGE>
<CAPTION>
1995 1996
------------ ------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 79 81
- from capital gain 0 5
- from investment income from
prior period 9 3
- from return of capital (Note 3) 0 0
------------ ------------
Total distributions on GAAP basis
(Note 6) 88 89
============ ============
Source (on cash basis)
- from sales 0 0
- from refinancing 0 0
- from operations 88 89
- from cash flow from prior
period 0 0
------------ ------------
Total distributions on cash basis
(Note 6) 88 89
============ ============
Total cash distributions as a
percentage of original $1,000
investment (Notes 7 and 8) 8.85% 8.85%
Total cumulative cash distributions
per $1,000 investment from inception 277 366
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) (Note 5) 100% 97%
</TABLE>
Note 1: The registration statement relating to the offering of Units by CNL
Income Fund XI, Ltd. became effective on March 12, 1992. Activities
through April 22, 1992, were devoted to organization of the partnership
and operations had not begun.
Note 2: Cash generated from operations includes cash received from tenants,
plus distributions from joint ventures, less cash paid for expenses,
plus interest received.
Note 3: Cash distributions presented above as a return of capital on a GAAP
basis represent the amount of cash distributions in excess of
accumulated net income on a GAAP basis. Accumulated net income includes
deductions for depreciation and amortization expense and income from
certain non-cash items. This amount is not required to be presented as
a return of capital except for purposes of this table, and CNL Income
Fund XI, Ltd. has not treated this amount as a return of capital for
any other purpose.
Note 4: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included in
the financial statements of CNL Income Fund XI, Ltd.
Note 5: In November 1996, CNL Income Fund XI, Ltd. sold one if its properties
and received net sales proceeds of $1,044,750.
Note 6: As a result of the partnership's change in investor services agents in
1993, distributions are now declared at the end of each quarter and
paid in the following quarter. Since this table generally presents
distributions on a cash basis (rather than amounts declared),
distributions on a cash basis for 1993 only reflect payments for three
quarters. Distributions declared for the quarters ended December 31,
1993, 1994 and 1995, are reflected in the 1994, 1995 and 1996 columns,
respectively, for distributions on a cash basis due to the payment of
such distributions in January 1994, 1995 and 1996, respectively. As a
result of 1994, 1995 and 1996 distributions being presented on a cash
basis, distributions declared and unpaid as of December 31, 1994, 1995
and 1996 are not included in the 1994, 1995 and 1996 totals,
respectively.
Note 7: On December 31, 1995 and 1996, CNL Income Fund XI, Ltd. declared a
special distribution of cumulative excess operating reserves equal to
.10% for each year of the total invested capital. Accordingly, the
total yield for each of 1995 and 1996 was 8.85%.
Note 8: Total cash distributions as a percentage of original $1,000 investment
are calculated based on actual distributions declared for the period.
(See Note 6 above)
Note 9: Certain data for columns representing less than 12 months have been
annualized.
C-14
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XII, LTD.
<TABLE>
<CAPTION>
1991
(Note 1) 1992 1993 1994
------------ ------------ ------------ ------------
<S> <C>
Gross revenue $ 0 $ 25,133 $ 3,374,640 $ 4,397,881
Equity in earnings of joint ventures 0 46 49,604 85,252
Profit (Loss) from sale of properties 0 0 0 0
Interest income (Note 7) 0 45,228 190,082 65,447
Less: Operating expenses 0 (7,211) (193,804) (192,951)
Interest expense 0 0 0 0
Depreciation and amortization 0 (3,997) (286,293) (327,795)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 59,199 3,134,229 4,027,834
============ ============ ============ ============
Taxable income
- from operations 0 58,543 2,749,072 3,301,005
============ ============ ============ ============
- from gain (loss) on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 5) 0 61,370 3,246,760 3,848,962
Cash generated from sales (Note 7) 0 0 0 0
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 61,370 3,246,760 3,848,962
Less: Cash distributions to investors
(Note 6)
- from operating cash flow 0 (61,370) (1,972,769) (3,768,754)
- from sale of properties 0 0 0 0
- from return of capital (Note 4) 0 (60,867) 0 0
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 (60,867) 1,273,991 80,208
Special items (not including sales and
refinancing):
Limited partners' capital
contributions 0 21,543,270 23,456,730 0
General partners' capital
contributions 1,000 0 0 0
Organization costs 0 (10,000) 0 0
Syndication costs 0 (2,066,937) (2,277,637) 0
Acquisition of land and buildings 0 (7,536,009) (15,472,737) (230)
Investment in direct financing
leases 0 (2,503,050) (11,875,100) (591)
Loan to tenant of joint venture,
net of repayments 0 0 (207,189) 6,400
Investment in joint ventures 0 (372,045) (468,771) (4,400)
Increase in restricted cash 0 0 0 0
Reimbursement of syndication and
acquisition costs paid on behalf
of CNL Income Fund XII, Ltd. by
related parties 0 (704,923) (432,749) 0
Increase in other assets 0 (654,497) 0 0
Other 0 0 0 973
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 1,000 7,634,942 (6,003,462) 82,360
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 5 64 73
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) 0 0 0 0
============ ============ ============ ============
C-15
<PAGE>
<CAPTION>
1995 1996
------------ ------------
<S> <C>
Gross revenue $ 4,404,792 $ 4,264,273
Equity in earnings of joint ventures 81,582 200,499
Profit (Loss) from sale of properties 0 (15,355)
Interest income (Note 7) 84,197 88,286
Less: Operating expenses (228,404) (279,341)
Interest expense 0 0
Depreciation and amortization (327,795) (315,319)
------------ -----------
Net income - GAAP basis 4,014,372 3,943,043
============ ===========
Taxable income
- from operations 3,262,046 3,275,495
============ ===========
- from gain (loss) on sale 0 (41,506)
============ ===========
Cash generated from operations
(Notes 2 and 5) 3,819,362 3,951,689
Cash generated from sales (Note 7) 0 1,640,000
Cash generated from refinancing 0 0
------------ -----------
Cash generated from operations, sales
and refinancing 3,819,362 5,591,689
Less: Cash distributions to investors
(Note 6)
- from operating cash flow (3,819,362) (3,870,008)
- from sale of properties 0 0
- from return of capital (Note 4) 0 0
- from cash flow from prior period (5,645) 0
------------ ------------
Cash generated (deficiency) after cash
distributions (5,645) 1,721,681
Special items (not including sales and
refinancing):
Limited partners' capital
contributions 0 0
General partners' capital
contributions 0 0
Organization costs 0 0
Syndication costs 0 0
Acquisition of land and buildings 0 0
Investment in direct financing
leases 0 0
Loan to tenant of joint venture,
net of repayments 7,008 7,741
Investment in joint ventures 0 (1,645,024)
Increase in restricted cash 0 0
Reimbursement of syndication and
acquisition costs paid on behalf
of CNL Income Fund XII, Ltd. by
related parties 0 0
Increase in other assets 0 0
Other 0 0
------------ ------------
Cash generated (deficiency) after cash
distributions and special items 1,363 (84,398)
============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 72 72
============ ============
- from recapture 0 0
============ ============
Capital gain (loss) 0 (1)
============ ============
C-16
<PAGE>
TABLE III - CNL INCOME FUND XII, LTD. (continued)
<CAPTION>
1991
(Note 1) 1992 1993 1994
------------ ------------ ------------ ------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 5 46 84
- from capital gain 0 0 0 0
- from investment income from
prior period 0 0 0 0
- from return of capital (Note 3) 0 7 0 0
------------ ------------ ------------ ------------
Total distributions on GAAP basis
(Note 6) 0 12 46 84
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 6 46 84
- from return of capital (Note 4) 0 6 0 0
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on cash basis
(Note 6) 0 12 46 84
============ ============ ============ ============
Total cash distributions as a
percentage of original $1,000
investment (Notes 8 and 9) 0.00% 5.00% 6.75% 8.50%
Total cumulative cash distributions
per $1,000 investment from inception 0 12 58 142
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) (Note 7) N/A 100% 100% 100%
</TABLE>
1995 1996
------------ --------
Cash distributions to investors
Source (on GAAP basis)
- from investment income 85 86
- from capital gain 0 0
- from investment income from
prior period 0 0
- from return of capital (Note 3) 0 0
------------ ------------
Total distributions on GAAP basis
(Note 6) 85 86
============ ============
Source (on cash basis)
- from sales 0 0
- from refinancing 0 0
- from operations 85 86
- from return of capital (Note 4) 0 0
- from cash flow from prior period 0 0
------------ ------------
Total distributions on cash basis
(Note 6) 85 86
============ ============
Total cash distributions as a
percentage of original $1,000
investment (Notes 8 and 9) 8.60% 8.50%
Total cumulative cash distributions
per $1,000 investment from inception 227 313
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) (Note 7) 100% 100%
Note 1: Pursuant to a registration statement on Form S-11 under the Securities
Act of 1933, as amended, CNL Income Fund XII, Ltd. ("CNL XII") and CNL
Income Fund XI, Ltd. each registered for sale $40,000,000 units of
limited partnership interests ("Units"). The offering of Units of CNL
Income Fund XI, Ltd. commenced March 12, 1992. Pursuant to the
registration statement, CNL XII could not commence until the offering
of Units of CNL Income Fund XI, Ltd. was terminated. CNL Income Fund
XI, Ltd. terminated its offering of Units on September 28, 1992, at
which time the maximum offering proceeds of $40,000,000 had been
received. Upon the termination of the offering of Units of CNL Income
Fund XI, Ltd., CNL XII commenced its offering of Units. Activities
through October 8, 1992, were devoted to organization of the
partnership and operations had not begun.
Note 2: Cash generated from operations includes cash received from tenants,
plus distributions from joint ventures, less cash paid for expenses,
plus interest received.
Note 3: Cash distributions presented above as a return of capital on a GAAP
basis represent the amount of cash distributions in excess of
accumulated net income on a GAAP basis. Accumulated net income includes
deductions for depreciation and amortization expense and income from
certain non-cash items. This amount is not required to be presented as
a return of capital except for purposes of this table, and CNL Income
Fund XII, Ltd. has not treated this amount as a return of capital for
any other purpose.
Note 4: CNL Income Fund XII, Ltd. makes its distributions in the current
period rather than in arrears based on estimated operating results. In
cases where distributions exceed cash from operations in the current
period, once finally determined, subsequent distributions are lowered
accordingly in order to avoid any return of capital. This amount is not
required to be presented as a return of capital except for purposes of
this table, and CNL Income Fund XII, Ltd. has not treated this amount
as a return of capital for any other purpose.
Note 5: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included in
the financial statements of CNL Income Fund XII, Ltd.
Note 6: As a result of the partnership's change in investor services agents in
1993, distributions are now declared at the end of each quarter and
paid in the following quarter. Since this table generally presents
distributions on a cash basis (rather than amounts declared),
distributions on a cash basis for 1993 only reflect payments for three
quarters. Distributions declared for the quarters ended December 31,
1993, 1994 and 1995, are reflected in the 1994, 1995 and 1996 columns,
respectively, for distributions on a cash basis due to the payment of
such distributions in January 1994, 1995 and 1996, respectively. As a
result of 1994, 1995 and 1996 distributions being presented on a cash
basis, distributions declared and unpaid as of December 31, 1994 and
1995, and June 30, 1996 are not included in the 1994, 1995 and 1996
totals, respectively.
C-17
<PAGE>
Note 7: In April 1996, CNL Income Fund XII, Ltd. sold one of its properties to
an unrelated third party for $1,640,000. As a result of this
transaction, CNL Income Fund XII, Ltd. recognized a loss of $15,355 for
financial reporting purposes primarily due to acquisition fees and
miscellaneous acquisition expenses CNL Income Fund XII, Ltd. had
allocated to this property. In May 1996, CNL Income Fund XII, Ltd.
reinvested the proceeds from this sale, along with additional funds,
for a total of $1,645,024 in Middleburg Joint Venture.
Note 8: On December 31, 1995, CNL Income Fund XII, Ltd. declared a special
distribution of cumulative excess operating reserves equal to .10% of
the total invested capital. Accordingly, the total yield for 1995 was
8.60%.
Note 9: Total cash distributions as a percentage of original $1,000 investment
are calculated based on actual distributions declared for the period.
(See Note 6 above)
Note 10: Certain data for columns representing less than 12 months have been
annualized.
C-18
<PAGE>
<TABLE>
<CAPTION>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XIII, LTD.
1992
(Note 1) 1993 1994 1995
------------ ------------ ------------ -----------
<S> <C>
Gross revenue $ 0 $ 966,564 $ 3,558,447 $ 3,806,944
Equity in earnings of joint ventures 0 1,305 43,386 98,520
Profit (Loss) from sale of properties
(Notes 4 and 5) 0 0 0 (29,560)
Interest income 0 181,568 77,379 51,410
Less: Operating expenses 0 (59,390) (183,311) (214,705)
Interest expense 0 0 0 0
Depreciation and amortization 0 (148,170) (378,269) (393,435)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 941,877 3,117,632 3,319,174
============ ============ ============ ============
Taxable income
- from operations 0 978,535 2,703,252 2,920,859
============ ============ ============ ============
- from gain (loss) on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 1,121,547 3,149,000 3,379,378
Cash generated from sales (Notes 4 and 5) 0 0 0 286,411
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 1,121,547 3,149,000 3,665,789
Less: Cash distributions to investors
(Note 6)
- from operating cash flow 0 (528,364) (2,800,004) (3,350,014)
- from sale of properties 0 0 0 0
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after
cash distributions 0 593,183 348,996 315,775
Special items (not including sales
and refinancing):
Limited partners' capital
contributions 0 40,000,000 0 0
General partners' capital
contributions 1,000 0 0 0
Syndication costs 0 (3,932,017) (181) 0
Acquisition of land and buildings 0 (19,691,630) (5,764,308) (336,116)
Investment in direct financing leases 0 (6,760,624) (1,365,075) 0
Investment in joint ventures 0 (314,998) (545,139) (140,052)
Increase in restricted cash 0 0 0 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XIII, Ltd. by related parties 0 (799,980) (25,036) (3,074)
Increase in other assets 0 (454,909) 9,226 0
Other 0 0 0 954
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 1,000 8,639,025 (7,341,517) (162,513)
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 33 67 72
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) (Notes 4 and 5) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-19
<PAGE>
1996
------------
Gross revenue $ 3,685,280
Equity in earnings of joint ventures 60,654
Profit (Loss) from sale of properties 0
(Notes 4 and 5) 82,855
Interest income 49,820
Less: Operating expenses (253,360)
Interest expense
Depreciation and amortization (393,434)
------------
Net income - GAAP basis 3,231,815
============
Taxable income
- from operations 2,972,159
============
- from gain (loss) on sale 0
============
Cash generated from operations
(Notes 2 and 3) 3,367,581
Cash generated from sales (Notes 4 and 5) 550,000
Cash generated from refinancing 0
------------
Cash generated from operations, sales
and refinancing 3,917,581
Less: Cash distributions to investors
(Note 6)
- from operating cash flow (3,367,581)
- from sale of properties 0
- from cash flow from prior period (32,427)
------------
Cash generated (deficiency) after
cash distributions 517,573
Special items (not including sales
and refinancing):
Limited partners' capital
contributions 0
General partners' capital
contributions 0
Syndication costs 0
Acquisition of land and buildings 0
Investment in direct financing leases 0
Investment in joint ventures 0
Increase in restricted cash (550,000)
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XIII, Ltd. by related parties 0
Increase in other assets 0
Other 0
------------
Cash generated (deficiency) after cash
distributions and special items (32,427)
============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 74
============
- from recapture 0
============
Capital gain (loss) (Notes 4 and 5) 0
============
C-20
<PAGE>
TABLE III - CNL INCOME FUND XIII, LTD. (continued)
<TABLE>
<CAPTION>
1992
(Note 1) 1993 1994 1995 1996
------------ ------------ ------------ ------------ -------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 18 70 82 78
- from capital gain 0 0 0 0 2
- from investment income from prior
period 0 0 0 2 5
------------ ------------ ------------ ------------ ---------
Total distributions on GAAP basis (Note 6) 0 18 70 84 85
============ ============ ============ ============ =========
Source (on cash basis)
- from sales 0 0 0 0 0
- from refinancing 0 0 0 0 0
- from operations 0 18 70 84 84
- from cash flow from prior period 0 0 0 0 1
------------ ------------ ------------ ------------ ---------
Total distributions on cash basis (Note 6) 0 18 70 84 85
============ ============ ============ ============ =========
Total cash distributions as a percentage
of original $1,000 investment (Note 7) 0.00% 5.33% 7.56% 8.44% 8.50%
Total cumulative cash distributions per
$1,000 investment from inception 0 18 88 172 257
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) (Notes 4 and 5) N/A 100% 100% 100% 99%
</TABLE>
Note 1: The registration statement relating to the offering of Units by CNL
Income Fund XIII, Ltd. became effective on March 17, 1993. Activities
through April 15, 1993, were devoted to organization of the partnership
and operations had not begun.
Note 2: Cash generated from operations includes cash received from tenants,
plus distributions from joint ventures, less cash paid for expenses,
plus interest received.
Note 3: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included in
the financial statements of CNL Income Fund XIII, Ltd.
Note 4: During 1995, the partnership sold one of its properties to a tenant
for its original purchase price, excluding acquisition fees and
miscellaneous acquisition expenses. The net sales proceeds were used
to acquire an additional property. As a result of this transaction,
the partnership recognized a loss for financial reporting purposes of
$29,560 primarily due to acquisition fees and miscellaneous acquisition
expenses the partnership had allocated to the property and due to the
accrued rental income relating to future scheduled rent increases that
the partnership had recorded and reversed at the time of sale.
Note 5: In November 1996, CNL Income Fund XIII, Ltd. sold one of its
properties and received net sales proceeds of $550,000. In January
1997, the partnership reinvested the net sales proceeds in an
additional property as tenants-in-common with an affiliate of the
general partners.
Note 6: As a result of the partnership's change in investor services agents
in 1993, distributions are now declared at the end of each quarter and
paid in the following quarter. Since this table generally presents
distributions on a cash basis (rather than amounts declared),
distributions on a cash basis for 1993 only reflect payments for three
quarters. Distributions declared for the quarters ended December 31,
1993, 1994 and 1995, are reflected in the 1994, 1995 and 1996 columns,
respectively, for distributions on a cash basis due to the payment of
such distributions in January 1994, 1995 and 1996, respectively. As a
result of 1994, 1995 and 1996 distributions being presented on a cash
basis, distributions declared and unpaid as of December 31, 1994, 1995
and 1996, are not included in the 1994, 1995 and 1996 totals,
respectively.
Note 7: Total cash distributions as a percentage of original $1,000 investment
are calculated based on actual distributions declared for the period.
(See Note 5 above)
Note 8: Certain data for columns representing less than 12 months have been
annualized.
C-21
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XIV, LTD.
<TABLE>
<CAPTION>
1992
(Note 1) 1993 1994 1995 1996
---------- ------------ ------------ ----------- ------------
<S> <C>
Gross revenue $ 0 $ 256,234 $ 3,135,716 $ 4,017,266 $ 3,999,813
Equity in earnings of joint ventures 0 1,305 35,480 338,717 459,137
Profit (Loss) from sale of properties
(Note 4) 0 0 0 (66,518) 0
Interest income 0 27,874 200,499 50,724 44,089
Less: Operating expenses 0 (14,049) (181,980) (248,840) (246,621)
Interest expense 0 0 0 0 0
Depreciation and amortization 0 (28,918) (257,640) (340,112) (340,089)
------------ ------------ ------------ ------------ ----------
Net income - GAAP basis 0 242,446 2,932,075 3,751,237 3,916,329
============ ============ ============ ============ -----------
Taxable income
- from operations 0 278,845 2,482,240 3,162,165 3,236,329
============ ============ ============ ============ ===========
- from gain on sale 0 0 0 0 0
============ ============ ============ ============ ===========
Cash generated from operations
(Notes 2 and 3) 0 321,737 2,812,631 3,709,844 3,706,296
Cash generated from sales (Note 4) 0 0 0 696,012 0
Cash generated from refinancing 0 0 0 0 0
------------ ------------ ------------ ------------ ----------
Cash generated from operations, sales
and refinancing 0 321,737 2,812,631 4,405,856 3,706,296
Less: Cash distributions to investors
(Note 5)
- from operating cash flow 0 (9,050) (2,229,952) (3,543,751) (3,706,296)
- from sale of properties 0 0 0 0 0
- from cash flow from prior period 0 0 0 0 (6,226)
------------ ------------ ------------ ------------ -----------
Cash generated (deficiency) after cash (6,226)
distributions 0 312,687 582,679 862,105
Special items (not including sales and
refinancing):
Limited partners' capital
contributions 0 28,785,100 16,214,900 0 0
General partners' capital
contributions 1,000 0 0 0 0
Syndication costs 0 (2,771,892) (1,618,477) 0 0
Acquisition of land and buildings 0 (13,758,004) (11,859,237) (964,073) 0
Investment in direct financing leases 0 (4,187,268) (5,561,748) (75,352) 0
Investment in joint ventures 0 (315,209) (1,561,988) (1,087,218) (7,500)
Return of capital from joint venture 0 0 0 0 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XIV, Ltd. by related parties 0 (706,215) (376,738) (577) 0
Increase in other assets 0 (444,267) 0 0 0
Other 0 0 0 5,530 0
------------ ------------ ------------ ------------ --------
Cash generated (deficiency) after cash
distributions and special items 1,000 6,914,932 (4,180,609) (1,259,585) (13,726)
============ ============ ============ ============ ========
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 16 56 70 71
============ ============ ============ ============ =======
- from recapture 0 0 0 0 0
============ ============ ============ ============ =======
Capital gain (loss) (Note 4) 0 0 0 0 0
============ ============ ============ ============ =======
C-22
<PAGE>
TABLE III - CNL INCOME FUND XIV, LTD. (continued)
</TABLE>
<TABLE>
<CAPTION>
1992
(Note 1) 1993 1994 1995 1996
------------ ------------ ------------ -------- -------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 1 51 79 83
- from capital gain 0 0 0 0 0
- from return of capital 0 0 0 0 0
------------ ------------ ------------ ------------ ---------
Total distributions on GAAP basis (Note 5) 0 1 51 79 83
============ ============ ============ ============ =========
Source (on cash basis)
- from sales 0 0 0 0 0
- from refinancing 0 0 0 0 0
- from operations 0 1 51 79 83
- from cash flow from prior period 0 0 0 0 0
------------ ------------ ------------ ------------ --------
Total distributions on cash basis (Note 5) 0 1 51 79 83
============ ============ ============ ============ ========
Total cash distributions as a percentage
of original $1,000 investment (Note 6) 0.00% 4.50% 6.50% 8.06% 8.25%
Total cumulative cash distributions
per $1,000 investment from inception 0 1 52 131 214
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) N/A 100% 100% 100% 100%
</TABLE>
Note 1: Pursuant to a registration statement on Form S-11 under the Securities
Act of 1933, as amended, CNL Income Fund XIV, Ltd. ("CNL XIV") and CNL
Income Fund XIII, Ltd. each registered for sale $40,000,000 units of
limited partnership interests ("Units"). The offering of Units of CNL
Income Fund XIII, Ltd. commenced March 17, 1993. Pursuant to the
registration statement, CNL XIV could not commence until the offering
of Units of CNL Income Fund XIII, Ltd. was terminated. CNL Income Fund
XIII, Ltd. terminated its offering of Units on August 26, 1993, at
which time the maximum offering proceeds of $40,000,000 had been
received. Upon the termination of the offering of Units of CNL Income
Fund XIII, Ltd., CNL XIV commenced its offering of Units. Activities
through September 13, 1993, were devoted to organization of the
partnership and operations had not begun.
Note 2: Cash generated from operations includes cash received from tenants,
plus distributions from joint ventures, less cash paid for expenses,
plus interest received.
Note 3: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included in
the financial statements of CNL Income Fund XIV, Ltd.
Note 4: During 1995, the partnership sold two of its properties to a tenant for
its original purchase price, excluding acquisition fees and
miscellaneous acquisition expenses. The net sales proceeds were used
to acquire two additional properties. As a result of these
transactions, the partnership recognized a loss for financial reporting
purposes of $66,518 primarily due to acquisition fees and miscellaneous
acquisition expenses the partnership had allocated to the property and
due to the accrued rental income relating to future scheduled rent
increases that the partnership had recorded and reversed at the time of
sale.
Note 5: As a result of the partnership's change in investor services agents in
1993, distributions are now declared at the end of each quarter and
paid in the following quarter. Since this table generally presents
distributions on a cash basis (rather than amounts declared),
distributions on a cash basis for 1993 only reflect payments for three
quarters. Distributions declared for the quarters ended December 31,
1993, 1994 and 1995, are reflected in the 1994, 1995 and 1996 columns,
respectively, for distributions on a cash basis due to the payment of
such distributions in January 1994, 1995 and 1996, respectively. As a
result of 1994, 1995 and 1996 distributions being presented on a cash
basis, distributions declared and unpaid as of December 31, 1994, 1995
and 1996 are not included in the 1994, 1995 and 1996 totals,
respectively.
Note 6: Total cash distributions as a percentage of original $1,000 investment
are calculated based on actual distributions declared for the period.
(See Note 5 above)
Note 7: Certain data for columns representing less than 12 months have been
annualized.
C-23
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XV, LTD.
<TABLE>
<CAPTION>
1993
(Note 1) 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C>
Gross revenue $ 0 $ 1,143,586 $ 3,546,320 $ 3,632,699
Equity in earnings of joint venture 0 8,372 280,606 392,862
Profit (Loss) from sale of properties
(Note 4) 0 0 (71,023) 0
Interest income 0 167,734 88,059 43,049
Less: Operating expenses 0 (62,926) (228,319) (235,319)
Interest expense 0 0 0 0
Depreciation and amortization 0 (70,848) (243,175) (248,232)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 1,185,918 3,372,468 3,585,059
============ ============ ============ ============
Taxable income
- from operations 0 1,026,715 2,861,912 2,954,318
============ ============ ============ ============
- from gain on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 1,116,834 3,239,370 3,434,682
Cash generated from sales (Note 4) 0 0 811,706 0
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 1,116,834 4,051,076 3,434,682
Less: Cash distributions to investors
(Note 5)
- from operating cash flow 0 (635,944) (2,650,003) (3,200,000)
- from sale of properties 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 480,890 1,401,073 234,682
Special items (not including sales and
refinancing):
Limited partners' capital contra-
bunions 0 40,000,000 0 0
General partners' capital contra-
bunions 1,000 0 0 0
Syndication costs 0 (3,892,003) 0 0
Acquisition of land and buildings 0 (22,152,379) (1,625,601) 0
Investment in direct financing
leases 0 (6,792,806) (2,412,973) 0
Investment in joint venture 0 (1,564,762) (720,552) (129,939)
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XV, Ltd. by related parties 0 (1,098,197) (23,507) 0
Increase in other assets 0 (187,757) 0 0
Other (38) (6,118) 25,150 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 962 4,786,868 (3,356,410) 104,743
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 33 71 73
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) (Note 4) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-24
<PAGE>
TABLE III - CNL INCOME FUND XV, LTD. (continued)
<TABLE>
<CAPTION>
1993
(Note 1) 1994 1995 1996
------------ ------------ ------------ -----------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 21 66 80
- from capital gain 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on GAAP basis (Note 5) 0 21 66 80
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 21 66 80
------------ ------------ ------------ ------------
Total distributions on cash basis (Note 5) 0 21 66 80
============ ============ ============ ============
Total cash distributions as a percentage
of original $1,000 investment (Notes 6
and 7) 0.00% 5.00% 7.25% 8.20%
Total cumulative cash distributions per
$1,000 investment from inception 0 21 87 167
Amount (in percentage terms) remaining
invested in program properties at the end
of each year (period) presented
(original total acquisition cost of properties
retained, divided by original
total acquisition cost of all properties
in program) N/A 100% 100% 100%
</TABLE>
Note 1: The registration statement relating to this offering of Units of CNL
Income Fund XV, Ltd. became effective February 23, 1994. Activities
through March 23, 1994, were devoted to organization of the partnership
and operations had not begun.
Note 2: Cash generated from operations includes cash received from tenants,
plus distributions from joint venture, less cash paid for expenses,
plus interest received.
Note 3: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included in
the financial statements of CNL Income Fund XV, Ltd.
Note 4: During 1995, the partnership sold three of its properties to a tenant
for its original purchase price, excluding acquisition fees and
miscellaneous acquisition expenses. The majority of the net sales
proceeds were used to acquire additional properties. As a result of
these transactions, the partnership recognized a loss for financial
reporting purposes of $71,023 primarily due to acquisition fees and
miscellaneous acquisition expenses the partnership had allocated to the
three properties and due to the accrued rental income relating to
future scheduled rent increases that the partnership had recorded and
reversed at the time of sale.
Note 5: Distributions declared for the quarters ended December 31, 1994 and
1995 are reflected in the 1995 and 1996 columns, respectively, due to
the payment of such distributions in January 1995 and 1996,
respectively. As a result of distributions being presented on a cash
basis, distributions declared and unpaid as of December 31, 1994, 1995
and 1996 are not included in the 1994, 1995 and 1996 totals,
respectively.
Note 6: On December 31, 1996, CNL Income Fund XV, Ltd. declared a special
distribution of cumulative excess operating reserves equal to .20% of
the total invested capital. Accordingly, the total yield for 1996 was
8.20%
Note 7: Total cash distributions as a percentage of original $1,000 investment
are calculated based on actual distributions declared for the period.
(See Note 5 above)
Note 8: Certain data for columns representing less than 12 months have been
annualized.
C-25
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XVI, LTD.
<TABLE>
<CAPTION>
1993
(Note 1) 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C>
Gross revenue $ 0 $ 186,257 $ 2,702,504 $ 4,343,390
Equity in earnings from joint venture 0 0 0 19,668
Profit from sale of properties (Note 5) 0 0 0 124,305
Interest income 0 21,478 321,137 75,160
Less: Operating expenses 0 (10,700) (274,595) (261,878)
Interest expense 0 0 0 0
Depreciation and amortization 0 (9,458) (318,205) (552,447)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 187,577 2,430,841 3,748,198
============ ============ ============ ============
Taxable income
- from operations 0 189,864 2,139,382 3,239,830
============ ============ ============ ============
- from gain on sale (Note 5) 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 205,148 2,481,395 3,753,726
Cash generated from sales (Note 5) 0 0 0 775,000
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 205,148 2,481,395 4,528,726
Less: Cash distributions to investors
(Note 4)
- from operating cash flow 0 (2,845) (1,798,921) (3,431,251)
- from sale of properties 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 202,303 682,474 1,097,475
Special items (not including sales and
refinancing):
Limited partners' capital contri-
butions 0 20,174,172 24,825,828 0
General partners' capital contri-
butions 1,000 0 0 0
Syndication costs 0 (1,929,465) (2,452,743) 0
Acquisition of land and buildings 0 (13,170,132) (16,012,458) (2,355,627)
Investment in direct financing
leases 0 (975,853) (5,595,236) (405,937)
Investment in joint venture 0 0 0 (775,000)
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XVI, Ltd. by related parties 0 (854,154) (405,569) (2,494)
Collection of overpayment of acqui-
sition and syndication costs paid
by related parties on behalf of the
partnership 0 0 0 0
Increase in other assets 0 (443,625) (58,720) 0
Other (36) (20,714) 20,714 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 964 2,982,532 1,004,290 (2,441,583)
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 17 53 71
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) (Note 5) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-26
<PAGE>
TABLE III - CNL INCOME FUND XVI, LTD. (continued)
<TABLE>
<CAPTION>
1993
(Note 1) 1994 1995 1996
------------ ------------ ------------ --------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 1 45 76
- from capital gain 0 0 0 0
- from investment income from
prior period 0 0 0 0
------------ ------------ ------------ ---------
Total distributions on GAAP basis (Note 4) 0 1 45 76
============ ============ ============ ==========
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 1 45 76
------------ ------------ ------------ ----------
Total distributions on cash basis (Note 4) 0 1 45 76
============ ============ ============ ==========
Total cash distributions as a percentage
of original $1,000 investment (Note 6) 0.00% 4.50% 6.00% 7.88%
Total cumulative cash distributions per
$1,000 investment from inception 0 1 46 122
Amount (in percentage terms) remaining
invested in program properties at the end
of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) (Note 5) N/A 100% 100% 100%
</TABLE>
Note 1: Pursuant to a registration statement on Form S-11 under the Securities
Act of 1933, as amended, CNL Income Fund XVI, Ltd. ("CNL XVI") and CNL
Income Fund XV, Ltd. each registered for sale $40,000,000 units of
limited partnership interests ("Units"). The offering of Units of CNL
Income Fund XV, Ltd. commenced February 23, 1994. Pursuant to the
registration statement, CNL XVI could not commence until the offering
of Units of CNL Income Fund XV, Ltd. was terminated. CNL Income Fund
XV, Ltd. terminated its offering of Units on September 1, 1994, at
which time the maximum offering proceeds of $40,000,000 had been
received. Upon the termination of the offering of Units of CNL Income
Fund XV, Ltd., CNL XVI commenced its offering of Units. Activities
through September 22, 1994, were devoted to organization of the
partnership and operations had not begun.
Note 2: Cash generated from operations includes cash received from tenants,
less cash paid for expenses, plus interest received.
Note 3: Cash generated from operations per this table agrees to cash generated
from operations per the statement of cash flows included in the
financial statements of CNL Income Fund XVI, Ltd.
Note 4: Distributions declared for the quarters ended December 31, 1994 and
1995 are reflected in the 1995 and 1996 columns, respectively, due to
the payment of such distributions in January 1995 and 1996,
respectively. As a result of distributions being presented on a cash
basis, distributions declared and unpaid as of December 31, 1994, 1995
and 1996 are not included in the 1994, 1995 and 1996 totals,
respectively.
Note 5: In April 1996, CNL Income Fund XVI, Ltd. sold one of its properties and
received net sales proceeds of $775,000. In October 1996, the
partnership reinvested the net sales proceeds in an additional property
as tenants-in-common with an affiliate of the general partners.
Note 6: Total cash distributions as a percentage of original $1,000 investment
are calculated based on actual distributions declared for the period.
(See Note 5 above)
Note 7: Certain data for columns representing less than 12 months have been
annualized.
C-27
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XVII, LTD.
1995
(Note 1) 1996
------------ -----------
Gross revenue $ 0 $ 1,195,263
Equity in earnings from joint venture 0 4,834
Interest income 12,153 244,406
Less: Operating expenses (3,493) (169,536)
Interest expense 0 0
Depreciation and amortization (309) (179,208)
------------ ------------
Net income - GAAP basis 8,351 1,095,759
============ ============
Taxable income
- from operations 12,153 1,114,964
============ ============
- from gain on sale 0 0
============ ============
Cash generated from operations
(Notes 2 and 3) 9,012 1,232,948
Cash generated from sales 0 0
Cash generated from refinancing 0 0
------------ ------------
Cash generated from operations, sales
and refinancing 9,012 1,232,948
Less: Cash distributions to investors
(Note 4)
- from operating cash flow (1,199) (703,681)
- from sale of properties 0 0
------------ ------------
Cash generated (deficiency) after cash
distributions 7,813 529,267
Special items (not including sales and
refinancing):
Limited partners' capital contri-
butions 5,696,921 24,303,079
General partners' capital contri-
butions 1,000 0
Contributions from minority interest 0 140,676
Syndication costs (604,348) (2,407,317)
Acquisition of land and buildings (332,928) (19,735,346)
Investment in direct financing
leases 0 (1,784,925)
Investment in joint venture 0 (201,501)
Increase in restricted cash 0 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XVII, Ltd. by related parties (347,907) (326,483)
Increase in other assets (221,282) 0
Other (410) 410
------------ ------------
Cash generated (deficiency) after cash
distributions and special items 4,198,859 517,860
============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 36 37
============ ============
- from recapture 0 0
============ ============
Capital gain (loss) 0 0
============ ============
C-28
<PAGE>
TABLE III - CNL INCOME FUND XVII, LTD. (continued)
1995
(Note 1) 1996
------------ -----------
Cash distributions to investors
Source (on GAAP basis)
- from investment income 4 23
- from capital gain 0 0
- from investment income from
prior period 0 0
------------ ------------
Total distributions on GAAP basis (Note 4) 0 23
============ ============
Source (on cash basis)
- from sales 0 0
- from refinancing 0 0
- from operations 4 23
------------ ------------
Total distributions on cash basis (Note 4) 4 23
============ ============
Total cash distributions as a percentage
of original $1,000 investment (Note 5) 5.00% 5.50%
Total cumulative cash distributions per
$1,000 investment from inception 4 27
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) N/A 100%
Note 1: Pursuant to a registration statement on Form S-11 under the Securities
Act of 1933, as amended, CNL Income Fund XVII, Ltd. ("CNL XVII") and
CNL Income Fund XVIII, Ltd. each registered for sale $30,000,000 units
of limited partnership interests ("Units"). The offering of Units of
CNL Income Fund XVII, Ltd. commenced September 2, 1995. Pursuant to
the registration statement, CNL XVIII could not commence until the
offering of Units of CNL Income Fund XVII, Ltd. was terminated. CNL
Income Fund XVII, Ltd. terminated its offering of Units on September
19, 1996, at which time subscriptions for the maximum offering proceeds
of $30,000,000 had been received. Upon the termination of the offering
of Units of CNL Income Fund XVII, Ltd., CNL XVIII commenced its
offering of Units. Activities through September 30, 1996, were devoted
to organization of the partnership and operations had not begun.
Note 2: Cash generated from operations includes cash received from tenants,
less cash paid for expenses, plus interest received.
Note 3: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included in
the financial statements of CNL Income Fund XVII, Ltd.
Note 4: Distributions declared for the quarter ended December 31, 1995 are
reflected in the 1996 column due to the payment of such distributions
in January 1996. As a result of distributions being presented on a cash
basis, distributions declared and unpaid as of December 31, 1996 are
not included in the 1996 totals.
Note 5: Total cash distributions as a percentage of original $1,000 investment
are calculated based on actual distributions declared for the period.
(See Note 4 above)
Note 6: Certain data for columns representing less than 12 months have been
annualized.
C-29
<PAGE>
<TABLE>
<CAPTION>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
====================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
--------------------------------------------------
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP Total
====================================================================================================
<S> <C>
CNL Income Fund, Ltd.:
Burger King -
San Dimas, CA 02/05/87 06/12/92 $1,169,021 0 0 0 $1,169,021
Wendy's -
Fairfield, CA 07/01/87 10/03/94 1,018,490 0 0 0 1,018,490
CNL Income Fund II, Ltd.
Golden Corral -
Salisbury, NC 05/29/87 07/21/93 746,800 0 0 0 746,800
Pizza Hut -
Graham, TX 08/24/87 07/28/94 261,628 0 0 0 261,628
Golden Corral -
Medina, OH 11/18/87 11/30/94 626,582 0 0 0 626,582
CNL Income Fund IV, Ltd.
Taco Bell -
York, PA 03/22/89 04/27/94 712,000 0 0 0 712,000
Burger King -
Hastings, MI 08/12/88 12/15/95 518,650 0 0 0 518,650
Wendy's -
Tampa, FL 12/30/88 09/20/96 1,049,550 0 0 0 1,049,550
CNL Income Fund V, Ltd.:
Perkins -
Myrtle Beach, SC (2) 02/28/90 08/25/95 0 0 1,040,000 0 1,040,000
Ponderosa -
St. Cloud, FL (6) 06/01/89 10/24/96 73,713 0 1,057,299 0 1,131,012
CNL Income Fund VI, Ltd.:
Hardee's -
Batesville, AR 11/02/89 05/24/94 791,211 0 0 0 791,211
Hardee's -
Heber Springs, AR 02/13/90 05/24/94 638,270 0 0 0 638,270
Hardee's -
Little Canada, MN 11/28/89 06/29/95 899,503 0 0 0 899,503
Jack in the Box -
Dallas, TX 06/28/94 12/09/96 982,980 0 0 0 982,980
</TABLE>
C-30
<PAGE>
<TABLE>
<CAPTION>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
============================================================================
Cost of Properties
Including Closing and
Soft Costs
--------------------------------------------------
Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property financing soft costs (1) Total expenditures
============================================================================
<S> <C>
CNL Income Fund, Ltd.:
Burger King -
San Dimas, CA 0 $955,000 $955,000 $214,021
Wendy's -
Fairfield, CA 0 861,500 861,500 156,990
CNL Income Fund II, Ltd.
Golden Corral -
Salisbury, NC 0 642,800 642,800 104,000
Pizza Hut -
Graham, TX 0 205,500 205,500 56,128
Golden Corral -
Medina, OH 0 743,000 743,000 (116,418)
CNL Income Fund IV, Ltd.
Taco Bell -
York, PA 0 616,501 616,501 95,499
Burger King -
Hastings, MI 0 419,936 419,936 98,714
Wendy's -
Tampa, FL 0 828,350 828,350 221,200
CNL Income Fund V, Ltd.:
Perkins -
Myrtle Beach, SC (2) 0 986,418 986,418 53,582
Ponderosa -
St. Cloud, FL (6) 0 996,769 996,769 134,243
CNL Income Fund VI, Ltd.:
Hardee's -
Batesville, AR 0 605,500 605,500 185,711
Hardee's -
Heber Springs, AR 0 532,893 532,893 105,377
Hardee's -
Little Canada, MN 0 821,692 821,692 77,811
Jack in the Box -
Dallas, TX 0 964,437 964,437 18,543
</TABLE>
C-31
<PAGE>
<TABLE>
<CAPTION>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
=========================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
--------------------------------------------
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP Total
=========================================================================================================
<S> <C>
CNL Income Fund VII, Ltd.:
Taco Bell -
Kearns, UT 06/14/90 05/19/92 700,000 0 0 0 700,000
Hardee's -
St. Paul, MN 08/09/90 05/24/94 869,036 0 0 0 869,036
Perkins -
Florence, SC (3) 08/28/90 08/25/95 0 0 1,160,000 0 1,160,000
Church's Fried Chicken -
Jacksonville, FL (4) 04/30/90 12/01/95 0 0 240,000 0 240,000
Shoney's -
Colorado Springs, CO 07/03/90 07/24/96 1,044,909 0 0 0 1,044,909
Hardee's -
Hartland, MI 07/10/90 10/23/96 617,035 0 0 0 617,035
CNL Income Fund VIII, Ltd.:
Denny's -
Ocoee, FL 03/16/91 07/31/95 1,184,865 0 0 0 1,184,865
Church's Fried Chicken -
Jacksonville, FL (4) 09/28/90 12/01/95 0 0 240,000 0 240,000
Church's Fried Chicken -
Jacksonville, FL (5) 09/28/90 12/01/95 0 0 220,000 0 220,000
Ponderosa -
Orlando, FL (6) 12/17/90 10/24/96 0 0 1,353,775 0 1,353,775
CNL Income Fund X, Ltd.:
Shoney's -
Denver, CO 03/04/92 08/11/95 1,050,186 0 0 0 1,050,186
CNL Income Fund XI, Ltd.:
Burger King -
Philadelphia, PA 09/29/92 11/07/96 1,044,750 0 0 0 1,044,750
CNL Income Fund XII, Ltd.:
Golden Corral -
Houston, TX 12/28/92 04/10/96 1,640,000 0 0 0 1,640,000
CNL Income Fund XIII, Ltd.:
Checkers -
Houston, TX 03/31/94 04/24/95 286,411 0 0 0 286,411
Checkers -
Richmond, VA 03/31/94 11/22/96 550,000 0 0 0 550,000
C-32
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
==================================================================================
Cost of Properties
Including Closing and
Soft Costs
---------------------------
Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property financing soft costs (1) Total expenditures
==================================================================================
<S> <C>
CNL Income Fund VII, Ltd.:
Taco Bell -
Kearns, UT 0 560,202 560,202 139,798
Hardee's -
St. Paul, MN 0 742,333 742,333 126,703
Perkins -
Florence, SC (3) 0 1,084,905 1,084,905 75,095
Church's Fried Chicken -
Jacksonville, FL (4) 0 233,728 233,728 6,272
Shoney's -
Colorado Springs, CO 0 893,739 893,739 151,170
Hardee's -
Hartland, MI 0 841,642 841,642 (224,607)
CNL Income Fund VIII, Ltd.:
Denny's -
Ocoee, FL 0 949,199 949,199 235,666
Church's Fried Chicken -
Jacksonville, FL (4) 0 238,153 238,153 1,847
Church's Fried Chicken -
Jacksonville, FL (5) 0 215,845 215,845 4,155
Ponderosa -
Orlando, FL (6) 0 1,179,210 1,179,210 174,565
CNL Income Fund X, Ltd.:
Shoney's -
Denver, CO 0 987,679 987,679 62,507
CNL Income Fund XI, Ltd.:
Burger King -
Philadelphia, PA 0 818,850 818,850 225,900
CNL Income Fund XII, Ltd.:
Golden Corral -
Houston, TX 0 1,636,643 1,636,643 3,357
CNL Income Fund XIII, Ltd.:
Checkers -
Houston, TX 0 286,411 286,411 0
Checkers -
Richmond, VA 0 413,288 413,288 136,712
</TABLE>
C-33
<PAGE>
<TABLE>
<CAPTION>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
==========================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
---------------------------------------------
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP Total
==========================================================================================================
<S> <C>
CNL Income Fund XIV, Ltd.:
Checkers -
Knoxville, TN 03/31/94 03/01/95 339,031 0 0 0 339,031
Checkers -
Dallas, TX 03/31/94 03/01/95 356,981 0 0 0 356,981
TGI Friday's -
Woodridge, NJ (7) 01/01/95 09/27/96 1,753,533 0 0 0 1,753,533
Wendy's -
Woodridge, NJ (7) 11/28/94 09/27/96 747,058 0 0 0 747,058
CNL Income Fund XV, Ltd.:
Checkers -
Knoxville, TN 05/27/94 03/01/95 263,221 0 0 0 263,221
Checkers -
Leavenworth, KS 06/22/94 03/01/95 259,600 0 0 0 259,600
Checkers -
Knoxville, TN 07/08/94 03/01/95 288,885 0 0 0 288,885
TGI Friday's -
Woodridge, NJ (7) 01/01/95 09/27/96 1,753,533 0 0 0 1,753,533
Wendy's -
Woodridge, NJ (7) 11/28/94 09/27/96 747,058 0 0 0 747,058
CNL Income Fund XVI, Ltd.:
Long John Silver's -
Appleton, WI 06/24/95 04/24/96 775,000 0 0 0 775,000
</TABLE>
<TABLE>
<CAPTION>
==========================================================================================================
Cost of Properties
Including Closing and
Soft Costs
------------------------------
Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property financing soft costs (1) Total expenditures
===================================================================================
<S> <C>
CNL Income Fund XIV, Ltd.:
Checkers -
Knoxville, TN 0 339,031 339,031 0
Checkers -
Dallas, TX 0 356,981 356,981 0
TGI Friday's -
Woodridge, NJ (7) 0 1,510,245 1,510,245 243,288
Wendy's -
Woodridge, NJ (7) 0 672,746 672,746 74,312
CNL Income Fund XV, Ltd.:
Checkers -
Knoxville, TN 0 263,221 263,221 0
Checkers -
Leavenworth, KS 0 259,600 259,600 0
Checkers -
Knoxville, TN 0 288,885 288,885 0
TGI Friday's -
Woodridge, NJ (7) 0 1,510,245 1,510,245 243,288
Wendy's -
Woodridge, NJ (7) 0 672,746 672,746 74,312
CNL Income Fund XVI, Ltd.:
Long John Silver's -
Appleton, WI 0 613,838 613,838 161,162
</TABLE>
(1) Amounts shown do not include pro rata share of original offering costs or
acquisition fees.
(2) Amount shown is face value and does not represent discounted current value.
The mortgage note bears interest at a rate of 10.25% per annum and provides
for a balloon payment of $1,006,004 in July 2000.
(3) Amount shown is face value and does not represent discounted current value.
The mortgage note bears interest at a rate of 10.25% per annum and provides
for a balloon payment of $1,106,657 in July 2000.
(4) Amounts shown are face value and do not represent discounted current value.
Each mortgage note bears interest at a rate of 10.00% per annum and
provides for a balloon payment of $218,252 in December 2005.
(5) Amount shown is face value and does not represent discounted current value.
The mortgage note bears interest at a rate of 10.00% per annum and provides
for a balloon payment of $200,324 in December 2005.
(6) Amounts shown are face value and do not represent discounted current value.
Each mortgage note bears interest at a rate of 10.75% per annum and
provides for 12 monthly payments of interest only and thereafter, 168 equal
monthly payments of principal and interest.
(7) CNL Income Fund XIV, Ltd. and CNL Income Fund XV, Ltd. each owned a 50
percent interest in Wood-Ridge Real Estate Joint Venture, which owned two
properties. The amounts presented for each of CNL Income Fund XIV, Ltd.
and CNL Income Fund XV, Ltd. represent each partnership's 50 percent
interest in the properties owned by Wood-Ridge Real Estate Joint Venture.
C-34
EXHIBIT D
Subscription Agreement
<PAGE>
CNL AMERICAN REALTY FUND, INC.
UP TO 16,500,000 SHARES - $10.00 PER SHARE
MINIMUM PURCHASE - $250 SHARES ($2,500)
100 SHARES ($1,000) FOR IRAs, KEOGH, AND QUALIFIED PLANS
(MINIMUM PURCHASE MAY BE HIGHER IN CERTAIN STATES)
PLEASE READ CAREFULLY this Subscription Agreement and the Notices (on the back
of the Agreement) before completing this document. TO SUBSCRIBE FOR SHARES,
complete and sign, where appropriate, and deliver the Subscription Agreement,
along with your check, to your Financial Advisor. YOUR CHECK SHOULD BE MADE
PAYABLE TO:
SOUTHTRUST ASSET MANAGEMENT COMPANY OF FLORIDA, N.A.
ALL ITEMS ON THE SUBSCRIPTION AGREEMENT MUST BE COMPLETED IN ORDER FOR YOUR
SUBSCRIPTION TO BE PROCESSED.
OVERNIGHT PACKAGES: REGULAR MAIL PACKAGES:
Attn: Investor Services Attn: Investor Services
400 E. South Street, Suite 500 Post Office Box 1033
Orlando, Florida 32801 Orlando, Florida 32802-1033
For Telephone Inquiries:
CNL SECURITIES CORP.
(407) 422-1574 OR (800) 522-3863
<PAGE>
<TABLE>
<CAPTION>
CNL AMERICAN REALTY FUND, INC.
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
1.-------- INVESTMENT -------------------------------------------------------------------------------------------------------------
THIS SUBSCRIPTION IS IN THE AMOUNT OF $__ FOR THE PURCHASE OF
___ SHARES ($10.00 PER SHARE). THE MINIMUM INITIAL SUBSCRIPTION IS
250 SHARES ($2,500); 100 SHARES ($1,000) FOR IRA, KEOGH AND QUALIFIED
PLAN ACCOUNTS (EXCEPT IN STATES WITH HIGHER MINIMUM PURCHASE
REQUIREMENTS). [ ADDITIONAL PURCHASE ] REINVESTMENT PLAN - Investor
elects to participate in Plan (SEE PROSPECTUS FOR DETAILS.)
2. -------- SUBSCRIBER INFORMATION ------------------------------------------------------------------------------------------------
Name (1st) _________________________________________________________ Date of Birth (MM/DD/YY) _____________________________________
Name (2nd) _________________________________________________________ Date of Birth (MM/DD/YY) _____________________________________
Address ________________________________________________City _____________________ State ________________ Zip Code _______________
Custodian Account No. _________________________________________________ Daytime Phone # ( ) ________________________
[ ] U.S. Citizen [ ] Resident Alien [ ] Foreign Resident Country _______________________________________________________
[ ] Check if Subscriber is a U.S. citizen residing outside the U.S. Income Tax Filing State _______________________________________
ALL SUBSCRIBERS: State of Residence of Subscriber/Plan Beneficiary (required) _____________________________________________________
TAXPAYER IDENTIFICATION NUMBER: For most individual taxpayers, it is their Social Security number. Note: If the purchase is in
more than one name, the number should be that of the first person listed. For IRAs, Keoghs and qualified plans, enter BOTH the
Social Security number and the taxpayer identification number.
TAXPAYER ID# ___________-_____________________ SOCIAL SECURITY #__________-_______-_____________
3. -------- INVESTOR MAILING ADDRESS ----------------------------------------------------------------------------------------------
For the Subscriber of an IRA, Keogh, or qualified plan to receive informational mailings, please complete if different from address
in Section 2.
Name
____________________________________________________________________________________________________________________________________
Address
____________________________________________________________________________________________________________________________________
City ________________________________________________ State ___________________________ Zip Code __________________________
Daytime Phone #(_____) __________________________
4. -------- DIRECT DEPOSIT ADDRESS -------------------------------------------------------------------------------------------------
Investors requesting direct deposit of distribution checks to another financial
institution or mutual fund, please complete below. In no event will the Company
or Affiliates be responsible for any adverse consequences of direct deposit.
Company ____________________________________________________________________________________________________________________________
Address ____________________________________________________________________________________________________________________________
City ________________________________________________ State ___________________________ Zip Code ________________________________
Account No. _________________________________________ Daytime Phone #(_____) ______________________________________________________
5. -------- FORM OF OWNERSHIP -----------------------------------------------------------------------------------------------------
(Select only one)
[ ] INDIVIDUAL-one signature required (1) [ ] IRREVOCABLE TRUST-trustee signature required (21)
<PAGE>
[ ] HUSBAND AND WIFE, AS COMMUNITY PROPERTY- two signatures required (15)
[ ] JOINT TENANTS WITH RIGHT OF SURVIVORSHIP-all parties must sign (8)
[ ] A MARRIED PERSON/SEPARATE PROPERTY-one signature required (34)
[ ] TENANTS IN COMMON-two signatures required (3)
[ ] KEOGH (H.R.10)-trustee signature required (24)
[ ] TENANTS BY THE ENTIRETY-two signatures required (31)
[ ] CUSTODIAN-custodian signature required (33)
[ ] CORPORATIONS
[ ] S-Corporation (22)
[ ] C-Corporation (5)
[ ] IRA-custodian signature required (23)
[ ] SEP-custodian signature required (38)
[ ] TAXABLE TRUST (7)
[ ] TAX-EXEMPT TRUST (28)
[ ] PARTNERSHIP (3)
[ ] NON-PROFIT ORGANIZATION (12)
[ ] PENSION PLAN-trustee signature(s) required (19)
[ ] PROFIT SHARING PLAN-trustee signature(s) required (27)
[ ] CUSTODIAN UGMA-STATE of -custodian signature required (16)
------------------
[ ] CUSTODIAN UTMA-STATE of -custodian signature required (42)
------------------
[ ] ESTATE-Personal Representative signature required (13)
[ ] REVOCABLE GRANTOR TRUST-grantor signature required (25)
SUBSCRIBER elects to have the Shares covered by this subscription placed in
a new sponsored IRA account offered by Franklin Bank as custodian. IRA
documents will be sent to subscriber upon receipt of subscription documents.
There is no annual fee involved for CNL American Realty Fund, Inc. investments.
6. -------- SUBSCRIBER SIGNATURES -------------------------------------------------------------------------------------------------
If the Subscriber is executing the Subscriber Signature Page, the Subscriber
understands that, BY EXECUTING THIS AGREEMENT A SUBSCRIBER DOES NOT WAIVE ANY
RIGHTS HE MAY HAVE UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE
ACT OF 1934 OR UNDER ANY STATE SECURITIES LAW:
X X
---------------------------------------- ------------------ ----------------------------------------- -----------------------
SIGNATURE OF 1ST SUBSCRIBER DATE SIGNATURE OF 2ND SUBSCRIBER DATE
7. -------- BROKER/DEALER INFORMATION ---------------------------------------------------------------------------------------------
Broker/Dealer NASD Firm Name
____________________________________________________________________________________________________________________________________
Financial Advisor
____________________________________________________________________________________________________________________________________
Branch Mail Address
____________________________________________________________________________________________________________________________________
City ________________________________________State ____________________ Zip Code __________ [ ] Please check if new address
Phone #(_____) __________________________ Fax #(________________) ________________________ [ ] Sold CNL before
Shipping Address _____________________________________________ City ___________________ State ____________ Zip Code _____________
[ ] TELEPHONIC SUBSCRIPTIONS (check here): If the Registered Representative and
Branch Manager are executing the signature page on behalf of the Subscriber,
both must sign below. Registered Representatives and Branch Managers may not
sign on behalf of residents of Florida, Iowa, Maine, Massachusetts,
Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Mexico, North
Carolina, Ohio, Oregon, South Dakota, Tennessee or Washington. [NOTE: Not to
be executed until Subscriber(s) has (have) acknowledged receipt of final
prospectus.] Telephonic subscriptions may not be completed for IRA accounts.
[ ] REGISTERED INVESTMENT ADVISOR (check here): If an owner or principal or any
member of the RIA firm is an NASD licensed Registered Representative
affiliated with a Broker/Dealer, the transaction should be conducted through
that Broker/Dealer, not through the RIA.
PLEASE READ CAREFULLY THE REVERSE SIDE OF THIS SIGNATURE PAGE AND SUBSCRIPTION AGREEMENT BEFORE COMPLETING
X
---------------------------------------------------------- -------------------- ----------------------------------------
PRINCIPAL, BRANCH MANAGER OR OTHER AUTHORIZED SIGNATURE DATE PRINT OR TYPE NAME OF PERSON SIGNING
X
---------------------------------------------------------- -------------------- ----------------------------------------
REGISTERED REPRESENTATIVE/INVESTMENT ADVISOR SIGNATURE Date Print or Type Name of Person Signing
<PAGE>
Make check payable to : SOUTHTRUST ASSET MANAGEMENT COMPANY OF FLORIDA, N.A., ESCROW AGENT
Please remit check and For overnight delivery, please send to: FOR OFFICE USE ONLY
subscription document to:
CNL SECURITIES CORP. CNL SECURITIES CORP. Sub. # _______________________________
Attn: Investor Services Attn: Investor Services
P. O. Box 1033 400 E. South Street, Suite 500 Admit Date ____________________________
Orlando, FL 32802-1033 Orlando, FL 32801
(800) 522-3863 (407) 422-1574 Amount ________________________________
(800) 522-3863
Region ________________________________
</TABLE>
NOTICE TO ALL INVESTORS:
(a) The purchase of Shares by an IRA, Keogh, or other tax-qualified plan
does not, by itself, create the plan.
(b) The Company, in its sole and absolute discretion, may accept or reject
the Subscriber's subscription which if rejected will be promptly returned to the
Subscriber, without interest. Non-U.S. stockholders (as defined in the
Prospectus) will be admitted as stockholders with the approval of the Advisor.
(c) THE SALE OF SHARES SUBSCRIBED FOR HEREUNDER MAY NOT BE COMPLETED UNTIL
AT LEAST FIVE BUSINESS DAYS AFTER THE DATE THE SUBSCRIBER RECEIVES A FINAL
PROSPECTUS. EXCEPT AS PROVIDED IN THIS NOTICE, THE NOTICE BELOW, AND IN THE
PROSPECTUS, THE SUBSCRIBER WILL NOT BE ENTITLED TO REVOKE OR WITHDRAW HIS
SUBSCRIPTION.
NOTICE TO CALIFORNIA AND FLORIDA RESIDENTS: California and Florida investors
will have the right to withdraw their subscription funds if subscriptions for at
least $2,500,000 have not been accepted by the Company within six months after
the initial offer of Shares of the Company pursuant to the Prospectus and the
Company elects at that time to extend the offering beyond such date. The Company
will promptly notify California and Florida investors if the Company so elects
to extend the offering, and such investors must exercise their right to withdraw
within ten (10) days of such notice by delivering written notice to the Company
of their intention to exercise such right. The subscription funds of withdrawing
California and Florida investors will be promptly returned along with such
investor's pro rata share of interest earned thereon net of any escrow fees
calculated as set forth in the Prospectus and the Escrow Agreement.
NOTICE TO CALIFORNIA RESIDENTS: IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER
OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION
THEREFORE, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS
OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
California investors who do not execute the Subscription Agreement will receive
a confirmation of investment accompanied by a second copy of the final
Prospectus, and will have the opportunity to rescind the investment within ten
(10) days from the date of confirmation.
NOTICE TO NORTH CAROLINA RESIDENTS: By signing this Subscription Agreement,
North Carolina investors acknowledge receipt of the Prospectus and represent
that they meet the suitability standards for North Carolina investors listed in
the Prospectus.
<PAGE>
BROKER/DEALER AND FINANCIAL ADVISOR:
By signing this subscription agreement, the signers certify that they recognize
and have complied with their obligations under the NASD's Conduct Rules, and
hereby further certify as follows: (i) a copy of the Prospectus, including the
Subscription Agreement attached thereto as Exhibit C, as amended and/or
supplemented to date, has been delivered to the Subscriber; (ii) they have
discussed such investor's prospective purchase of Shares with such investor and
have advised such investor of all pertinent facts with regard to the liquidity,
valuation, and marketability of the Shares; and (iii) they have reasonable
grounds to believe that the purchase of Shares is a suitable investment for such
investor, that such investor meets the suitability standards applicable to such
investor set forth in the Prospectus and related supplements, if any, that such
investor is legally capable of purchasing such Shares and will not be in
violation of any laws for having engaged in such purchase, and that such
investor is in a financial position to enable such investor to realize the
benefits of such an investment and to suffer any loss that may occur with
respect thereto and will maintain documentation on which the determination was
based for a period of not less than six years; (iv) under penalties of perjury,
(a) the information provided in this Subscription Agreement to the best of our
knowledge and belief is true, correct, and complete, including, but not limited
to, the number shown above as the Subscriber's taxpayer identification number;
(b) to the best of our knowledge and belief, the Subscriber is not subject to
backup withholding either because the Subscriber has not been notified that the
Subscriber is subject to backup withholding as result of failure to report all
interest or dividends or to the Internal Revenue Service has notified the
subscriber that the Subscriber is no longer subject to backup withholding under
Section 3406(a)(1)(C) of the Internal Revenue Code of 1986, as amended; and (c)
to the best of our knowledge and belief, the Subscriber is not a nonresident
alien, foreign corporation, foreign trust, or foreign estate for U.S. tax
purposes, and we hereby agree to notify the Company if it comes to the attention
of either of us that the Subscriber becomes such a person within sixty (60) days
of any event giving rise to the Subscriber becoming such a person.
<PAGE>
FRANKLIN BANK, N.A.
- --------------------------------------------------------------------------------
FRANKLIN BANK, N.A., INDIVIDUAL RETIREMENT ACCOUNT APPLICATION
ACCOUNTHOLDER INFORMATION: NAME _______________________________________________
DISCLAIMER:
Franklin Bank, N.A. is a national bank, not associated with CNL Group,
Inc. or any CNL entity. Franklin Bank, N.A. is a custodian for IRAs and will
act in a custodial capacity for all beneficial owners of IRAs. CNL has no
affiliation with Franklin Bank, N.A.
It is not reasonable to project the growth of your IRA investments
include assets other than bank time deposits or savings accounts. Therefore,
your final account balance will depend upon many factors - the amount of your
contributions, the amount of time the funds are invested, the earnings and/or
losses from the investments, expenses incurred such as brokerage commissions and
trustee's fees and the overall performance of your investments. We expressly
state that the growth in the value of your IRA cannot be guaranteed or
projected.
SIGNATURES IMPORTANT: Please read before signing.
I understand the eligibility requirements for the type of IRA
deposit I am making and I state that I do qualify to make the
deposit. I understand that the terms and conditions which apply
to the Individual Retirement Account are contained in this
Application and Form 5305A (which will be provided within 10
days of our receipt of this application). I agree to be bound by
those terms and conditions. I understand that I will not be
required to pay an annual fee as long as all investments in this
IRA are sponsored by a CNL entity. Within seven (7) days from
the date I establish the Individual Retirement Account I may
revoke it without penalty by mailing or delivering a written
notice to the Custodian.
I assume complete responsibility for:
1. Determining that I am eligible for an IRA each year I make a
contribution.
2. Insuring that all contributions I make are within the limits
set forth by the tax laws.
3. The tax consequences of any contribution (including rollover
contributions) and distributions.
Signature _______________________________________________
Accountholder
------------------------------------- -------------------
Authorized Signature Trustee Date
DESIGNATION OF
BENEFICIARY(IES): I designate the individual(s) named below as my
primary and contingent Beneficiary(ies) of
the IRA. I revoke all prior IRA Beneficiary
designations, if any, made by me. I understand that I
may change or add Beneficiaries at any time by
completing and delivering the proper form to the
Custodian. (If you wish to name more than one
Beneficiary, attach a list of each Beneficiary's name,
social security number, relationship to you and
percentage share in this IRA.)
If any primary or contingent Beneficiary dies before
me, his or her interest and the interest of his or
her heirs shall terminate completely, and the
percentage share of any remaining Beneficiary(ies)
shall be increased on a pro rata basis.
<TABLE>
<CAPTION>
<S> <C>
Primary The following individual(s) shall be my Primary Beneficiary(ies):
Beneficiary(ies)
Name______________________________________________________ Social Security #___________________
Address____________________________________________________ Date of Birth__________ Share______
___________________________________________________________ Relationship________________________
Contingent If none of the Primary Beneficiaries survive me, the following individual(s) shall be my Beneficiary(ies):
Beneficiary(ies)
Name______________________________________________________ Social Security #___________________
Address____________________________________________________ Date of Birth__________ Share______
___________________________________________________________ Relationship________________________
</TABLE>
<PAGE>
Spousal Consent
I am the spouse of IRA accountholder named above. I
agree to my spouse's naming of a primary Beneficiary
other than myself. I acknowledge that I have
received a fair and reasonable disclosure of my
spouse's property and financial obligation. I also
acknowledge that I shall have no claim whatsoever
against the Custodian for any payments to my spouse's
Beneficiary(ies).
------------------------------------- ------------
Spouse's Signature Date
- --------------------------------------------------------------------------------
Custodial Services P.O. Box 7090 Troy, MI 48007-7090
1-800-344-0667
<PAGE>
INVESTMENT OPTIONS:
[ ] I would like to receive information regarding mutual fund investments.
[ ] I would like to receive information regarding money market accounts.
Note: Franklin Bank, N.A. may consider other investment options for your IRA.
Please provide the following information on your options.
Fund Name
-----------------------------------------------------------------------
Sponsor Name
--------------------------------------------------------------------
Address
-------------------------------------------------------------------------
Account No. Telephone #
-------------------------------------- -----------------
Registered Representative information:
Registered Representative's Name
------------------------------------------------
Company
-------------------------------------------------------------------------
Address
-------------------------------------------------------------------------
Telephone #
---------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Amount
------
SEC registration fee $56,897
NASD filing fee 17,000
Accounting fees and expenses 100,000*
Escrow Agent's Fees 5,000*
Sales and advertising expenses 3,000,000*
Legal fees and expenses 250,000*
Blue Sky fees and expenses 300,000*
Printing expenses 200,000*
Miscellaneous 571,103*
Total 4,500,000*
---------------------
* ESTIMATED THROUGH COMPLETION OF THE OFFERING, ASSUMING SALE OF 15,000,000
SHARES.
ITEM 31. SALES TO SPECIAL PARTIES.
The registrant was capitalized through the purchase by the Advisor of
20,000 Shares for aggregate consideration of $200,000.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES.
See response to Item 31. The offer and sale of the shares is claimed to be
exempt from the registration provisions of the Securities Act of 1933, as
amended, by virtue of Section 4(2) thereunder.
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to Maryland corporate law and the Company's Articles of
Incorporation, the Company is required to indemnify and hold harmless a present
or former Director, officer, Advisor, or Affiliate and may indemnify and hold
harmless a present or former employee or agent of the Company (the "Indemnitee")
against any or all losses or liabilities reasonably incurred by the Indemnitee
in connection with or by reason of any act or omission performed or omitted to
be performed on behalf of the Company while a Director, officer, Advisor,
Affiliate, employee, or agent and in such capacity, provided, that the
Indemnitee has determined, in good faith, that the act or omission which caused
the loss or liability was in the best interests of the Company. The Company will
not indemnify or hold harmless the Indemnitee if: (i) the loss or liability was
the result of negligence or misconduct, or if the Indemnitee is an Independent
Director, the loss or liability was the result of gross negligence or willful
misconduct, (ii) the act or omission was material to the loss or liability and
was committed in bad faith or was the result of active or deliberate dishonesty,
(iii) the Indemnitee actually received an improper personal benefit in money,
property, or services, (iv) in the case of any criminal proceeding, the
Indemnitee had reasonable cause to believe that the act or omission was
unlawful, or (v) in a proceeding by or in the right of the Company, the
Indemnitee shall have been adjudged to be liable to the Company. In addition,
the Company will not provide indemnification for any loss or liability arising
from an alleged violation of federal or state securities laws unless one or
II-1
<PAGE>
more of the following conditions are met: (i) there has been a successful
adjudication on the merits of each count involving alleged securities law
violations as to the particular Indemnitee; (ii) such claims have been dismissed
with prejudice on the merits by a court of competent jurisdiction as to the
particular Indemnitee; or (iii) a court of competent jurisdiction approves a
settlement of the claims against a particular Indemnitee and finds that
indemnification of the settlement and the related costs should be made, and the
court considering the request for indemnification has been advised of the
position of the Securities and Exchange Commission and of the published position
of any state securities regulatory authority in which securities of the Company
were offered or sold as to indemnification for violations of securities laws.
Pursuant to its Articles of Incorporation, the Company is required to pay or
reimburse reasonable expenses incurred by a present or former Director, officer,
Advisor or Affiliate and may pay or reimburse reasonable expenses incurred by
any other Indemnitee in advance of final disposition of a proceeding if the
following are satisfied: (i) the Indemnitee was made a party to the proceeding
by reasons of his or her service as a Director, officer, Advisor, Affiliate,
employee or agent of the Company, (ii) the Indemnitee provides the Company with
written affirmation of his or her good faith belief that he or she has met the
standard of conduct necessary for indemnification by the Company as authorized
by the Articles of Incorporation, (iii) the Indemnitee provides the Company with
a written agreement to repay the amount paid or reimbursed by the Company,
together with the applicable legal rate of interest thereon, if it is ultimately
determined that the Indemnitee did not comply with the requisite standard of
conduct, and (iv) the legal proceeding was initiated by a third party who is not
a stockholder or, if by a stockholder of the Company acting in his or her
capacity as such, a court of competent jurisdiction approves such advancement.
The Company's Articles of Incorporation further provide that any
indemnification, payment, or reimbursement of the expenses permitted by the
Articles of Incorporation will be furnished in accordance with the procedures in
Section 2-418 of the Maryland General Corporation Law.
Any indemnification may be paid only out of Net Assets of the Company, and
no portion may be recoverable from the stockholders.
The Company will enter into indemnification agreements with each of the
Company's officers and Directors. The indemnification agreements will require,
among other things, that the Company indemnify its officers and Directors to the
fullest extent permitted by law, and advance to the officers and Directors all
related expenses, subject to reimbursement if it is subsequently determined that
indemnification is not permitted. In accordance with this agreement, the Company
must indemnify and advance all expenses incurred by officers and Directors
seeking to enforce their rights under the indemnification agreements. The
Company must also cover officers and Directors under the Company's directors'
and officers' liability insurance.
ITEM 34. TREATMENT OF PROCEEDS FROM SECURITIES BEING REGISTERED.
Not applicable.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS.
Financial Statements:
The following financial statements are included in the Prospectus.
(1) Report of Independent Accountants for CNL American Realty Fund,
Inc.
(2) Balance Sheets of CNL American Realty Fund, Inc. at March 31, 1997
(unaudited) and December 31, 1996
(3) Statements of Stockholder's Equity of CNL American Realty Fund,
Inc. for the quarter ended March 31, 1997 (unaudited) and the
period June 12, 1996 (date of inception) through December 31, 1996
II-2
<PAGE>
(4) Notes to Financial Statements of CNL American Realty Fund, Inc.
All Schedules have been omitted as the required information is
inapplicable or is presented in the financial statements or related notes.
(b) Exhibits:
1.1 Form of Managing Dealer Agreement (PREVIOUSLY FILED.)
1.2 Form of Participating Broker Agreement (FILED HEREWITH.)
3.1 CNL American Realty Fund, Inc. Articles of Incorporation
(PREVIOUSLY FILED.)
3.2 Form of CNL American Realty Fund, Inc. Amended and Restated
Articles of Incorporation (FILED HEREWITH.)
3.3 Form of CNL American Realty Fund, Inc. Bylaws (PREVIOUSLY FILED.)
4.1 CNL American Realty Fund, Inc. Articles of Incorporation
(PREVIOUSLY FILED AS EXHIBIT 3.1 AND INCORPORATED HEREIN BY
REFERENCE.)
4.2 Form of CNL American Realty Fund, Inc. Amended and Restated
Articles of Incorporation (PREVIOUSLY FILED AS EXHIBIT 3.2 AND
INCORPORATED HEREIN BY REFERENCE.)
4.3 Form of CNL American Realty Fund, Inc. Bylaws (PREVIOUSLY FILED AS
EXHIBIT 3.3 AND INCORPORATED HEREIN BY REFERENCE.)
4.4 Form of Reinvestment Plan (INCLUDED IN THE PROSPECTUS AS EXHIBIT A
AND INCORPORATED HEREIN BY REFERENCE.)
5 Opinion of Shaw, Pittman, Potts & Trowbridge as to the legality of
the securities being registered by CNL American Realty Fund, Inc.
(FILED HEREWITH.)
8 Opinion of Shaw, Pittman, Potts & Trowbridge regarding certain
material tax issues relating to CNL American Realty Fund, Inc.
(FILED HEREWITH.)
10.1 Form of Escrow Agreement between CNL American Realty Fund, Inc.
and SouthTrust Asset Management Company of Florida, N.A.
(PREVIOUSLY FILED.)
10.2 Form of Advisory Agreement (PREVIOUSLY FILED.)
10.3 Form of Joint Venture Agreement (PREVIOUSLY FILED.)
10.4 Form of Indemnification and Put Agreement (PREVIOUSLY FILED.)
10.5 Form of Unconditional Guaranty of Payment and Performance
(PREVIOUSLY FILED.)
10.6 Form of Purchase Agreement (PREVIOUSLY FILED.)
II-3
<PAGE>
10.7 Form of Lease Agreement including Rent Addendum, Construction
Addendum and Memorandum of Lease (PREVIOUSLY FILED.)
10.8 Form of Reinvestment Plan (INCLUDED IN THE PROSPECTUS AS EXHIBIT A
AND INCORPORATED HEREIN BY REFERENCE.)
23.1 Consent of Coopers & Lybrand L.L.P., Certified Public Accountants,
dated June 26, 1997 (FILED HEREWITH.)
23.2 Consent of Shaw, Pittman, Potts & Trowbridge (CONTAINED IN ITS
OPINION FILED HEREWITH AS EXHIBIT 5 AND INCORPORATED HEREIN BY
REFERENCE.)
*27.1 Financial Data Schedule (PREVIOUSLY FILED.)
99.1 Consents of Certain Persons Named as Directors (PREVIOUSLY FILED.)
- -------------------
* INCLUDED IN ELECTRONIC FILING VIA EDGAR ONLY.
ITEM 36. UNDERTAKINGS.
The registrant undertakes (a) to file any prospectus required by Section
10(a)(3) as post-effective amendments to this registration statement, (b) during
any period in which offers or sales are being made, to file a post-effective
amendment to this registration statement (i) 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, and (ii) 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, (c) that, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment may 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, (d) 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, and (e) 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.
The registrant undertakes to send to each stockholder, at least on an
annual basis, a detailed statement of any transactions with the 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.
The registrant undertakes to provide to the stockholders the financial
statements required by Form 10-K for the first full fiscal year of operations.
The registrant undertakes to file a sticker supplement pursuant to Rule
424(b)(3) under the Act during the distribution period describing each property
not identified in the Prospectus at such time as there arises a reasonable
probability that such property 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 stockholders. Each sticker supplement will disclose all compensation
and fees received by the Advisor and its Affiliates in connection with any such
acquisition. The post-effective amendment will include audited financial
statements meeting the requirements of Rule 3-14 of Registration S-X only for
properties acquired during the distribution period.
II-4
<PAGE>
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 stockholders at least once each quarter after
the distribution period of the offering has ended.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, 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 such 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 a 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.
The undersigned registrant hereby undertakes that (a) 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(h) under the Securities Act
shall be deemed to be part of this registration statement as of the time it was
declared effective, and (b) 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.
II-5
<PAGE>
TABLE VI
ACQUISITION OF PROPERTIES BY PROGRAMS
Table VI presents information concerning the acquisition of real
properties by public real estate limited partnerships and the unlisted public
REIT sponsored by Affiliates of the Company in the nine years ended December 31,
1996, which were formed to invest in restaurant properties leases on a
triple-net basis to operators of national and regional fast-food and
family-style restaurant chains similar to those in which the Company may invest.
No Prior Public Programs sponsored by the Company's Affiliates have invested in
hotel properties leased on a triplenet basis to operators of national and
regional limited-service, extended-stay and full-service hotel chains. The
information includes the gross leasable space or number of units and total
square feet of units, dates of purchase, locations, cash down payment and
contract purchase price plus acquisition fee. This information is intended to
assist the prospective investor in evaluating the terms involved in acquisitions
by such prior programs.
II-6
<PAGE>
TABLE VI
ACQUISITIONS OF PROPERTIES BY PROGRAMS
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund, Fund II, Fund III, Fund IV,
Ltd. Ltd. Ltd. Ltd.
(Note 2) (Note 3) (Note 4) (Note 5)
-------------- -------------- -------------- --------------
<S> <C>
AL,DC,FL,GA,
AL,AZ,CO,FL, AZ,CA,FL,GA, IL,IN,KS,MA,
AL,AZ,CA,FL, GA,IL,IN,LA, IA,IL,IN,KS, MD,MI,MS,NC,
GA,LA,MD,OK, MI,MN,MO,NC, KY,MD,MI,MN, OH,PA,TN,TX,
Locations TX,VA NM,OH,TX,WY MO,NE,OK,TX VA
Type of property Restaurants Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 20 units 43 units 32 units 44 units
total square feet
of units 67,645 s/f 149,829 s/f 131,992 s/f 159,196 s/f
Dates of purchase 6/17/86 - 2/11/87- 10/04/87- 6/24/88-
12/17/87 12/08/94 6/30/88 12/31/96
Cash down payment (Note 1) $12,296,264 $23,182,624 $19,637,008 $27,611,441
Contract purchase price
plus acquisition fee $12,222,062 $23,022,783 $19,512,548 $27,506,106
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 74,202 159,841 124,460 105,335
----------- ----------- ----------- -----------
Total acquisition cost
(Note 1) $12,296,264 $23,182,624 $19,637,008 $27,611,441
=========== =========== =========== ===========
</TABLE>
Note 1: This amount was derived from capital contributions from partners and
net sales proceeds reinvested in other properties.
Note 2: The partnership owns a 50% interest in three separate joint ventures
which each own a restaurant property.
Note 3: The partnership owns a 49%, 50% and 64% interest in three separate
joint ventures. Each joint venture owns one restaurant property. In
addition, the partnership owns a 33.87% interest in one restaurant
property held as tenants-in-common with an affiliate.
Note 4: The partnership owns a 73.4% and 69.07% interest in two separate
joint ventures. Each joint venture owns one restaurant property.
Note 5: The partnership owns a 51%, 26.6%, 57%, 96.1% and 68.87% interest in
five separate joint ventures. Each joint venture owns one restaurant
property. In addition, the partnership owns a 53.68% interest in one
restaurant property held as tenants-in-common with affiliates.
II-7
<PAGE>
TABLE VI - ACQUISITIONS OF PROPERTIES BY PROGRAMS (continued)
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund V, Fund VI, Fund VII, Fund VIII,
Ltd. Ltd. Ltd. Ltd.
(Note 6) (Note 7) (Note 8) (Note 9)
-------------- -------------- -------------- --------------
<S> <C>
AR,AZ,FL,IN,
FL,GA,IL,IN, MA,MI,MN,NC, AZ,CO,FL,GA,
MI,NH,NY,OH, NE,NM,NY,OH, IN,LA,MI,MN, AZ,FL,IN,LA,
SC,TN,TX,UT, OK,PA,TN,TX, OH,SC,TN,TX, MI,MN,NC,NY,
Locations WA VA,WY UT,WA OH,TN,TX,VA
Type of property Restaurants Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 30 units 46 units 46 units 40 units
total square feet
of units 117,652 s/f 173,841 s/f 164,225 s/f 179,705 s/f
Dates of purchase 2/06/89- 7/13/89- 3/30/90- 9/13/90-
1/05/90 1/24/96 10/30/96 5/31/96
Cash down payment (Note 1) $22,113,522 $32,679,181 $28,352,368 $31,985,071
Contract purchase price
plus acquisition fee $21,706,859 $32,146,520 $27,679,595 $31,450,507
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 406,663 532,661 672,773 534,564
----------- ----------- ----------- -----------
Total acquisition cost
(Note 1) $22,113,522 $32,679,181 $28,352,368 $31,985,071
=========== =========== =========== ===========
</TABLE>
Note 6: The partnership owns a 43%, 49% and 66.5% interest in three separate
joint ventures. Each joint venture owns one restaurant property.
Note 7: The partnership owns a 3.9%, 14.5%, 36% and a 66.14% interest in
four separate joint ventures. Each joint venture owns one restaurant
property. In addition, the partnership owns a 51.67% and a 17.93%
interest in two restaurant properties held separately as
tenants-in-common with affiliates.
Note 8: The partnership owns a 51%, 83.3%, 4.79% and a 18% interest in four
separate joint ventures. Three of the joint ventures each own one
restaurant property and the other joint venture owns six restaurant
properties. In addition, the partnership owns a 48.33% interest in one
restaurant property held as tenants-in-common with an affiliate.
Note 9: The partnership owns a 85.5%, 87.68%, 36.8% and a 12% interest in
four separate joint ventures. Three of the joint ventures each own one
restaurant property and the other joint venture owns six restaurant
properties.
II-8
<PAGE>
TABLE VI - ACQUISITIONS OF PROPERTIES BY PROGRAMS (continued)
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund IX, Fund X, Fund XI, Fund XII,
Ltd. Ltd. Ltd. Ltd.
(Note 10) (Note 11) (Note 12) (Note 13)
-------------- -------------- -------------- --------------
<S> <C>
AL,AZ,CA,CO,
AL,CA,CO,FL, CT,FL,KS,LA,
AL,FL,GA,IL, ID,IL,LA,MI, MA,MI,MS,NC, AL,AZ,CA,FL,
IN,LA,MI,MN, MO,MT,NC,NH, NH,NM,OH,OK, GA,LA,MO,MS,
MS,NC,NH,NY, NM,NY,OH,PA, PA,SC,TX,VA, NC,NM,OH,SC,
Locations OH,SC,TN,TX SC,TN,TX WA TN,TX,WA
Type of property Restaurants Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 42 units 49 units 39 units 49 units
total square feet
of units 180,843 s/f 203,466 s/f 168,418 s/f 206,865 s/f
Dates of purchase 5/31/91- 10/01/91- 5/18/92- 11/20/92-
12/12/96 1/24/96 10/16/92 5/31/96
Cash down payment (Note 1) $31,763,146 $36,036,814 $35,200,825 $40,840,795
Contract purchase price
plus acquisition fee $31,016,376 $35,320,865 $34,595,348 $40,339,796
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 746,770 715,949 605,477 500,999
----------- ----------- ----------- -----------
Total acquisition cost
(Note 1) $31,763,146 $36,036,814 $35,200,825 $40,840,795
=========== =========== =========== ===========
</TABLE>
Note 10: The partnership owns a 50%, 45.2% and 27.3% interest in three
separate joint ventures. One of the joint ventures owns one
restaurant property and the other two joint ventures own six
restaurant properties each.
Note 11: The partnership owns a 50%, 88.3%, 40.95% and 10.5% interest
in four separate joint ventures. Three of the joint ventures own
one restaurant property each and the other joint venture owns six
restaurant properties. In addition, the partnership owns a 13.37%
interest in one restaurant property held as tenants-in-common with
affiliates.
Note 12: The partnership owns a 62.2%, 77.33%, 85% and 76.6% interest
in four separate joint ventures. Each joint venture owns one
restaurant property.
Note 13: The partnership owns a 31.13%, 59.05%, 18.61% and 88% interest
in four separate joint ventures. Each joint venture owns one
restaurant property.
II-9
<PAGE>
TABLE VI - ACQUISITIONS OF PROPERTIES BY PROGRAMS (continued)
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund XIII, Fund XIV, Fund XV, Fund XVI,
Ltd. Ltd. Ltd. Ltd.
(Note 14) (Note 15) (Note 16) (Note 17)
-------------- -------------- -------------- --------------
<S> <C>
AL,AR,AZ,CA, AL,AZ,CO,FL, CA,FL,GA,KS, AZ,CA,CO,DC,
CO,FL,GA,IN, GA,KS,LA,MN, KY,MN,MO,MS, FL,GA,ID,IN,
KS,LA,MD,NC, MO,MS,NC,NJ, NC,NJ,NM,OH, KS,MN,MO,NC,
OH,PA,SC,TN, NV,OH,SC,TN, OK,PA,SC,TN, NM,NV,OH,TN,
Locations TX,VA TX,VA TX,VA TX,UT,WI
Type of property Restaurants Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 48 units 61 units 53 units 44 units
total square feet
of units 156,156 s/f 181,475 s/f 163,035 s/f 169,867 s/f
Dates of purchase 5/18/93- 9/27/93- 4/28/94- 10/21/94-
4/24/95 10/09/96 10/09/96 10/04/96
Cash down payment (Note 1) $34,905,219 $42,141,137 $37,976,175 $40,197,565
Contract purchase price
plus acquisition fee $34,535,596 $41,717,951 $37,590,883 $39,805,020
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 369,623 423,186 385,292 392,545
----------- ----------- ----------- -----------
Total acquisition cost
(Note 1) $34,905,219 $42,141,137 $37,976,175 $40,197,565
=========== =========== =========== ===========
</TABLE>
Note 14: The partnership owns a 50% and 28% interest in two separate
joint ventures. Each joint venture owns one restaurant property.
In addition, the Partnership owns a 66.13% interest in one
restaurant property held as tenants-in-common with an affiliate.
Note 15: The partnership owns a 50% interest in two separate joint
ventures and a 72% interest in one joint venture. Two of the joint
ventures each own one restaurant property and the other joint
venture owns five restaurant properties.
Note 16: The partnership owns a 50% interest in a joint venture which
owns five restaurant properties. In addition, the partnership owns
a 15.02% interest in one restaurant property held as
tenants-in-common with affiliates.
Note 17: The partnership owns a 80.27% interest in one restaurant
property held as tenants-in-common with an affiliate.
II-10
<PAGE>
TABLE VI - ACQUISITIONS OF PROPERTIES BY PROGRAMS (continued)
<TABLE>
<CAPTION>
CNL American CNL Income CNL Income
Properties Fund, Fund XVII, Fund XVIII,
Inc. Ltd. Ltd.
(Note 18)
-------------- -------------- --------------
<S> <C>
CA, CT, DE, FL,
GA, IA, IL, IN,
MI, MN, MO, NE, CA,FL,GA,IL,
NJ, NM, OH, OK, IN,MI,NC,NV,
Locations OR, TN, TX, WV, OH,SC,TN,TX NC,TX
Type of property Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 94 units 24 units 2 units
total square feet
of units 387,786 s/f 102,728 s/f 11,758 s/f
Dates of purchase 6/30/95 - 12/20/95 - 12/27/96 -
12/31/96 12/31/96 12/31/96
Cash down payment (Note 1) $ - $23,560,315 $ 1,529,483
Contract purchase price
plus acquisition fee $70,742,076 $23,520,854 $ 1,531,069
Other cash expenditures
expensed $70,387,773 - -
Other cash expenditures
capitalized 354,303 39,461 (1,586)
----------- ----------- -----------
Total acquisition cost
(Note 1) $70,742,076 $23,560,315 $ 1,529,483
=========== =========== ===========
</TABLE>
Note 18: The partnership owns a 80% interest in a joint venture which
owns one restaurant property. In addition, the partnership owns a
19.73% interest in one restaurant property held as
tenants-in-common with an affiliate.
II-11
<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 registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Orlando, State of Florida, on June 25, 1997.
CNL AMERICAN REALTY FUND, INC.
(Registrant)
By: /s/ James M. Seneff, Jr.
------------------------
James M. Seneff, Jr.
Chairman of the Board and Chief
Executive Officer
II-12
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned hereby
constitutes and appoints Robert A. Bourne and James M. Seneff, Jr. and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, with full power to act alone, to sign any and all
documents (including both pre- and post-effective amendments in connection with
the registration statement), and to file the same, with all exhibits thereto,
and all documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agent, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their or his substitutes or substitute, may lawfully do or cause to be done by
virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ James M. Seneff, Jr. Chairman of the Board and Chief June 25, 1997
- ------------------------ Chief Executive Officer
James M. Seneff, Jr. (Principal Executive Officer)
/s/ Robert A. Bourne Director and Presine June 25, 1997
- ---------------------- (Principal Financial and
Robert A. Bourne Accounting Officer)
II-13
<PAGE>
EXHIBIT INDEX
-------------
Exhibits Page
- -------- ----
1.1 Form of Managing Dealer Agreement (PREVIOUSLY FILED.)
1.2 Form of Participating Broker Agreement (FILED HEREWITH.)
3.1 CNL American Realty Fund, Inc. Articles of Incorporation
(PREVIOUSLY FILED.)
3.2 Form of CNL American Realty Fund, Inc. Amended and Restated
Articles of Incorporation (FILED HEREWITH.)
3.3 Form of CNL American Realty Fund, Inc. Bylaws (PREVIOUSLY FILED.)
4.1 CNL American Realty Fund, Inc. Articles of Incorporation
(PREVIOUSLY FILED AS EXHIBIT 3.1 AND INCORPORATED HEREIN BY
REFERENCE.)
4.2 Form of CNL American Realty Fund, Inc. Amended and Restated
Articles of Incorporation (PREVIOUSLY FILED AS EXHIBIT 3.2 AND
INCORPORATED HEREIN BY REFERENCE.)
4.3 Form of CNL American Realty Fund, Inc. Bylaws (PREVIOUSLY FILED AS
EXHIBIT 3.3 AND INCORPORATED HEREIN BY REFERENCE.)
4.4 Form of Reinvestment Plan (INCLUDED IN THE PROSPECTUS AS EXHIBIT A
AND INCORPORATED HEREIN BY REFERENCE.)
5 Opinion of Shaw, Pittman, Potts & Trowbridge as to the legality of
the securities being registered by CNL American Realty Fund, Inc.
(FILED HEREWITH.)
8 Opinion of Shaw, Pittman, Potts & Trowbridge regarding certain
material tax issues relating to CNL American Realty Fund, Inc.
(FILED HEREWITH.)
10.1 Form of Escrow Agreement between CNL American Realty Fund, Inc.
and SouthTrust Asset Management Company of Florida, N.A.
(PREVIOUSLY FILED.)
10.2 Form of Advisory Agreement (PREVIOUSLY FILED.)
10.3 Form of Joint Venture Agreement (PREVIOUSLY FILED.)
10.4 Form of Indemnification and Put Agreement (PREVIOUSLY FILED.)
10.5 Form of Unconditional Guaranty of Payment and Performance
(PREVIOUSLY FILED.)
10.6 Form of Purchase Agreement (PREVIOUSLY FILED.)
10.7 Form of Lease Agreement including Rent Addendum, Construction
Addendum and Memorandum of Lease (PREVIOUSLY FILED.)
10.8 Form of Reinvestment Plan (INCLUDED IN THE PROSPECTUS AS EXHIBIT A
AND INCORPORATED HEREIN BY REFERENCE.)
II-14
<PAGE>
Exhibits Page
- -------- ----
23.1 Consent of Coopers & Lybrand L.L.P., Certified Public Accountants,
dated June 26, 1997 (FILED HEREWITH.)
23.2 Consent of Shaw, Pittman, Potts & Trowbridge (CONTAINED IN ITS
OPINION FILED HEREWITH AS EXHIBIT 5 AND INCORPORATED HEREIN BY
REFERENCE.)
*27.1 Financial Data Schedule (PREVIOUSLY FILED.)
99.1 Consents of Certain Persons Named as Directors (PREVIOUSLY FILED.)
- -------------------
* INCLUDED IN ELECTRONIC FILING VIA EDGAR ONLY.
EXHIBIT 1.2
Form of Participating Broker Agreement
<PAGE>
FORM OF PARTICIPATING BROKER AGREEMENT
CNL AMERICAN REALTY FUND, INC.
THIS PARTICIPATING BROKER AGREEMENT (the "Agreement") is made and
entered into as of the day indicated on Exhibit A attached hereto and by this
reference incorporated herein, between CNL SECURITIES CORP., a Florida
corporation (the "Managing Dealer"), and the Participating Broker (the "Broker")
identified in Exhibit A hereto.
WHEREAS, CNL AMERICAN REALTY FUND, INC. is a Maryland
corporation (the "Company"); and
WHEREAS, the Company proposes to offer and sell up to 16,500,000
shares of Common Stock of the Company (the "Shares") to the general public,
pursuant to a public offering (the "Offering") of the Shares pursuant to a
prospectus (the "Prospectus") filed with the Securities and Exchange Commission
("SEC"); and
WHEREAS, the Managing Dealer, which has heretofore entered into a
Managing Dealer Agreement with the Company pursuant to which it has been
designated the managing dealer to sell and manage the sale by others of the
Shares pursuant to the terms of such agreement and the Offering, is a
corporation incorporated in and presently in good standing in the State of
Florida, and is presently registered with the Florida Securities Commission
and with the National Association of Securities Dealers, Inc. ("NASD") as a
securities broker-dealer qualified to offer and sell to members of the public
securities of the type represented by the Shares; and
WHEREAS, the Broker is an entity, as designated in Exhibit A hereto,
organized and presently in good standing in the state or states designated in
Exhibit A hereto, presently registered as a broker-dealer with the NASD, and
presently licensed by the appropriate regulatory agency of each state in which
it will offer and sell the Shares as a securities broker-dealer qualified to
offer and sell to members of the public securities of the type represented by
the Shares or exempt from all such registration requirements; and
WHEREAS, the Company has filed with the SEC a registration
statement on Form S-11, including a preliminary or final prospectus, for the
registration of the Shares under the Securities Act of 1933, as amended
(such registration statement, as it may be amended, and the prospectus and
exhibits on file with the SEC at the time the registration statement becomes
effective, including any post-effective amendments or supplements to such
registration statement or prospectus after the effective date of registration,
being herein respectively referred to as the "Registration Statement" and the
"Prospectus"); and
WHEREAS, the offer and sale of the Shares shall be made pursuant to
the terms and conditions of the Registration Statement and the Prospectus and,
further, pursuant to the terms and conditions of all applicable securities laws
of all states in which the Shares are offered and sold; and
WHEREAS, the Managing Dealer desires to retain the Broker to use
its best efforts to sell the Shares, and the Broker is willing and desires to
serve as a broker for the Managing Dealer for the sale of the Shares upon the
following terms and conditions;
NOW, THEREFORE, in consideration of the premises and terms and
conditions thereof, it is agreed between the Managing Dealer and the Broker as
follows.
1. EMPLOYMENT.
(a) Subject to the terms and conditions herein set
forth, the Managing Dealer hereby employs the Broker to use its best efforts to
sell for the account of the Company a portion of the Shares described
in
<PAGE>
the Registration Statement, as specified on Exhibit A hereto. The Broker
hereby accepts such employment and covenants, warrants and agrees to sell the
Shares according to all of the terms and conditions of the Registration
Statement, all applicable state and federal laws, including the Securities Act
of 1933, as amended, and any and all regulations and rules pertaining
thereto, heretofore or hereafter issued by the SEC and the NASD. Neither the
Broker nor any other person shall have any authority to give any information or
make any representations in connection with any offer or sale of the Shares
other than as contained in the Prospectus, as amended and supplemented, and
as is otherwise expressly authorized in writing by the Managing Dealer.
(b) The Broker shall use its best efforts, promptly
following receipt of written notice from the Managing Dealer of the effective
date of the Registration Statement, to sell the Shares in such quantities and
for the account of Company as shall be agreed between the Broker and the
Managing Dealer and specified on Exhibit A hereto, and to such persons and
according to all such terms as are contained in the Registration
Statement and the Prospectus. The Broker shall comply with all requirements
set forth in the Registration Statement and the Prospectus. The Broker
shall use and distribute, in connection with the offer and sale of the
Shares, only the Prospectus and such sales literature and advertising as shall
conform in all respects to any restrictions of local law and the applicable
requirements of the Securities Act of 1933, as amended, and which has been
approved in writing by the Company or the Managing Dealer. The Managing Dealer
reserves the right to establish such additional procedures as it may deem
necessary to ensure compliance with the requirements of the Registration
Statement, and the Broker shall comply with all such additional procedures to
the extent that it has received written notice thereof.
(c) The Broker shall be permitted to accept
subscriptions for the Shares by telephone from residents of those states
identified on Schedule A attached hereto and made a part hereof provided
that: (1) the registered representative and branch manager of the Broker
execute the subscription agreement on behalf of any investor who subscribes
for Shares by telephone; and (2) the Broker does not charge any additional
fees, including but not limited to fees relating to opening an account with
the Broker, to any investor who telephonically or orally subscribes for
Shares. It is understood and agreed between the Managing Dealer and the Broker
that the Managing Dealer may, in its discretion, change, modify, add to or
delete from the list of states identified on Schedule A. Any such modification
shall be effective ten days from the date written notice to the Broker has
been mailed by the Managing Dealer. The Broker shall not execute a
subscription agreement on behalf of any investor who subscribes for Shares
by telephone unless such investor has specifically authorized the registered
representative and the branch manager of the Broker to execute the
subscription agreement on behalf of such investor and has made or agreed to
make full payment for all Shares covered by such subscription agreement.
Notwithstanding anything contained herein to the contrary, the Broker shall
have no authority to make representations on behalf of an investor or
to initial representations contained in the subscription agreement on
behalf of an investor. In connection with telephonic or other oral
subscriptions for Shares, the Broker represents and warrants as follows: (i)
that a Prospectus was delivered to the investor before the investor made a
decision to invest; (ii) that the investor meets the suitability requirements
set forth in the Prospectus; and (iii) that, in compliance with the NASD's
Conduct Rules, the Broker has reasonable grounds to believe that the
investment in the Company is suitable for the investor, based upon
information supplied by the investor to such Broker. Further, the Broker
shall explain to any investor from a state identified in the Prospectus as
having such additional requirements, that: (i) the investor has the right to
rescind such subscription for a period of at least ten days following the date
written confirmation of the subscription has been received by the investor from
the Managing Dealer; and (ii) unless the investor rescinds such subscription
within the applicable period of time, the investor shall be bound by the
subscription agreement.
(d) Notwithstanding anything to the contrary contained
in Section 2 of this Agreement, in the event that the Managing Dealer pays any
commission to the Broker for sale of one or more Shares, including, but not
limited to, those Shares sold pursuant to a telephonic or other oral
subscription therefor, where representatives of the Broker execute the
subscription agreement relating to such Shares, and the subscription is
rescinded as to one or more of the Shares covered by such subscription, the
Managing Dealer shall decrease the next payment of commissions or other
compensation otherwise payable to the Broker by the Managing Dealer under this
Agreement by an amount equal to the commission rate established in Section 2
and Exhibit A of this Agreement, multiplied by the number of Shares as to which
the subscription is rescinded. In the event that no payment of commissions or
other compensation is due to the Broker after such withdrawal occurs, the
Broker shall pay the amount specified in
-2-
<PAGE>
the preceding sentence to the Managing Dealer within ten (10) days following
mailing of notice to the Broker by the Managing Dealer stating the amount
owed as a result of rescinded subscriptions.
(e) All monies received for purchase of any of the
Shares shall be forwarded by the Broker to the Managing Dealer for delivery
to SouthTrust Asset Management Company of Florida, N.A. (the "Escrow Agent"),
where such monies will be deposited in an escrow account established by
the Company solely for such subscriptions, except that, until such time (if any)
that such monies are deliverable to the Company pursuant to the Escrow Agreement
between the Company and the Escrow Agent, the Broker shall return any check not
made payable to "SouthTrust Asset Management Company of Florida, N.A.,
Escrow Agent" directly to the subscriber who submitted the check. Thereafter,
the Broker may accept checks made payable to either the Company or the
Escrow Agent. Subscriptions will be executed as described in the
Registration Statement or as directed by the Managing Dealer. The monies
shall be deposited or transmitted by the Broker to the Managing Dealer no
later than the close of business of the first business day after receipt
of the subscription documents by the Broker; provided, however, that if the
Broker maintains a branch office, the branch office shall transmit the
subscription documents and check to the Broker by the close of business on
the first business day following their receipt by the branch office and the
Broker shall review the subscription documents and check to ensure their proper
execution and form and, if they are acceptable, transmit the check to the
Managing Dealer by the close of business on the first business day after their
receipt by the Broker. Pursuant to the terms of the Managing Dealer
Agreement, the Managing Dealer will transmit the check or monies to the Escrow
Agent by no later than the close of business on the first business day after
the check is received from the Broker.
(f) During the full term of this Agreement the
Managing Dealer shall have full authority to take such action as it may deem
advisable in respect to all matters pertaining to the performance of the Broker
under this Agreement.
(g) The Shares shall be offered and sold by the Broker
only where the Shares may be legally offered and sold, and only to such persons
in such states who shall be legally qualified to purchase the Shares. The
Managing Dealer shall give the Broker written notice at the time of
effectiveness of those states in which the offering and sale of Shares may be
made, and shall amend such notice thereafter as additional states are added; no
Shares shall be offered or sold in any other states.
(h) The Broker shall have no obligation under this
Agreement to purchase any of the Shares for its own account.
(i) The Broker will use every reasonable effort to
assure that Shares are sold only to investors who:
(1) meet the investor suitability standards,
including the minimum income and net worth standard established by the
Company, and minimum purchase requirements set forth in the Registration
Statement;
(2) can reasonably benefit from the Company
based on the prospective investor's overall investment objectives and
portfolio structure;
(3) are able to bear the economic risk of the
investment based on each prospective investor's overall financial
situation; and
(4) have apparent understanding of: (a) the
fundamental risks of the investment; (b) the risk that the
prospective investor may lose the entire investment; (c) the lack of
liquidity of the Shares; (d) the restrictions on transferability of
the Shares; (e) the background and qualifications of the
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<PAGE>
officers and directors of CNL Real Estate Advisors, Inc., the advisor
to the Company (the "Advisor"); and (f) the tax consequences of an
investment in the Shares.
(5) The Broker will make the determinations
required to be made by it pursuant to subparagraph (i) based on
information it has obtained from a prospective investor, including, at a
minimum, but not limited to, the prospective investor's age,
investment objectives, investment experience, income, net worth,
financial situation, other investments of the prospective investor, as
well as any other pertinent factors deemed by the Broker to be
relevant.
(j) In addition to the complying with the
provisions of subparagraph (i) above, and not in limitation of any other
obligations of the Broker to determine suitability imposed by state or federal
law, the Broker agrees that it will comply fully with all of the applicable
provisions of the NASD's Conduct Rules, and the following provisions:
(1) The Broker shall have reasonable grounds
to believe, based upon information provided by the investor
concerning his investment objectives, other investments, financial
situation and needs, and upon any other information known by the
Broker, that (A) each investor to whom the Broker sells Shares is or
will be in a financial position appropriate to enable him to realize
to a significant extent the benefits (including tax benefits) of an
investment in the Shares, (B) each investor to whom the Broker sells
Shares has a fair market net worth sufficient to sustain the risks
inherent in an investment in the Shares (including potential loss and
lack of liquidity), and (C) the Shares otherwise are or will be a
suitable investment for each investor to whom it sells Shares, and the
Broker shall maintain files disclosing the basis upon which the
determination of suitability was made;
(2) The Broker shall not execute any transaction
involving the purchase of Shares in a discretionary account without
prior written approval of the transactions by the investor;
(3) The Broker shall have reasonable grounds
to believe, based upon the information made available to it, that all
material facts are adequately and accurately disclosed in the
Registration Statement and provide a basis for evaluating the Shares;
(4) In making the determination set forth in
subparagraph (3) above, the Broker shall evaluate items of
compensation, physical properties, tax aspects, financial stability and
experience of the sponsor, conflicts of interest and risk factors,
appraisals, as well as any other information deemed pertinent by it;
(5) If the Broker relies upon the results of
any inquiry conducted by another member of the NASD with respect to
the obligations set forth in subparagraphs (3) or (4) above, the
Broker shall have reasonable grounds to believe that such inquiry was
conducted with due care, that the member or members conducting or
directing the inquiry consented to the disclosure of the results of
the inquiry and that the person who participated in or conducted the
inquiry is not a sponsor or an affiliate of the sponsor of the Company;
and
(6) Prior to executing a purchase transaction in
the Shares, the Broker shall have informed the prospective investor of
all pertinent facts relating to the liquidity and marketability of the
Shares.
(k) The Broker agrees that it will comply with Rules
2730, 2740 and 2750 of the NASD's Conduct Rules.
-4-
<PAGE>
(l) The Broker agrees to retain in its files, for a
period of at least six years, information which will establish that each
purchaser of Shares falls within the permitted class of investors.
(m) The Broker shall not, directly or indirectly, pay or
award any finder's fees, commissions or other compensation to any persons
engaged by a potential investor for investment advice as an inducement to such
advisor to advise the potential investor to purchase Shares in the Company.
(n) The Broker either (i) shall not purchase Shares
for its own account or (ii) shall hold for investment any Shares purchased
for its own account.
(o) The Broker hereby confirms that it is familiar with
Securities Act Release No. 4968 and Rule 15c2-8 under the Securities Exchange
Act of 1934, relating to the distribution of preliminary and final
prospectuses, and confirms that it has and will comply therewith.
(p) The Broker shall deliver a copy of the
Articles of Incorporation of the Company with each Prospectus that is
delivered to potential investors in Mississippi.
2. COMPENSATION OF BROKER.
The Managing Dealer shall pay the Broker, as compensation for all
services to be rendered by the Broker hereunder, a commission equal to 7.0%
on sales of Shares by such Broker, as set forth in Exhibit A hereto, subject to
reduction as specified in this Section 2 and the Prospectus. The Managing
Dealer, in its sole discretion, may reallow to the Broker, from its marketing
support and due diligence expense reimbursement fee, up to an additional 0.5% on
sales of Shares by such Broker, based on such factors as the number of Shares
sold by the Broker, the assistance of the Broker in marketing the Offering,
and BONA FIDE due diligence expenses incurred by the Broker. Such commission
rates shall remain in effect during the full term of this Agreement unless
otherwise changed by a written agreement between the parties hereto. A sale of
Shares shall be deemed to be completed only after the Company receives a
properly completed subscription agreement for Shares from the Broker
evidencing the fact that the investor had received a final Prospectus for a
period of not less than five full business days, together with payment of the
full purchase price of each purchased Share from a buyer who satisfies each of
the terms and conditions of the Registration Statement and Prospectus, and only
after such subscription agreement has been accepted in writing by the
Company. Such compensation shall be payable to the Broker by the Managing
Dealer after such acceptance of the subscription agreement; PROVIDED, HOWEVER,
that compensation or commissions shall not be paid by the Managing Dealer: (i)
other than from funds received as compensation or commissions from the Company
for the sale of its Shares; (ii) until such time as subscriptions for a
minimum of 250,000 Shares ($2,500,000), excluding subscriptions from
Pennsylvania investors, have been received and approved by the Company, and
deposited into the escrow account provided for in Paragraph 1(e) hereof;
(iii) until any and all compensation or commissions payable by the Company to
the Managing Dealer have been received by the Managing Dealer; and (iv) if the
commission payable to any broker-dealer or salesman exceeds the amount allowed
by any regulatory agency. The Broker shall not reallow any commissions to
non-NASD members. The Company (and the Managing Dealer) may pay reduced
commissions or may eliminate commissions on certain sales of Shares, including
the reduction or elimination of commissions in accordance with the following
paragraph of this Section 2. Any such reduction or elimination of
commissions will not, however, change the net proceeds to the Company.
A registered principal or representative of the Managing Dealer or
a Broker, employees, officers, Directors, and directors of the Company or the
Advisor, or any of their Affiliates (and the families of any of the foregoing
persons), and any Plan (as defined in the Prospectus) established exclusively
for the benefit of such persons may purchase Shares net of 7% commissions,
at a per Share purchase price of $9.30. In addition, clients of an investment
adviser registered under the Investment Advisers Act of 1940, as amended, who
have been advised by such adviser on an ongoing basis regarding investments
other than in the Company, and who are not being charged by such adviser or
its Affiliates, through the payment of commissions or otherwise, for the
advice rendered by such adviser in connection with the purchase of the
Shares, may purchase the Shares net of commissions. In
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<PAGE>
addition, brokers that have a contractual arrangement with their clients for
the payment of fees which is consistent with accepting selling commissions,
in their sole discretion, may elect not to accept any selling commissions
offered by the Company for Shares that they sell. In that event, such Shares
shall be sold to the investor net of all selling commissions, at a per share
purchase price of $9.30.
In addition to the commissions described above in this Section 2,
the Managing Dealer may reallow to the Broker all or a portion of its annual
fee actually received from the Company of .20% of the Company's Invested
Capital (as defined below) on December 31 of each year, commencing in the year
following the year in which the Offering terminates. It is understood that
payment of such fee by the Company to the Managing Dealer is subject to any
limitations imposed on the Company by the NASD, state securities regulators or
otherwise. The Managing Dealer may reallow this fee only to a Broker whose
clients hold Shares on December 31 of the applicable year. In general, Invested
Capital is the amount of cash contributed by the shareholders to the Company,
reduced by certain prior capital distributions to the shareholders from the
sale of Company properties. This fee will terminate as of the beginning of
any year in which the Company is liquidated or the Shares become listed on a
national securities exchange or over-the-counter market.
The Managing Dealer shall pay the Broker commissions on Shares
purchased pursuant to the Company's Dividend Reinvestment Plan on the same
basis as commissions paid for Shares otherwise purchased in the Offering.
3. ASSOCIATION WITH OTHER DEALERS.
It is expressly understood between the Managing Dealer and the
Broker that the Managing Dealer may cooperate with other broker-dealers who are
registered as broker-dealers with the NASD and duly licensed by the appropriate
regulatory agency of each state in which they will offer and sell the Shares
or with broker-dealers exempt from all such registration requirements. Such
other participating broker-dealers may be employed by the Managing Dealer as
brokers on terms and conditions identical or similar to this Agreement and
shall receive such rates of commission as are agreed to between the Managing
Dealer and the respective other participating broker-dealers and as are in
accordance with the terms of the Registration Statement. The Broker understands
that, to that extent, such other participating broker-dealers shall compete
with the Broker in the sale of the Shares.
4. CONDITIONS OF THE BROKER'S OBLIGATIONS.
The Broker's obligations hereunder are subject, during the full
term of this Agreement and the Offering, to (a) the performance by the
Managing Dealer of its obligations hereunder; and (b) the conditions that: (i)
the Registration Statement shall become and remain effective; and (ii) no stop
order shall have been issued suspending the effectiveness of the Offering.
5. CONDITIONS TO THE MANAGING DEALER'S OBLIGATIONS.
The obligations of the Managing Dealer hereunder are subject, during
the full term of this Agreement and the Offering, to the conditions that: (a)
at the effective date of the Registration Statement and thereafter during the
term of this Agreement while any Shares remain unsold, the Registration
Statement shall remain in full force and effect authorizing the offer and sale
of the Shares; (b) no stop order suspending the effectiveness of the
Offering or other order restraining the offer or sale of the Shares shall have
been issued nor proceedings therefor initiated or threatened by any state
regulatory agency or the SEC; and (c) the Broker shall have satisfactorily
performed all of its obligations hereunder.
6. COVENANTS OF THE MANAGING DEALER.
The Managing Dealer covenants, warrants and represents, during the
full term of this Agreement, that:
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<PAGE>
(a) It shall use its best efforts to prevent the sale of the
Shares through persons other than registered NASD broker-dealers.
(b) It shall use its best efforts to cause the Company to
maintain the effectiveness of the Registration Statement and to file such
applications or amendments to the Registration Statement as may be reasonably
necessary for that purpose.
(c) It shall advise the Broker whenever and as soon as it
receives or learns of any order issued by the SEC, any state regulatory agency
or any other regulatory agency which suspends the effectiveness of the
Registration Statement or prevents the use of the Prospectus or which otherwise
prevents or suspends the offering or sale of the Shares, or receives
notice of any proceedings regarding any such order.
(d) It shall use its best efforts to prevent the issuance of
any order described herein at subparagraph (c) hereof and to obtain the lifting
of any such order if issued.
(e) It shall give the Broker written notice when the
Registration Statement becomes effective and shall deliver to the Broker such
number of copies of the Prospectus, and any supplements and amendments
thereto, which are finally approved by the SEC, as the Broker may reasonably
request for sale of the Shares.
(f) It shall promptly notify the Broker of any
post-effective amendments or supplements to the Registration Statement or
Prospectus, and shall furnish the Broker with copies of any revised
Prospectus and/or supplements and amendments to the Prospectus.
(g) To the extent to which the Managing Dealer has knowledge,
it shall keep the Broker fully informed of any material development to which
the Company is a party or which concerns the business and condition of
the Company.
(h) In conjunction with the Company, it shall use its best
efforts to cause, at or prior to the time the Registration Statement
becomes effective, the qualification of the Shares for offering and sale
under the securities laws of such states as the Company shall elect.
(i) It shall not in any way participate in, or effect the sale or
transfer of Shares in connection with, a tender offer with respect to shares of
the Company's common stock, whether or not such offer is subject to Section
(14)(d)(1) of the Securities Exchange Act of 1934, as amended, other than with
the written consent of the Company.
7. PAYMENT OF COSTS AND EXPENSES.
The Broker shall pay all costs and expenses incident to the
performance of its obligations under this Agreement, including:
(a) All expenses incident to the preparation, printing and
filing of all advertising originated by it related to the sale of the Shares;
and
(b) All other costs and expenses incurred in connection
with its sales efforts related to the sales of the Shares which are not
expressly assumed by the Company in its Managing Dealer Agreement with the
Managing Dealer.
8. INDEMNIFICATION.
(a) The Broker agrees to indemnify, defend and hold
harmless the Company, its affiliates and their or its officers, directors,
trustees, employees and agents, including the Managing Dealer, against all
losses, claims, demands, liabilities and expenses, joint or several,
including reasonable legal and other expenses incurred in defending such
claims or liabilities, whether or not resulting in any liability to the
Company, its affiliates and their or its officers, directors, trustees,
employees or agents, which they or any of them may incur arising out of the
offer or sale by the Broker, or any person acting on its behalf, of any Shares
pursuant to this Agreement if such
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<PAGE>
loss, claim, demand, liability, or expense arises out of or is based upon (i)
an untrue statement or alleged untrue statement of a material fact, or any
omission or alleged omission of a material fact, other than a statement,
omission, or alleged omission by the Broker which is also, as the case may
be, contained in or omitted from the Prospectus or the Registration Statement
and which statement or omission was not based on information supplied to
the Company or the Managing Dealer by such Broker, or (ii) the breach by the
Broker, or any person acting on its behalf, of any of the terms and conditions
of this Agreement. This indemnity provision shall survive the termination of
this Agreement.
(b) The Managing Dealer agrees to indemnify, defend
and hold harmless the Broker, its officers, directors, employees and agents,
against all losses, claims, demands, liabilities and expenses, including
reasonable legal and other expenses incurred in defending such claims or
liabilities, which they or any of them may incur, including, but not limited
to, alleged violations of the Securities Act of 1933, as amended, but only to
the extent that such losses, claims, demands, liabilities and expenses shall
arise out of or be based upon (i) any untrue statement of a material fact
contained in the Prospectus or the Registration Statement, as filed and in
effect with the SEC, or in any amendment or supplement thereto, or in any
application prepared or approved in writing by counsel to the Company and
filed with any state regulatory agency in order to register or qualify
the Shares under the securities laws thereof (the "Blue Sky applications"), or
(ii) any omission or alleged omission to state therein a material fact required
to be stated in the Prospectus or the Registration Statement or the Blue Sky
applications, or necessary to make such statements, and any part thereof,
not misleading; provided, further, that any such untrue statement,
omission or alleged omission is not based on information included in any such
document which was supplied to the Managing Dealer, the Company, or any officer
of the Company by such Broker. This indemnity provision shall survive the
termination of this Agreement.
(c) No indemnifying party shall be liable under the
indemnity agreements contained in subparagraphs (a) and (b) above unless the
party to be indemnified shall have notified such indemnifying party in writing
promptly after the summons or other first legal process giving information
of the nature of the claim shall have been served upon the party to be
indemnified, but failure to notify an indemnifying party of any such claim
shall not relieve it from any liabilities which it may have to the
indemnified party against whom action is brought other than on account of
its indemnity agreement contained in subparagraphs (a) and (b) above. In the
case of any such claim, if the party to be indemnified notified the
indemnifying party of the commencement thereof as aforesaid, the
indemnifying party shall be entitled to participate at its own expense in
the defense of such claim. If it so elects, in accordance with arrangements
satisfactory to any other indemnifying party or parties similarly notified,
the indemnifying party has the option to assume the entire defense of the
claim, with counsel who shall be satisfactory to such indemnified party and
all other indemnified parties who are defendants in such action; and after
notice from the indemnifying party of its election so to assume the defense
thereof and the retaining of such counsel by the indemnifying party, the
indemnifying party shall not be liable to such indemnified party under
subparagraphs (a) and (b) above for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof,
other than for the reasonable costs of investigation.
9. TERM OF AGREEMENT.
This Agreement shall become effective at 8:00 A.M. (Eastern
Standard Time) on the first full business day following the day on which
the Registration Statement becomes effective, or if later, the date on which
this Agreement is executed by the Managing Dealer and the Broker. The Broker
and the Managing Dealer may each prevent this Agreement from becoming
effective, without liability to the other, by written notice before the time
this Agreement would otherwise become effective. After this Agreement becomes
effective, either party may terminate it at any time for any reason by giving
thirty (30) days' written notice to the other party; provided, however, that
this Agreement shall in any event automatically terminate at the first
occurrence of any of the following events: (a) the Registration Statement for
offer and sale of the Shares shall cease to be effective; (b) the Company
shall be terminated; or (c) the Broker's license or registration to act as a
broker-dealer shall be revoked or suspended by any federal, self-regulatory or
state agency and such revocation or suspension is not cured within ten
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<PAGE>
(10) days from the date of such occurrence. In any event, this Agreement
shall be deemed suspended during any period for which such license is revoked
or suspended.
10. NOTICES.
All notices and communications hereunder shall be in writing and
shall be deemed to have been given and delivered when deposited in the
United States mail, postage prepaid, registered or certified mail, to the
applicable address set forth below.
IF SENT TO THE MANAGING DEALER:
CNL SECURITIES CORP.
400 East South Street, Suite 500
Orlando, Florida 32801
Attention: Robert A. Bourne, President
IF SENT TO THE BROKER: TO THE PERSON WHOSE NAME AND ADDRESS ARE
IDENTIFIED IN EXHIBIT A HERETO.
11. SUCCESSORS.
This Agreement shall be binding upon and inure to the benefit of
the parties hereto, and shall not be assigned or transferred by the Broker by
operation of law or otherwise.
12. MISCELLANEOUS.
(a) This Agreement shall be construed in accordance
with the applicable laws of the State of Florida.
(b) Nothing in this Agreement shall constitute the
Broker as in association with or in partnership with the Managing Dealer.
Instead, this Agreement shall only authorize the Broker to sell the Shares
according to the terms as expressly set forth herein; provided, further, that
the Broker shall not in any event have any authority to act as the agent or
broker of the Managing Dealer except according to the terms expressly set forth
herein.
(c) This Agreement, including Exhibit A and Schedule
A hereto, embodies the entire understanding between the parties to the
Agreement, and no variation, modification or amendment to this Agreement shall
be deemed valid or effective unless it is in writing and signed by both parties
hereto.
(d) If any provision of this Agreement shall be
deemed void, invalid or ineffective for any reason, the remainder of the
Agreement shall remain in full force and effect.
(e) This Agreement may be executed in counterpart
copies, each of which shall be deemed an original but all of which together
shall constitute one and the same instrument comprising this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on
the date and year indicated on Exhibit A hereto.
BROKER: MANAGING DEALER:
_______________________________________ CNL SECURITIES CORP.
(Name of Broker)
By:_____________________________________ By_________________________________
Print Name:_____________________________ Print Name:________________________
Title:__________________________________ Title:_____________________________
Witness:________________________________ Witness:___________________________
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<PAGE>
EXHIBIT A
TO
PARTICIPATING BROKER AGREEMENT
OF
CNL AMERICAN REALTY FUND, INC.
This Exhibit A is attached to and made a part of that certain
Participating Broker Agreement, dated as of the ___ day of ___________________,
19__, by and between CNL SECURITIES CORP., as Managing Dealer,
and __________________________________, as Broker.
1. Date of Agreement:_______________________________________________________
2. Identity of Broker:
Name:_____________________________________________________________________
Firm NASD (CRD) No:_______________________________________________________
Type of Entity____________________________________________________________
(TO BE COMPLETED BY BROKER, E.G., CORPORATION, PARTNERSHIP
OR SOLE PROPRIETORSHIP.)
State Organized in:_______________________________________________________
(TO BE COMPLETED BY BROKER)
Qualified To Do Business and in Good Standing in the Following
Jurisdictions (INCLUDING YOUR STATE OF ORGANIZATION) (NOTE:
QUALIFICATION TO DO BUSINESS IN ANY JURISDICTION IS GENERALLY A
REQUIREMENT IMPOSED BY THE SECRETARY OF STATE OR OTHER AUTHORITY OF
JURISDICTIONS IN WHICH YOU DO BUSINESS, AND IS NOT RELATED TO YOUR
HOLDING A LICENSE AS A SECURITIES BROKER-DEALER IN SUCH JURISDICTIONS.
QUESTIONS CONCERNING THIS MATTER SHOULD BE DIRECTED TO YOU OR YOUR LEGAL
COUNSEL.):
__________________________________________________________________________
__________________________________________________________________________
(TO BE COMPLETED BY BROKER)
Licensed as Broker-Dealer in The Following States:________________________
__________________________________________________________________________
__________________________________________________________________________
(TO BE COMPLETED BY BROKER)
3. Schedule of Commissions Payable to Participating Broker (see Section 2
of Agreement):
Number of Shares
Purchased in Sales Price As a Percentage
Individual Order To Subscriber of the Sales Price(1) Dollar Amount
---------------- ------------- --------------------- -------------
1 or more $10.00 7.0% $0.70
________________________
(1) Subject to reduction as set forth in Section 2 of the Participating
Broker Agreement.
A-1
[Exhibit A
Page 1 of 2]
<PAGE>
4. Name and Address for Notice Purposes (see Paragraph 10 of Agreement):
Name:______________________________________________________________________
Title:_____________________________________________________________________
Company:___________________________________________________________________
Address:___________________________________________________________________
City, State and Zip Code:__________________________________________________
Telephone Number (including area code):____________________________________
5. Please complete the following for our records:
(a) Please name those individuals who hold the following positions:
President:___________________________________________________________
Due Diligence Officer:_______________________________________________
Marketing Director:__________________________________________________
In-House Editor:_____________________________________________________
(b) Does your company hold national or regional conferences?
Yes _____ No _____
If so, when?_________________________________________________________
Who is the coordinator?______________________________________________
(c) How many representatives are registered with your broker-dealer?
________________________
PLEASE ENCLOSE A CURRENT LIST. ALL INFORMATION WILL BE HELD IN
CONFIDENCE.
(d) Does your firm publish a newsletter? Yes _____ No _____
What is/are the frequency of the publication(s)?
_____ Weekly _____ Monthly _____ Quarterly
_____ Bi-weekly _____ Bi-monthly _____ Other (please specify)
PLEASE PLACE CNL ON YOUR MAILING LIST AND PROVIDE A SAMPLE OF THE
PUBLICATION IF AVAILABLE.
(e) Does your firm have regular internal mailings, or bulk package
mailings to representatives? Yes _____ No _____
PLEASE PLACE CNL ON YOUR MAILING LIST AND PROVIDE A SAMPLE OF THE
PUBLICATION IF AVAILABLE.
(f) Does your firm have a computerized electronic mail (E-Mail) system
for your representatives? Yes _____ No _____
A-2
[Exhibit A
Page 2 of 2]
<PAGE>
SCHEDULE A
TO
PARTICIPATING BROKER AGREEMENT
OF
CNL AMERICAN REALTY FUND, INC.
This Schedule A is attached to and made a part of that certain
Participating Broker Agreement, dated as of the ___ day of
____________________, 19__, by and between CNL SECURITIES CORP., as
Managing Dealer, and _____________________________________________, as
Broker.
TELEPHONIC SUBSCRIPTION AUTHORIZATION
The list of states in which the Broker is permitted to accept
telephonic subscriptions shall be those states identified by Item 2 of
Exhibit A, as amended from time to time, to the Broker Agreement between the
parties hereto, as states in which the Broker is licensed as a Broker-Dealer,
EXCEPT FOR THE FOLLOWING STATES IN WHICH THE BROKER IS SPECIFICALLY PROHIBITED
FROM ACCEPTING TELEPHONIC SUBSCRIPTIONS: Florida, Iowa, Maine,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New
Mexico, North Carolina, Ohio, Oregon, South Dakota, Tennessee and Washington.
Initials: ______________ CNL SECURITIES CORP.
______________ PARTICIPATING BROKER
EXHIBIT 3.2
Form of CNL American Realty Fund, Inc.
Amended and Restated Articles of Incorporation
<PAGE>
ARTICLES OF AMENDMENT AND RESTATEMENT
OF
CNL AMERICAN REALTY FUND, INC.
CNL American Realty Fund, Inc., a Maryland corporation having its principal
office at 32 South Street, Baltimore, Maryland 21202 (hereinafter, the
"Company"), hereby certifies to the Department of Assessments and Taxation of
the State of Maryland, that:
FIRST: The Company desires to amend and restate its articles of
incorporation as currently in effect.
SECOND: The provisions of the articles of incorporation which are now in
effect and as amended hereby, dated ___________ in accordance with the Maryland
General Corporation Law (the "MGCL"), are as follows.
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
CNL AMERICAN REALTY FUND, INC.
* * * * * * * * * *
ARTICLE I
THE COMPANY; DEFINITIONS
SECTION 1.1. NAME. The name of the corporation (the "Company") is:
CNL American Realty Fund, Inc.
So far as may be practicable, the business of the Company shall be
conducted and transacted under that name, which name (and the word "Company"
wherever used in these Articles of Amendment and Restatement of CNL American
Realty Fund, Inc. (these "Articles of Incorporation"), except where the context
otherwise requires) shall refer to the Directors collectively but not
individually or personally and shall not refer to the Stockholders or to any
officers, employees or agents of the Company or of such Directors.
Under circumstances in which the Directors determine that the use of the
name "CNL American Realty Fund, Inc." is not practicable, they may use any other
designation or name for the Company.
SECTION 1.2. RESIDENT AGENT. The name and address of the resident agent
for service of process of the Company in the State of Maryland is The
Corporation Trust
<PAGE>
Incorporated, 32 South Street, Baltimore, Maryland 21202. The Company may have
such principal office within the State of Maryland as the Directors may from
time to time determine.The Company may also have such other offices or places of
business within or without the State of Maryland as the Directors may from time
to time determine.
SECTION 1.3 NATURE OF COMPANY. The Company is a Maryland corporation
within the meaning of the MGCL.
SECTION 1.4 PURPOSE. The purposes for which the Company is formed are to
conduct any business for which corporations may be organized under the laws of
the State of Maryland including, but not limited to, the following: (i) to
acquire, hold, own, develop, construct, improve, maintain, operate, sell, lease,
transfer, encumber, convey, exchange and otherwise dispose of or deal with real
and personal property; (ii) to engage in the business of offering furniture,
fixture, and equipment financing to operators of Restaurant Chains and Hotel
Chains; (iii) to engage in the business of offering mortgage financing secured
by Real Property; and (iv) to enter into any partnership, joint venture or other
similar arrangement to engage in any of the foregoing.
SECTION 1.5 DEFINITIONS. As used in these Articles of Incorporation, the
following terms shall have the following meanings unless the context otherwise
requires (certain other terms used in Article VII hereof are defined in Sections
7.2, 7.3, 7.6, and 7.7 hereof):
"ACQUISITION EXPENSES" means any and all expenses incurred by the Company,
the Advisor, or any Affiliate of either in connection with the selection or
acquisition of any Property or the making of any Mortgage Loan, whether or not
acquired, including, without limitation, legal fees and expenses, travel and
communications expenses, costs of appraisals, nonrefundable option payments on
property not acquired, accounting fees and expenses, and title insurance.
"ACQUISITION FEE" means any and all fees and commissions, exclusive of
Acquisition Expenses, paid by any Person or entity to any other Person or entity
(including any fees or commissions paid by or to any Affiliate of the Company or
the Advisor) in connection with making or investing in Mortgage Loans or the
purchase, development or construction of a Property, including, without
limitation, real estate commissions, acquisition fees, finder's fees, selection
fees, development fees, construction fees, nonrecurring management fees,
consulting fees, loan fees, points, the Secured Equipment Lease Servicing Fee,
or any other fees or commissions of a similar nature. Excluded shall be
development fees and construction fees paid to any Person or entity not
affiliated with the Advisor in connection with the actual development and
construction of any Property.
"ADVISOR" or "ADVISORS" means the Person or Persons, if any, appointed,
employed or contracted with by the Company pursuant to Section 4.1 hereof and
responsible for directing or
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performing the day-to-day business affairs of the Company, including any Person
to whom the Advisor subcontracts substantially all of such functions.
"ADVISORY AGREEMENT" means the agreement between the Company and the
Advisor pursuant to which the Advisor will direct or perform the day-to-day
business affairs of the Company.
"AFFILIATE" or "AFFILIATED" means, as to any individual, corporation,
partnership, trust or other association (other than the Excess Shares Trust),
(i) any Person or entity directly or indirectly through one or more
intermediaries controlling, controlled by, or under common control with another
Person or entity; (ii) any Person or entity, directly or indirectly owning,
controlling, or holding with power to vote ten percent (10%) or more of the
outstanding voting securities of another Person or entity; (iii) any officer,
director, partner or trustee of such Person or entity; (iv) any Person ten
percent (10%) or more of whose outstanding voting securities are directly or
indirectly owned, controlled or held, with power to vote, by such other Person;
and (v) if such other Person or entity is an officer, director, partner, or
trustee of a Person or entity, the Person or entity for which such Person or
entity acts in any such capacity.
"ASSET MANAGEMENT FEE" means the fee payable to the Advisor for day-to-day
professional management services in connection with the Company and its
investments in Properties and Mortgage Loans pursuant to the Advisory Agreement.
"ASSETS" means Properties, Mortgage Loans and Secured Equipment Leases,
collectively.
"AVERAGE INVESTED ASSETS" means, for a specified period, the average of the
aggregate book value of the assets of the Company invested, directly or
indirectly, in equity interests in and loans secured by real estate 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.
"BYLAWS" means the bylaws of the Company, as the same are in effect from
time to time.
"CODE" means the Internal Revenue Code of 1986, as amended from time to
time, or any successor statute thereto. Reference to any provision of the Code
shall mean such provision as in effect from time to time, as the same may be
amended, and any successor provision thereto, as interpreted by any applicable
regulations as in effect from time to time.
"COMPANY PROPERTY" means any and all property, real, personal or otherwise,
tangible or intangible, including Secured Equipment Leases and Mortgage Loans,
which is transferred or conveyed to the Company (including all rents, income,
profits and gains therefrom), which is owned or held by, or for the account of,
the Company.
"COMPETITIVE REAL ESTATE COMMISSION" means a real estate or brokerage
commission for the purchase or sale of property which is reasonable, customary,
and competitive in light of the size, type, and location of the property. The
total of all real estate commissions paid by the
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Company to all Persons (including the subordinated real estate disposition fee
payable to the Advisor) in connection with any Sale of one or more of the
Company's Properties shall not exceed the lesser of (i) a Competitive Real
Estate Commission or (ii) six percent (6%) of the gross sales price of the
Property or Properties.
"DIRECTORS," "BOARD OF DIRECTORS" or "BOARD" means, collectively, the
individuals named in Section 2.4 of these Amended and Restated Articles of
Incorporation so long as they continue in office and all other individuals who
have been duly elected and qualify as Directors of the Company hereunder.
"DISTRIBUTIONS" means any distributions of money or other property,
pursuant to Section 7.2(iv) hereof, by the Company to owners of Shares,
including distributions that may constitute a return of capital for federal
income tax purposes. The Company will make no distributions other than
distributions of money or readily marketable securities unless the requirements
of Section 7.2(iv) hereof are satisfied.
"EQUIPMENT" shall mean the furniture, fixtures and equipment used at
Restaurant Chains and Hotel Chains.
"EQUITY SHARES" means transferable shares of beneficial interest of the
Company of any class or series, including Common Shares or Preferred Shares.
"GROSS PROCEEDS" means the aggregate purchase price of all Shares sold for
the account of the Company, without deduction for Selling Commissions, volume
discounts, the marketing support and due diligence expense reimbursement fee or
Organizational and Offering Expenses. For the purpose of computing Gross
Proceeds, the purchase price of any Share for which reduced Selling Commissions
are paid to the Managing Dealer or a Soliciting Dealer (where net proceeds to
the Company are not reduced) shall be deemed to be $10.00.
"HOTEL CHAINS" means the national and regional hotel chains, primarily
limited service, extended stay and full service hotel chains, to be
selected by the Advisor, and who themselves or their franchisees will
either (i) lease Properties purchased by the Company, (ii) become borrowers
under Mortgage Loans, or (iii) become lessees or borrowers of Secured
Equipment Leases.
"INDEPENDENT DIRECTOR" means a Director who is not, and within the last two
(2) years has not been, directly or indirectly associated with the Advisor by
virtue of (i) ownership of an interest in the Advisor or its Affiliates, (ii)
employment by the Advisor or its Affiliates, (iii) service as an officer or
director of the Advisor or its Affiliates, (iv) performance of services, other
than as a Director, for the Company, (v) service as a director or trustee of
more than three (3) real estate investment trusts advised by the Advisor, or
(vi) maintenance of a material business or professional relationship with the
Advisor or any of its Affiliates. An indirect relationship shall include
circumstances in which a Director's spouse, parents, children, siblings,
mothers- or fathers-in-law, sons- or daughters-in-law or brothers- or
sisters-in-law is or has been associated with the Advisor, any of its Affiliates
or the Company. A business or professional relationship is considered material
if the gross revenue derived by the Director from the Advisor and Affiliates
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exceeds five percent (5%) of either the Company's annual gross revenue during
either of the last two (2) years or the Director's net worth on a fair market
value basis.
"INDEPENDENT EXPERT" means a Person or entity with no material current or
prior business or personal relationship with the Advisor or the Directors 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 Company.
"INITIAL PUBLIC OFFERING" means the offering and sale of Equity Shares of
the Company pursuant to the Company's first effective registration statement
covering such Common Shares filed under the Securities Act of 1933, as amended.
"INVESTED CAPITAL" means the amount calculated by multiplying the total
number of Shares purchased by Stockholders by the issue price, reduced by the
portion of any Distribution that is attributable to Net Sales Proceeds and by
any amounts paid by the Company to repurchase Shares pursuant to the Company's
plan for redemption of Shares.
"JOINT VENTURES" means those joint venture or general partnership
arrangements in which the Company is a co-venturer or general partner which are
established to acquire Properties.
"LEVERAGE" means the aggregate amount of indebtedness of the Company for
money borrowed (including purchase money mortgage loans) outstanding at any
time, both secured and unsecured.
"LINE OF CREDIT" means a line of credit in an amount up to $45,000,000, the
proceeds of which will be used to acquire Properties and make Mortgage Loans and
Secured Equipment Leases.
"LISTING" means the listing of the Shares of the Company on a national
securities exchange or over-the-counter market.
"MANAGER DEALER" means CNL Securities Corp., an Affiliate of the Advisor,
or such other Person or entity selected by the Board of Directors to act as the
managing dealer for the offering. CNL Securities Corp. is a member of the
National Association of Securities Dealers, Inc.
"MGCL" means the Maryland General Corporation Law as contained in the
Corporations and Associations Article of the Annotated Code of Maryland.
"MORTGAGE LOANS" means, in connection with mortgage financing provided by
the Company, notes or other evidences of indebtedness or obligations which are
secured or collateralized by real estate owned by the borrowers.
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"MORTGAGE" means mortgages, deeds of trust or other security interests on
or applicable to Real Property.
"NASAA REIT GUIDELINES" means the guidelines for Real Estate Investment
Trusts published by the North American Securities Administrators Association.
"NET ASSETS" means the total assets of the Company (other than
intangibles), at cost, before deducting depreciation or other non-cash reserves,
less total liabilities, calculated quarterly by the Company on a basis
consistently applied.
"NET INCOME" means for any period, the total revenues applicable to such
period, less the total expenses applicable to such period excluding
additions to reserves for depreciation, bad debts or other similar non-cash
reserves; provided, however, Net Income for purposes of calculating total
allowable Operating Expenses shall exclude the gain from the sale of the
Company's assets.
"NET SALES PROCEEDS" means in the case of a transaction described in clause
(i)(A) of the definition of Sale, the proceeds of any such transaction less the
amount of all real estate commissions and closing costs paid by the Company. In
the case of a transaction described in clause (i)(B) of such definition, Net
Sales Proceeds means the proceeds of any such transaction less the amount of any
legal and other selling expenses incurred in connection with such transaction.
In the case of a transaction described in clause (i)(C) of such definition, Net
Sales Proceeds means the proceeds of any such transaction actually distributed
to the Company from the Joint Venture. In the case of a transaction or series
of transactions described in clause (i)(D) of the Definition of Sale, Net Sales
Proceeds means the proceeds of any such transaction less the amount of all
commissions and closing costs paid by the Company. In the case of a transaction
described in clause (ii) of the definition of Sale, Net Sales Proceeds means the
proceeds of such transaction or series of transactions less all amounts
generated thereby and reinvested in one or more Properties within one hundred
eighty (180) days thereafter and less the amount of any real estate commissions,
closing costs, and legal and other selling expenses incurred by or allocated to
the Company in connection with such transaction or series of transactions. Net
Sales Proceeds shall also include, in the case of any lease of a Property
consisting of a building only, any Mortgage Loan or any Secured Equipment Lease,
any amounts from tenants, borrowers or lessees that the Company determines, in
its discretion, to be economically equivalent to the proceeds of a Sale. Net
Sales Proceeds shall not include, as determined by the Company in its sole
discretion, any amounts reinvested in one or more Properties, Mortgage Loans,
Secured Equipment Leases or other assets, to repay outstanding indebtedness, or
to establish reserves.
"OPERATING EXPENSES" mean all costs and expenses incurred by the Company,
as determined under generally accepted accounting principles, which in any way
are related to the operation of the Company or to Company business, including
(a) advisory fees, (b) the Soliciting Dealer Servicing Fee, (c) the Asset
Management Fee, (d) the Performance Fee, and (e) the Subordinated Incentive Fee,
but excluding (i) the expenses of raising capital such as Organizational and
Offering Expenses, legal, audit, accounting, underwriting, brokerage, listing,
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registration, and other fees, printing and other such expenses and tax incurred
in connection with the issuance, distribution, transfer, registration and
Listing of the Shares, (ii) interest payments, (iii) taxes, (iv) non-cash
expenditures such as depreciation, amortization and bad debt reserves, (v) the
Advisor's subordinated ten percent (10%) share of Net Sales Proceeds, and (vi)
Acquisition Fees and Acquisition Expenses, real estate commissions on the Sale
of property, and other expenses connected with the acquisition and ownership of
real estate interests, mortgage loans, or other property (such as the costs of
foreclosure, insurance premiums, legal services, maintenance, repair, and
improvement of property).
"ORGANIZATIONAL and OFFERING EXPENSES" means any and all costs and expenses,
other than Selling Commissions, the 0.5% marketing support and due diligence
expense reimbursement fee, and the Soliciting Dealer Servicing Fee incurred by
the Company, the Advisor or any Affiliate of either in connection with the
formation, qualification and registration of the Company and the marketing and
distribution of Shares, including, without limitation, the following: legal,
accounting and escrow fees; printing, amending, supplementing, mailing and
distributing costs; filing, registration and qualification fees and taxes;
telegraph and telephone costs; and all advertising and marketing expenses,
including the costs related to investor and broker-dealer sales meetings. The
Organizational and Offering Expenses paid by the Company in connection with
formation of the Company, together with all Selling Commissions, the 0.5%
marketing support and due diligence reimbursement fee, and the Soliciting Dealer
Servicing Fee incurred by the Company, will not exceed thirteen percent (13%) of
the proceeds raised in connection with such offering.
"PERFORMANCE FEE" means the fee payable to the Advisor under certain
circumstances if certain performance standards have been met and the
Subordinated Incentive Fee has not been paid.
"PERMANENT FINANCING" means financing to acquire Assets, to pay the Secured
Equipment Lease Servicing Fee to pay a fee of 4.5% of any Permanent Financing,
excluding amounts to fund Secured Equipment Leases, as Acquisition Fees, and
refinance outstanding amounts on the Line of Credit.
"PERSON" means an individual, corporation, partnership, estate, trust
(including a trust qualified under Section 401(a) or 501(c)(17) of the
Code), a portion of a trust permanently set aside for or to be used
exclusively for the purposes described in Section 642(c) of the Code,
association, private foundation within the meaning of Section 509(a) of the
Code, joint stock company or other entity, or any government or any agency
or political subdivision thereof, and also includes a group as that term is
used for purposes of Section 13(d)(3) of the Securities Exchange Act of
1934, as amended, but does not include (i) an underwriter that participates
in a public offering of Equity Shares for a period of sixty (60) days
following the initial purchase y such underwriter of such Equity Shares in
such public offering, or (ii) CNL Real Estate Advisors, Inc., during the
period ending December 31, 1997, provided that the foregoing exclusions
shall apply only if the ownership of such Equity Shares by an underwriter
or CNL Real Estate Advisors, Inc. would not cause the Company to fail to
qualify as a REIT by reason of being
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"closely held" within the meaning of Section 856(a) of the Code or otherwise
cause the Company to fail to qualify as a REIT.
"PROPERTY" or "PROPERTIES" means (i) the real properties, including the
buildings located thereon, (ii) the real properties only, or (iii) the buildings
only, which are acquired by the Company, either directly or through joint
venture arrangements or other partnerships.
"PROSPECTUS" means the same as that term is defined in Section 2(10) of the
Securities Act of 1933, including a preliminary prospectus, an offering circular
as described in Rule 256 of the General Rules and Regulations under the
Securities Act of 1933 or, in the case of an intrastate offering, any document
by whatever name known, utilized for the purpose of offering and selling
securities to the public.
"REAL ESTATE ASSET VALUE" or "CONTRACT PURCHASE PRICE" means the amount
actually paid or allocated to the purchase, development, construction or
improvement of a Property, exclusive of Acquisition Fees and Acquisition
Expenses.
"REAL PROPERTY" or "REAL ESTATE" means land, rights in land (including
leasehold interests), and any buildings, structures, improvements,
furnishings, fixtures and equipment located on or used in connection with
land and rights or interests in land.
"REIT" means real estate investment trust as defined pursuant to Sections
856 through 860 of the Code.
"REIT PROVISIONS OF THE CODE" means Sections 856 through 860 of the Code
and any successor or other provisions of the Code relating to real estate
investment trusts (including provisions as to the attribution of ownership
of beneficial interests therein) and the regulations promulgated
thereunder.
"RESTAURANT CHAINS" means the national and regional restaurant chains,
primarily fast-food, family-style, and casual-dining chains, to be selected by
the Advisor, and who themselves or their franchisees will either (i) lease
Properties purchased by the Company, (ii) become borrowers under Mortgage Loans
or (iii) become lessees or borrowers of Secured Equipment Leases.
"ROLL-UP ENTITY" means a partnership, real estate investment trust,
corporation, trust or similar entity that would be created or would survive
after the successful completion of a proposed Roll-Up Transaction.
"ROLL-UP TRANSACTION" means a transaction involving the acquisition,
merger, conversion, or consolidation, 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 listed on a national securities exchange or included for
quotation on the National Market System of the National Association of
Securities Dealers Automated Quotation System for at least 12 months; 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
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significant adverse change in Stockholder voting rights, the term of existence
of the Company, compensation to the Advisor or the investment objectives of the
Company.
"SALE" or "SALES" (i) means any transaction or series of transactions
whereby: (A) the Company sells, grants, transfers, conveys or relinquishes its
ownership of any Property or portion thereof, including the lease of any
Property consisting of the building only, and including any event with respect
to any Property which gives rise to a significant amount of insurance proceeds
or condemnation awards; (B) the Company sells, grants, transfers, conveys or
relinquishes its ownership of all or substantially all of the interest of the
Company in any Joint Venture in which it is a co-venturer or partner; (C) any
Joint Venture in which the Company as a co-venturer or partner sells, grants,
transfers, conveys or relinquishes its ownership of any Property or portion
thereof, including any event with respect to any Property which gives rise to
insurance claims or condemnation awards; or (D) the Company sells, grants,
conveys, or relinquishes its interest in any Mortgage Loan, Secured Equipment
Lease, or other asset, or portion thereof, including any event with respect to
any Mortgage Loan, Secured Equipment Lease or other asset which gives rise to a
significant amount of insurance proceeds or similar awards, but (ii) shall not
include any transaction or series of transactions specified in clause (i)(A),
(i)(B), or (i)(C) above in which the proceeds of such transaction or series of
transactions are reinvested in one or more Properties within one hundred eighty
(180) days thereafter.
"SECURED EQUIPMENT LEASES" means the Equipment financing made available by
the Company to operators of Restaurant Chains and Hotel Chains pursuant to which
the Company will finance, through loans or direct financing leases, the
Equipment.
"SECURED EQUIPMENT LEASE SERVICING FEE" means the fee payable to the
Advisor by the Company out of the proceeds of the Line of Credit or Permanent
Financing for negotiating Secured Equipment Leases and supervising the Secured
Equipment Lease program equal to 2% of the purchase price of the Equipment
subject to each Secured Equipment Lease and paid upon entering into such lease
or loan.
"SECURITIES" means Equity Shares, Excess Shares, any other stock, shares or
other evidences of equity or beneficial or other interests, voting trust
certificates, bonds, debentures, notes or other evidences of indebtedness,
secured or unsecured, convertible, subordinated or otherwise, or in general any
instruments commonly known as "securities" or any certificates of interest,
shares or participations in, temporary or interim certificates for, receipts
for, guarantees of, or warrants, options or rights to subscribe to, purchase or
acquire, any of the foregoing.
"SELLING COMMISSIONS" means any and all commissions payable to
underwriters, managing dealers, or other broker-dealers in connection with the
sale of Shares, including, without limitation, commissions payable to CNL
Securities Corp.
"SHARES" means the up to 16,500,000 Shares of common stock of the Company
to be sold in the Initial Public Offering.
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"SOLICITING DEALER SERVICING FEE" means an annual fee of .20% of Invested
Capital on December 31 of each year following the year in which the offering of
the Shares terminates, payable to the Managing Dealer, which in turn may reallow
all or a portion of such fee to the Soliciting Dealers whose clients hold Shares
on such date.
"SOLICITING DEALERS" means those broker-dealers that are members of the
National Association of Securities Dealers, Inc., or that are exempt from
broker-dealer registration, and that, in either case, enter into participating
broker or other agreements with the Managing Dealer to sell Shares.
"SPONSOR" means any Person directly or indirectly instrumental in
organizing, wholly or in part, the Company or any Person who will control,
manage or participate in the management of the Company, and any Affiliate
of such Person. Not included is any Person whose only relationship with
the Company is that of an independent property manager of Company assets,
and whose only compensation is as such. Sponsor does not include wholly
independent third parties such as attorneys, accountants, and underwriters
whose only compensation is for professional services. A Person may also be
deemed a Sponsor of the Company by:
a. taking the initiative, directly or indirectly, in founding or
organizing the business or enterprise of the Company, either
alone or in conjunction with one or more other Persons;
b. receiving a material participation in the Company in connection
with the founding or organizing of the business of the Company,
in consideration of services or property, or both services and
property;
c. having a substantial number of relationships and contacts
with the Company;
d. possessing significant rights to control Company properties;
e. receiving fees for providing services to the Company which are
paid on a basis that is not customary in the industry; or
f. providing goods or services to the Company on a basis which
was not negotiated at arms length with the Company.
"STOCK OPTION PLAN" means a plan that provides for the matters set forth in
Rule 260.140.41 of Section 25140 of the Corporations Code of California, as in
effect as of the date of these Articles of Incorporation.
"STOCKHOLDER'S 8% RETURN," as of each date, means an aggregate amount equal
to an eight percent (8%) cumulative, noncompounded, annual return on Invested
Capital.
"STOCKHOLDERS" means the registered holders of the Company's Equity Shares.
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"SUBORDINATED INCENTIVE FEE" means the fee payable to the Advisor under
certain circumstances if the Shares are listed on a national securities exchange
or over-the-counter market.
"SUCCESSOR" means any successor in interest of the Company.
"TERMINATION DATE" means the date of termination of the Advisory Agreement.
"TOTAL PROCEEDS" means Gross Proceeds plus loan proceeds from Permanent
Financing, excluding loan proceeds used to finance Secured Equipment Leases.
"UNIMPROVED REAL PROPERTY" means Property in which the Company has an
equity interest that is not acquired for the purpose of producing rental or
other operating income, that has no development or construction in process
and for which no development or construction is planned, in good faith, to
commence within one year.
ARTICLE II
BOARD OF DIRECTORS
SECTION 2.1 NUMBER. The number of Directors initially shall be five (5),
which number may be increased or decreased from time to time by resolution of
the Directors then in office or by a majority vote of the Stockholders entitled
to vote: provided, however, that the total number of Directors shall be not
fewer than three (3) and not more than fifteen (15), subject to the Bylaws and
to any express rights of any holders of any series of Preferred Shares to elect
additional directors under specified circumstances. A majority of the Board of
Directors will be Independent Directors except for a period of 90 days after the
death, removal or resignation of an Independent Director. Independent Directors
shall nominate replacements for vacancies in the Independent Director positions.
No reduction in the number of Directors shall cause the removal of any Director
from office prior to the expiration of his term. Any vacancy created by an
increase in the number of Directors will be filled, at any regular meeting or at
any special meeting of the Directors called for that purpose, by a majority of
the Directors. Any other vacancy will be filled at any annual meeting or at any
special meeting of the Stockholders called for that purpose, by a majority of
the Common Shares present in person or by proxy and entitled to vote. For the
purposes of voting for Directors, each Share of stock may be voted for as many
individuals as there are directors to be elected and for whose election the
Share is entitled to be voted, or as may otherwise be required by the MGCL or
other applicable law as in effect from time to time.
SECTION 2.2 EXPERIENCE. A Director shall have had at least three (3)
years of relevant experience demonstrating the knowledge and experience required
to successfully acquire and manage the type of assets being acquired by the
Company. At least one of the Independent Directors shall have three (3) years
of relevant real estate experience.
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SECTION 2.3 COMMITTEES. Subject to the MGCL, the Directors may establish
such committees as they deem appropriate, in their discretion, provided that the
majority of the members of each committee are Independent Directors.
SECTION 2.4 INITIAL BOARD; TERM. The initial Directors are James M.
Seneff, Jr., Robert A. Bourne, G. Richard Hostetter, J. Joseph Kruse and Richard
C. Huseman. Each Director shall hold office for one (1) year, until the next
annual meeting of Stockholders and until his successor shall have been duly
elected and shall have qualified. Directors may be elected to an unlimited
number of successive terms.
The names and address of the initial Directors are as follows:
Name Address
---- -------
James M. Seneff, Jr. 400 E. South Street
Orlando, Florida 32801
Robert A. Bourne 400 E. South Street
Orlando, Florida 32801
G. Richard Hostetter 400 E. South Street
Orlando, Florida 32801
J. Joseph Kruse 400 E. South Street
Orlando, Florida 32801
Richard C. Huseman 400 E. South Street
Orlando, Florida 32801
SECTION 2.5 FIDUCIARY OBLIGATIONS. The Directors serve in a fiduciary
capacity to the Company and have a fiduciary duty to the Stockholders of the
Company, including a specific fiduciary duty to supervise the relationship of
the Company with the Advisor.
SECTION 2.6 APPROVAL BY INDEPENDENT DIRECTORS. A majority of Independent
Directors must approve all matters to which Sections 2.1, 3.2(vii) and (xii),
3.3, 4.1, 4.2, 4.6, 4.7, 4.8, 4.10, 4.13, 5.2, 5.4(xiii) and (xiv), 6.3, 6.4,
8.1, 8.2, 9.2 and 9.4 herein apply.
SECTION 2.7 RESIGNATION, REMOVAL OR DEATH. Any Director may resign by
written notice to the Board of Directors, effective upon execution and
delivery to the Company of such written notice or upon any future date
specified in the notice. A Director may be removed from office with or
without cause only at a meeting of the Stockholders called for that
purpose, by the affirmative vote of the holders of not less than a majority
of the Equity Shares then outstanding and entitled to vote, subject to the
rights of any Preferred Shares to vote for such Directors. The notice of
such meeting shall indicate that the purpose, or one of the purposes, of
such meeting is to determine if a Director should be removed.
SECTION 2.8. BUSINESS COMBINATION STATUTE. Notwithstanding any other
provision of these Articles of Incorporation or any contrary provision of
law, the Maryland Business
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Combination Statute, found in Title 3, subtitle 6 of the MGCL, as amended from
time to time, or any successor statute thereto, shall not apply to any "business
combination" (as defined in Section 3-601(e) of the MGCL, as amended from time
to time, or any successor statute thereto) of the Company and any Person.
SECTION 2.9. CONTROL SHARE ACQUISITION STATUTE. Notwithstanding any
other provision of these Articles of Incorporation or any contrary provision of
law, the Maryland Control Share Acquisition Statute, found in Title 3, subtitle
7 of the MGCL, as amended from time to time, or any successor statute thereto
shall not apply to any acquisition of Securities of the Company by any Person.
ARTICLE III
POWERS OF DIRECTORS
SECTION 3.1. General. Subject to the express limitations herein or in
the Bylaws and to the general standard of care required of directors under the
MGCL and other applicable law, (i) the business and affairs of the Company shall
be managed under the direction of the Board of Directors and (ii) the Directors
shall have full, exclusive and absolute power, control and authority over the
Company Property and over the business of the Company as if they, in their own
right, were the sole owners thereof, except as otherwise limited by these
Articles of Incorporation. The Directors have established the written policies
on investments and borrowing set forth in this Article III and Article V hereof
and shall monitor the administrative procedures, investment operations and
performance of the Company and the Advisor to assure that such policies are
carried out. The Directors may take any actions that, in their sole judgment
and discretion, are necessary or desirable to conduct the business of the
Company. A majority of the Board of Directors, including a majority of
Independent Directors, hereby ratify these Articles of Incorporation, which
shall be construed with a presumption in favor of the grant of power and
authority to the Directors. Any construction of these Articles of Incorporation
or determination made in good faith by the Directors concerning their powers and
authority hereunder shall be conclusive. The enumeration and definition of
particular powers of the Directors included in this Article III shall in no way
be limited or restricted by reference to or inference from the terms of this or
any other provision of these Articles of Incorporation or construed or deemed by
inference or otherwise in any manner to exclude or limit the powers conferred
upon the Directors under the general laws of the State of Maryland as now or
hereafter in force.
SECTION 3.2. SPECIFIC POWERS AND AUTHORITY. Subject only to the
expresslimitations herein, and in addition to all other powers and authority
conferred by these Articles of Incorporation or by law, the Directors, without
any vote, action or consent by the Stockholders, shall have and may exercise, at
any time or times, in the name of the Company or on its behalf the following
powers and authorities:
(i) INVESTMENTS. Subject to Article V and Section 9.5 hereof, to
invest in, purchase or otherwise acquire and to hold real, personal or mixed,
tangible or intangible, property of any kind wherever located, or rights or
interests therein or in connection therewith, all without regard
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to whether such property, interests or rights are authorized by law for the
investment of funds held by trustees or other fiduciaries, or whether
obligations the Company acquires have a term greater or lesser than the term of
office of the Directors or the possible termination of the Company, for such
consideration as the Directors may deem proper (including cash, property of any
kind or Securities of the Company); provided, however, that the Directors shall
take such actions as they deem necessary and desirable to comply with any
requirements of the MGCL relating to the types of assets held by the Company.
(ii) REIT QUALIFICATION. The Board of Directors shall use its
best efforts to cause the Company and its Stockholders to qualify for U.S.
federal income tax treatment in accordance with the provisions of the Code
applicable to REITs (as those terms are defined in Section 1.5 hereof). In
furtherance of the foregoing, the Board of Directors shall use its best efforts
to take such actions as are necessary, and may take such actions as it deems
desirable (in its sole discretion) to preserve the status of the Company as a
REIT; provided, however, that in the event that the Board of Directors
determines, by vote of at least two-thirds (2/3) of the Directors, that it no
longer is in the best interests of the Company to qualify as a REIT, the Board
of Directors shall take such actions as are required by the Code, the MGCL and
other applicable law, to cause the matter of termination of qualification as a
REIT to be submitted to a vote of the Stockholders of the Company pursuant to
Section 8.2.
(iii) SALE, DISPOSITION AND USE OF COMPANY PROPERTY. Subject to
Article V and Sections 9.5 and 10.3 hereof, the Board of Directors shall have
the authority to sell, rent, lease, hire, exchange, release, partition, assign,
mortgage, grant security interests in, encumber, negotiate, dedicate, grant
easements in and options with respect to, convey, transfer (including transfers
to entities wholly or partially owned by the Company or the Directors) or
otherwise dispose of any or all of the Company Property by deeds (including
deeds in lieu of foreclosure with or without consideration), 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 Company or the Directors by one or more of
the Directors or by a duly authorized officer, employee, agent or nominee of the
Company, on such terms as they deem appropriate; to give consents and make
contracts relating to the Company Property and its use or other property or
matters; to develop, improve, manage, use, alter or otherwise deal with the
Company Property; and to rent, lease or hire from others property of any kind;
provided, however, that the Company may not use or apply land for any purposes
not permitted by applicable law.
(iv) FINANCINGS. To borrow or, in any other manner, raise money
for the purposes and on the terms they determine, which terms may (i) include
evidencing the same by issuance of Securities of the Company and (ii) may have
such provisions as the Directors determine; to reacquire such Securities of the
Excess Shares Trust; to enter into other contracts or obligations on behalf of
the Excess Shares Trust; to guarantee, indemnify or act as surety with respect
to payment or performance of obligations of any Person; to mortgage, pledge,
assign, grant security interests in or otherwise encumber the Company Property
to secure any such Securities of the Company, contracts or obligations
(including guarantees, indemnifications and suretyships); and to renew, modify,
release, compromise, extend, consolidate or cancel, in whole or in part, any
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obligation to or of the Company or participate in any reorganization of obligors
to the Company; provided, however, that the Company's Leverage, in the absence
of a satisfactory showing that a higher level of borrowing is appropriate, may
not exceed 300% of Net Assets. Any excess in borrowing over such 300% level
shall occur only with approval by a majority Independent Directors and will be
discussed and explained to Stockholders in the first quarterly report of the
Company prepared after such approval occurs.
(v) LENDING. Subject to the provisions of Section 9.5 hereof, to
lend money or other Company Property on such terms, for such purposes and to
such Persons as they may determine.
(vi) SECURED EQUIPMENT LEASES. To engage in the business of
offering furniture, fixture, and equipment financing to the operators of
Restaurant Chains and other businesses, provided, however, that the Company
shall use its best efforts to ensure that the total value of Secured Equipment
Leases, in the aggregate will not exceed 25% of the Company's total assets and
that Secured Equipment Leases to a single lessee or borrower, in the aggregate,
will not exceed 5% of the Company's total assets.
(vii) ISSUANCE OF SECURITIES. Subject to the provisions of
Article VII hereof, to create and authorize and direct the issuance (on either
a pro rata or a non-pro rata basis) by the Company, in shares, units or amounts
of one or more types, series or classes, of Securities of the Company, which may
have such voting rights, dividend or interest rates, preferences,
subordinations, conversion or redemption prices or rights; maturity dates,
distribution, exchange, or liquidation rights or other rights as the Directors
may determine, without vote of or other action by the Stockholders, to such
Persons for such consideration, at such time or times and in such manner and on
such terms as the Directors determine, to list any of the Securities of the
Company on any securities exchange; and to purchase or otherwise acquire, hold,
cancel, reissue, sell and transfer any Securities of the Company.
(viii) EXPENSES AND TAXES. To pay any charges, expenses or
liabilities necessary or desirable, in the sole discretion of the Directors, for
carrying out the purposes of these Articles of Incorporation and conducting
business of the Company, including compensation or fees to Directors, officers,
employees and agents of the Company, and to Persons contracting with the
Company, and any taxes, levies, charges and assessments of any kind imposed upon
or chargeable against the Company, the Company Property or the Directors in
connection therewith; and to prepare and file any tax returns, reports or other
documents and take any other appropriate action relating to the payment of any
such charges, expenses or liabilities.
(ix) COLLECTION AND ENFORCEMENT. To collect, sue for and receive
money or other property due to the Company; to consent to extensions of the time
for payment, or to the renewal, of any Securities or obligations; to engage or
to intervene in, prosecute, defend, compound, enforce, compromise, release,
abandon or adjust any actions, suits, proceedings, disputes, claims, demands,
security interests or things relating to the Company, the Company Property or
the Company's affairs; to exercise any rights and enter into any agreements and
take any other action necessary or desirable in connection with the foregoing.
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(x) DEPOSITS. To deposit funds or Securities constituting part
of the Company Property in banks, trust companies, savings and loan
associations, financial institutions and other depositories, whether or not such
deposits will draw interest, subject to withdrawal on such terms and in such
manner as the Directors determine.
(xi) ALOCATION; ACCOUNTS. To determine whether moneys, profits
or other assets of the Company shall be charged or credited to, or allocated
between, income and capital, including whether or not to amortize any premium or
discount and to determine in what manner any expenses or disbursements are to be
borne as between income and capital (regardless of how such items would normally
or otherwise be charged to or allocated between income and capital without such
determination); to treat any dividend or other distribution on any investment
as, or apportion it between, income and capital; in their discretion to provide
reserves for depreciation, amortization, obsolescence or other purposes in
respect of any Company Property in such amounts and by such methods as they
determine; to determine what constitutes net earnings, profits or surplus; to
determine the method or form in which the accounts and records of the Company
shall be maintained; and to allocate to the Stockholders' equity account less
than all of the consideration paid for Securities and to allocate the balance to
paid-in capital or capital surplus.
(xii) VALUATION OF PROPERTY. To determine the value of all or
any part of the Company Property and of any services, Securities, property or
other consideration to be furnished to or acquired by the Company, and to
revalue all or any part of the Company Property, all in accordance with such
appraisals or other information as are reasonable, in their sole judgment.
(xiv) OWNERSHIP AND VOTING POWERS. To exercise all of the
rights, powers, options and privileges pertaining to the ownership of any
Mortgages, Securities, Real Estate, Secured Equipment Leases and other Company
Property to the same extent that an individual owner might, including without
limitation to vote or give any consent, request or notice or waive any notice,
either in person or by proxy or power of attorney, which proxies and powers of
attorney may be for any general or special meetings or action, and may include
the exercise of discretionary powers.
(xiv) OFFICERS, ETC.; DELEGATION OF POWERS. To elect, appoint or
employ such officers for the Company and such committees of the Board of
Directors with such powers and duties as the Directors may determine, the
Company's Bylaws provide or the MGCL requires; to engage, employ or contract
with and pay compensation to any Person (including subject to Section 9.5
hereof, any Director and Person who is an Affiliate of any Director) as agent,
representative, Advisor, member of an advisory board, employee or independent
contractor (including advisors, consultants, transfer agents, registrars,
underwriters, accountants, attorneys-at-law, real estate agents, property and
other managers, appraisers, brokers, architects, engineers, construction
managers, general contractors or otherwise) in one or more capacities, to
perform such services on such terms as the Directors may determine; to delegate
to one or more Directors, officers or other Persons engaged or employed as
aforesaid or to committees of Directors or to the Advisor, the performance of
acts or other things (including granting of consents), the making of decisions
and the execution of such deeds, contracts, leases or other instruments, either
in the names of the
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Company, the Directors or as their attorneys or otherwise, as the Directors may
determine; and to establish such committees as they deem appropriate.
(xv) ASSOCIATIONS. Subject to Section 9.5 hereof, to cause the
Company to enter into joint ventures, general or limited partnerships,
participation or agency arrangements or any other lawful combinations,
relationships or associations of any kind.
(xvii) REORGANIZATIONS, ETC. Subject to Sections 10.2 and 10.3
hereof, to cause to be organized or assist in organizing any Person under the
laws of any jurisdiction to acquire all or any part of the Company Property,
carry on any business in which the Company shall have an interest or otherwise
exercise the powers the Directors deem necessary, useful or desirable to carry
on the business of the Company or to carry out the provisions of these Articles
of Incorporation, to merge or consolidate the Company with any Person; to sell,
rent, lease, hire, convey, negotiate, assign, exchange or transfer all or any
part of the Company Property to or with any Person in exchange for Securities of
such Person or otherwise; and to lend money to, subscribe for and purchase the
Securities of, and enter into any contracts with, any Person in which the
Company holds, or is about to acquire, Securities or any other interests.
(xvii) INSURANCE. To purchase and pay for out of Company
Property insurance policies insuring the Stockholders, Company and the Company
Property against any and all risks, and insuring the Directors, Advisors and
Affiliates of the Company individually (each an "Insured") against all claims
and liabilities of every nature arising by reason of holding or having held any
such status, office or position or by reason of any action alleged to have been
taken or omitted by the Insured in such capacity, whether or not the Company
would have the power to indemnify against such claim or liability, provided that
such insurance be limited to the indemnification permitted by Section 9.2 hereof
in regard to any liability or loss resulting from negligence, gross negligence,
misconduct, willful misconduct or an alleged violation of federal or state
securities laws. Nothing contained herein shall preclude the Company from
purchasing and paying for such types of insurance, including extended coverage
liability and casualty and workers' compensation, as would be customary for any
Person owning comparable assets and engaged in a similar business, or from
naming the Insured as an additional insured party thereunder, provided that such
addition does not add to the premiums payable by the Company. The Board of
Directors' power to purchase and pay for such insurance policies shall be
limited to policies that comply with all applicable state laws and the NASAA
REIT Guidelines.
(xviii) DISTRIBUTIONS. To declare and pay dividends or other
Distributions to Stockholders, subject to the provisions of Section 7.2 hereof.
(xix) DISCONTINUE OPERATIONS; BANKRUPTCY. To discontinue the
operations of the Company (subject to Section 10.2 hereof); to petition or
apply for relief under any provision of federal or state bankruptcy, insolvency
or reorganization laws or similar laws for the relief of debtors; to permit any
Company Property to be foreclosed upon without raising any legal or equitable
defenses that may be available to the Company or the Directors or otherwise
defending or responding to such foreclosure; to confess judgment against the
Excess Shares Trust (as hereinafter defined); or to take such other action with
respect to indebtedness or other obligations
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of the Directors, the Company Property or the Company as the Directors, in such
capacity, and in their discretion may determine.
(xx) TERMINATION of STATUS. To terminate the status of the
Company as a real estate investment trust under the REIT Provisions of the Code;
provided, however, that the Board of Directors shall take no action to terminate
the Company's status as a real estate investment trust under the REIT Provisions
of the Code until such time as (i) the Board of Directors adopts a resolution
recommending that the Company terminate its status as a real estate investment
trust under the REIT Provisions of the Code, (ii) the Board of Directors
presents the resolution at an annual or special meeting of the Stockholders and
(iii) such resolution is approved by the holders of a majority of the issued and
outstanding Common Shares (as defined in Section 7.2(ii) hereof).
(xxi) FISCAL YEAR. Subject to the Code, to adopt, and from time
to time change, a fiscal year for the Company.
(xxii) SEAL. 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
Company.
(xxiii) BYLAWS. To adopt, implement and from time to time alter,
amend or repeal the Bylaws of the Company relating to the business and
organization of the Company, provided that such amendments are not inconsistent
with the provisions of these Articles of Incorporation, and further provided
that the Directors may not amend the Bylaws, without the affirmative vote of a
majority of the Equity Shares, to the extent that such amendments adversely
affect the rights, preferences and privileges of Stockholders.
(xxiv) Listing Shares. To cause the Listing of the Shares at any
time after completion of the Initial Public Offering but in no event shall such
Listing occur more than ten (10) years after completion of the offering.
(xxv) FURTHER POWERS. To do all other acts and things and
execute and deliver all instruments incident to the foregoing powers, and to
exercise all powers which they deem necessary, useful or desirable to carry on
the business of the Company or to carry out the provisions of these Articles of
Incorporation, even if such powers are not specifically provided hereby.
SECTION 3.3 DETERMINATION OF BEST INTEREST OF COMPANY. In determining
what is in the best interest of the Company, a Director shall consider the
interests of the Stockholders of the Company and, in his or her sole and
absolute discretion, may consider (i) the interests of the Company's employees,
suppliers, creditors and customers, (ii) the economy of the nation, (iii)
community and societal interests, and (iv) the long-term as well as short-term
interests of the Company and its Stockholders, including the possibility that
these interests may be best served by the continued independence of the Company.
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ARTICLE IV
ADVISOR
SECTION 4.1 APPOINTMENT AND INITIAL INVESTMENT OF ADVISOR. The Directors
are responsible for setting the general policies of the Company and for the
general supervision of its business conducted by officers, agents, employees,
advisors or independent contractors of the Company. However, the Directors are
not required personally to conduct the business of the Company, and they may
(but need not) appoint, employ or contract with any Person (including a Person
Affiliated with any Director) as an Advisor and may grant or delegate such
authority to the Advisor as the Directors may, in their sole discretion, deem
necessary or desirable. The term of retention of any Advisor shall not exceed
one (1) year, although there is no limit to the number of times that a
particular Advisor may be retained. The Advisor is the holder of 20,000 Shares,
representing an initial investment of $200,000. The Advisor or any Affiliate
may not sell this initial investment while the Advisor remains a Sponsor but may
transfer the 20,000 Shares to other Affiliates.
SECTION 4.2. SUPERVISION OF ADVISOR. The Directors shall evaluate the
performance of the Advisor before entering into or renewing an advisory contract
and the criteria used in such evaluation shall be reflected in the minutes of
meetings of the Board. The Directors may exercise broad discretion in allowing
the Advisor to administer and regulate the operations of the Company, to act as
agent for the Company, to execute documents on behalf of the Company and to make
executive decisions which conform to general policies and principles established
by the Directors.
The Directors shall establish written policies on investments and borrowing
and shall monitor the administrative procedures, investment operations and
performance of the Company and the Advisor to assure that such procedures,
operations and programs are in the best interests of the Stockholders and are
fulfilled.
The Board of Directors is also responsible for reviewing the fees and
expenses of the Company at least annually or with sufficient frequency to
determine that the expenses incurred are in the best interests of the
Stockholders. In addition, a majority of the Independent Directors and a
majority of Directors not otherwise interested in the transaction must approve
each transaction with the Advisor or its Affiliates. A majority of the
Independent Directors also will be responsible for reviewing the performance of
the Advisor and determining that compensation to be paid to the Advisor is
reasonable in relation to the nature and quality of services to be performed and
the investment performance of the Company and that the provisions of the
Advisory Agreement are being carried out. Specifically, the Independent
Directors will consider factors such as the Net Assets and Net Income of the
Company, the amount of the fee paid to the Advisor in relation to the size,
composition and performance of the Company's portfolio, the success of the
Advisor in generating opportunities that meet the investment objectives of the
Company, rates charged to other REITs and to investors other than REITs by
advisors performing the same or similar services, additional revenues realized
by the Advisor and its Affiliates through their relationship with the Company,
whether paid by the Company or by others with whom the Company does
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business, the quality and extent of service and advice furnished by the Advisor,
the performance of the investment portfolio of the Company, including income,
conservation or appreciation of capital, frequency of problem investments and
competence in dealing with distress situations, and the quality of the portfolio
of the Company relative to the investments generated by the Advisor for its own
account. The Independent Directors also shall determine whether any successor
Advisor possesses sufficient qualifications to perform the advisory function for
the Company and whether the compensation provided for in its contract with the
Company is justified.
SECTION 4.3 FIDUCIARY OBLIGATIONS. The Advisor has a fiduciary
responsibility to the Company and to the Stockholders.
SECTION 4.4 AFFILIATION AND FUNCTIONS. The Directors, by resolution or
in the Bylaws, may provide guidelines, provisions, or requirements concerning
the affiliation and functions of the Advisor.
SECTION 4.5 TERMINATION. Either a majority of the Independent Directors
or the Advisor may terminate the advisory contract on sixty (60) days' written
notice without cause or penalty, and, in such event, the Advisor will cooperate
with the Company and the Directors in making an orderly transition of the
advisory function.
SECTION 4.6 REAL ESTATE COMMISSION ON SALE OF PROPERTY. The Company
shall pay the Advisor a deferred, subordinated real estate disposition fee upon
Sale of one or more Properties, in an amount equal to the lesser of (i) one-half
(1/2) of a Competitive Real Estate Commission, or (ii) three percent (3%) of the
sales price of such Property or Properties. Payment of such fee shall be made
only if the Advisor provides a substantial amount of services in connection with
the Sale of a Property or Properties and shall be subordinated to receipt by the
Stockholders of Distributions equal to the sum of (i) their aggregate
Stockholders' 8% Return and (ii) their aggregate Invested Capital. If, at the
time of a Sale, payment of such disposition fee is deferred because the
subordination conditions have not been satisfied, then the disposition fee shall
be paid at such later time as the subordination conditions are satisfied. Upon
Listing, if the Advisor has accrued but not been paid such real estate
disposition fee, then for purposes of determining whether the subordination
conditions have been satisfied, Stockholders will be deemed to have received a
Distribution in the amount equal to the product of the total number of Shares
outstanding and the average closing price of the Shares over a period, beginning
180 days after Listing, of 30 days during which the Shares are traded.
SECTION 4.7 SUBORDINATED SHARE OF NET SALES PROCEEDS. The Company shall
pay the Advisor a deferred, subordinated share from Sales of assets of the
Company, whether or not in liquidation of the Company, equal to 10% of Net Sales
Proceeds remaining after receipt by the Stockholders of Distributions equal to
the sum of (i) the Stockholders' 8% Return and (ii) 100% of Invested Capital.
Following Listing, no share of Net Sales Proceeds will be paid to the Advisor.
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SECTION 4.8 INCENTIVE FEES.
(i) At such time, if any, as Listing occurs, the Advisor shall be
paid the Subordinated Incentive Fee in an amount equal to ten percent (10%) of
the amount by which (i) the market value of the Company (as defined below) plus
the total Distributions paid to Stockholders from the Company's inception until
the date of Listing exceeds (ii) the sum of (A) one hundred percent (100% ) of
Invested Capital and (B) the total Distributions required to be paid to the
Stockholders in order to pay the Stockholders' 8% Return from inception through
the date the market value is determined. For purposes of calculating the
Subordinated Incentive Fee, the market value of the Company shall be the average
closing price or average of bid and asked price, as the case may be, over a
period of thirty (30) days during which the Shares are traded with such period
beginning one hundred eighty (180) days after Listing. In the case of multiple
Advisors, Advisors and any Affiliate shall be allowed incentive fees provided
such fees are distributed by a proportional method reasonably designed to
reflect the value added to Company assets by each respective Advisor or any
Affiliate. The Subordinated Incentive Fee will be reduced by the amount of any
prior payment to the Advisor of a deferred, subordinated share of Net Sales
Proceeds from Sales of assets of the Company.
(ii) In no event shall the Company pay a single Advisor both the
Subordinated Incentive Fee and the Performance Fee.
(iii) In the event that the Company becomes a perpetual life
entity, which will occur if the Shares become listed on a national securities
exchange or over-the-counter market, the Company and the Advisor will negotiate
in good faith a fee structure appropriate for an entity with a perpetual life,
subject to approval by a majority of the Independent Directors. In negotiating
a new fee structure, the Independent Directors shall consider all of the factors
they deem relevant. These are expected to include, but will not necessarily be
limited to: (i) the amount of the advisory fee in relation to the asset value,
composition, and profitability of the Company's portfolio; (ii) the success of
the Advisor in generating opportunities that meet the investment objectives of
the Company; (iii) the rates charged to other REITs and to investors other than
REITs by Advisors that perform the same or similar services; (iv) additional
revenues realized by the Advisor and its Affiliates through their relationship
with the Company, including loan administration, underwriting or broker
commissions, servicing, engineering, inspection and other fees, whether paid by
the Company or by others with whom the Company does business; (v) the quality
and extent of service and advice furnished by the Advisor; (vi) the performance
of the investment portfolio of the Company, including income, conservation or
appreciation of capital, and number and frequency of problem investments; and
(vii) the quality of the Property portfolio of the Company in relationship to
the investments generated by the Advisor for its own account. The Board of
Directors, including a majority of the Independent Directors, may not approve a
new fee structure that, in its judgment, is more favorable to the Advisor than
the current fee structure.
SECTION 4.9 PERFORMANCE FEE. Upon termination of the Advisory Agreement,
the Advisor shall be entitled to receive a Performance Fee if performance
standards satisfactory to a majority of the Board of Directors, including a
majority of the Independent Directors, when
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compared to (a) the performance of the Advisor in comparison with its
performance for other entities; and (b) the performance of other advisors for
similar entities, have been met. If Listing has not occurred, the Performance
Fee, if any, shall equal ten percent (10%) of the amount, if any, by which (i)
the appraised value of the assets of the Company on the Termination Date, less
the amount of all indebtedness secured by such assets, plus the total
Distributions paid to Stockholders from the Company's inception through the
Termination Date, exceeds (ii) Invested Capital plus an amount equal to the
Stockholders' 8% Return from inception through the Termination Date. The
Advisor shall be entitled to receive all accrued but unpaid compensation and
expense reimbursements in cash within thirty (30) days of the Termination Date.
All other amounts payable to the Advisor in the event of a termination shall be
evidenced by a promissory note and shall be payable from time to time. The
Performance Fee shall be paid in twelve (12) equal quarterly installments
without interest on the unpaid balance, provided, however, that no payment will
be made in any quarter in which such payment would jeopardize the Company's REIT
status, in which case any such payment or payments will be delayed until the
next quarter in which payment would not jeopardize REIT status. Notwithstanding
the preceding sentence, any amounts which may be deemed payable at the date the
obligation to pay the Performance Fee is incurred which relate to the
appreciation of the Company's assets shall be an amount which provides
compensation to the terminated Advisor only for that portion of the holding
period for the respective assets during which such terminated Advisor provided
services to the Company. Upon Listing, the Performance Fee, if any, payable
thereafter will be as negotiated between the Company and the Advisor. The
Advisor shall not be entitled to payment of the Performance Fee in the event the
Advisory Agreement is terminated because of failure of the Company and the
Advisor to establish a fee structure appropriate for a perpetual-life entity at
such time, if any, as the Shares become listed on a national securities exchange
or over-the-counter market. The Performance Fee, to the extent payable at the
time of Listing, will not be paid in the event that the Subordinated Incentive
Fee is paid.
SECTION 4.10 ACQUISITION FEE and ACQUISITION EXPENSES. The Company shall
pay the Advisor a fee in the amount of 4.5% of Total Proceeds as Acquisition
Fees. Acquisition Fees shall be reduced to the extent that, and if necessary to
limit, the total compensation paid to all persons involved in the acquisition of
any Property to the amount customarily charged in arms- length transactions by
other persons or entities rendering similar services as an ongoing public
activity in the same geographical location and for comparable types of
Properties, and to the extent that other acquisition fees, finder's fees, real
estate commissions, or other similar fees or commissions are paid by any person
in connection with the transaction. The Company shall reimburse the Advisor for
Acquisition Expenses incurred in connection with the initial selection and
acquisition of Properties, provided that reimbursement shall be limited to the
actual cost of goods and services used by the Company and obtained from entities
not affiliated with the Advisor, or the lesser of the actual cost or 90% of the
competitive rate charged by unaffiliated persons providing similar goods and
services in the same geographic location for goods or services provided by the
Advisor or its Affiliates. The total of all Acquisition Fees and any
Acquisition Expenses shall be reasonable and shall not exceed an amount equal to
six percent (6%) of the Real Estate Asset Value or the Contract Purchase Price
of a Property, or in the case of a Mortgage Loan, six percent (6%) of the funds
advanced, unless a majority of the Board of Directors, including a majority of
the Independent Directors not otherwise interested in the
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transaction, approves fees in excess of these limits subject to a determination
that the transaction is commercially competitive, fair and reasonable to the
Company.
SECTION 4.11 ASSET MANAGEMENT FEE. The Company shall pay the Advisor a
monthly Asset Management Fee in an amount equal to one-twelfth of .60% of the
Company's Real Estate Asset Value and the outstanding principal amount of any
Mortgage Loans, as of the end of the preceding month. Specifically, Real Estate
Asset Value equals the amount invested in the Properties wholly owned by the
Company, determined on the basis of cost, plus, in the case of Properties owned
by any Joint Venture or partnership in which the Company is a co-venturer or
partner, the portion of the cost of such Properties paid by the Company,
exclusive of Acquisition Fees and Acquisition Expenses. The Asset Management
Fee, which will not exceed fees which are competitive for similar services in
the same geographic area, may or may not be taken, in whole or in part as to any
year, in the sole discretion of the Advisor. All or any portion of the Asset
Management Fee not taken as to any fiscal year shall be deferred without
interest and may be taken in such other fiscal year as the Advisor shall
determine.
SECTION 4.12 SECURED EUIPMENT LEASE SERVICING FEE. The Company shall pay
the Advisor a fee out of the proceeds of the Line of Credit or Permanent
Financing for negotiating Secured Equipment Leases and supervising the Secured
Equipment Lease program equal to 2% of the purchase price of the Equipment
subject to each Secured Equipment Lease and paid upon entering into such lease
or loan.
SECTION 4.13 REIMBURSEMENT FOR OPERATING EXPENSES. The Company shall not
reimburse the Advisor at the end of any fiscal quarter for Operating Expenses
that, in the four consecutive fiscal quarters then ended (the "Expense Year")
exceed the greater of 2% of Average Invested Assets or 25% of Net Income (the
"2%/25% Guidelines") for such year. Within 60 days after the end of any fiscal
quarter of the Company for which total Operating Expenses for the Expense Year
exceed the 2%/25% Guidelines, the Advisor shall reimburse the Company the amount
by which the total Operating Expenses paid or incurred by the Company exceed the
2%/25% Guidelines.
ARTICLE V
INVESTMENT OBJECTIVES AND LIMITATIONS
SECTION 5.1 INVESTMENT OBJECTIVES. The Company's primary investment
objectives are to preserve, protect, and enhance the Company's assets; while (i)
making Distributions commencing in the initial year of Company operations; (ii)
obtaining fixed income through the receipt of base rent, and increasing the
Company's income (and Distributions) and providing protection against inflation
through automatic increases in base rent and receipt of percentage rent, and
obtaining fixed income through the receipt of payments on Mortgage Loans and
Secured Equipment Leases; (iii) qualifying and remaining qualified as a REIT for
federal income tax purposes; and (iv) providing Stockholders of the Company with
liquidity of their investment within five (5) to ten (10) years after
commencement of the offering, either in whole or in part,
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through (a) Listing, or, (b) if Listing does not occur within ten (10) years
after commencement of the offering, the commencement of orderly Sales of the
Company's assets (outside the ordinary course of business and consistent with
its objective of qualifying as a REIT) and distribution of the proceeds thereof.
The sheltering from tax of income from other sources is not an objective of the
Company. Subject to Section 3.2(v) hereof and to the restrictions set forth
herein, the Directors will use their best efforts to conduct the affairs of the
Company in such a manner as to continue to qualify the Company for the tax
treatment provided in the REIT Provisions of the Code; provided, however, no
Director, officer, employee or agent of the Company shall be liable for any act
or omission resulting in the loss of tax benefits under the Code, except to the
extent provided in Section 9.2 hereof.
SECTION 5.2 REVIEW OF OBJECTIVES. The Independent Directors shall review
the investment policies of the Company with sufficient frequency and at least
annually to determine that the policies being followed by the Company at any
time are in the best interests of its Stockholders. Each such determination and
the basis therefor shall be set forth in the minutes of the meetings of the
Board of Directors.
SECTION 5.3 CERTAIN PERMITTED INVESTMENTS.
(i) The Company may invest in Properties including, but not
limited to, Properties to be leased to operators of Restaurant Chains and Hotel
Chains in various locations across the United States.
(ii) The Company may invest in Joint Ventures with the Advisor,
one or more Directors or any Affiliate, if a majority of Directors (including a
majority of Independent Directors) not otherwise interested in the transaction,
approve such investment as being fair and reasonable to the Company and on
substantially the same terms and conditions as those received by the other joint
venturers.
(iii) The Company may invest in equity securities and Mortgage
Loans, if a majority of Directors (including a majority of Independent
Directors) not otherwise interested in the transaction approve such investment
as being fair, competitive and commercially reasonable.
(iv) The Company may offer Secured Equipment Leases to operators
of Restaurant Chains and Hotel Chains provided that a majority of Directors
(including a majority of Independent Directors) approve the Secured Equipment
Leases as being fair, competitive and commercially reasonable.
SECTION 5.4 INVESTMENT LIMITATIONS. In addition to other investment
restrictions imposed by the Directors from time to time, consistent with the
Company's objective of qualifying as a REIT, the following shall apply to the
Company's investments:
(i) Not more than 10% of the Company's total assets shall be
invested in unimproved real property or mortgage loans on unimproved real
property. For purposes of this
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paragraph, "unimproved real property" does not include any Property or Real
Estate under construction, under contract for development or planned for
development within one year.
(ii) The Company shall not invest in commodities or commodity
future contracts. This limitation is not intended to apply to interest rate
futures, when used solely for hedging purposes.
(iii) The Company shall not invest in or make mortgage loans
unless an appraisal is obtained concerning the underlying property. Mortgage
indebtedness on any property shall not exceed such property's appraised value.
In cases in which a majority of Independent Directors so determine, and in all
cases in which the mortgage loan involves the Advisor, Directors, or Affiliates,
such appraisal of the underlying property must be obtained from an Independent
Expert. Such appraisal shall be maintained in the Company's records for at
least five (5) years and shall be available for inspection and duplication by
any Stockholder. In addition to the appraisal, a mortgagee's or owner's title
insurance policy or commitment as to the priority of the mortgage or condition
of the title must be obtained.
(iv) The Company shall not make or invest in mortgage loans,
including construction loans, on any one (1) property if the aggregate amount of
all mortgage loans outstanding on the property, including the loans of the
Company would exceed an amount equal to eighty-five percent (85%) of the
appraised value of the property as determined by appraisal unless substantial
justification exists because of the presence of other underwriting criteria. For
purposes of this subsection, the "aggregate amount of all mortgage loans
outstanding on the Property, including the loans of the Company" shall include
all interest (excluding contingent participation in income and/or appreciation
in value of the mortgaged property), the current payment of which may be
deferred pursuant to the terms of such loans, to the extent that deferred
interest on each loan exceeds five percent (5%) per annum of the principal
balance of the loan.
(v) The Company shall not invest in indebtedness ("Junior Debt")
secured by a mortgage on real property which is subordinate to the lien or other
indebtedness ("Senior Debt"), except where such amount of such Junior Debt,
plus the outstanding amount of Senior Debt, does not exceed 90% of the appraised
value of such property, if after giving effect thereto, the value of all such
mortgage loans 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 Net Assets. The value of all investments in Junior Debt of the
Company which does not meet the aforementioned requirements shall be limited to
10% of the Company's tangible assets (which would be included within the 25%
limitation).
(vi) The Company shall not engage in any short sale, or borrow,
on an unsecured basis, if such borrowing will result in an Asset Coverage of
less than 300%, except that such borrowing limitation shall not apply to a first
mortgage trust. "Asset Coverage," for the purpose of this Section 5.4(vi)
means the ratio which the value of the total assets of an issuer, less all
liabilities and indebtedness except indebtedness for unsecured borrowings, bears
to the aggregate amount of all unsecured borrowings of such issuer.
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(vii) The Company shall not make or invest in any mortgage loans
that are subordinate to any mortgage, other indebtedness or equity interest of
the Advisor, the Directors or an Affiliate of the Company. In addition, the
Company shall not invest in any security of any entity holding investments or
engaging in activities prohibited by these Articles of Incorporation.
(viii) The Company shall not invest in equity securities unless a
majority of the Directors (including a majority of Independent Directors) not
otherwise interested in such transaction approve the transaction as being fair,
competitive and commercially reasonable and determine that the transaction will
not jeopardize the Company's ability to qualify and remain qualified as a REIT.
Investments in entities affiliated with the Advisor, a Director, the Company or
their Affiliates are subject to restrictions on Joint Venture investments.
(ix) The Company shall not issue (A) equity securities
redeemable solely at the option of the holder (except that Stockholders may
offer their Common Shares to the Company pursuant to that certain redemption
plan adopted or to be adopted by the Board of Directors on terms outlined in the
section relating to Common Shares entitled "Redemption of Shares" in the
Company's Prospectus relating to the Initial Public Offering); (B) debt
securities unless the historical debt service coverage (in the most recently
completed fiscal year) as adjusted for known charges is sufficient to properly
service that higher level of debt; (C) Equity Shares on a deferred payment
basis or under similar arrangements; (D) non- voting or assessable securities;
(E) options, warrants, or similar evidences of a right to buy its securities
(collectively, "Options") unless (1) issued to all of its Stockholders ratably,
(2) as part of a financing arrangement, or (3) as part of a Stock Option Plan
available to Directors, officers or employees of the Company or the Advisor.
Options may not be issued to the Advisor, Director or any Affiliate thereof
except on the same terms as such Options are sold to the general public. Options
may be issued to persons other than the Advisor, Directors or any Affiliate
thereof but not at exercise prices less than the fair market value of the
underlying securities on the date of grant and not for consideration that in the
judgment of the Independent Directors has a market value less than the value of
such Option on the date of grant. Options issuable to the Advisor, Directors or
any Affiliate thereof shall not exceed 10% of the outstanding Shares on the date
of grant. The voting rights per share of Equity Shares of the Company (other
than the publicly held Equity Shares of the Company) sold in a private offering
shall not exceed the voting rights which bear the same relationship to the
voting rights of the publicly held Equity Shares as the consideration paid to
the Company for each privately offered Equity Share of the Company bears to the
book value of each outstanding publicly held Equity Share.
(x) The Company shall not invest in real estate contracts of sale
unless such contracts of sale are in recordable form and appropriately recorded
in the chain of title.
(xi) A majority of the Directors shall authorize the
consideration to be paid for each Property, based on the fair market value of
the Property. If a majority of the Independent Directors determine, or if the
Property is acquired from the Advisor, a Director, or their Affiliates, such
fair market value shall be determined by a qualified independent real estate
appraiser selected by the Independent Directors.
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(xii) The Company shall not engage in underwriting or the agency
distribution of securities issued by others or in trading, as compared to
investment activities.
(xiii) The Company shall not invest in any foreign currency or
bullion or engage in short sales.
(xiv) The Company shall not issue senior securities except notes
to banks and other lenders and Preferred Shares.
(xv) The aggregate Leverage of the Company shall be reasonable in
relation to the Net Assets of the Company and shall be reviewed by the Directors
at least quarterly. The maximum amount of such Leverage in relation to the Net
Assets shall, in the absence of a satisfactory showing that a higher level of
borrowing is appropriate, not exceed three hundred percent (300%). Any excess
in Leverage over such three hundred percent (300%) level shall be approved by at
least a majority of the Independent Directors and disclosed to Stockholders in
the next quarterly report of the Company, along with the justification for such
excess.
(xvi) Unless at least 80% of the Company's tangible assets are
comprised of Properties or first mortgage loans, the Company may not incur any
indebtedness which would result in an aggregate amount of indebtedness in excess
of 300% of the Net Assets.
(xvii) The Company may borrow money from the Advisor, Director or
any Affiliate thereof, upon a finding by a majority of Directors (including a
majority of Independent Directors) not otherwise interested in the transaction
that such transaction is fair, competitive and commercially reasonable and no
less favorable to the Company than loans between unaffiliated parties under the
same circumstances. Notwithstanding the foregoing, the Advisor and its
Affiliates shall be entitled to reimbursement, at cost, for actual expenses
incurred by the Advisor or its Affiliates on behalf of the Company or Joint
Ventures in which the Company is a co-venturer, subject to subsection (xix)
below.
(xviii) The Company shall not make loans to the Advisor or its
Affiliates.
(xix) The Company shall not operate so as to be classified as an
"investment company" under the Investment Company Act of 1940, as amended.
(xx) The Company will not make any investment that the Company
believes will be inconsistent with its objectives of qualifying and remaining
qualified as a REIT.
The foregoing investment limitations may not be modified or eliminated
without the approval of Stockholders owning a majority of the outstanding Equity
Shares.
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ARTICLE VI
CONFLICTS OF INTEREST
SECTION 6.1 SALES AND LEASES TO COMPANY. The Company may purchase a
Property or Properties from the Advisor, Director, or any Affiliate upon a
finding by a majority of Directors (including a majority of Independent
Directors) not otherwise interested in the transaction that such transaction is
fair and reasonable to the Company and at a price to the Company no greater than
the cost of the asset to such Advisor, Director or Affiliate, or, if the price
to the Company is in excess of such cost, that substantial justification for
such excess exists and such excess is reasonable. In no event shall the cost of
such asset to the Company exceed its current appraised value.
SECTION 6.2. SALES AND LEASES TO THE ADVISOR, DIRECTORS OR AFFILIATES. An
Advisor, Director or Affiliate may acquire or lease assets from the Company if a
majority of Directors (including a majority of Independent Directors) not
otherwise interested in the transaction determine that the transaction is fair
and reasonable to the Company.
SECTION 6.3 MULTIPLE PROGRAMS.
(i) Until completion of the Initial Public Offering of Shares by
the Company, the Advisor and its Affiliates will not offer or sell interests in
any subsequently formed public program that has investment objectives and
structure similar to those of the Company and that intends to (a) invest, on a
cash and/or leveraged basis, in a diversified portfolio of restaurant and hotel
properties to be leased on a "triple-net" basis to operators of Restaurant
Chains and Hotel Chains; (b) offer Mortgage Loans; and (c) offer Secured
Equipment Leases. The Advisor and its Affiliates also will not purchase a
property or offer or invest in a mortgage loan or secured equipment lease for
any such subsequently formed public program that has investment objectives and
structure similar to the Company and that intends to invest on a cash and/or
leveraged basis primarily in a diversified portfolio of restaurant and hotel
properties to be leased on a "triple-net" basis to operators of Restaurant
Chains and Hotel Chains until substantially all (generally, eighty percent
(80%)) of the funds available for investment (net offering proceeds) by the
Company have been invested or committed to investment. (For purposes of the
preceding sentence only, funds are deemed to have been committed to investment
to the extent written agreements in principle or letters of understanding are
executed and in effect at any time, whether or not any such investment is
consummated, and also to the extent any funds have been reserved to make
contingent payments in connection with any Property, whether or not any such
payments are made). Affiliates of the Advisor are currently purchasing
restaurant properties and other types of properties, including furniture,
fixtures, and equipment, and incurring related costs for public and private
investor programs, which have investment objectives that are not identical,
and/or a structure not similar to those of the Company, but which make
investments that include "triple-net" leases of fast-food, family-style, and
casual- dining restaurant properties and other types of properties, mortgage
loans and/or in secured equipment leases. The Advisor or its Affiliates
currently are and in the future may offer interests in one or more public or
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private programs organized to purchase properties of the type to be acquired by
the Company, to offer mortgage loans and/or to offer secured equipment leases.
(ii) In the event that an investment opportunity becomes
available which is suitable for both the Company and a public or private entity
with which the Advisor or its Affiliates are affiliated for which both entities
have sufficient uninvested funds, then the entity which has had the longer
period of time elapse since it was offered an investment opportunity will first
be offered the investment opportunity. An investment opportunity will not be
considered suitable for a program if the requirements of subparagraph (i) above
could not be satisfied if the program were to make the investment. In
determining whether or not an investment opportunity is suitable for more than
one program, the Advisor will examine such factors, among others, as the cash
requirements of each program, the effect of the acquisition both on
diversification of each program's investments by types of restaurants and other
businesses and geographic area, and on diversification of the tenants of its
properties (which also may affect the need for one of the programs to prepare or
produce audited financial statements for a property or a tenant), the
anticipated cash flow of each program, the size of the investment, the amount of
funds available to each program, and the length of time such funds have been
available for investment. If a subsequent development, such as a delay in the
closing of a property or a delay in the construction of a property, causes any
such investment, in the opinion of the Advisor and its Affiliates, to be more
appropriate for an entity other than the entity which committed to make the
investment, however, the Advisor has the right to agree that the other entity
affiliated with the Advisor or its Affiliates may make the investment.
SECTION 6.4 OTHER TRANSACTIONS.
(i) No goods or services will be provided by the Advisor or its
Affiliates to the Company except for transactions in which the Advisor or its
Affiliates provide goods or services to the Company in accordance with these
Articles of Incorporation or if a majority of the Directors (including a
majority of the Independent Directors) not otherwise interested in such
transactions approve such transactions as fair and reasonable to the Company and
on terms and conditions not less favorable to the Company than those available
from unaffiliated third parties.
(ii) The Company will not make any loans to Affiliates. Any
loans to the Company by the Advisor or its Affiliates must be approved by a
majority of the Directors (including a majority of Independent Directors) not
otherwise interested in such transaction as fair, competitive, and commercially
reasonable, and no less favorable to the Company than comparable loans between
unaffiliated parties.
ARTICLE VII
SHARES
SECTION 7.1 AUTHORIZED SHARES. The beneficial interest in the Company
shall be divided into Equity Shares. The total number of Equity Shares which
the Company is authorized
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to issue is one hundred twenty-six million (126,000,000) shares of beneficial
interest, consisting of sixty million (60,000,000) Common Shares (as defined and
described in Section 7.2(ii) hereof), three million (3,000,000) Preferred Shares
(as defined in Section 7.3 hereof) and sixty-three million (63,000,000) Excess
Shares (as defined in Section 7.7 hereof). All Shares shall be fully paid and
nonassessable when issued. Shares may be issued for such consideration as the
Directors determine or, if issued as a result of a Share dividend or Share
split, without any consideration.
SECTION 7.2 COMMON SHARES.
(i) COMMON SHARES SUBJECT TO TERMS OF PREFERRED SHARES. The
Common Shares shall be subject to the express terms of any series of Preferred
Shares.
(ii) DESCRIPTION. Common Shares (herein so called) shall have a
par value of $.01 per share and shall entitle the holders to one (1) vote per
share on all matters upon which Stockholders are entitled to vote pursuant to
Section 8.2 hereof, and shares of a particular class of issued Common Shares
shall have equal dividend, distribution, liquidation and other rights, and shall
have no preference, cumulative, preemptive, appraisal, conversion or exchange
rights. The Directors may classify or reclassify any unissued Common Shares by
setting or changing the number, designation, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends, qualifications
or terms or conditions of redemption of any such Common Shares and, in such
event, the Company shall file for record with the State Department of
Assessments and Taxation of the State of Maryland amended articles in substance
and form as prescribed by Title 2 of the MGCL.
(iii) DISTRIBUTION RIGHTS. The holders of Common Shares shall be
entitled to receive such Distributions as may be declared by the Board of
Directors of the Company out of funds legally available therefor.
(iv) DIVIDEND OR DISTRIBUTION RIGHTS. The Directors from time
to time may declare and pay to Stockholders such dividends or Distributions in
cash or other property as the Directors in their discretion shall determine. The
Directors shall endeavor to declare and pay such dividends and Distributions as
shall be necessary for the Company to qualify as a real estate investment trust
under the REIT Provisions of the Code; provided, however, Stockholders shall
have no right to any dividend or Distribution unless and until declared by the
Directors. The exercise of the powers and rights of the Directors pursuant to
this section shall be subject to the provisions of any class or series of Equity
Shares at the time outstanding. The receipt by any Person in whose name any
Equity Shares are registered on the records of the Company or by his duly
authorized agent shall be a sufficient discharge for all dividends or
Distributions payable or deliverable in respect of such Equity Shares and from
all liability to see to the application thereof. Distributions in kind shall
not be permitted, except for distributions of readily marketable securities;
distributions of beneficial interests in a liquidating trust established for the
dissolution of the Company and the liquidation of its assets in accordance with
the terms of these Articles of Incorporation; or distributions of in-kind
property as long as the Directors (i) advise each Stockholder of the risks
associated with direct ownership of the property; (ii) offer each Stockholder
the election of
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receiving in-kind property distributions; and (iii) distribute in-kind property
only to those Stockholders who accept the Directors' offer.
(v) RIGHTS UPON LIQUIDATION. In the event of any voluntary or
involuntary liquidation, dissolution or winding up, or any distribution of the
assets of the Company, the aggregate assets available for distribution to
holders of the Common Shares (including holders of Excess Shares resulting from
the exchange of Common Shares pursuant to Section 7.6(iii) hereof) shall be
determined in accordance with applicable law. Except as provided below as a
consequence of the limitations on distributions to holders of Excess Shares,
each holder of Common Shares shall be entitled to receive, ratably with (i) each
other holder of Common Shares and (ii) each holder of Excess Shares resulting
from the exchange of Common Shares, that portion of such aggregate assets
available for distribution as the number of the outstanding Common Shares held
by such holder bears to the total number of outstanding Common Shares and Excess
Shares resulting from the exchange of Common Shares then outstanding. Anything
herein to the contrary notwithstanding, in no event shall the amount payable to
a holder of Excess Shares exceed (i) the price per share such holder paid for
the Common Shares in the purported Transfer or Acquisition (as those terms are
defined in Section 7.6(i)) or change in capital structure or other transaction
or event that resulted in the Excess Shares or (ii) if the holder did not give
full value for such Excess Shares (as through a gift, a devise or other event or
transaction), a price per share equal to the Market Price (as that term is
defined in Section 7.6(i)) for the Common Shares on the date of the purported
Transfer, Acquisition, change in capital structure or other transaction or event
that resulted in such Excess Shares. Any amount available for distribution in
excess of the foregoing limitations shall be paid ratably to the holders of
Common Shares and other holders of Excess Shares resulting from the exchange of
Common Shares to the extent permitted by the foregoing limitations.
(vi) VOTING RIGHTS. Except as may be provided in these Articles
of Incorporation, and subject to the express terms of any series of Preferred
Shares, the holders of the Common Shares shall have the exclusive right to vote
on all matters (as to which a common Stockholder shall be entitled to vote
pursuant to applicable law) at all meetings of the Stockholders of the Company,
and shall be entitled to one (1) vote for each Common Share entitled to vote at
such meeting.
SECTION 7.3 PREFERRED SHARES. The Directors are hereby expressly granted
the authority to authorize from time to time the issuance of one or more series
of Preferred Shares. Prior to the issuance of each such series, the Board of
Directors, by resolution, shall fix the number of shares to be included in each
series, and the terms, rights, restrictions and qualifications of the shares of
each series, however, the voting rights for each share of the Preferred Shares
shall not exceed voting rights which bear the same relationship to the voting
rights of the Common Shares as the consideration paid to the Company for each of
Preferred Shares bears to the book value of the Common Shares or the date that
such Preferred Shares are issued. The authority of the Board of Directors with
respect to each series shall include, but not be limited to, determination of
the following:
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(i) The designation of the series, which may be by distinguishing
number, letter or title.
(ii) The dividend rate on the shares of the series, if any,
whether any dividends shall be cumulative and, if so, from which date or dates,
and the relative rights of priority, if any, of payment of dividends on shares
of the series.
(iii) The redemption rights, including conditions and the price
or prices, if any, for shares of the series.
(iv) The terms and amounts of any sinking fund for the purchase
or redemption of shares of the series.
(v) The rights of the shares of the series in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the Company, and the relative rights of priority, if any, of payment of
shares of the series.
(vi) Whether the shares of the series shall be convertible into
shares of any other class or series, or any other security, of the Company or
any other corporation or other entity, and, if so, the specification of such
other class or series of such other security, the conversion price or prices or
rate or rates, any adjustments thereof, the date or dates on which such shares
shall be convertible and all other terms and conditions upon which such
conversion may be made.
(vii) Restrictions on the issuance of shares of the same series
or of any other class or series.
(viii) The voting rights of the holders of shares of the series
subject to the limitations contained in this Section 7.3.
(ix) Any other relative rights, preferences and limitations on
that series. Subject to the express provisions of any other series of Preferred
Shares then outstanding, and notwithstanding any other provision of these
Articles of Incorporation, the Board of Directors may increase or decrease (but
not below the number of shares of such series then outstanding) the number of
shares, or alter the designation or classify or reclassify any unissued shares
of a particular series of Preferred Shares, by fixing or altering, in one or
more respects, from time to time before issuing the shares, the terms, rights,
restrictions and qualifications of the shares of any such series of Preferred
Shares.
SECTION 7.4 GENERAL NATURE OF SHARES. All Shares shall be personal
property entitling the Stockholders only to those rights provided in these
Articles of Incorporation, the MGCL or in the resolution creating any class or
series of Shares. The legal ownership of the Company Property and the right to
conduct the business of the Company are vested exclusively in the Directors; the
Stockholders shall have no interest therein other than the beneficial interest
in the Company conferred by their Shares and shall have no right to compel any
partition, division,
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dividend or Distribution of the Company or any of the Company Property. The
death of a Stockholder shall not terminate the Company or give his legal
representative any rights against other Stockholders, the Directors or the
Company Property, except the right, exercised in accordance with applicable
provisions of the Bylaws, to require the Company to reflect on its books the
change in ownership of the Shares. Holders of Shares shall not have any
preemptive or other right to purchase or subscribe for any class of securities
of the Company which the Company may at any time issue or sell.
SECTION 7.5 NO ISSUANCE OF SHARE CERTIFICATES. The Company shall not
issue share certificates except to Stockholders who make a written request to
the Company. A Stockholder's investment shall be recorded on the books of the
Company. To transfer his or her Shares a Stockholder shall submit an executed
form to the Company, which form shall be provided by the Company upon request.
Such transfer will also be recorded on the books of the Company. Upon issuance
or transfer of shares, the Company will provide the Stockholder with information
concerning his or her rights with regard to such stock, in a form substantially
similar to Section 7.6(xii), and required by the Bylaws and the MGCL or other
applicable law.
SECTION 7.6 RESTRICTIONS ON OWNERSHIP AND TRANSFER.
(i) DEFINITIONS. For purposes of Sections 7.6 and 7.7, the
following terms shall have the following meanings:
"ACQUIRE" means the acquisition of Beneficial or Constructive Ownership
of Equity Shares by any means, including, without limitation, the exercise of
any rights under any option, warrant, convertible security, pledge or other
security interest or similar right to acquire shares, but shall not include the
acquisition of any such rights unless, as a result, the acquiror would be
considered a Beneficial Owner or Constructive Owner. The terms "Acquires" and
"Acquisition" shall have correlative meanings.
"BENEFICIAL OWNERSHIP" means ownership of Shares by an individual who
would be treated as an owner of such Shares under Section 542(a)(2) of the Code,
either directly or constructively through the application of Section 544 of the
Code, as modified by Section 856(h)(1)(B) of the Code. For purposes of this
definition, the term "individual" shall include any organization, trust, or
other entity that is treated as an individual for purposes of Section 542(a)(2)
of the Code. The terms "Beneficial Owner," "Beneficially Owns" and
"Beneficially Owned" shall have correlative meanings.
"BENEFICIARY" means a beneficiary of the Excess Shares Trust as
determined pursuant to Section 7.7(v)(a) hereof.
"CLOSING PRICE" on any day shall mean the last sale price, regular way
on such day, or, if no such sale takes place on that day, the average of the
closing bid and asked prices, regular way, in either case as reported on the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the New York Stock Exchange, or if the affected
class or series of Equity Shares are not so listed or admitted to trading, as
reported in the principal
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consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange (including the National Market System
of the National Association of Securities Dealers, Inc. Automated Quotation
System) on which the affected class or series of Equity Shares are listed or
admitted to trading, or, if the affected class or series of Equity Shares are
not so listed or admitted to trading, the last quoted price or, if not quoted,
the average of the high bid and low asked prices in the over-the-counter market,
as reported by the National Association of Securities Dealers, Inc. Automated
Quotation System or, if such system is no longer in use, the principal automated
quotation system then in use, or, if the affected class or series of Equity
Shares are not so quoted by any such system, the average of the closing bid and
asked prices as furnished by a professional market maker selected by the Board
of Directors making a market in the affected class or series of Equity Shares,
or, if there is no such market maker or such closing prices otherwise are not
available, the fair market value of the affected class or series of Equity
Shares as of such day, as determined by the Board of Directors in its
discretion.
"COMMON SHARE OWNERSHIP LIMIT" means, with respect to the Common Shares,
nine point eight percent (9.8%) of the outstanding Common Shares, subject to
adjustment pursuant to Section 7.6(x) (but not more than nine point nine percent
(9.9%) of the outstanding Common Shares, as so adjusted) and to the limitations
contained in Section 7.6(xi).
"CONSTRUCTIVE OWNERSHIP" means ownership of Equity Shares by a person
who would be treated as an owner of such shares, either actually or
constructively, directly or indirectly, through the application of Section 318
of the Code, as modified by Section 856(d)(5) thereof. The terms "Constructive
Owner," "Constructively Owns" and "Constructively Owned" shall have correlative
meanings.
"EXCESS SHARES TRUST" means the trust created pursuant to Section 7.7(i)
hereof.
"EXCESS SHARES TRUSTEE" means the Company as trustee for the Excess
Shares Trust, and any successor trustee appointed by the Company.
"MARKET PRICE" means, during the offering, the price per Equity Share
and thereafter, until the Equity Shares are listed for trading on an exchange or
market, a price determined on the basis of the quarterly valuation of the
Company's assets. Upon listing of the Shares, market price shall mean the
average of the Closing Prices for the ten (10) consecutive Trading Days
immediately preceding such day (or those days during such ten (10)-day period
for which Closing Prices are available).
"OWNERSHIP LIMIT" means the Common Share Ownership Limit or the
Preferred Share Ownership Limit, or both, as the context may require.
"PREFERRED SHARE OWNERSHIP LIMIT" means, with respect to the Preferred
Shares, nine point eight percent (9.8%) of the outstanding Shares of a
particular series of Preferred Shares of the Company, subject to adjustment
pursuant to Section 7.6(x) (but not more than nine point nine
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percent (9.9%) of the outstanding Preferred Shares, as so adjusted) and to the
limitations contained in this Section 7.6.
"PURPORTED BENEFICIAL HOLDER" means, with respect to any event or
transaction other than a purported Transfer or Acquisition which results in
Excess Shares, the Person for whom the applicable Purported Record Holder held
the Equity Shares that were, pursuant to paragraph (iii) of this Section 7.6,
automatically exchanged for Excess Shares upon the occurrence of such event or
transaction. The Purported Beneficial Holder and the Purported Record Holder
may be the same Person.
"PURPORTED BENEFICIAL TRANSFEREE" means, with respect to any purported
Transfer or Acquisition which results in Excess Shares, the purported beneficial
transferee for whom the Purported Record Transferee would have acquired Equity
Shares if such Transfer or Acquisition which results in Excess Shares had been
valid under Section 7.6(ii). The Purported Beneficial Transferee and the
Purported Record Transferee may be the same Person.
"PURPORTED RECORD HOLDER" means, with respect to any event or
transaction other than a purported Transfer or Acquisition which results in
Excess Shares, the record holder of the Equity Shares that were, pursuant to
Section 7.6(iii), automatically exchanged for Excess Shares upon the occurrence
of such an event or transaction. The Purported Record Holder and the Purported
Beneficial Holder may be the same Person.
"PURPORTED RECORD TRANSFEREE" means, with respect to any purported
Transfer or Acquisition which results in Excess Shares, the record holder of the
Equity Shares if such Transfer or Acquisition which results in Excess Shares had
been valid under Section 7.6(ii). The Purported Record Transferee and the
Purported Beneficial Transferee may be the same Person.
"RESTRICTION TERMINATION DATE" means the first day after the date of the
closing of the Initial Public Offering on which the Board of Directors of the
Company determines, pursuant to Section 3.2(xxii) hereof, that it is no longer
in the best interests of the Company to attempt or continue to qualify as REIT.
"TRADING DAY" means a day on which the principal national securities
exchange on which the affected class or series of Equity Shares are listed or
admitted to trading is open for the transaction of business or, if the affected
class or series of Equity Shares are not listed or admitted to trading, shall
mean any day other than a Saturday, Sunday or other day on which banking
institutions in the State of New York are authorized or obligated by law or
executive order to close.
"TRANSFER" means any sale, transfer, gift, hypothecation, assignment,
devise or other disposition of a direct or indirect interest in Equity Shares or
the right to vote or receive dividends on Equity Shares (including (i) the
granting of any option (including any option to acquire an option or any series
of such options) or entering into any agreement for the sale, transfer or other
disposition of Equity Shares or the right to vote or receive dividends on Equity
Shares or (ii) the sale, transfer, assignment or other disposition of any
securities or rights convertible into or
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exchangeable for Equity Shares, whether voluntary or involuntary, of record,
constructively or beneficially, and whether by operation of law or otherwise.
The terms "Transfers," "Transferred" and "Transferable" shall have correlative
meanings.
(ii) OWNERSHIP AND TRANSFER LIMITATIONS.
(a) Notwithstanding any other provision of these Articles of
Incorporation, except as provided in Section 7.6(ix) and Section 7.8, from the
date of the Initial Public Offering and prior to the Restriction Termination
Date, no Person shall Beneficially or Constructively Own Equity Shares in excess
of the Common or Preferred Share Ownership Limit.
(b) Notwithstanding any other provision of these Articles of
Incorporation, except as provided in Section 7.6(ix) and Section 7.8, from the
date of the Initial Public Offering and prior to the Restriction Termination
Date, any Transfer, Acquisition, change in the capital structure of the Company,
other purported change in Beneficial or Constructive Ownership of Equity Shares
or other event or transaction that, if effective, would result in any Person
Beneficially or Constructively Owning Equity Shares in excess of the Common or
Preferred Share Ownership Limit shall be void AB INITIO as to the Transfer,
Acquisition, change in the capital structure of the Company, other purported
change in Beneficial or Constructive Ownership or other event or transaction
with respect to that number of Equity Shares which would otherwise be
Beneficially or Constructively Owned by such Person in excess of the Common or
Preferred Share Ownership Limit, and none of the Purported Beneficial
Transferee, the Purported Record Transferee, the Purported Beneficial Holder or
the Purported Record Holder shall acquire any rights in that number of Equity
Shares.
(c) Notwithstanding any other provision of these Articles of
Incorporation, and except as provided in Section 7.8, from the date of the
Initial Public Offering and prior to the Restriction Termination Date, any
Transfer, Acquisition, change in the capital structure of the Company, or other
purported change in Beneficial or Constructive Ownership (including actual
ownership) of Equity Shares or other event or transaction that, if effective,
would result in the Equity Shares being actually owned by fewer than 100 Persons
(determined without reference to any rules of attribution) shall be void AB
INITIO as to the Transfer, Acquisition, change in the capital structure of the
Company, other purported change in Beneficial or Constructive Ownership
(including actual ownership) with respect to that number of Equity Shares which
otherwise would be owned by the transferee, and the intended transferee or
subsequent owner (including a Beneficial Owner or Constructive Owner) shall
acquire no rights in that number of Equity Shares.
(d) Notwithstanding any other provision of these Articles of
Incorporation, except as provided in Section 7.8, from the date of the Initial
Public Offering and prior to the Restriction Termination Date, any Transfer,
Acquisition, change in the capital structure of the Company, other purported
change in Beneficial or
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Constructive Ownership of Equity Shares or other event or transaction that, if
effective, would cause the Company to fail to qualify as a REIT by reason of
being "closely held" within the meaning of Section 856(h) of the Code or
otherwise, directly or indirectly, would cause the Company to fail to qualify as
a REIT shall be void ab initio as to the Transfer, Acquisition, change in the
capital structure of the Company, other purported change in Beneficial or
Constructive Ownership or other event or transaction with respect to that number
of Equity Shares which would cause the Company to be "closely held" within the
meaning of Section 856(h) of the Code or otherwise, directly or indirectly,
would cause the Company to fail to qualify as a REIT, and none of the Purported
Beneficial Transferee, the Purported Record Transferee, the Purported Beneficial
Holder or the Purported Record Holder shall acquire any rights in that number of
Equity Shares.
(e) Notwithstanding any other provision of these Articles of
Incorporation, except as provided in Section 7.8, from the date of the Initial
Public Offering and prior to the Restriction Termination Date, any Transfer,
Acquisition, change in capital structure of the Company, or other purported
change in Beneficial or Constructive Ownership of Equity Shares or other event
or transaction that, if effective, would (i) cause the Company to own (directly
or Constructively) an interest in a tenant that is described in Section
856(d)(2)(B) of the Code and (ii) cause the Company to fail to satisfy any of
the gross income requirements of section 856(c) of the Code, shall be void ab
initio as to the Transfer, Acquisition, change in capital structure of the
Company, other purported change in Beneficial or Constructive Ownership or other
event or transaction with respect to that number of Equity Shares which would
cause the Company to own an interest (directly or Constructively) in a tenant
that is described in Section 856(d)(2)(B) of the Code, and none of the Purported
Beneficial Transferee, the Purported Record Transferee, the Purported Beneficial
Holder or the Purported Record Holder shall acquire any rights in that number of
Equity Shares.
(f) Notwithstanding any other provision of these Articles of
Incorporation, any person selling securities on behalf of the Company in its
Initial Public Offering may not complete a sale of securities to a Stockholder
until at least five (5) business days after the date the Stockholder receives a
final Prospectus and shall send each Stockholder a confirmation of his or her
purchase.
(iii) EXCHANGE FOR EXCESS SHARES.
(a) If, notwithstanding the other provisions contained in
this Article VII, at any time from the date of the Initial Public Offering and
prior to the Restriction Termination Date, there is a purported Transfer,
Acquisition, change in the capital structure of the Company, other purported
change in the Beneficial or Constructive Ownership of Equity Shares or other
event or transaction such that any Person would either Beneficially or
Constructively Own Equity Shares in excess of the Common or Preferred Share
Ownership Limit, then, except as otherwise provided in Section 7.6(ix), such
Equity Shares (rounded up to the next whole number of shares) in
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excess of the Common or Preferred Share Ownership Limit automatically shall be
exchanged for an equal number of Excess Shares having terms, rights,
restrictions and qualifications identical thereto, except to the extent that
this Article VII requires different terms. Such exchange shall be effective
as of the close of business on the business day next preceding the date of the
purported Transfer, Acquisition, change in capital structure, other change in
purported Beneficial or Constructive Ownership of Shares, or other event or
transaction.
(b) If, notwithstanding the other provisions contained in
this Article VII, at any time after the date of the Initial Public Offering and
prior to the Restriction Termination Date, there is a purported Transfer,
Acquisition, change in the capital structure of the Company, other purported
change in the Beneficial or Constructive Ownership of Equity Shares or other
event or transaction which, if effective, would result in a violation of any of
the restrictions described in subparagraphs (b), (c), (d) and (e) of paragraph
(ii) of this Section 7.6 or, directly or indirectly, would cause the Company
for any reason to fail to qualify as a REIT by reason of being "closely held"
within the meaning of Section 856(h) of the Code, or otherwise, directly or
indirectly, would cause the Company to fail to qualify as a REIT, then the
Shares (rounded up to the next whole number of Shares) being Transferred or
which are otherwise affected by the change in capital structure or other
purported change in Beneficial or Constructive Ownership and which, in any case,
would cause the Company to be "closely held" within the meaning of such Section
856(h) or otherwise would cause the Company to fail to qualify as a REIT
automatically shall be exchanged for an equal number of Excess Shares having
terms, rights, restrictions and qualifications identical thereto, except to the
extent that this Article VII requires different terms. Such exchange shall be
effective as of the close of business on the business day prior to the date of
the purported Transfer, Acquisition, change in capital structure, other
purported change in Beneficial or Constructive Ownership or other event or
transaction.
(iv) REMEDIES FOR BREACH. If the Board of Directors or its
designee shall at any time determine in good faith that a Transfer, Acquisition,
change in the capital structure of the Company or other purported change in
Beneficial or Constructive Ownership or other event or transaction has taken
place in violation of Section 7.6(ii) or that a Person intends to Acquire or has
attempted to Acquire Beneficial or Constructive Ownership of any Equity Shares
in violation of this Section 7.6, the Board of Directors or its designee shall
take such action as it deems advisable to refuse to give effect to or to prevent
such Transfer, Acquisition, change in the capital structure of the Company,
other attempt to Acquire Beneficial or Constructive Ownership of any Shares or
other event or transaction, including, but not limited to, refusing to give
effect thereto on the books of the Company or instituting injunctive proceedings
with respect thereto; provided, however, that any Transfer, Acquisition, change
in the capital structure of the Company, attempted Transfer or other attempt to
Acquire Beneficial or Constructive Ownership of any Equity Shares or other event
or transaction in violation of subparagraphs (b), (c), (d) and (e) of Section
7.6(ii) (as applicable) shall be void ab initio and where applicable
automatically shall result
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in the exchange described in Section 7.6(iii), irrespective of any action (or
inaction) by the Board of Directors or its designee.
(v) NOTICE OF RESTRICTED TRANSFER. Any Person who acquires or
attempts to Acquire Beneficial or Constructive Ownership of Equity Shares in
violation of Section 7.6(ii) and any Person who Beneficially or Constructively
Owns Excess Shares as a transferee of Equity Shares resulting in an exchange for
Excess Shares, pursuant to Section 7.6(iii), or otherwise shall immediately give
written notice to the Company, or, in the event of a proposed or attempted
Transfer, Acquisition, or purported change in Beneficial or Constructive
Ownership, shall give at least fifteen (15) days prior written notice to the
Company, of such event and shall promptly provide to the Company such other
information as the Company, in its sole discretion, may request in order to
determine the effect, if any, of such Transfer, attempted Transfer, Acquisition,
Attempted Acquisition or purported change in Beneficial or Constructive
Ownership on the Company's status as a REIT.
(vi) OWNERS REQUIRED TO PROVIDE INFORMATION. From the date of
the Initial Public Offering and prior to the Restriction Termination Date:
(a) Every Beneficial or Constructive Owner of more than five
percent (5%), or such lower percentages as determined pursuant to regulations
under the Code or as may be requested by the Board of Directors, in its sole
discretion, of the outstanding shares of any class or series of Equity Shares of
the Company shall annually, no later than January 31 of each calendar year, give
written notice to the Company stating (i) the name and address of such
Beneficial or Constructive Owner; (ii) the number of shares of each class or
series of Equity Shares Beneficially or Constructively Owned; and (iii) a
description of how such shares are held. Each such Beneficial or Constructive
Owner promptly shall provide to the Company such additional information as the
Company, in its sole discretion, may request in order to determine the effect,
if any, of such Beneficial or Constructive Ownership on the Company's status as
a REIT and to ensure compliance with the Common or Preferred Share Ownership
Limit and other restrictions set forth herein.
(b) Each Person who is a Beneficial or Constructive Owner of
Equity Shares and each Person (including the Stockholder of record) who is
holding Equity Shares for a Beneficial or Constructive Owner promptly shall
provide to the Company such information as the Company, in its sole discretion,
may request in order to determine the Company's status as a REIT, to comply with
the requirements of any taxing authority or other governmental agency, to
determine any such compliance or to ensure compliance with the Common or
Preferred Share Ownership Limit and other restrictions set forth herein.
(vii) REMEDIES NOT LIMITED. Nothing contained in this Article
VII except Section 7.8 shall limit scope or application of the provisions of
this Section 7.6, the ability of the Company to implement or enforce compliance
with the terms thereof or the authority of the Board of Directors to take any
such other action or actions as it may deem necessary or advisable to
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protect the Company and the interests of its Stockholders by preservation of the
Company's status as a REIT and to ensure compliance with the Ownership Limit for
any class or series of Equity Shares and other restrictions set forth herein,
including, without limitation, refusal to give effect to a transaction on the
books of the Company.
(viii) AMBIGUITY. In the case of an ambiguity in the application
of any of the provisions of this Section 7.6, including any definition contained
in Sections 1.5 and 7.6(i), the Board of Directors shall have the power and
authority, in its sole discretion, to determine the application of the
provisions of this Section 7.6 with respect to any situation based on the facts
known to it.
(ix) EXCEPTION. The Board of Directors, upon receipt of a ruling
from the Internal Revenue Service, an opinion of counsel or other evidence
satisfactory to the Board of Directors, in its sole discretion, in each case to
the effect that the restrictions contained in subparagraphs (c), (d) and (e) of
Section 7.6(ii) will not be violated, may waive or change, in whole or in part,
the application of the Common or Preferred Share Ownership Limit with respect to
any Person that is not an individual, as such term is defined in Section
542(a)(2) of the Code. In connection with any such waiver or change, the Board
of Directors may require such representations and undertakings from such Person
or affiliates and may impose such other conditions as the Board deems necessary,
advisable or prudent, in its sole discretion, to determine the effect, if any,
of the proposed transaction or ownership of Equity Shares on the Company's
status as a REIT.
(x) INCREASE IN COMMON OR PREFERRED SHARE OWNERSHIP LIMIT.
Subject to the limitations contained in Section 7.6(xi), the Board of Directors
may from time to time increase the Common or Preferred Share Ownership Limit.
(xi) LIMITATIONS ON MODIFICATIONS.
(a) The Ownership Limit for a class or series of Equity
Shares may not be increased and no additional ownership limitations may be
created if, after giving effect to such increase or creation, the Company would
be "closely held" within the meaning of Section 856(h) of the Code (assuming
ownership of shares of Equity Shares by all Persons equal to the greatest of (A)
the actual ownership, (B) the Beneficial Ownership of Equity Shares by each
Person, or (C) the applicable Ownership Limit with respect to such Person.
(b) Prior to any modification of the Ownership Limit with
respect to any Person, the Board of Directors may require such opinions of
counsel, affidavits, undertakings or agreements as it may deem necessary,
advisable or prudent, in its sole discretion, in order to determine or ensure
the Company's status as a REIT.
(c) Neither the Preferred Share Ownership Limit nor the
Common Share Ownership Limit may be increased to a percentage that is greater
than nine point nine percent (9.9%).
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(xii) NOTICE TO STOCKHOLDERS UPON ISSUANCE OR TRANSFER. Upon
issuance or transfer of Shares, the Company shall provide the recipient with a
notice containing information about the shares purchased or otherwise
transferred, in lieu of issuance of a share certificate, in a form substantially
similar to the following:
"The securities issued or transferred are subject to restrictions on
transfer and ownership for the purpose of maintenance of the Company's
status as a real estate investment trust (a "REIT") under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the
"Code"). Except as otherwise provided pursuant to the Articles of
Incorporation of the Company, no Person may (i) Beneficially or
Constructively Own Common Shares of the Company in excess of 9.8% (or
such greater percent as may be determined by the Board of Directors of
the Company) of the outstanding Common Shares; (ii) Beneficially or
Constructively Own shares of any series of Preferred Shares of the
Company in excess of 9.8% of the outstanding shares of such series of
Preferred Shares; or (iii) Beneficially or Constructively Own Common
Shares or Preferred Shares (of any class or series) which would result
in the Company being "closely held" under Section 856(h) of the Code or
which otherwise would cause the Company to fail to qualify as a REIT.
Any Person who has Beneficial or Constructive Ownership, or who Acquires
or attempts to Acquire Beneficial or Constructive Ownership of Common
Shares and/or Preferred Shares in excess of the above limitations and
any Person who Beneficially or Constructively Owns Excess Shares as a
transferee of Common or Preferred Shares resulting in an exchange for
Excess Shares (as described below) immediately must notify the Company
in writing or, in the event of a proposed or attempted Transfer or
Acquisition or purported change in Beneficial or Constructive Ownership,
must give written notice to the Company at least 15 days prior to the
proposed or attempted transfer, transaction or other event. Any
Transfer or Acquisition of Common Shares and/or Preferred Shares or
other event which results in violation of the ownership or transfer
limitations set forth in the Company's Articles of Incorporation shall
be void ab initio and the Purported Beneficial and Record Transferee
shall not have or acquire any rights in such Common Shares and/or
Preferred Shares. If the transfer and ownership limitations referred to
herein are violated, the Common Shares or Preferred Shares represented
hereby automatically will be exchanged for Excess Shares to the extent
of violation of such limitations, and such Excess Shares will be held in
trust by the Company, all as provided by the Articles of Incorporation
of the Company. All defined terms used in this legend have the meanings
identified in the Company's Articles of
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Incorporation, as the same may be amended from time to time, a copy of
which, including the restrictions on transfer, will be sent without
charge to each Stockholder who so requests."
SECTION 7.7 EXCESS SHARES.
(i) OWNERSHIP IN TRUST. Upon any purported Transfer,
Acquisition, change in the capital structure of the Company, other purported
change in Beneficial or Constructive Ownership or event or transaction that
results in Excess Shares pursuant to Section 7.6(iii), such Excess Shares shall
be deemed to have been transferred to the Company, as Excess Shares Trustee of
an Excess Shares Trust for the benefit of such Beneficiary or Beneficiaries to
whom an interest in such Excess Shares may later be transferred pursuant to
Section 7.6(v). Excess Shares so held in trust shall be issued and outstanding
stock of the Company. The Purported Record Transferee (or Purported Record
Holder) shall have no rights in such Excess Shares except the right to designate
a transferee of such Excess Shares upon the terms specified in Section 7.6(v).
The Purported Beneficial Transferee shall have no rights in such Excess Shares
except as provided in Section 7.7(iii) and (v).
(ii) DISTRIBUTION RIGHTS. Excess Shares shall not be entitled to
any dividends or Distributions (except as provided in Section 7.7(iii)). Any
dividend or Distribution paid prior to the discovery by the Company that the
Equity Shares have been exchanged for Excess Shares shall be repaid to the
Company upon demand, and any dividend or Distribution declared but unpaid at the
time of such discovery shall be void ab initio with respect to such Excess
Shares.
(iii) RIGHTS UPON LIQUIDATION.
(a) Except as provided below, in the event of any
voluntary or involuntary liquidation, dissolution or winding up, or any
other distribution of the assets, of the Company, each holder of Excess
Shares resulting from the exchange of Preferred Shares of any specified
series shall be entitled to receive, ratably with each other holder of
Excess Shares resulting from the exchange of Preferred Shares of such
series and each holder of Preferred Shares of such series, such accrued and
unpaid dividends, liquidation preferences and other preferential payments,
if any, as are due to holders of Preferred Shares of such series. In the
event that holders of shares of any series of Preferred Shares are entitled
to participate in the Company's distribution of its residual assets, each
holder of Excess Shares resulting from the exchange of Preferred Shares of
any such series shall be entitled to participate, ratably with (A) each
other holder of Excess Shares resulting from the exchange of Preferred
Shares of all series entitled to so participate; (B) each holder of
Preferred Shares of all series entitled to so participate; and (C) each
holder of Common Shares and Excess Shares resulting from the exchange of
Common Shares (to the extent permitted by Section 7.6(iii) hereof), that
portion of the aggregate assets available for distribution (determined in
accordance with applicable law) as the number of shares of such Excess
Shares held by such holder bears to the total number of (1) outstanding
Excess Shares resulting from the exchange of Preferred Shares of all series
entitled to
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so participate; (2) outstanding Preferred Shares of all series entitled to so
participate; and (3) outstanding Common Shares and Excess Shares resulting from
the exchange of Common Shares. The Company, as holder of the Excess Shares in
trust, or, if the Company shall have been dissolved, any trustee appointed by
the Company prior to its dissolution, shall distribute ratably to the
Beneficiaries of the Excess Shares Trust, when determined, any such assets
received in respect of the Excess Shares in any liquidation, dissolution or
winding up, or any distribution of the assets, of the Company. Anything to the
contrary herein notwithstanding, in no event shall the amount payable to a
holder with respect to Excess Shares resulting from the exchange of Preferred
Shares exceed (A) the price per share such holder paid for the Preferred Shares
in the purported Transfer, Acquisition, change in capital structure or other
transaction or event that resulted in the Excess Shares or (B) if the holder did
not give full value for such Excess Shares (as through a gift, devise or other
event or transaction), a price per share equal to the Market Price for the
shares of Preferred Shares on the date of the purported Transfer, Acquisition,
change in capital structure or other transaction or event that resulted in such
Excess Shares. Any amount available for distribution in excess of the foregoing
limitations shall be paid ratably to the holders of Preferred Shares and Excess
Shares resulting from the exchange of Preferred Shares to the extent permitted
by the foregoing limitations.
(b) Except as provided below, in the event of any voluntary
or involuntary liquidation, dissolution or winding up, or any other distribution
of the assets, of the Company, each holder of Excess Shares resulting from the
exchange of Common Shares shall be entitled to receive, ratably with (A) each
other holder of such Excess Shares and (B) each holder of Common Shares, that
portion of the aggregate assets available for distribution to holders of Common
Shares (including holders of Excess Shares resulting from the exchange of Common
Shares pursuant to Section 7.6(iii)), determined in accordance with applicable
law, as the number of such Excess Shares held by such holder bears to the total
number of outstanding Common Shares and outstanding Excess Shares resulting from
the exchange of Common Shares then outstanding. The Company, as holder of the
Excess Shares in trust, or, if the Company shall have been dissolved, any
trustee appointed by the Company prior to its dissolution, shall distribute
ratably to the Beneficiaries of the Excess Shares, when determined, any such
assets received in respect of the Excess Shares in any liquidation, dissolution
or winding up, or any distribution of the assets, of the Company. Anything
herein to the contrary notwithstanding, in no event shall the amount payable to
a holder with respect to Excess Shares exceed (A) the price per share such
holder paid for the Equity Shares in the purported Transfer, Acquisition, change
in capital structure or other transaction or event that resulted in the Excess
Shares or (B) if the holder did not give full value for such Equity Shares (as
through a gift, devise or other event or transaction), a price per share equal
to the Market Price for the Equity Shares on the date of the purported Transfer,
Acquisition, change in capital structure or other transaction or event that
resulted in such Excess Shares. Any amount available for distribution in excess
of the foregoing limitations shall be
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paid ratably to the holders of Common Shares and Excess Shares resulting from
the exchange of Common Shares to the extent permitted by the foregoing
limitations.
(iv) VOTING RIGHTS. The holders of Excess Shares shall not be
entitled to vote on any matters (except as required by the MGCL).
(v) RESTRICTIONS ON TRANSFER; DESIGNATION OF BENEFICIARY.
(a) Excess Shares shall not be transferable. The Purported
Record Transferee (or Purported Record Holder) may freely designate a
Beneficiary of its interest in the Excess Shares Trust (representing the number
of Excess Shares held by the Excess Shares Trust attributable to the purported
Transfer or Acquisition that resulted in the Excess Shares), if (A) the Excess
Shares held in the Excess Shares Trust would not be Excess Shares in the hands
of such Beneficiary and (B) the Purported Beneficial Transferee (or Purported
Beneficial Holder) does not receive a price for designating such Beneficiary
that reflects a price per share for such Excess Shares that exceeds (1) the
price per share such Purported Beneficial Transferee (or Purported Beneficial
Holder) paid for the Equity Shares in the purported Transfer, Acquisition,
change in capital structure, or other transaction or event that resulted in the
Excess Shares or (2) if the Purported Beneficial Transferee (or Purported
Beneficial Holder) did not give value for such Excess Shares (as through a gift,
devise or other event or transaction), a price per share equal to the Market
Price for the Equity Shares on the date of the purported Transfer, Acquisition,
change in capital structure, or other transaction or event that resulted in the
Excess Shares. Upon such transfer of an interest in the Excess Shares Trust,
the corresponding Excess Shares in the Excess Shares Trust automatically shall
be exchanged for an equal number of Equity Shares (depending on the type and
class of Shares that were originally exchanged for such Excess Shares), and such
Equity Shares shall be transferred of record to the Beneficiary of the interest
in the Excess Shares Trust designated by the Purported Record Transferee (or
Purported Record Holder), as described above, if such Equity Shares would not be
Excess Shares in the hands of such Beneficiary. Prior to any transfer of any
interest in the Excess Shares Trust, the Purported Record Transferee (or
Purported Record Holder) must give advance written notice to the Company of the
intended transfer and the Company must have waived in writing its purchase
rights under Section 7.7(vi).
(b) Notwithstanding the foregoing, if a Purported Beneficial
Transferee (or Purported Beneficial Holder) receives a price for designating a
Beneficiary of an interest in the Excess Shares Trust that exceeds the amounts
allowable under subparagraph (i) of this Section 7.6(v), such Purported
Beneficial Transferee (or Purported Beneficial Holder) shall pay, or cause the
Beneficiary of the interest in the Excess Shares Trust to pay, such excess in
full to the Company.
(c) If any of the transfer restrictions set forth in this
Section 7.6(v), or any application thereof, are determined to be void, invalid
or unenforceable by any court
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having jurisdiction over the issue, the Purported Record Transferee (or
Purported Record Holder) may be deemed, at the option of the Company, to have
acted as the agent of the Company in acquiring the Excess Shares as to which
such restrictions would otherwise, by their terms, apply and to hold such Excess
Shares on behalf of the Company.
(vi) PURCHASE RIGHT IN EXCESS SHARES. Excess Shares shall be
deemed to have been offered for sale to the Company, or its designee, at a price
per share equal to the lesser of (i) the price per share in the transaction that
created such Excess Shares (or, in the case of devise or gift or event other
than a Transfer or Acquisition which results in the issuance of Excess Shares,
the Market Price at the time of such devise or gift or event other than a
Transfer or Acquisition which results in the issuance of Excess Shares) and (ii)
the Market Price of the Equity Shares exchanged for such Excess Shares on the
date the Company, or its designee, accepts such offer. The Company and its
assignees shall have the right to accept such offer for a period of ninety (90)
days after the later of (i) the date of the purported Transfer, Acquisition,
change in capital structure of the Company, purported change in Beneficial
Ownership or other event or transaction which resulted in such Excess Shares and
(ii) the date on which the Board of Directors determines in good faith that a
Transfer, Acquisition, change in capital structure of the Company, purported
change in Beneficial or Constructive Ownership resulting in Excess Shares has
occurred, if the Company does not receive a notice pursuant to Section 7.6(v),
but in no event later than a permitted Transfer pursuant to and in compliance
with the terms of Section 7.7(v).
(vii) REMEDIES NOT LIMITED. Nothing contained in this Article
VII except Section 7.8 shall limit scope or application of the provisions of
this Section 7.7, the ability of the Company to implement or enforce compliance
with the terms hereof or the authority of the Board of Directors to take any
such other action or actions as it may deem necessary or advisable to protect
the Company and the interests of its Stockholders by preservation of the
Company's status as a REIT and to ensure compliance with applicable Share
Ownership Limits and the other restrictions set forth herein, including, without
limitation, refusal to give effect to a transaction on the books of the Company.
(viii) AUTHORIZATION. At such time as the Board of Directors
authorizes a series of Preferred Shares pursuant to Section 7.3 of this Article
VII, without any further or separate action of the Board of Directors, there
shall be deemed to be authorized a series of Excess Shares consisting of the
number of shares included in the series of Preferred Shares so authorized and
having terms, rights, restrictions and qualifications identical thereto, except
to the extent that such Excess Shares are already authorized or this Article VII
requires different terms.
SECTION 7.8 SETTLEMENTS. Nothing in Sections 7.6 and 7.7 shall preclude
the settlement of any transaction with respect to the Common Shares entered into
through the facilities of the New York Stock Exchange or other national
securities exchange on which the Common Shares are listed.
SECTION 7.9 SEVERABILITY. If any provision of this Article VII or any
application of any such provision is determined to be void, invalid or
unenforceable by any court having
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jurisdiction over the issue, the validity and enforceability of the remaining
provisions of this Article VII shall not be affected and other applications of
such provision shall be affected only to the extent necessary to comply with the
determination of such court.
SECTION 7.10 WAIVER. The Company shall have authority at any time to
waive the requirements that Excess Shares be issued or be deemed outstanding in
accordance with the provisions of this Article VII if the Company determines,
based on an opinion of nationally recognized tax counsel, that the issuance of
such Excess Shares or the fact that such Excess Shares are deemed to be
outstanding, would jeopardize the status of the Company as a REIT (as that term
is defined in Section 1.5).
ARTICLE VIII
STOCKHOLDERS
SECTION 8.1 MEETINGS OF STOCKHOLDERS. There shall be an annual meeting of
the Stockholders, to be held at such time and place as shall be determined by or
in the manner prescribed in the Bylaws, at which the Directors shall be elected
and any other proper business may be conducted. The annual meeting will be held
at a location convenient to the Stockholders, on a date which is a reasonable
period of time following the distribution of the Company's annual report to
Stockholders but not less than thirty (30) days after delivery of such report. A
majority of Stockholders present in person or by proxy at an annual meeting at
which a quorum is present, may, without the necessity for concurrence by the
Directors, vote to elect the Directors. A quorum shall be 50% of the then
outstanding Shares. Special meetings of Stockholders may be called in the
manner provided in the Bylaws, including at any time by Stockholders holding, in
the aggregate, not less than ten percent (10%) of the outstanding Equity Shares
entitled to be cast on any issue proposed to be considered at any such special
meeting. If there are no Directors, the officers of the Company shall promptly
call a special meeting of the Stockholders entitled to vote for the election of
successor Directors. Any meeting may be adjourned and reconvened as the
Directors determine or as provided by the Bylaws.
SECTION 8.2 VOTING RIGHTS OF STOCKHOLDERS. Subject to the provisions of
any class or series of Shares then outstanding and the mandatory provisions of
any applicable laws or regulations, the Stockholders shall be entitled to vote
only on the following matters; (a) election or removal of Directors as provided
in Sections 8.1, 2.4 and 2.7 hereof; (b) amendment of these Articles of
Incorporation as provided in Section 10.1 hereof; (c) termination of the Company
as provided in Section 11.2 hereof; (d) reorganization of the Company as
provided in Section 10.2 hereof; (e) merger, consolidation or sale or other
disposition of all or substantially all of the Company Property, as provided in
Section 10.3 hereof; and (f) termination of the Company's status as a real
estate investment trust under the REIT Provisions of the Code, as provided in
Section 3.2(xxii) hereof. The Stockholders may terminate the status of the
Company as a REIT under the Code by a vote of a majority of the Shares
outstanding and entitled to vote. Except with respect to the foregoing matters,
no action taken by the Stockholders at any meeting shall in any way bind the
Directors.
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SECTION 8.3 VOTING LIMITATIONS ON SHARES HELD BY THE ADVISOR, DIRECTORS
AND AFFILIATES. With respect to Shares owned by the Advisor, the Directors, or
any of their Affiliates, neither the Advisor, nor the Directors, nor any of
their Affiliates may vote or consent on matters submitted to the Stockholders
regarding the removal of the Advisor, Directors or any of their Affiliates or
any transaction between the Company and any of them. In determining the
requisite percentage in interest of Shares necessary to approve a matter on
which the Advisor, Directors and any of their Affiliates may not vote or
consent, any Shares owned by any of them shall not be included.
SECTION 8.4 STOCKHOLDER ACTION TO BE TAKEN BY MEETING. Any action
required or permitted to be taken by the Stockholders of the Company must be
effected at a duly called annual or special meeting of Stockholders of the
Company and may not be effected by any consent in writing of such Stockholders.
SECTION 8.5 RIGHT OF INSPECTION. Any Stockholder 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 for a reasonable
charge. Inspection of the Company books and records by the office or agency
administering the securities laws of a jurisdiction shall be provided upon
reasonable notice and during normal business hours.
SECTION 8.6 ACCESS TO STOCKHOLDER LIST. An alphabetical list of the
names, addresses and telephone numbers of the Stockholders of the Company, along
with the number of Shares held by each of them (the "Stockholder List"), shall
be maintained as part of the books and records of the Company and shall be
available for inspection by any Stockholder or the Stockholder's designated
agent at the home office of the Company upon the request of the Stockholder. The
Stockholder List shall be updated at least quarterly to reflect changes in the
information contained therein. A copy of such list shall be mailed to any
Stockholder so requesting within ten (10) days of the request. The copy of the
Stockholder 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). The
Company may impose a reasonable charge for expenses incurred in reproduction
pursuant to the Stockholder request. A Stockholder may request a copy of the
Stockholder List in connection with matters relating to Stockholders' voting
rights, and the exercise of Stockholder rights under federal proxy laws.
If the Advisor or Directors neglect or refuse to exhibit, produce or mail a
copy of the Stockholder List as requested, the Advisor and the Directors shall
be liable to any Stockholder requesting the list for the costs, including
attorneys' fees, incurred by that Stockholder for compelling the production of
the Stockholder List, and for actual damages suffered by any Stockholder 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
Stockholder List is to secure such list of Stockholders 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 Stockholder
relative to the affairs of the Company. The Company may require the Stockholder
requesting the Stockholder List to represent that the list is not requested for
a commercial purpose unrelated to the Stockholder's interest in the Company. The
remedies provided
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hereunder to Stockholders requesting copies of the Stockholder List are in
addition, to and shall not in any way limit, other remedies available to
Stockholders under federal law, or the laws of any state.
SECTION 8.7 REPORTS. The Directors, including the Independent Directors,
shall take reasonable steps to insure that the Company shall cause to be
prepared and mailed or delivered to each Stockholder as of a record date after
the end of the fiscal year and each holder of other publicly held securities of
the Company within one hundred twenty (120) days after the end of the fiscal
year to which it relates an annual report for each fiscal year ending after the
initial public offering of its securities which shall include: (i) financial
statements prepared in accordance with generally accepted accounting principles
which are audited and reported on by independent certified public accountants;
(ii) the ratio of the costs of raising capital during the period to the capital
raised; (iii) the aggregate amount of advisory fees and the aggregate amount of
other fees paid to the Advisor and any Affiliate of the Advisor by the Company
and including fees or changes paid to the Advisor and any Affiliate of the
Advisor by third parties doing business with the Company; (iv) the Operating
Expenses of the Company, stated as a percentage of Average Invested Assets and
as a percentage of its Net Income; (v) a report from the Independent Directors
that the policies being followed by the Company are in the best interests of its
Stockholders and the basis for such determination; (vi) separately stated, full
disclosure of all material terms, factors, and circumstances surrounding any and
all transactions involving the Company, Directors, Advisors and any Affiliate
thereof occurring in the year for which the annual report is made, and the
Independent Directors shall be specifically charged with a duty to examine and
comment in the report on the fairness of such transactions; and (vii)
Distributions to the Stockholders for the period, identifying the source of such
Distributions, and if such information is not available at the time of the
distribution, a written explanation of the relevant circumstances will accompany
the Distributions (with the statement as to the source of Distributions to be
sent to Stockholders not later than sixty (60) days after the end of the fiscal
year in which the distribution was made).
ARTICLE IX
LIABILITY OF STOCKHOLDERS, DIRECTORS, ADVISORS AND AFFILIATES;
TRANSACTIONS BETWEEN AFFILIATES AND THE COMPANY
SECTION 9.1 LIMITATION OF STOCKHOLDER LIABILITY. No Stockholder shall be
liable for any debt, claim, demand, judgment or obligation of any kind of,
against or with respect to the Company by reason of his being a Stockholder, nor
shall any Stockholder be subject to any personal liability whatsoever, in tort,
contract or otherwise, to any Person in connection with the Company Property or
the affairs of the Company by reason of his being a Stockholder. The Company
shall include a clause in its contracts which provides that Stockholders shall
not be personally liable for obligations entered into on behalf of the Company.
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SECTION 9.2 LIMITATION OF LIABILITY AND INDEMNIFICATION.
(i) The Company shall indemnify and hold harmless a Director,
Advisor, or Affiliate (the "Indemnitee") against any or all losses or
liabilities reasonably incurred by the Indemnitee in connection with or by
reason of any act or omission performed or omitted to be performed on behalf of
the Company in such capacity, provided, that the Indemnitee has determined, in
good faith, that the course of conduct which caused the loss or liability was in
the best interests of the Company. The Company shall not indemnify or hold
harmless the Indemnitee if: (i) in the case that the Indemnitee is not an
Independent Director, the loss or liability was the result of negligence or
misconduct by the Indemnitee, or (ii) in the case that the Indemnitee is an
Independent Director, the loss or liability was the result of gross negligence
or willful misconduct by the Indemnitee. Any indemnification of expenses or
agreement to hold harmless may be paid only out of the Net Assets of the Company
and no portion may be recoverable from the Stockholders.
(ii) The Company shall not provide indemnification for any loss,
liability or expense arising from or out of an alleged violation of federal or
state securities laws by such party unless one or more of the following
conditions are met: (i) there has been a successful adjudication on the merits
of each count involving alleged securities law violations as to the Indemnitee,
(ii) such claims have been dismissed with prejudice on the merits by a court of
competent jurisdiction as to the Indemnitee; or (iii) a court of competent
jurisdiction approves a settlement of the claims against the Indemnitee and
finds that indemnification of the settlement and the related costs should be
made, and the court considering the request for indemnification has been advised
of the position of the Securities and Exchange Commission and of the published
position of any state securities regulatory authority in which securities of the
Company were offered or sold as to indemnification for violations of securities
laws.
(iii) Notwithstanding anything to the contrary contained in the
provisions of subsection (i) and (ii) above of this Section, the Company shall
not indemnify or hold harmless an Indemnitee if it is established that: (a) the
act or omission was material to the loss or liability and was committed in bad
faith or was the result of active or deliberate dishonesty, (b) the Indemnitee
actually received an improper personal benefit in money, property, or services,
(c) in the case of any criminal proceeding, the Indemnitee had reasonable cause
to believe that the act or omission was unlawful, or (d) in a proceeding by or
in the right of the Company, the Indemnitee shall have been adjudged to be
liable to the Company.
(iv) The Directors may take such action as is necessary to carry
out this Section 9.2 and are expressly empowered to adopt, approve and amend
from time to time Bylaws, resolutions or contracts implementing such provisions.
No amendment of these Articles of Incorporation or repeal of any of its
provisions shall limit or eliminate the right of indemnification provided
hereunder with respect to acts or omissions occurring prior to such amendment or
repeal.
SECTION 9.3 PAYMENT OF EXPENSES. The Company shall pay or reimburse
reasonable legal expenses and other costs incurred by a Director, Advisor, or
Affiliate in advance of final
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disposition of a proceeding if all of the following are satisfied: (i) the
proceeding relates to acts or omissions with respect to the performance of
duties or services on behalf of the Company, (ii) the Indemnitee provides the
Company with written affirmation of his good faith belief that he has met the
standard of conduct necessary for indemnification by the Company as authorized
by Section 9.2 hereof, (iii) the legal proceeding was initiated by a third party
who is not a Stockholder or, if by a Stockholder of the Company acting in his or
her capacity as such, a court of competent jurisdiction approves such
advancement, and (iv) the Indemnitee provides the Company with a written
agreement to repay the amount paid or reimbursed by the Company, together with
the applicable legal rate of interest thereon, if it is ultimately determined
that the Indemnitee did not comply with the requisite standard of conduct and is
not entitled to indemnification. Any indemnification payment or reimbursement
of expenses will be furnished in accordance with the procedures in Section
2-418(e) of the Maryland General Corporation Law.
SECTION 9.4 EXPRESS EXCULPATORY CLAUSES IN INSTRUMENTS. Neither the
Stockholders nor the Directors, officers, employees or agents of the Company
shall be liable under any written instrument creating an obligation of the
Company by reason of their being Stockholders, Directors, officers, employees or
agents of the Company, and all Persons shall look solely to the Company Property
for the payment of any claim under or for the performance of that instrument.
The omission of the foregoing exculpatory language from any instrument shall not
affect the validity or enforceability of such instrument and shall not render
any Stockholder, Director, officer, employee or agent liable thereunder to any
third party, nor shall the Directors or any officer, employee or agent of the
Company be liable to anyone as a result of such omission.
SECTION 9.5 TRANSACTIONS WITH AFFILIATES. The Company shall not engage in
transactions with any Affiliates, 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 Directors (including a majority of
the Independent Directors) not Affiliated with the person who is party to the
transaction and:
(i) The transaction is fair and reasonable to the Company and its
Stockholders.
(ii) The terms of such transaction are at least as favorable as
the terms of any comparable transactions made on an arms-length basis and known
to the Directors.
(iii) The total consideration is not in excess of the appraised
value of the property being acquired, if an acquisition is involved.
(iv) Payments to the Advisor, its Affiliates and the Directors
for services rendered in a capacity other than that as Advisor or Director may
only be made upon a determination that:
(a) The compensation is not in excess of their compensation
paid for any comparable services; and
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(b) 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.
Transactions between the Company and its Affiliates are further subject to
any express restrictions in these Articles of Incorporation (including Article
IV and Section 7.7) or adopted by the Directors in the Bylaws or by resolution,
and further subject to the disclosure and ratification requirements of MGCL
(section) 2-419 and other applicable law.
ARTICLE X
AMENDMENT; REORGANIZATION; MERGER, ETC.
SECTION 10.1 AMENDMENT.
(i) These Articles of Incorporation may be amended, without the
necessity for concurrence by the Directors, by the affirmative vote of the
holders of not less than a majority of the Equity Shares then outstanding and
entitled to vote thereon, except that (1) no amendment may be made which would
change any rights with respect to any outstanding class of securities, by
reducing the amount payable thereon upon liquidation, or by diminishing or
eliminating any voting rights pertaining thereto; and (2) Section 10.2 hereof
and this Section 10.1 shall not be amended (or any other provision of these
Articles of Incorporation be amended or any provision of these Articles of
Incorporation be added that would have the effect of amending such sections),
without the affirmative vote of the holders of two-thirds (2/3) of the Equity
Shares then outstanding and entitled to vote thereon.
(ii) The Directors, by a two-thirds (2/3) vote, may amend
provisions of these Articles of Incorporation from time to time as necessary to
enable the Company to qualify as a real estate investment trust under the REIT
Provisions of the Code. With the exception of the foregoing, the Directors may
not amend these Articles of Incorporation.
(iii) An amendment to these Articles of Incorporation shall
become effective as provided in Section 12.5.
(iv) These Articles of Incorporation may not be amended except as
provided in this Section 10.1.
SECTION 10.2 REORGANIZATION. Subject to the provisions of any class or
series of Equity Shares at the time outstanding, the Directors shall have the
power (i) to cause the organization of a corporation, association, trust or
other organization to take over the Company Property and to carry on the affairs
of the Company, or (ii) merge the Company into, or sell, convey and transfer the
Company Property to any such corporation, association, trust or organization in
exchange for Securities thereof or beneficial interests therein, and the
assumption by the transferee of the liabilities of the Company, and upon the
occurrence of (i) or (ii) above
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terminate the Company and deliver such Securities or beneficial interests
ratably among the Stockholders according to the respective rights of the class
or series of Equity Shares held by them; provided, however, that any such action
shall have been approved, at a meeting of the Stockholders called for that
purpose, by the affirmative vote of the holders of not less than a majority of
the Equity Shares then outstanding and entitled to vote thereon.
SECTION 10.3 MERGER, CONSOLIDATION OR SALE OF COMPANY PROPERTY. Subject
to the provisions of any class or series of Equity Shares at the time
outstanding, the Directors shall have the power to (i) merge the Company into
another entity, (ii) consolidate the Company with one (1) or more other entities
into a new entity; (iii) sell or otherwise dispose of all or substantially all
of the Company Property; or (iv) dissolve or liquidate the Company, other than
before the initial investment in Company Property; provided, however, that such
action shall have been approved, at a meeting of the Stockholders called for
that purpose, by the affirmative vote of the holders of not less than a majority
of the Equity Shares then outstanding and entitled to vote thereon. Any such
transaction involving an Affiliate of the Company or the Advisor also must be
approved by a majority of the Directors (including a majority of the Independent
Directors) not otherwise interested in such transaction as fair and reasonable
to the Company and on terms and conditions not less favorable to the Company
than those available from unaffiliated third parties.
In connection with any proposed Roll-Up Transaction, which, in general
terms, is any transaction involving the acquisition, merger, conversion, or
consolidation, directly or indirectly, of the Company and the issuance of
securities of a Roll-Up Entity that would be created or would survive after
the successful completion of the Roll-Up Transaction, an appraisal of all
Properties shall be obtained from a competent independent appraiser. The
Properties shall be appraised on a consistent basis, and the appraisal
shall be based on the evaluation of all relevant information and shall
indicate the value of the Properties as of a date immediately prior to the
announcement of the proposed Roll-Up Transaction. The appraisal shall
assume an orderly liquidation of Properties over a 12-month period. The
terms of the engagement of the independent appraiser shall clearly state
that the engagement is for the benefit of the Company and the Stockholders.
A summary of the appraisal, indicating all material assumptions underlying
the appraisal, shall be included in a report to Stockholders in connection
with a proposed Roll-Up Transaction. In connection with a proposed Roll-Up
Transaction, the person sponsoring the Roll-Up Transaction shall offer to
Stockholders who vote against the proposed Roll-Up Transaction the choice
of:
(i) accepting the securities of a Roll-Up Entity offered in the
proposed Roll-Up Transaction; or
(ii) one of the following:
(a) remaining Stockholders of the Company and preserving
their interests therein on the same terms and conditions as existed previously;
or
(b) receiving cash in an amount equal to the Stockholder's
pro rata share of the appraised value of the net assets of the Company.
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The Company is prohibited from participating in any proposed Roll-Up
Transaction:
(iii) which would result in the Stockholders having democracy
rights in a Roll-Up Entity that are less than the rights provided for in
Sections 8.1, 8.2, 8.4, 8.5, 8.6 and 9.1 of these Articles of Incorporation;
(iv) which includes provisions that would operate as a material
impediment to, or frustration of, 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), or which would limit the ability
of an investor to exercise the voting rights of its Securities of the Roll-Up
Entity on the basis of the number of Shares held by that investor;
(v) in which investor's rights to access of records of the
Roll-Up Entity will be less than those described in Sections 8.5 and 8.6 hereof;
or
(vi) in which any of the costs of the Roll-Up Transaction would
be borne by the Company if the Roll-Up Transaction is not approved by the
Stockholders.
ARTICLE XI
DURATION OF COMPANY
SECTION 11.1 The Company automatically will terminate and dissolve on
December 31, 2007, will undertake orderly liquidation and Sales of Company
assets and will distribute any Net Sales Proceeds to Stockholders, unless
Listing occurs, in which event the Company shall continue perpetually unless
dissolved pursuant to the provisions contained herein or pursuant to any
applicable provision of the MGCL.
SECTION 11.2 DISSOLUTION OF THE COMPANY BY STOCKHOLDER VOTE. The Company
may be terminated at any time, without the necessity for concurrence by the
Board of Directors, by the vote or written consent of a majority of the
outstanding Equity Shares.
ARTICLE XII
MISCELLANEOUS
SECTION 12.1 GOVERNING LAW. These Articles of Incorporation are executed
by the undersigned Directors and delivered in the State of Maryland with
reference to the laws thereof, and the rights of all parties and the validity,
construction and effect of every provision hereof shall be subject to and
construed according to the laws of the State of Maryland without regard to
conflicts of laws provisions thereof.
SECTION 12.2 RELIANCE BY THIRD PARTIES. Any certificate shall be final
and conclusive as to any persons dealing with the Company if executed by an
individual who, according to the
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records of the Company or of any recording office in which these Articles of
Incorporation may be recorded, appears to be the Secretary or an Assistant
Secretary of the Company or a Director, and if certifying to: (i) the number or
identity of Directors, officers of the Company or Stockholders; (ii) the due
authorization of the execution of any document; (iii) the action or vote taken,
and the existence of a quorum, at a meeting of the Directors or Stockholders;
(iv) a copy of the Articles of Incorporation or of the Bylaws as a true and
complete copy as then in force; (v) an amendment to these Articles of
Incorporation; (vi) the dissolution of the Company; or (vii) the existence of
any fact or facts which relate to the affairs of the Company. No purchaser,
lender, transfer agent or other person shall be bound to make any inquiry
concerning the validity of any transaction purporting to be made on behalf of
the Company by the Directors or by any duly authorized officer, employee or
agent of the Company.
SECTION 12.3 PROVISIONS IN CONFLICT WITH LAW OR REGULATIONS.
(i) The provisions of these Articles of Incorporation are
severable, and if the Directors shall determine that any one or more of such
provisions are in conflict with the REIT Provisions of the Code, or other
applicable federal or state laws, the conflicting provisions shall be deemed
never to have constituted a part of these Articles of Incorporation, even
without any amendment of these Articles of Incorporation pursuant to Section
10.1 hereof; provided, however, that such determination by the Directors shall
not affect or impair any of the remaining provisions of these Articles of
Incorporation or render invalid or improper any action taken or omitted prior to
such determination. No Director shall be liable for making or failing to make
such a determination.
(ii) If any provision of these Articles of Incorporation shall be
held invalid or unenforceable in any jurisdiction, such holding shall not in any
manner affect or render invalid or unenforceable such provision in any other
jurisdiction or any other provision of these Articles of Incorporation in any
jurisdiction.
SECTION 12.4 CONSTRUCTION. In these Articles of Incorporation, unless the
context otherwise requires, words used in the singular or in the plural include
both the plural and singular and words denoting any gender include both genders.
The title and headings of different parts are inserted for convenience and shall
not affect the meaning, construction or effect of these Articles of
Incorporation. In defining or interpreting the powers and duties of the Company
and its Directors and officers, reference may be made, to the extent
appropriate, to the Code and to Titles 1 through 3 of the Corporations and
Associations Article of the Annotated Code of Maryland, referred to herein as
the "MGCL."
SECTION 12.5 RECORDATION. These Articles of Incorporation and any
amendment hereto shall be filed for record with the State Department of
Assessments and Taxation of Maryland and may also be filed or recorded in such
other places as the Directors deem appropriate, but failure to file for record
these Articles of Incorporation or any amendment hereto in any office other than
in the State of Maryland shall not affect or impair the validity or
effectiveness of these Articles of Incorporation or any amendment hereto. A
restated Articles of Incorporation shall, upon filing, be conclusive evidence of
all amendments contained therein and
-54-
<PAGE>
may thereafter be referred to in lieu of the original Declaration of Trust and
the various amendments thereto.
* * * * * * * * * *
THIRD: This amendment and restatement of the Articles of Incorporation of
the Company has been approved by a majority of the Directors and approved by the
Stockholders as required by law.
FOURTH: The Company currently has authority to issue one hundred thousand
(100,000) shares of capital stock, all of one class of common stock, par value
$0.01 per share. The number, classes, par values and preferences, rights,
powers, restrictions, limitations, qualifications, terms and conditions of the
shares of capital stock that the Company will have authority to issue upon
effectiveness of this amendment and restatement of its Articles of Incorporation
are set forth in Article VII of the foregoing amendment and restatement of such
Articles of Incorporation.
-55-
<PAGE>
IN WITNESS WHEREOF, these Articles of Incorporation have been signed on
this _____ day of ____________, 1997 by the undersigned Directors, each of whom
acknowledges, under penalty of perjury, that this document is his free act and
deed, and that to the best of his knowledge, information and belief, the matters
and facts set forth herein are true in all material respects.
--------------------------------
James M. Seneff, Jr.
--------------------------------
Robert A. Bourne
--------------------------------
G. Richard Hostetter
--------------------------------
J. Joseph Kruse
--------------------------------
Richard C. Huseman
-56-
Opinion of Shaw, Pittman, Potts & Trowbridge as to the legality
of the securities being registered by CNL American Realty Fund, Inc.
<PAGE>
June 25, 1997
CNL American Realty Fund, Inc.
400 East South Street, Suite 500
Orlando, Florida 32801
Gentlemen:
We have acted as counsel for CNL American Realty Fund, Inc., a
Maryland corporation (the "Company"), in connection with the registration of up
to 16,500,000 shares of common stock of the Company, par value $.01 per share,
and having a purchase price of $10.00 each (the "Shares"), pursuant to the
Registration Statement on Form S-11 (File No. 333-9943) filed by the Company
under the Securities Act of 1933 (the "Registration Statement"), and the
proposed sale of the Shares by the Company in accordance with the Registration
Statement.
Based upon an examination and review of such documents as we have
deemed necessary, relevant or appropriate, we are of the opinion that the
Company has the corporate power to issue the Shares issuable pursuant to the
Registration Statement, and upon issuance and delivery in accordance with the
Registration Statement, such Shares will be validly issued, fully paid and
nonassessable.
We hereby consent to filing of this opinion as an exhibit to the
Registration Statement, with such of the state securities authorities as may
require a copy of the opinion, and to the
<PAGE>
use of our name under the caption "Legal Opinions" in the prospectus which
constitutes a part of the Registration Statement.
Very truly yours,
SHAW, PITTMAN, POTTS & TROWBRIDGE
EXHIBIT 8
Opinion of Shaw, Pittman, Potts & Trowbridge regarding certain
material tax issues relating to CNL American Realty Fund, Inc.
<PAGE>
June 25, 1997
CNL American Realty Fund, Inc.
400 E. South Street
Suite 500
Orlando, Florida 32801
Ladies and Gentlemen:
You have requested certain opinions regarding the application of
U.S. federal income tax laws to CNL American Realty Fund, Inc. (the "Company")
in connection with the registration statement on Form S-11, No. 333-9943,
originally filed with the Securities and Exchange Commission on August 12, 1996,
and the amendments thereto (the "Registration Statement"). All capitalized terms
used but not otherwise defined herein shall have the respective meanings given
them in the prospectus included in the amendment to the Registration Statement
filed on or about June 26, 1997.
In rendering the following opinions, we have examined such statutes,
regulations, records, certificates and other documents as we have considered
necessary or appropriate as a basis for such opinions, including the following:
(1) the Registration Statement (including all Exhibits thereto and all
amendments made thereto through the date hereof), (2) the Articles of
Incorporation of the Company, together with all amendments, (3) certain written
representations of the Company contained in a letter to us dated June 25, 1997
and attached hereto and (4) such other documents or information as we have
deemed necessary to render the opinions set forth in this letter. In our review,
we have assumed, with your consent, that the documents listed above that we
reviewed in proposed form will be executed in substantially the same form, all
of the representations and statements set forth in such documents are true and
correct, and all of the
<PAGE>
obligations imposed by any such documents on the parties thereto, including
obligations imposed under the Articles of Incorporation of the Company, have
been or will be performed or satisfied in accordance with their terms. We also
have assumed the genuineness of all signatures, the proper execution of all
documents, the authenticity of all documents submitted to us as originals, the
conformity to originals of documents submitted to us as copies, and the
authenticity of the originals from which any copies were made.
Unless facts material to the opinions expressed herein are
specifically stated to have been independently established or verified by us, we
have relied as to such facts solely upon the representations made by the
Company. To the extent that the representations of the Company are with respect
to matters set forth in the Code or Treasury Regulations, we have reviewed with
the individuals making such representations the relevant provisions of the Code,
the applicable Treasury Regulations and published administrative interpretations
thereof.
Based upon, and subject to, the foregoing, we are of the opinion as
follows:
1. Commencing with the Company's taxable year ending
December 31, 1997, the Company will be organized in
conformity with the requirements for qualification as a
REIT, and the Company's proposed method of operation
will enable it to meet the requirements for
qualification as a REIT under the Code.
2. The discussion of matters of law under the heading
"FEDERAL INCOME TAX CONSIDERATIONS" in the Registration
Statement is accurate in all material respects, and such
discussion fairly summarizes the federal income tax
considerations that are likely to be material to a
holder of Shares of the Company.
3. Assuming that there is no waiver of the
restrictions on ownership of Shares in the Articles of
Incorporation of the Company and that a tax-exempt
stockholder does not finance the acquisition of its
Shares with "acquisition indebtedness"
<PAGE>
CNL American Realty Fund, Inc.
June 25, 1997
Page 4
within the meaning of Section 524(c) of the Code or
otherwise use its Shares in an unrelated trade or
business, the distributions of the Company with respect
to such tax-exempt shareholder will not constitute
unrelated business taxable income as defined in Section
512(a) of the Code.
4. Assuming (i) the Company leases the Properties on
substantially the same terms and conditions described in
the "Business -- Description of Property Leases" section
of the Registration Statement, and (ii) the residual
value of the Properties for which the Company owns the
underlying land remaining after the end of their lease
terms (including all renewal periods) may reasonably be
expected to be at least 20% of the Company's cost of
such properties, and the remaining useful lives of the
Properties for which the Company owns the underlying
land at the end of their lease terms (including all
renewal periods) may reasonably be expected to be at
least 20% of such properties' useful lives at the
beginning of their lease terms, the Company will be
treated as the owner of the Properties for which the
Company owns the underlying land for federal income tax
purposes and will be entitled to claim depreciation and
other tax benefits associated with such ownership.
5. Assuming (i) the Mortgage Loans are made on the
terms and conditions described in the
"Business--Mortgage Loans" section of the Registration
Statement, and (ii) the amount of each loan does not
exceed the fair market value of the real property
subject to the mortgage at the time of the loan
commitment, the income generated through the Company's
investments in Mortgage Loans will be treated as
qualifying income under the 75 percent gross income
test.
6. Assuming (i) the Secured Equipment Leases are made
on substantially the same terms and conditions described
in the "Business -- General" section of the Registration
Statement, and (ii) each of the Secured Equipment Leases
will have a term that equals or exceeds the useful life
of the Equipment subject to the lease, the Company will
not be treated as the owner of the Equipment that is
subject to the Secured Equipment Leases and the Company
will be able to treat the Secured
<PAGE>
CNL American Realty Fund, Inc.
June 25, 1997
Page 5
Equipment Leases as loans secured by personal property
for federal income tax purposes.
7. Assuming that each Joint Venture has the
characteristics described in the "Business -- Joint
Venture Arrangements" section of the Registration
Statement, and is operated in the same manner as the
Company operates with respect to Properties that it owns
directly, (i) the Joint Ventures will be treated as
partnerships, as defined in Sections 7701(a)(2) and
761(a) of the Code and not as associations taxable as
corporations, and the Company will be subject to tax as
a partner pursuant to Sections 701 through 761 of the
Code and (ii) all material allocations to the Company of
income, gain, loss and deduction as provided in the
Joint Venture Agreements and as discussed in the
Registration Statement will be respected under Section
704(b) of the Code.
For a discussion relating the law to the facts and legal analysis
underlying the opinions set forth in this letter, we incorporate by reference
the discussion of federal income tax issues, which we assisted in preparing, in
the sections of the Registration Statement under the heading "FEDERAL INCOME TAX
CONSIDERATIONS."
The opinions set forth in this letter are based on existing law as
contained in the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury Regulations thereunder (including any Temporary and Proposed
Regulations), and interpretations of the foregoing by the Internal Revenue
Service ("IRS") and by the courts in effect (or, in case of certain Proposed
Regulations, proposed) as of the date hereof, all of which are subject to
change, both retroactively or prospectively, and to possibly different
interpretations. Moreover, the Company's ability to achieve and maintain
qualification as a REIT depends upon its ability to achieve and maintain certain
diversity of stock ownership requirements and, through actual annual operating
results, certain requirements under the Code regarding its income, assets and
distribution levels. No assurance can be given that the actual ownership of the
Company's stock and its actual operating results and distributions for any
taxable year will satisfy the tests necessary to achieve and maintain its status
as a REIT. We assume no obligation to update the opinions set forth in this
<PAGE>
CNL American Realty Fund, Inc.
June 25, 1997
Page 6
letter. We believe that the conclusions expressed herein, if challenged by the
IRS, would be sustained in court. Because our positions are not binding upon the
IRS or the courts, however, there can be no assurance that contrary positions
may not be successfully asserted by the IRS.
The foregoing opinions are limited to the specific matters covered
thereby and should not be interpreted to imply the undersigned has offered its
opinion on any other matter.
We hereby consent to the use and filing of this opinion as an
exhibit to the Registration Statement and to all references to us in the
Registration Statement.
Very truly yours,
SHAW, PITTMAN, POTTS & TROWBRIDGE
EXHIBIT 23.1
Consent of Independent Public Accountants
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-11 (File
No. 333-9943) of our report dated February 21, 1997, on our audit of the
financial statements of CNL American Realty Fund, Inc. We also consent to the
reference to our Firm under the caption "Experts".
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
June 26, 1997
