As filed with the Securities and Exchange Commission on March ____, 1998
Registration No. 333-9943
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. TWO
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933, AS AMENDED
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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)
JAMES M. SENEFF, JR.
Chief Executive Officer
400 East South Street, Suite 500
Orlando, Florida 32801
Telephone: (407) 422-1574
(Name and Address of Agent for Service)
COPIES TO:
THOMAS H. McCORMICK, ESQUIRE
PATRICK CONNORS, ESQUIRE
Shaw, Pittman, Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
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.
<PAGE>
PROSPECTUS
CNL AMERICAN REALTY FUND, INC.
Shares of Common Stock
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 and remain qualified 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 10), including the following:
o Both the number of Properties that the Company will acquire and the
diversification of its investments will be reduced to the extent that the total
proceeds of the offering are less than $165,000,000. As of February 24, 1998,
the total offering proceeds were $15,435,890.
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 and/or receipt of percentage rent, and obtaining fixed income through
the receipt of payments from 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 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)
-------- -------------- -----------
Per Share................ $ 10.00 $ 0.75 $ 9.25
Total Maximum(3)......... $165,000,000 $12,375,000 $152,625,000
(footnotes on following page)
CNL SECURITIES CORP.
March ___, 1998
<PAGE>
- iv -
(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, with the prior written approval from, and in the sole
discretion of, the Managing Dealer. Such amounts also do not
include a Soliciting Dealer Servicing Fee payable to the
Managing Dealer by the Company (see "Management Compensation"),
all or a portion of which may be reallowed to certain Soliciting
Dealers in the Managing Dealer's with prior written approval
from, and in the sole discretion of, the Managing Dealer. 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.
-----------------------------------
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. On July 9, 1997, the Company
commenced this offering and as of October 15, 1997, the Company had received
aggregate subscription proceeds of $2,774,580, which exceeded the minimum
offering amount of $2,500,000, and $2,652,330 of the funds, excluding funds from
Pennsylvania investors, were released from escrow. As of December 4, 1997, the
Company had received aggregate subscription proceeds of $8,253,530, and funds
from Pennsylvania investors were released from escrow. As of February 24, 1996,
the Company had received total subscription proceeds of $15,435,890 (1,543,589
Shares), including $1,056 (106 Shares) issued pursuant to the Reinvestment Plan.
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. The offering of
Shares will terminate no later than July 9, 1998 (one year after the initial
date of this Prospectus), unless the Company elects to extend it to a date no
later than July 9, 1999 (two years after the initial date of this Prospectus),
in states that permit such extension.
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.
-----------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
TABLE OF CONTENTS...............................................................................................
SUMMARY.........................................................................................................
CNL American Realty Fund, Inc..........................................................................
Risk Factors...........................................................................................
Estimated Use of Proceeds..............................................................................
Conflicts of Interest..................................................................................
Management.............................................................................................
Management Compensation................................................................................
Summary of Reinvestment Plan...........................................................................
Business...............................................................................................
Investment Objectives And Policies.....................................................................
Description of Shares..................................................................................
Distribution Policy....................................................................................
Prior Performance of Affiliates........................................................................
Tax Status Of The Company..............................................................................
The Offering...........................................................................................
Definitions............................................................................................
RISK FACTORS....................................................................................................
Investment Risks.......................................................................................
Possible Lack of Diversification..............................................................
Limited Experience of Management..............................................................
Reliance on Management........................................................................
Reliance on Advisor...........................................................................
Leverage......................................................................................
Conflicts of Interest.........................................................................
Competing Demands on Officers and
Directors.........................................................................
Timing of Sales and Acquisitions Impact..............................................
Property Development.................................................................
The Company May Invest With Affiliates of
the Advisor.......................................................................
No Independent Review of the Company or
the Prospectus by Managing Dealer.................................................
No Separate Counsel for the Company,
Affiliates and Investors..........................................................
Lack of Liquidity of Shares...................................................................
Lack of Control over Joint Ventures...........................................................
Lack of Control of Property Management........................................................
Mortgage Loans................................................................................
Real Estate Market Conditions........................................................
Interest Rate Fluctuations...........................................................
Delays in Liquidating Defaulted Mortgage
Loans.............................................................................
Regulation...........................................................................
Secured Equipment Leases......................................................................
Default by Lessee....................................................................
Regulation...........................................................................
Tax Risks............................................................................
No Operating History..........................................................................
Impact of Inflation...........................................................................
Binding Nature of Majority Stockholder Vote...................................................
Significant Flexibility of the Board of Directors.............................................
Restrictions on Transfer Relating to REIT Status..............................................
Limited Liability of Officers and Directors...................................................
Possible Effect of ERISA......................................................................
Insufficient Working Capital..................................................................
- iii -
<PAGE>
Ability to use Leverage to Make Distributions.................................................
Real Estate and Financing Risks........................................................................
An Unspecified Property Offering ................................
Inability of Potential Investors to Evaluate
Properties........................................................................
No Limitation on Number of
Properties of a Particular Chain..................................................
No Assurance of Obtaining Suitable
Investments.......................................................................
Conflicts of Interest................................................................
Possible Delays in Investment.................................................................
Lack of Control Over Properties Under
Construction...............................................................................
Ground Lease Property Risks...................................................................
Impasse or Conflicts with Joint Venture Partner...............................................
Impasse with Joint Venture Partner...................................................
Interests of Joint Venture Partner...................................................
Limitations on the Ability of the Company to
Liquidate..................................................................................
Inability to Control the Sale of Certain Properties...........................................
Real Property Investments.....................................................................
Lack of Control Over Market and Business
Conditions........................................................................
Multiple Property Leases or Mortgage Loans
with Individual Tenants or Borrowers..............................................
Re-leasing of Properties.............................................................
Third Party Franchise Agreements.....................................................
Lack of Adequate Insurance...........................................................
Impact of Adverse Trends......................................................................
Competition...................................................................................
Seasonality of Hotel Industry.................................................................
Possible Environmental Liabilities............................................................
The Line of Credit and Permanent Financing....................................................
Unspecified Secured Equipment Leases..........................................................
Tax Risks..............................................................................................
REIT Qualification............................................................................
Secured Equipment Lease Treatment.............................................................
Effect of REIT Disqualification...............................................................
Effect of Distribution Requirements...........................................................
Restrictions on Maximum Share Ownership.......................................................
Other Tax Liabilities.........................................................................
Changes in Tax Laws...........................................................................
SUITABILITY STANDARDS AND HOW TO SUBSCRIBE......................................................................
Suitability Standards..................................................................................
How to Subscribe.......................................................................................
ESTIMATED USE OF PROCEEDS.......................................................................................
MANAGEMENT COMPENSATION.........................................................................................
CONFLICTS OF INTEREST...........................................................................................
Prior and Future Programs..............................................................................
Acquisition of Properties..............................................................................
Sales of Properties....................................................................................
Joint Investment With An Affiliated Program............................................................
Competition for Management Time........................................................................
Compensation of the Advisor............................................................................
Relationship with Managing Dealer......................................................................
Legal Representation...................................................................................
Certain Conflict Resolution Procedures.................................................................
SUMMARY OF REINVESTMENT PLAN....................................................................................
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<PAGE>
General................................................................................................
Investment of Distributions............................................................................
Participant Accounts, Fees, and Allocation of Shares...................................................
Reports to Participants................................................................................
Election to Participate or Terminate Participation.....................................................
Federal Income Tax Considerations......................................................................
Amendments and Termination.............................................................................
REDEMPTION OF SHARES............................................................................................
BUSINESS........................................................................................................
General................................................................................................
Site Selection and Acquisition of Properties...........................................................
Standards for Investment in Properties.................................................................
Description of Properties..............................................................................
Description of Property Leases.........................................................................
Joint Venture Arrangements.............................................................................
Mortgage Loans.........................................................................................
Management Services....................................................................................
Borrowing..............................................................................................
Sale of Properties, Mortgage Loans and Secured
Equipment Leases....................................................................................
Franchise Regulation...................................................................................
Competition............................................................................................
Regulation of Mortgage Loans and Secured Equipment
Leases..............................................................................................
SELECTED FINANCIAL DATA.........................................................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OF THE COMPANY...........................................................................
Liquidity and Capital Resources........................................................................
Results of Operations..................................................................................
MANAGEMENT......................................................................................................
General................................................................................................
Fiduciary Responsibility of the Board of Directors.....................................................
Directors and Executive Officers.......................................................................
Independent Directors..................................................................................
Committees of the Board of Directors...................................................................
Compensation of Directors and Executive Officers.......................................................
Management Compensation................................................................................
THE ADVISOR AND THE ADVISORY AGREEMENT..........................................................................
The Advisor............................................................................................
The Advisory Agreement.................................................................................
CERTAIN TRANSACTIONS............................................................................................
PRIOR PERFORMANCE INFORMATION...................................................................................
INVESTMENT OBJECTIVES AND POLICIES..............................................................................
General................................................................................................
Certain Investment Limitations.........................................................................
DISTRIBUTION POLICY.............................................................................................
General................................................................................................
Distributions..........................................................................................
SUMMARY OF THE ARTICLES OF INCORPORATION
AND BYLAWS...................................................................................................
General................................................................................................
Description of Capital Stock...........................................................................
Board of Directors.....................................................................................
Stockholder Meetings...................................................................................
Advance Notice for Stockholder Nominations for
Directors and Proposals of New Business.............................................................
Amendments to the Articles of Incorporation............................................................
Mergers, Combinations, and Sale of Assets..............................................................
Termination of the Company and REIT Status.............................................................
Restriction of Ownership...............................................................................
- v -
<PAGE>
Responsibility of Directors............................................................................
Limitation of Liability and Indemnification............................................................
Removal of Directors...................................................................................
Inspection of Books and Records........................................................................
Restrictions on "Roll-Up" Transactions.................................................................
FEDERAL INCOME TAX CONSIDERATIONS...............................................................................
Introduction...........................................................................................
Taxation of the Company................................................................................
Taxation of Stockholders...............................................................................
State and Local Taxes..................................................................................
Characterization of Property Leases....................................................................
Characterization of Secured Equipment Leases...........................................................
Investment in Joint Ventures...........................................................................
REPORTS TO STOCKHOLDERS.........................................................................................
THE OFFERING....................................................................................................
General................................................................................................
Plan of Distribution...................................................................................
Subscription Procedures................................................................................
Escrow Arrangements....................................................................................
ERISA Considerations...................................................................................
Determination of Offering Price........................................................................
SUPPLEMENTAL SALES MATERIAL.....................................................................................
LEGAL OPINIONS..................................................................................................
EXPERTS.........................................................................................................
ADDITIONAL INFORMATION..........................................................................................
DEFINITIONS.....................................................................................................
Form of Reinvestment Plan.................................................................................Exhibit A
Financial Information.....................................................................................Exhibit B
Prior Performance Tables..................................................................................Exhibit C
Subscription Agreement....................................................................................Exhibit D
</TABLE>
- vi -
<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. CAPITALIZED TERMS NOT OTHERWISE DEFINED
HEREIN SHALL HAVE THE MEANINGS SET FORTH IN THE "DEFINITIONS" SECTION OF THE
PROSPECTUS.
CNL AMERICAN REALTY FUND, INC.
CNL American Realty Fund, Inc. (the "Company") is a Maryland
corporation which intends to qualify and remain qualified 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 has engaged in discussions with a potential lender but has not yet
executed 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. 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.
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
<PAGE>
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 a reduced number of Properties and will have
reduced diversification of its investments, if the Company raises less
than $165,000,000 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.
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 executed 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
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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 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
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 be 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."
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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.
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, with prior
written approval from, and in the sole discretion of, the Managing Dealer. 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
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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.
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
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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 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 to make Distributions commencing in the initial year of
Company operations.
o to 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/or 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
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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.
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.
Distributions were expected to commence not later than the close of the first
full calendar quarter after the first release of funds from escrow to the
Company, and in fact the Company declared Distributions in November and December
1997, and paid such Distributions in December 1997. For the period October 15,
1997 (the date operations of the Company commenced) through December 31, 1997,
the Company declared and paid Distributions totalling $29,776. 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. For the period
October 15, 1997 (the date operations of the Company commenced) through December
31, 1997, 100 percent of the Distributions declared and paid were considered
ordinary income for federal income tax purposes. Due to the fact that the
Company had not yet acquired any Properties and was still in its offering stage
as of December 31, 1997, the characterization of Distributions for federal
income tax purposes is not considered by management to be necessarily
representative of the characterization of Distributions in future years.
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 June 30, 1997, 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 865 fast-food and family-style
restaurant properties. Based on an analysis of the operating results of the 88
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 July 1992 and June 1997 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."
THE OFFERING
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."
All subscription funds for Shares of the Company will be deposited in an
interest-bearing escrow account with SouthTrust Asset Management Company of
Florida, N.A. See "The Offering" for a description of the current status of the
offering.
A minimum investment of 250 Shares ($2,500) is required, except for
Nebraska, New York, and North Carolina stockholders who must make a minimum
investment of 500 Shares ($5,000). 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). 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
Possible Lack of Diversification. There can be
no assurance that the Company will sell the maximum number of Shares. 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.
The Company is not obligated to invest in both restaurant and hotel
Properties. The Company could invest entirely in hotel Properties . 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 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 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. The 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
encountered 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
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, has not acquired any Properties yet,
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 has executed
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.
Insufficient Working Capital. There can be no assurance that the Company
will have sufficient working capital. As of December 31, 1997, the Company had
stockholder's equity of $9,233,917.
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 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 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.
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 demographics, 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
environmental 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.
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 have qualified as a REIT in its taxable year ended
December 31, 1997, but no assurance can be given that it did so qualify or that
it will continue to qualify in the future. In this regard, based on certain
representations and assumptions, the Company has received an opinion of tax
counsel to the Company ("Counsel") to the effect that the Company qualified as a
REIT for the taxable year ended December 31, 1997, that the Company is 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 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 Ownership" 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, furnishings, 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,
investment 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, except for
Nebraska, New York, and North Carolina investors who must make a minimum
investment of 500 Shares ($5,000). 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). 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."
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 15,000,000
Shares are sold (1,543,483 Shares had been sold as of February 24, 1998,
excluding 106 Shares issued pursuant to the Reinvestment Plan). 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.
Maximum Offering(1)(2)
Amount Percent
------ -------
GROSS PROCEEDS TO THE COMPANY (3)................ $150,000,000 100.0%
Less:
Selling Commissions to CNL
Securities Corp. (3)....................... 11,250,000 7.5%
Marketing Support and Due Diligence
Expense Reimbursement Fee to
CNL Securities Corp. (3)................... 750,000 0.5%
Organizational and Offering Expenses (4)...... 4,500,000 3.0%
------------ -----
NET PROCEEDS TO THE COMPANY...................... 133,500,000 89.0%
Less
Acquisition Fees to the Advisor (5) .......... 6,750,000 4.5%
Acquisition Expenses (6)...................... 750,000 0.5%
Initial Working Capital Reserve .............. (7)
------------ -----
CASH PAYMENT FOR PURCHASE OF PROPERTIES
AND THE MAKING OF MORTGAGE LOANS
BY THE COMPANY (8)........................... $126,000,000 84.0%
============ =====
FOOTNOTES:
(1) Excludes the purchase of 20,000 shares of Common Stock 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, with prior written approval from, and in the sole
discretion of, the Managing Dealer. 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. The Advisor will pay all Organizational and Offering
Expenses which exceed 3% of Gross Proceeds. The Organizational and
Offering Expenses paid by the Company in connection with the formation of
the Company, together with the 7.5% 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.
(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.
MANAGEMENT COMPENSATION
The table below summarizes the types, recipients, methods of
computation, and estimated amounts of all compensation, 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.
- 38 -
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
TYPE OF
COMPENSATION ESTIMATED
AND RECIPIENT METHOD OF COMPUTATION MAXIMUM AMOUNT
- ---------------------------------------------------------------------------------------
<S><C>
Organizational Stage
- ---------------------------------------------------------------------------------------
Selling Selling Commissions of 7.5% per Share on all $ 1 1 ,250,000 if
Commissions to Shares sold, subject to reduction under 15,000,000 Shares are
Managing Dealer certain circumstances as described in The sold; $12,375,000 if
and Soliciting Offering Plan of Distribution. Soliciting 16,500,000 Shares
Dealers Dealers may be reallowed Selling Commissions (including 1,500,000
of up to 7% with respect to Shares they sell. S h a res offered
pursuant to the
Reinvestment Plan)
are sold. As of
December 31, 1997,
the Company had
incurred $849,405 in
Selling Commissions,
$792,832 of which was
r e a l l owed to
unaffiliated
Soliciting Dealers.
- ---------------------------------------------------------------------------------------
M a r k e t ing Expense allowance of 0.5% of Gross Proceeds $ 7 5 0 , 0 00 if
support and due to the Managing Dealer, all or a portion of 15,000,000 Shares are
d i l i g e nce which may be reallowed to Soliciting Dealers sold; $825,000 if
e x p e n s e with prior written approval from, and in the 16,500,000 Shares
r e imbursement sole discretion of, the Managing Dealer. The (including 1,500,000
fee to Managing M a naging Dealer will pay all sums S h a res offered
Dealer and attributable to bona fide due diligence pursuant to the
S o l i c iting expenses from this fee, in the Managing Reinvestment Plan)
Dealers Dealer's sole discretion. are sold. As of
December 31, 1997,
the Company had
incurred $56,627 in
these fees.
- ---------------------------------------------------------------------------------------
R e imbursement Actual expenses incurred, except that the Amount is not
to the Advisor Advisor will pay all such expenses in excess determinable at this
a n d its of 3% of Gross Proceeds. The Organizational time, but will not
Affiliates for and Offering Expenses paid by the Company in exceed 3% of Gross
Or ganizational connection with the formation of the Company, Proceeds, $4,500,000 if
and Offering together with the 7.5% Selling Commissions, 15,000,000 Shares are
Expenses the 0.5% marketing support and due diligence sold; $4,950,000 if
reimbursement fee, and the Soliciting Dealer 16,500,000 Shares
Servicing Fee incurred by the Company will (including 1,500,000
not exceed thirteen percent (13%) of the S h a res offered
proceeds raised in connection with this pursuant to the
offering. Reinvestment Plan)
are sold.
- ---------------------------------------------------------------------------------------
Acquisition Stage
- ---------------------------------------------------------------------------------------
Acquisition Fee 4.5% of Total Proceeds payable to the Advisor $ 6 , 7 50,000 if
to the Advisor as Acquisition Fees. 15,000,000 Shares are
sold plus $2,025,000
i f P e rmanent
Financing equals
$ 4 5 , 0 0 0 , 0 00;
$ 7 , 4 25,000 if
16,500,000 Shares
(including 1,500,000
Shares offered pur-
suant to the
Reinvestment Plan)
are sold plus
$2,227,500 if Perm-
a n ent Financing
equals $49,500,000.
As of December 31,
1997, the Company had
incurred $509,643 in
Acquisition Fees.
- ---------------------------------------------------------------------------------------
O t h e r Any fees paid to Affiliates of the Advisor in Amount is not
A c q u isition connection with the financing, development, determinable at this
F e e s to construction or renovation of a Property. time.
Affiliates of Such fees are in addition to 4.5% of Total
the Advisor Proceeds payable to the Advisor as
Acquisition Fees, and payment of such fees
will be subject to approval by the Board of
D i rectors, including a majority of the
Independent Directors, not otherwise
interested in the transaction.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
TYPE OF
COMPENSATION ESTIMATED
AND RECIPIENT METHOD OF COMPUTATION MAXIMUM AMOUNT
- ---------------------------------------------------------------------------------------
<S><C>
- ---------------------------------------------------------------------------------------
R e imbursement R e i m bursement to the Advisor and its Acquisition Expenses,
of Acquisition Affiliates for expenses actually incurred. which are based on a
Expenses to the number of factors,
Advisor and its The total of all Acquisition Fees and any i n c l uding the
Affiliates Acquisition Expenses payable to the Advisor purchase price of the
and its Affiliates shall be reasonable and Properties, are not
shall not exceed an amount equal to 6% of the determinable at this
Real Estate Asset Value of a Property, or in time.
the case of a Mortgage Loan, 6% of the funds
advanced, unless a majority of the Board of
D i rectors, including a majority of the
Independent Directors not otherwise
interested in the transaction, approves fees
i n excess of this limit subject to a
determination that the transaction is
c o mmercially competitive, fair and
reasonable to the Company. Acquisition Fees
shall be reduced to the extent that, and if
necessary to limit, the total compensation
p a i d to all persons involved in the
acquisition of any Property to the amount
c u stomarily charged in arms-length
transactions by other persons or entities
rendering similar services as an ongoing
public activity in the same geographical
l o c a tion and for comparable types of
Properties, and to the extent that other
acquisition fees, finder's fees, real estate
c o m missions, or other similar fees or
c o mmissions are paid by any person in
connection with the transaction. 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Operational Stage
- ---------------------------------------------------------------------------------------
<S><C>
A s s e t A monthly Asset Management Fee in an amount Amount is not
Management Fee equal to one-twelfth of .60% of the Company's determinable at this
to the Advisor Real Estate Asset Value and the outstanding time. The amount of
principal amount of any Mortgage Loans, as of the Asset Management
t h e end of the preceding month. F e e will depend
Specifically, Real Estate Asset Value equals upon, among other
the amount invested in the Properties wholly things, the cost of
owned by the Company, determined on the basis the Properties and
of cost, plus, in the case of Properties the amount invested
owned by any Joint Venture or partnership in in Mortgage Loans.
w h ich the Company is a co-venturer or As of December 31,
partner, the portion of the cost of such 1997, the Company had
Properties paid by the Company, exclusive of not incurred any
Acquisition Fees and Expenses. The Asset asset management
Management Fee, which will not exceed fees 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.
- ---------------------------------------------------------------------------------------
R e imbursement Operating Expenses (which, in general, are Amount is not
to the Advisor those expenses relating to administration of determinable at this
and Affiliates the Company on an ongoing basis) will be time.
for operating reimbursed by the Company. To the extent
expenses that Operating Ex penses payable or
reimbursable by the Company, in any four con-
s e cutive 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 total 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 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.
" Net Income" means for any period, the total
revenues applicable to such period, less the
total expenses applicable to such period
e x c l uding 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.
- ---------------------------------------------------------------------------------------
S o l i c iting An annual fee of .20% of Invested Capital on Amount is not
D e a l e r December 31 of each year, commencing on determinable at this
Servicing Fee December 31 of the year following the year in time. Until such
to Managing which the offering terminates, generally time as assets are
Dealer payable to the Managing Dealer, which, in its sold, the estimated
sole discretion, in turn may reallow all or a amounts payable to
portion of such fee to Soliciting Dealers the Managing Dealer
whose clients hold Shares on such date. In for each of the years
general, Invested Capital is the amount of following the year of
cash paid by the stockholders to the Company termination of the
for their Shares, reduced by certain prior offering are expected
Distributions to the stockholders from the to be $300,000 if
Sale of Assets. The Soliciting Dealer 15,000,000 Shares are
Servicing Fee will terminate as of the sold ; and $330,000
beginning of any year in which the Company is if 16,500,000 Shares
l i quidated or in which Listing occurs, (including 1,500,000
provided, however, that any previously Shares offered pur-
accrued but unpaid portion of the Soliciting suant to the
Dealer Servicing Fee may be paid in such year Reinvestment Plan)
or any subsequent year. are sold. The
maximum total amount
payable to the Manag-
ing Dealer through
December 31, 2005 is
$30,000 if $250,000
shares are sold;
$ 1 , 8 00,000 if
15,000,000 Shares are
sold ; and $1,980,000
if 16,500,000 Shares
are sold. No amounts
h a d been paid or
accrued as of
December 31, 1997.
D e f e r r ed, A deferred, subordinated real estate Amount is not
s u b ordinated disposition fee, payable upon Sale of one or determinable at this
real estate more Properties, in an amount equal to the time. The amount of
disposition fee lesser of (i) one-half of a Competitive Real this fee, if it
payable to the Estate Commission, or (ii) 3% of the sales becomes payable, will
Advisor from a p r i ce of such Property or Properties. depend upon the price
Sale or Sales Payment of such fee shall be made only if the at which Properties
of a Property Advisor provides a substantial amount of are sold. No amounts
n o t i n services in connection with the Sale of a h a d been paid or
liquidation of Property or Properties and shall be accrued as of
the Company subordinated to receipt by the stockholders December 31, 1997.
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
s u b ordination 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
p u rposes of determining whether the
subordination conditions have been satisfied,
stockholders will be deemed to have received
a Distribution in the amount equal to the
p r oduct 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
S h ares are traded. Stockholders' 8%
Return, as of each date, means an aggregate
a m ount equal to an 8% cumulative,
noncompounded, annual return on Invested
Capital.
- ---------------------------------------------------------------------------------------
S u b ordinated At such time, if any, as Listing occurs, the Amount is not
Incentive Fee Advisor shall be paid the Subordinated determinable at this
payable to the Incentive Fee in an amount equal to 10% of time. No amounts had
Advisor at such the amount by which (i) the market value of been paid or accrued
time, if any, the Company (as defined below) plus the total as of December 31,
as Listing Distributions made to stockholders from the 1997.
occurs Company's inception until the date of Listing
exceeds (ii) the sum of (A) 100% of Invested
Capital and (B) the total Distributions
required to be made 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
30 days during which the Shares are traded
with such period beginning 180 days after
Listing. 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.
- ---------------------------------------------------------------------------------------
D e f e r r ed, A deferred, subordinated share equal to 10% Amount is not
s u b ordinated of Net Sales Proceeds from Sales of assets of determinable at this
share of Net the Company payable after receipt by the time. No amounts had
Sales Proceeds stockholders of Distributions equal to the been paid or accrued
from Sales of sum of (i) the Stockholders' 8% Return and as of December 31,
assets of the (ii) 100% of Invested Capital. Following 1997.
Company not in Listing, no share of Net Sales Proceeds will
liquidation of be paid to the Advisor.
the Company
payable to the
Advisor
- ---------------------------------------------------------------------------------------
S e c u r e d A fee paid to the Advisor out of the proceeds Amount is not
Equipment Lease of the Line of Credit or Permanent Financing determinable at this
Servicing Fee for negotiating Secured Equipment Leases and time. No amounts had
to the Advisor s u pervising the Secured Equipment Lease been paid or accrued
program equal to 2% of the purchase price of as of December 31,
t h e Equipment subject to each Secured 1997.
Equipment Lease and paid upon entering into
such lease.
- ---------------------------------------------------------------------------------------
R e imbursement Repayment by the Company of actual expenses A m o u n t not
to the Advisor incurred. determinable at this
and Affiliates time.
for Secured
Equipment Lease
s e r v i c ing
expenses
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Liquidation Stage
- ---------------------------------------------------------------------------------------
<S><C>
D e f e r r ed, A deferred, subordinated real estate Amount is not
s u b ordinated disposition fee, payable upon Sale of one or determinable at this
real estate more Properties, in an amount equal to the time. The amount of
disposition fee lesser of (i) one-half of a Competitive Real this fee, if it
payable to the Estate Commission, or (ii) 3% of the sales becomes payable, will
Advisor from a p r i ce of such Property or Properties. depend upon the price
Sale or Sales Payment of such fee shall be made only if the at which Properties
in liquidation Advisor provides a substantial amount of are sold.
of 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
s u b ordination conditions have not been
satisfied, then the disposition fee shall be
paid at such later time as the subordination
conditions are satisfied.
- ---------------------------------------------------------------------------------------
D e f e r r ed, A deferred, subordinated share equal to 10% Amount is not
s u b ordinated of Net Sales Proceeds from Sales of assets of determinable at this
share of Net the Company payable after receipt by the time.
Sales Proceeds stockholders of Distributions equal to the
from Sales of sum of (i) the Stockholders' 8% Return and
assets of the (ii) 100% of Invested Capital. Following
Company in Listing, no share of Net Sales Proceeds will
liquidation of be paid to the Advisor.
the Company
payable to the
Advisor
- ---------------------------------------------------------------------------------------
</TABLE>
<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. | | CNL GROUP, INC. (1) |
(the Company) | | |
- -------------------------------- -----------------------------
| |
Advisory Agreement --------------------------100%---------
| |
| | |
- ------------------------------- ---------------------------
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 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 relationship 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.
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 compensation 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 relationship 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.
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 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 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., a public program, and CNL Income & Growth Fund VIII, Ltd., a private
program, offerings of securities for each of which are ongoing. As of December
31, 1997, CNL American Properties Fund, Inc. and CNL Income & Growth Fund VIII,
Ltd. had approximately $51,200,000 and $2,900,000, 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 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
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, determined 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.
ELECTION TO PARTICIPATE OR TERMINATE PARTICIPATION
Stockholders of the Company who purchase Shares in this offering may
become Participants in the Reinvestment 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 Reinvestment 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 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 and/or 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 $335.3 billion in
1998. Restaurant industry sales for 1997 are projected to be $321.3 billion.
Nominal growth, which is comprised of real growth and inflationary growth, is
estimated to be 4.7% in 1998. Real growth of the restaurant industry in 1997 was
1.7%, and industry analysts currently estimate that the restaurant industry will
achieve 1.8% real growth in 1998; however, according to the National Restaurant
Association, fast-food restaurants should outpace the industry average for real
growth, with a projected 2.1% increase over 1997. Sales in this segment of the
restaurant industry are projected to be $105.7 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 4.59% growth in their
systemwide sales figures for 1996. Casual-theme dining concepts are among the
chains showing the strongest growth. In 1996, the sandwich segment experienced
sales growth of 3.61% over 1995 figures, and, the casual-dining segment
experienced systemwide sales growth in 1996 of 12.37%, compared to 12.99% in
1995. 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 an unlisted
public REIT, 18 public partnerships and 8 private partnerships) and a listed
public REIT (which was managed by an Affiliate through December 31, 1997, at
which time such Affiliate merged with the REIT) had invested, as of September
30, 1997:
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<PAGE>
<TABLE>
<CAPTION>
Approximate Aggregate
Dollars Invested Percentage of Number of
Restaurant Chain by Affiliates Dollars Invested Prior Programs
- ---------------- ---------------- ---------------- --------------
<S><C>
Golden Corral $150,613,000 16.6% 26
Burger King 105,659,000 11.7% 25
Jack in the Box 94,041,000 10.4% 15
Denny's 91,365,000 10.1% 20
Hardee's 58,599,000 6.5% 13
Boston Market 51,351,000 5.7% 8
Shoney's 37,240,000 4.1% 13
IHOP 34,165,000 3.8% 6
Long John Silver's 32,029,000 3.5% 6
TGI Friday's 30,228,000 3.3% 9
Wendy's 30,011,000 3.3% 16
Darryl's 22,296,000 2.5% 4
Checkers 21,263,000 2.3% 7
Perkins 16,311,000 1.8% 9
Pizza Hut 15,578,000 1.7% 8
KFC 14,436,000 1.6% 11
Black-eyed Pea 10,602,000 1.2% 4
Popeyes 10,589,000 1.2% 9
Arby's 10,493,000 1.2% 6
Taco Bell 7,435,000 0.8% 8
Tumbleweed Southwest
Mesquite Grill & Bar 6,402,000 0.7% 1
Houlihan's 4,741,000 0.5% 1
</TABLE>
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 past six
consecutive years. Also according to Smith Travel Research, in 1997, the
industry will reach its highest absolute level of pre-tax profit in its history
at approximately $14.5 billion, an increase of approximately 16% over 1996. The
average daily room rate increased 6.1% in 1997, from $70.81 in 1996 to $75.16 in
1997, resulting in nine consecutive years of room rate growth. Revenue per
available room also increased by 5% from $46.03 in 1996 to $48.48 in 1997. In
1997, for the first time since 1992, growth in room supply exceeded
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growth in room demand and resulted in a slight dip in occupancy. In 1997, total
occupancy fell 0.8% from 65% in 1996 to 64.5%. 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.
According to the Smith Travel Research data, in 1997, there were 47,000 hotel
properties which included over 3.5 million hotel rooms recording over $61
billion revenue. 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 . In terms of
employment, travel and tourism provides over 6.6 million direct jobs, generating
over $121 billion in payroll expenditures. Nationally, 11% of total hotel rooms
available are located in urban areas, 47% in suburban areas, 30% in highway
locations, 5% in airport areas, and the remaining 7% in resort locations.
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 structure its leases to provide a minimum level of 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 relationships 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 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
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to appreciate, the Company currently expects to provide Mortgage Loans in the
aggregate principal amount of approximately 5% to 10% of Gross Proceeds.
Mortgage Loans will be secured by the building and improvements on the land. 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
discussions with a potential lender but has not yet executed 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. The
Company presently is negotiating the acquisition of certain Properties, but as
of February 24, 1998, had not acquired any such Properties or entered into a
commitment to acquire such Properties.
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
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. 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 supplement 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.
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
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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 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
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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
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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.
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 Properties. 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
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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
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,
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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/or 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
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. In the
case of acquisition of Properties that are to be constructed or renovated
pursuant to a development 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" and/or automatic
increases in the minimum annual rent at predetermined intervals during the term
of the lease. 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
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.
<PAGE>
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 replacement 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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<PAGE>
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 ss.1.704-1(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
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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 the tenant. The Mortgage Loan 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.
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
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<PAGE>
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 discussions with a
potential lender but has not yet executed 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
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
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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.
SELECTED FINANCIAL DATA
The following table sets forth certain financial information for the
Company, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements included in Exhibit B.
<TABLE>
<CAPTION>
1997 (1) 1996 (2)
------------- ---------
<S> <C>
Year Ended December 31:
Revenues $ 46,071 $ -
Net earnings 22,852 -
Cash distributions declared 29,776 -
Funds from operations (3) 22,852 -
Earnings per Share 0.03 -
Cash distributions declared per Share 0.05 -
Weighted average number of Shares outstanding (4) 686,063 -
At December 31:
Total assets $9,443,476 $598,190
Total stockholders' equity 9,233,917 200,000
</TABLE>
(1) No operations commenced until the Company received minimum offering
proceeds and funds were released from escrow on October 15, 1997.
(2) Selected financial data for 1996 represents the period June 12, 1996
(date of inception) through December 31, 1996.
(3) Funds from operations ("FFO"), based on the revised definition adopted
by the Board of Governors of NAREIT and as used herein, means net
earnings determined in accordance with generally accepted accounting
principles ("GAAP"), excluding gains or losses from debt restructuring
and sales of property, plus depreciation and amortization of real
estate assets and after adjustments for unconsolidated partnerships and
joint ventures. FFO was developed by NAREIT as a relative measure of
performance and liquidity of an equity REIT in order to recognize that
income-producing real estate historically has not depreciated on the
basis determined under GAAP. However, FFO (i) does not represent cash
generated from operating activities determined in accordance with GAAP
(which, unlike FFO, generally reflects all cash effects of transactions
and other events that enter into the determination of net earnings),
(ii) is not necessarily indicative of cash flow available to fund cash
needs and (iii) should not be considered as an alternative to net
earnings determined in accordance with GAAP as an indication of the
Company's operating performance, or to cash flow from operating
activities determined in accordance with GAAP as a measure of either
liquidity or the Company's ability to make distributions. Accordingly,
the Company believes that in order to facilitate a clear understanding
of the consolidated historical operating results of the Company, FFO
should be considered in conjunction with the Company's net earnings and
cash flows as reported in the accompanying financial statements and
notes thereto.
(4) The weighted average number of Shares outstanding is based upon the
period the Company was operational.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OF THE COMPANY
The Company has been formed recently, has not yet acquired any
Properties and has no significant 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.
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
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rent and/or receipt of percentage rent, and obtaining fixed income through the
receipt of payments from 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 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
During the period June 12, 1996 (date of inception) through December
31, 1996, the Company received initial capital contributions of $200,000 for
20,000 shares of common stock from CNL Fund Advisors, Inc. 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.
Effective July 1997, the Company commenced its offering of Shares of
common stock. As of December 31, 1997, the Company had received aggregate
subscription proceeds totalling $11,325,402 (1,132,540 Shares), including $1,056
(106 Shares) through the Company's Reinvestment Plan.
As of December 31, 1997, net proceeds to the Company from its offering
of Shares and capital contributions from the Advisor, after deduction of Selling
Commissions, the marketing support and due diligence expense reimbursement fee
and Organizational and Offering Expenses totalled $9,220,841. The Company used
$535,792 to pay for Acquisition Fees and Acquisition Expenses, leaving
$8,658,049 in Net Offering Proceeds available for investment in Properties and
Mortgage Loans. As of February 24, 1998, the Company had received subscription
proceeds of $15,435,890 (1,543,589 Shares) from its offering of Shares. As of
February 24, 1998, net proceeds to the Company from its offering of Shares and
capital contributions from the Advisor, after deduction of Selling Commissions,
the marketing support and due diligence expense reimbursement fee and
Organizational and Offering Expenses totalled approximately $13,000,000. The
Company used approximately $720,000 to pay for Acquisition Fees and Acquisition
Expenses, leaving approximately $12,280,000 in Net Offering Proceeds available
for investment in Properties and Mortgage Loans. As of February 24, 1998, the
Company had not acquired any Properties or entered into any Mortgage Loans.
The Company will use Net Offering Proceeds 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 discussions with a potential lender but has not yet
executed 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.
Properties will be leased on a long-term, triple-net basis, meaning
that tenants are generally required to pay all repairs and maintenance, property
taxes, insurance and utilities. Rental payments under the leases are expected to
exceed the Company's operating expenses. For these reasons, no short-term or
long-term liquidity problems associated with operating the Properties are
currently anticipated by management.
Until Properties are acquired, or Mortgage Loans are entered into, Net
Offering Proceeds are held in short-term, highly liquid investments which
management believes to have appropriate safety of principal. This investment
strategy provides high liquidity in order to facilitate the Company's use of
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these funds to acquire Properties at such time as Properties suitable for
acquisition are located or to fund Mortgage Loans. At December 31, 1997, the
Company had $8,869,838 invested in such short-term investments as compared to
$2,084 at December 31, 1996. The increase in the amount invested in short-term
investments reflects subscription proceeds derived from the sale of Shares
during the year ended December 31, 1997. These funds will be used primarily to
purchase and develop or renovate Properties, to make Mortgage Loans, to pay
Organizational and Offering Expenses and Acquisition Expenses, to pay
Distributions to stockholders, to meet other Company expenses and, in
management's discretion, to create cash reserves.
During the year ended December 31, 1997 and the period June 12, 1996
(date of inception) through December 31, 1996, Affiliates of the Company
incurred on behalf of the Company $638,274 and $555,812, respectively, for
certain Organizational and Offering Expenses. In addition, during the year ended
December 31, 1997, Affiliates of the Company incurred on behalf of the Company
$26,149 for certain Acquisition Expenses and $11,003 for certain Operating
Expenses. As of December 31, 1997 and 1996, the Company owed the Advisor
$193,254 and $386,561, respectively, for such amounts, unpaid fees and
accounting and administrative expenses. The Advisor has agreed to pay or
reimburse to the Company all Organizational and Offering Expenses in excess of
three percent of Gross Proceeds.
During the year ended December 31, 1997, the Company generated cash
from operations (which includes interest received less cash paid for operating
expenses) of $22,469. Based on current and anticipated future cash from
operations the Company declared Distributions to its stockholders of $29,776
during the period October 15, 1997 (the date operations commenced) through
December 31, 1997. No Distributions were paid or declared for the period June
12, 1996 (date of inception) through October 14, 1997 because operations had not
commenced. On January 1, 1998, the Company declared Distributions to
stockholders of record on January 1, 1998, totalling $28,814 ($0.025 per share),
payable in March 1998. On January 16, 1998, the Company declared Distributions
of $0.025 per share of common stock to stockholders of record on February 1,
1998, also payable in March 1998. For the year ended December 31, 1997, 100
percent of the Distributions received by stockholders were considered to be
ordinary income for federal income tax purposes . No amounts distributed or to
be distributed to the stockholders as of February 24, 1998, were required to be
or have been treated by the Company as a return of capital for purposes of
calculating the Stockholders' 8% Return on stockholders' Invested Capital.
Due to anticipated low operating expenses, rental income expected to be
obtained from Properties after they are acquired, the fact that the Line of
Credit and Permanent Financing have not been obtained and that the Company has
not entered into Mortgage Loans or Secured Equipment Leases , management does
not believe that working capital reserves will be necessary at this time.
Management has the right to cause the Company to maintain reserves if, in their
discretion, they determine such reserves are required to meet the Company's
working capital needs.
As of February 24, 1998, 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 Mortgage Loans to
be invested in will depend upon the amount of net offering proceeds and loan
proceeds available to the Company. The amount invested in Secured Equipment
Leases will not exceed 10% of the Gross Proceeds.
Management is not aware of any material trends, favorable or
unfavorable, in either capital resources or the outlook for long-term cash
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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
No operations commenced until the Company received the minimum offering
proceeds of $2,500,000 on October 15, 1997. The Company did not acquire any
Properties or enter into any Mortgage Loans during the year ended December 31,
1997.
During the year ended December 31, 1997, the Company earned $46,071 in
interest income from investments in money market accounts. Interest income is
expected to increase as the Company invests subscription proceeds received in
the future in highly liquid investments pending investment in Properties and
Mortgage Loans. However, as Net Offering Proceeds are invested in Properties and
used to make Mortgage Loans, the percentage of the Company's total revenues from
interest income from investments in money market accounts or other short term,
highly liquid investments is expected to decrease.
Operating expenses, including amortization expense, were $23,219 for
the year ended December 31, 1997. Operating expenses, including amortization
expense, represent only a portion of operating expenses which the Company is
expected to incur during a full year in which the Company owns Properties or in
which the Company is operational. The dollar amount of operating expenses is
expected to increase as the Company acquires Properties and invests in Mortgage
Loans; however, operating expenses as a percentage of total revenues is expected
to decrease as the Company acquires Properties and invests in Mortgage Loans.
The Company anticipates that its leases will be triple-net leases and
will contain provisions that management believes will mitigate the adverse
effect of inflation. Such provisions will include clauses requiring the payment
of percentage rent based on certain gross sales above a specified level and/or
automatic increases in base rent at specified times during the term of the
lease. Management expects that increases in gross sales volumes due to inflation
and real sales growth should result in an increase in rental income over time.
Continued inflation also may cause capital appreciation of the Company's
Properties. Inflation and changing prices, however, also may have an adverse
impact on the sales of the Properties and on potential capital appreciation of
the Properties.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure." The Statement, which is effective for fiscal years
ending after December 15, 1997, provides for disclosure of the Company's capital
structure as it relates to its preferred stock. At this time, the Company's
Board of Directors has not determined the relative rights, preferences, and
privileges of each class or series of preferred stock authorized. Since the
Company has not issued preferred shares, the disclosures required by this
Statement are not applicable.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The
Statement, which is effective for fiscal years beginning after December 15,
1997, requires the reporting of net earnings and all other changes to equity
during the period, except those resulting from investments by owners and
distributions to owners, in a separate statement that begins with net earnings.
Currently, the Company's only component of comprehensive income is its net
earnings. The Company does not believe that adoption of this Statement will have
a material effect on the Company's financial position or results of operations.
The Advisor of the Company is in the process of assessing and
addressing the impact of the year 2000 on its computer package software. The
hardware and built-in software are believed to be year 2000 compliant.
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Accordingly, the Company does not expect this matter to materially impact how it
conducts business nor its future results of operations or financial position .
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
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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 compensation 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
performance 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:
Name Age Position with the Company
James M. Seneff, Jr. 51 Director, Chairman of the Board,
and Chief Executive Officer
Robert A. Bourne 50 Director and President
G. Richard Hostetter 58 Independent Director
J. Joseph Kruse 65 Independent Director
Richard C. Huseman 59 Independent Director
Charles A. Muller 39 Executive Vice President
John T. Walker 39 Executive Vice President
Jeanne A. Wall 39 Executive Vice President
Lynn E. Rose 49 Secretary and Treasurer
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. 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 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, served as Chief Executive
Officer and Chairman of the Board of CNL Realty Advisors, Inc. from its
inception in 1991 through 1997 at which time such company merged with Commercial
Net Lease Realty, Inc., 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 $60 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
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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. Mr. Bourne also serves as President and a director of CNL American
Properties Fund, Inc. Mr. Bourne currently holds the position of Vice Chairman
of the Board of Directors, director and Treasurer of CNL Fund Advisors, Inc. Mr.
Bourne served as President of CNL Fund Advisors, Inc. from the date of its
inception through October 1997. Mr. Bourne is President and Treasurer of CNL
Group, Inc., President, Treasurer, 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 Chief Investment Officer Vice Chairman
of the Board of Directors, a director and Treasurer of CNL Institutional
Advisors, Inc., a registered investment advisor. Mr. Bourne served as President
of CNL Institutional Advisors, Inc. from the date of its inception through June
30, 1997. Mr. Bourne served as President and a director from July 1992 to
February 1996, served as Secretary and Treasurer from February 1996 through
December 1997, and has served as Vice Chairman of the Board of Directors 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
served as a director of CNL Realty Advisors, Inc. from 1991 through December
1997, and as Treasurer and Vice Chairman from February 1996 through December
1997, at which time such company merged with Commercial Net Lease Realty, Inc.
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
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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 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 currently serves as Executive
Vice President of CNL Real Estate Advisors, Inc., the Advisor, and Chief
Operating Officer of CNL Hotel Development Company. Mr. Muller joined CNL
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. 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, has
served on the Market, Finance and Investment Analysis Committee of the American
Hotel & Motel Association.
John T. Walker. Executive Vice President. Mr. Walker joined CNL Fund
Advisors, 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. 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 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 has served as Executive Vice President of CNL Investment Company since
January 1991. In 1984, Ms. Wall joined CNL Securities Corp. In 1985, Ms. Wall
became Vice President of CNL Securities Corp. in 1987, she became a Senior Vice
President and in July 1997, she became Executive 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 product development, partnership
administration and investor services for programs offered through participating
brokers and corporate communications for CNL Group, Inc. and Affiliates. 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 through 1997, and as Vice
President of Commercial Net Lease Realty, Inc. since 1992 through 1997. 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.
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Lynn E. Rose. Secretary and Treasurer. Ms. Rose serves as Secretary,
Treasurer and a director of CNL Real Estate Advisors, Inc., the Advisor. 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. from its inception in 1991 through 1997,
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."
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<PAGE>
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 July 9,
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:
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
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 of Common Stock. 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 of Common Stock necessary to approve a matter on which the
Advisor, Directors, and any Affiliate may not vote or consent, any shares of
Common Stock 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.
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<PAGE>
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 compensation 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 July 9, 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.
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<PAGE>
The Advisory Agreement may be terminated without cause or penalty by
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.
<PAGE>
CERTAIN TRANSACTIONS
The Managing Dealer is entitled to receive Selling Commissions
amounting to 7.5% of the total amount raised from the sale of Shares of common
stock for services in connection with the offering of Shares, a substantial
portion of which has been or will be paid as commissions to other
broker-dealers. For the period January 1, 1998 through February 24, 1998, and
the year ended December 31, 1997, the Company incurred $308,287 and $849,405,
respectively, of such fees, a substantial portion of which was paid by the
Managing Dealer as commissions to other broker-dealers.
In addition, the Managing Dealer is entitled to receive a Marketing
Support and Due Diligence Expense Reimbursement Fee equal to 0.5% of the total
amount raised from the sale of Shares, a portion of which may be reallowed to
other broker-dealers. For the period January 1, 1998 through February 24, 1998,
and the year ended December 31, 1997, the Company incurred $20,552 and $56,627,
respectively, of such fees, substantially all of which were reallowed to other
broker-dealers and from which all bona fide due diligence expenses were paid.
The Advisor is entitled to receive Acquisition Fees for services in
identifying the Properties and structuring the terms of the acquisition and
leases of the Properties and structuring the terms of the Mortgage Loans equal
to 4.5% of the total amount raised from the sale of Shares, 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. For the period January 1, 1998 through
February 24, 1998, and the year ended December 31, 1997, the Company incurred
$184,972 and $509,643, respectively, of such fees.
The Advisor and its Affiliates provide accounting and administrative
services to the Company (including accounting and administrative services in
connection with the offering of Shares) on a day-to-day basis. For the year
ended December 31, 1997 and the period June 12, 1996 (date of inception) through
December 31, 1996, the Company incurred a total of $192,224 and $28,665,
respectively, for these services, $185,335 and $28,665, respectively, of such
costs representing stock issuance costs and $6,889 and $0, respectively,
representing general operating and administrative expenses, including costs
related to preparing and distributing reports required by the Securities and
Exchange Commission.
<PAGE>
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 RETURNS, 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
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<PAGE>
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 June 30, 1997, the 18 partnerships and
the unlisted REIT had raised a total of $826,052,689 from a total of 59,630
investors, and had invested in 865 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 Net
Number of Proceeds Fully
Maximum Limited Invested or
Name of Offering Partnership Committed to
Entity Amount (1) Date Closed Units or Shares Sold Investment (2)
- ------- ---------- ----------- -------------------- --------------
<S> <C>
CNL Income $15,000,000 December 31, 1986 30,000 December 1986
Fund, Ltd. (30,000 units)
CNL Income $25,000,000 August 21, 1987 50,000 November 1987
Fund II, Ltd. (50,000 units)
CNL Income $25,000,000 April 29, 1988 50,000 June 1988
Fund III, Ltd. (50,000 units)
CNL Income $30,000,000
Fund IV, Ltd. (60,000 units) December 6, 1988 60,000 February 1989
CNL Income $25,000,000 June 7, 1989 50,000 December 1989
Fund V, Ltd. (50,000 units)
CNL Income $35,000,000 January 19, 1990 70,000 May 1990
Fund VI, Ltd. (70,000 units)
CNL Income $30,000,000 August 1, 1990 30,000,000 January 1991
Fund VII, Ltd. (30,000,000 units)
CNL Income $35,000,000 March 7, 1991 35,000,000 September 1991
Fund VIII, Ltd. (35,000,000 units)
CNL Income $35,000,000 September 6, 1991 3,500,000 November 1991
Fund IX, Ltd. (3,500,000 units)
CNL Income $40,000,000 March 18, 1992 4,000,000 June 1992
Fund X, Ltd. (4,000,000 units)
CNL Income $40,000,000 September 28, 1992 4,000,000 September 1992
Fund XI, Ltd. (4,000,000 units)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Date 90% of Net
Number of Proceeds Fully
Maximum Limited Invested or
Name of Offering Partnership Committed to
Entity Amount (1) Date Closed Units or Shares Sold Investment (2)
- ------- ---------- ----------- -------------------- --------------
<S> <C>
CNL Income $45,000,000 March 15, 1993 4,500,000 July 1993
Fund XII, Ltd. (4,500,000 units)
CNL Income $40,000,000 August 26, 1993 4,000,000 August 1993
Fund XIII, Ltd. (4,000,000 units)
CNL Income $45,000,000 February 22, 1994 4,500,000 May 1994
Fund XIV, Ltd. (4,500,000 units)
CNL Income $40,000,000 September 1, 1994 4,000,000 December 1994
Fund XV, Ltd. (4,000,000 units)
CNL Income $45,000,000 June 12, 1995 4,500,000 August 1995
Fund XVI, Ltd. (4,500,000 units)
CNL Income $30,000,000 September 19, 1996 3,000,000 December 1996
Fund XVII, Ltd. (3,000,000 units)
CNL Income
Fund XVIII, Ltd. $35,000,000 (3) (3) (3)
(3,500,000 units)
CNL American $425,000,000 (4) (4) (4)
Properties Fund, Inc. (42,500,000 shares)
</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 programs, see the
table set forth on the following page.
(3) As of June 30, 1997, CNL Income Fund XVIII, Ltd., which is offering a
maximum of 3,500,000 limited partnership units ($35,000,000), had received
subscriptions totaling $22,192,212 (2,219,221 units). As of such date, CNL
Income Fund XVIII, Ltd. had purchased 17 properties.
(4) In April 1995, CNL American Properties Fund, Inc. commenced an offering of
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. On February 6, 1997, the initial
offering closed upon receipt of subscriptions totalling $150,591,765
(15,059,177 shares), including $591,765 (59,177 shares) through the
reinvestment plan. Following completion of the initial offering on
February 6, 1997, CNL American Properties Fund, Inc. commenced a
subsequent offering (the "1997 Offering") of up to 27,500,000 shares
($275,000,000) of common stock. As of June 30, 1997, CNL American
Properties Fund, Inc. had received subscriptions totalling $73,251,412
(7,325,141 shares), including $643,293 (64,329 shares) through the
reinvestment plan from the 1997 Offering. As of such date, CNL American
Properties Fund, Inc. had purchased 174 properties.
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As of June 30, 1997, Mr. Seneff and Mr. Bourne, directly or through affiliated
entities, also had served as joint general partners of 67 nonpublic real estate
limited partnerships. The offerings of 65 of these 67 nonpublic limited
partnerships had terminated as of June 30, 1997. These 65 partnerships raised a
total of $166,969,266 from approximately 4,180 investors, and purchased,
directly or through participation in a joint venture or limited partnership,
interests in a total of 203 projects as of June 30, 1997. These 203 projects
consist of 19 apartment projects (comprising 11% of the total amount raised by
all 65 partnerships), 13 office buildings (comprising 5% of the total amount
raised by all 65 partnerships), 157 fast-food or family-style restaurant
property and business investments (comprising 68% of the total amount raised by
all 65 partnerships), one condominium development (comprising .5% of the total
amount raised by all 65 partnerships), four hotels/motels (comprising 5% of the
total amount raised by all 65 partnerships), seven commercial/retail properties
(comprising 10% of the total amount raised by all 65 partnerships), and two
tracts of undeveloped land (comprising .5% of the total amount raised by all 65
partnerships). The offering of the two remaining nonpublic limited partnerships
(offerings aggregating $16,750,000) had raised $9,700,000 from 201 investors
(approximately 57.9% of the total offering amount) as of June 30, 1997.
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 85 real estate limited partnerships whose offerings had closed
as of June 30, 1997 (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 85 real
estate limited partnerships).
The following table sets forth summary information, as of June 30,
1997, regarding property acquisitions 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.
Name of Type of Method of Type of
Entity Property Location Financing Program
- ------- -------- -------- --------- -------
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 44 fast-food AL, AZ, CO, FL, All cash Public
Fund II, Ltd. or GA, IL, IN, LA,
family-style MI, MN, MO, NC,
restaurants NM, OH, TX, WY
CNL Income 33 fast-food AZ, CA, FL, GA, All cash Public
Fund III, Ltd. or IA, IL, IN, KS,
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Name of Type of Method of Type of
Entity Property Location Financing Program
- ------- -------- -------- --------- -------
family-style KY, MD, MI, MN,
restaurants MO, NC, NE,
OK, TX
CNL Income 45 fast-food AL, DC, FL, GA, All cash Public
Fund IV, Ltd. or IL, IN, KS, MA,
family-style MD, MI, MS, NC,
restaurants 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
CNL Income 48 fast-food AR, AZ, FL, IN, All cash Public
Fund VI, Ltd. or MA, MI, MN, NC,
family-style NE, NM, NY, OH,
restaurants OK, PA, TN, TX,
VA, WY
CNL Income 47 fast-food AZ, CO, FL, GA, All cash Public
Fund VII, Ltd. or IN, LA, MI, MN,
family-style OH, SC, TN, TX,
restaurants UT, WA
CNL Income 42 fast-food AZ, FL, IN, LA, All cash Public
Fund VIII, Ltd. or MI, MN, NC, NY,
family-style OH, TN, TX, VA
restaurants
CNL Income 42 fast-food AL, FL, GA, IL, All cash Public
Fund IX, Ltd. or IN, LA, MI, MN,
family-style MS, NC, NH, NY,
restaurants OH, SC, TN, TX
CNL Income 49 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 40 fast-food AL, AZ, CA, CO, All cash Public
Fund XI, Ltd. or CT, FL, KS, LA,
family-style MA, MI, MS, NC,
restaurants 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 49 fast-food AL, AR, AZ, CA, All cash Public
Fund XIII, Ltd. or CO, FL, GA, IN,
family-style KS, LA, MD, NC,
restaurants OH, PA, SC, TN,
TX, VA
CNL Income 62 fast-food AL, AZ, CO, FL, All cash Public
Fund XIV, Ltd. or GA, KS, LA, MN,
family-style MO, MS, NC, NJ,
restaurants NV, OH, SC, TN,
TX, VA
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Name of Type of Method of Type of
Entity Property Location Financing Program
- ------- -------- -------- --------- -------
CNL Income 54 fast-food AL, CA, FL, GA, All cash Public
Fund XV, Ltd. or KS, KY, MN, MO,
family-style MS, NC, NJ, NM,
restaurants OH, OK, PA, SC,
TN, TX, VA
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 27 fast- CA, FL, GA, IL, All cash Public
Fund XVII, Ltd. food, family- IN, MI, NC, NV,
style or OH, SC, TN, TX
casual-dining
restaurant
properties
CNL Income 17 fast-food, CA, GA, KY, MD, All cash Public
Fund XVIII, family- MN, NC, NV, OH,
Ltd. style or TN, TX
casual-dining
restaurant
properties
CNL American 174 fast- AL, AZ, CA, All cash Public REIT
Properties food, family- CO, DE, FL, IA,
Fund, Inc. style or ID, IL, IN,
casual-dining KY, MD, MI, MN,
restaurants MO, NC, NE,
NM, NV, OH,
OK, OR, PA, TN,
TX, UT, VA, WA,
WV
-----------------------------------------------------------------------
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
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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 July 1992
and June 1997, 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 partnerships, 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/or 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
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 base annual rental, with automatic
increases in base rent and/or 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
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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.
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
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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 Investment 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.
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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. The
payment of Distributions commenced in December 1997. 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; 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.
For the period October 15, 1997 (the date operations of the Company
commenced) through December 31, 1997, the Company declared and paid
Distributions totaling $29,776. All of such amount was characterized as ordinary
income for federal income tax purposes. Due to the fact that the Company had not
yet acquired any Properties and was still in the offering stage as of December
31, 1997, the characterization of Distributions for federal income tax purposes
is not necessarily considered by management to be representative of the
characterization of Distributions in future years.
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.
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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 corporation, 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." As of February 24, 1998, the Company had
1,563,589 shares of Common Stock outstanding (including 20,000 shares issued to
the Advisor prior to the commencement of this offering and 106 Shares issued
pursuant to the Reinvestment Plan) 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
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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.
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.
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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."
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
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(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 underwriter 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
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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 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.
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 has entered 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
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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,
examination, 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
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
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(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
conclusions 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 is 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
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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
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, the Company qualified as a REIT under the Code for the taxable
year ending December 31, 1997, the Company is organized in conformity with the
requirements for qualification as a REIT, and the Company's proposed method of
operation will enable it to continue 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
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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 Equipment 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
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.
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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 two 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. However, a REIT is
currently permitted to earn up to one percent of its gross income from tenants,
determined on a property-by-property basis, by furnishing services that are
noncustomary or provided directly to the tenants, without causing the rental
income to fail to qualify as rents from real 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.
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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 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 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. 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
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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.
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
designated 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. In addition, the Company may elect to retain
and pay income tax on its long-term capital gains. If the Company so elects,
each stockholder will take into income the stockholder's share of the retained
capital gain as long-term capital gain and will receive a credit or refund for
that stockholder's share of the tax paid by the Company. The stockholder will
increase the basis of such stockholder's share by an amount equal to the excess
of the retained capital gain included in the stockholder's income over the tax
deemed paid by such stockholder. 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
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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
stockholder 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%
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(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
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.
Distributions 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 dividends of 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. A number of U.S. tax
treaties that reduce the rate of withholding tax on corporate dividends do not
reduce, or reduce to a lesser extent, the rate of withholding applied to
dividends from a REIT. The Company expects to withhold U.S. income tax at the
rate of 30% on the gross amount of any such distributions paid to a Non-U.S.
Stockholder unless (i) a lower treaty rate applies (and, with regard to payments
on or after January 1, 1999, the Non-U.S. Stockholder files IRS Form W-8 with
the Company and, if the Shares are not traded on an established securities
market, acquires a taxpayer identification number from the IRS) or (ii) the
Non-U.S. Stockholder files an IRS Form 4224 (or, with respect to payments on or
after January 1, 1999, files IRS Form W-8 with the Company) with the Company
claiming that the distribution is effectively connected income. Distributions in
excess of the Company's current and accumulated earnings and profits will not be
taxable to a stockholder to the extent that such distributions 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 distributions in excess of
current and accumulated earnings and profits exceed the adjusted basis of a
Non-U.S. Stockholders' Shares, such distributions 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 distribution is paid whether or not such
distribution will be in excess of current and accumulated earnings and profits,
the distribution 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 distribution was, in fact, in excess of the
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Company's current and accumulated earnings and profits. Beginning with payments
made on or after January 1, 1999, the Company will be permitted, but not
required, to make reasonable estimates of the extent to which distributions
exceed current or accumulated earnings and profits. Such distributions will
generally be subject to a 10% withholding tax, which may be refunded to the
extent they exceed the stockholder's actual U.S. tax liability, provided the
required information is furnished to the IRS.
For any year in which the Company qualifies as a REIT, distributions
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, distributions 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,
distributions 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 or
rate reduction. 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.
Stockholder's 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 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 certain other conditions are met.
Effectively connected gain realized by a foreign corporate shareholder may be
subject to an additional 30% branch profits tax, subject to possible exemption
or rate reduction under an applicable tax treaty. 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,
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.
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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 Properties. For
example, under the types of leases described in "Business Description of
Property 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
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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 Properties 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
"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 Properties 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.
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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
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
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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
As of February 24, 1998, the Company had received aggregate
subscription proceeds of $15,435,890 (1,543,589 Shares), including $1,056 (106
Shares) issued pursuant to the Reinvestment Plan. As of February 24, 1998, the
Company had not yet invested or committed for investment any of the Net Offering
Proceeds in Properties or Mortgage Loans. As of February 24, 1998, the Company
had approximately $12,280,000 available to invest in Properties and Mortgage
Loans following deduction of Selling Commissions, the market support and due
diligence reimbursement fee, and Organizational and Offering Expenses,
Acquisition Fees and Acquisition Expenses. As of February 24, 1998, the Company
had incurred $694,615 in Acquisition Fees to the Advisor.
GENERAL
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, except for
Nebraska, New York, and North Carolina investors who must make a minimum
investment of 500 Shares ($5,000). 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). 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."
PLAN OF DISTRIBUTION
The Shares are being 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
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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 the funds of such 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
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>
Dollar Amount
of Shares Purchase Price Reallowed Commissions on Sales Per Share
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
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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
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
compensation. 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
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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.
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
Soliciting Dealer. There are no additional fees associated with telephonic
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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
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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
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, 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 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
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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.
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
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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 sheets of the Company as of December 31, 1997 and
1996, and the related statements of earnings, stockholders' equity and cash
flows for the year ended December 31, 1997 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
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(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" 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 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.
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"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 rendering 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
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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 the
7.5% 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.
"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.
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"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.
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"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
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:
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; 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; having a
substantial number of relationships and contacts with the Company; possessing
significant rights to control Company properties; receiving fees for providing
services to the Company which are paid on a basis that is not customary in the
industry; or 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.
-109-
<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
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
A-1
<PAGE>
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 a
public offering of Shares and who has received a copy of the related final
prospectus included in the Company's registration statement 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 a 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.
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. ("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
A-2
<PAGE>
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.
8. Administrative Charges, Commissions, and Plan Expenses. The Company
shall be responsible for all administrative charges 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 a 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 Real
Estate 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.
A-3
<PAGE>
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 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-4
<PAGE>
EXHIBIT B
FINANCIAL INFORMATION
<PAGE>
INDEX TO FINANCIAL STATEMENTS
CNL AMERICAN REALTY FUND, INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants B-2
Financial Statements:
Balance Sheets at December 31, 1997 and 1996 B-3
Statements of Earnings for the year ended December
31, 1997 and the period June 12, 1996 (date of
inception) through December 31, 1996 B-4
Statements of Stockholders' Equity for the year
ended December 31, 1997 and the period June 12,
1996 (date of inception) through December 31, 1996 B-5 Statements of Cash
Flows for the year ended December
31, 1997 and the period June 12, 1996 (date of
inception) through December 31, 1996 B-6
Notes to Financial Statements B-8
</TABLE>
B-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
CNL American Realty Fund, Inc.
We have audited the accompanying balance sheets of CNL American Realty Fund,
Inc. (a Maryland corporation) as of December 31, 1997 and 1996, and the related
statements of earnings, stockholders' equity, and cash flows for the year ended
December 31, 1997 and 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 audits.
We conducted our audits 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 audits provide 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, 1997 and 1996, and the results of its operations and its cash
flows for the year ended December 31, 1997 and 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.
- ---------------------------------
Coopers & Lybrand L.L.P.
Orlando, Florida
January 22, 1998
B-2
<PAGE>
CNL AMERICAN REALTY FUND, INC.
BALANCE SHEETS
December 31,
ASSETS 1997 1996
------------ -----------
Cash and cash equivalents $8,869,838 $ 2,084
Due from related party 7,500 -
Prepaid expenses 11,179 -
Organization costs, less accumulated
amortization of $833 in 1997 19,167 -
Deferred offering costs - 596,106
Other assets 535,792 -
---------- ----------
$9,443,476 $ 598,190
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 16,305 $ 11,629
Due to related parties 193,254 386,561
---------- ----------
Total liabilities 209,559 398,190
---------- ----------
Stockholders' equity:
Preferred stock, without par value.
Authorized and unissued 3,000,000
shares in 1997 - -
Excess shares, $.01 par value per
share. Authorized and unissued
63,000,000 shares in 1997 - -
Common stock, $.01 par value per
share. Authorized 60,000,000
shares and 100,000 shares,
respectively, issued and
outstanding 1,152,540 and 20,000,
respectively 11,525 200
Capital in excess of par value 9,229,316 199,800
Accumulated distributions in excess
of net earnings (6,924) -
---------- ----------
Total stockholders' equity 9,233,917 200,000
---------- ----------
$9,443,476 $ 598,190
========== ==========
See accompanying notes to financial statements.
B-3
<PAGE>
CNL AMERICAN REALTY FUND, INC.
STATEMENTS OF EARNINGS
June 12, 1996
(Date of
Inception)
Year Ended through
December 31, December 31,
1997 1996
------------ --------------
Interest income $ 46,071 $ -
---------- ---------
Expenses:
General operating and
administrative 22,386 -
Amortization 833 -
---------- ---------
23,219 -
---------- ---------
Net Earnings $ 22,852 $ -
========== =========
Earnings Per Share of Common
Stock (Basic and Diluted) $ 0.03 $ -
========== =========
Weighted Average Number of
Shares of Common Stock
Outstanding 686,063 -
========== =========
See accompanying notes to financial statements.
B-4
<PAGE>
CNL AMERICAN REALTY FUND, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Year Ended December 31, 1997 and the
Period June 12, 1996 (Date of Inception) through
December 31, 1996
<TABLE>
<CAPTION>
Accumulated
Common stock distributions
------------ Capital in in excess
Number Par excess of of net
of shares value par value earnings Total
--------- ----- ---------- -------- -----
<S> <C>
Balance at
June 12, 1996 - $ - $ - $ - $ -
Sale of common
stock to related
party 20,000 200 199,800 - 200,000
---------- ------- ----------- --------- -----------
Balance at
December 31, 1996 20,000 200 199,800 - 200,000
Subscriptions
received for
common stock
through public
offering and
distribution
reinvestment plan 1,132,540 11,325 11,314,077 - 11,325,402
Stock issuance costs - - (2,284,561) - (2,284,561)
Net earnings - - - 22,852 22,852
Distributions
declared ($0.05
per share) - - - (29,776) (29,776)
---------- ------- ----------- --------- -----------
Balance at
December 31, 1997 1,152,540 $11,525 $ 9,229,316 $ (6,924) $ 9,233,917
========== ======= =========== ========= ===========
</TABLE>
See accompanying notes to financial statements.
B-5
<PAGE>
CNL AMERICAN REALTY FUND, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
June 12, 1996
(Date of
Inception)
Year Ended through
December 31, December 31,
1997 1996
------------ ---------------
<S> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Interest received $ 46,071 $ -
Cash paid for expenses (23,602) -
------------ -----------
Net cash provided by operating
activities 22,469 -
------------ -----------
Cash Flows From Investing Activities:
Increase in other assets (463,470) -
------------ -----------
Net cash used in investing
activities (463,470) -
------------ -----------
Cash Flows From Financing Activities:
Reimbursement of acquisition, organi-
zation and stock issuance costs paid
by related parties on behalf of the
Company (1,003,031) (197,916)
Sale of common stock to related party - 200,000
Subscriptions received from stock-
holders 11,327,900 -
Distributions to stockholders (29,776) -
Payment of stock issuance costs (986,338) -
------------ -----------
Net cash provided by financing
activities 9,308,755 2,084
------------ ------------
Net Increase in Cash and Cash Equivalents 8,867,754 2,084
Cash and Cash Equivalents at Beginning of
Period 2,084 -
------------ -----------
Cash and Cash Equivalents at End of Period $ 8,869,838 $ 2,084
============ ============
</TABLE>
See accompanying notes to financial statements.
B-6
<PAGE>
CNL AMERICAN REALTY FUND, INC.
STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
June 12, 1996
(Date of
Inception)
Year Ended through
December 31, December 31,
1997 1996
------------ --------------
<S> <C>
Reconciliation of Net Earnings to Net Cash
Provided by Operating Activities:
Net earnings $ 22,852 $ -
------------ -----------
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Amortization 833 -
Increase in prepaid expenses (11,179) -
Increase in accounts payable and
accrued expenses 6,141 -
Increase in due to related parties,
excluding reimbursement of acqui-
sition, organization and stock
issuance costs paid on behalf
of the Company 3,822 -
------------ -----------
Total adjustments (383) -
------------ -----------
Net Cash Provided by Operating Activities $ 22,469 $ -
============ ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Related parties paid certain acquisition,
organization and stock issuance
costs on behalf of the Company
as follows:
Acquisition costs $ 26,149 $ -
Organization costs - 20,000
Deferred offering costs - 535,812
Stock issuance costs 638,274 -
------------ -----------
$ 664,423 $ 555,812
============ ============
</TABLE>
See accompanying notes to financial statements.
B-7
<PAGE>
CNL AMERICAN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 1997 and the Period
June 12, 1996 (Date of Inception) through
December 31, 1996
1. Significant Accounting Policies:
Organization and Nature of Business - CNL American Realty Fund, Inc.
(the "Company") was organized in Maryland on June 12, 1996 primarily to
acquire properties ("Properties") located across the United States to
be leased on a long-term triple-net basis. 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 (the "Secured Equipment Leases") to operators of Hotel Chains
and Restaurant Chains.
The Company was a development stage enterprise from June 12, 1996
through October 15, 1997. Since operations had not begun, activities
through October 15, 1997 were devoted to organization of the Company.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with a maturity of three months or less when purchased to
be cash equivalents. Cash and cash equivalents consist of demand
deposits at commercial banks and money market funds (some of which are
backed by government securities). Cash equivalents are stated at cost
plus accrued interest, which approximates market value.
Cash accounts maintained on behalf of the Company in demand deposits at
commercial banks and money market funds may exceed federally insured
levels; however, the Company has not experienced any losses in such
accounts. The Company limits investment of temporary cash investments
to financial institutions with high credit standing; therefore,
management believes it is not exposed to any significant credit risk on
cash and cash equivalents.
Organization Costs - Organization costs are amortized over five years
using the straight-line method.
B-8
<PAGE>
CNL AMERICAN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Year Ended December 31, 1997 and the Period
June 12, 1996 (Date of Inception) through
December 31, 1996
1. Significant Accounting Policies - Continued:
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 ended December 31, 1997. If the Company qualifies for
taxation as a REIT, the Company generally will not be subject to
federal corporate income taxes 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 and meets certain other
requirements for qualifying as a REIT. Accordingly, no provision for
federal income taxes has been made in the financial statements. 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.
Earnings Per Share - Basic earnings per share are calculated based upon
net earnings (income available to common stockholders) divided by the
weighted average number of shares of common stock outstanding during
the reporting period. The Company does not have any dilutive potential
common shares.
Use of Estimates - Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
New Accounting Standard - In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
129, "Disclosure of Information about Capital Structure." The
Statement, which is effective for fiscal years ending after December
15, 1997, provides for disclosure of the Company's capital structure.
At this time, the Company's Board of Directors has not determined the
B-9
<PAGE>
CNL AMERICAN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Year Ended December 31, 1997 and the Period
June 12, 1996 (Date of Inception) through
December 31, 1996
1. Significant Accounting Policies - Continued:
relative rights, preferences, and privileges of each class or series of
preferred stock authorized. Since the Company has not issued preferred
shares, the disclosures to this Statement are not applicable.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." The Statement, which is effective for fiscal years beginning
after December 15, 1997, requires the reporting of net earnings and all
other changes to equity during the period, except those resulting from
investments by owners and distributions to owners, in a separate
statement that begins with net earnings. Currently, the Company's only
component of comprehensive income is its net earnings. The Company does
not believe that adoption of this Statement will have a material effect
on the Company's financial position or results of operations.
2. Public Offering:
The Company has filed a currently effective registration statement on
Form S-11 with the Securities and Exchange Commission.
A maximum of 16,500,000 shares ($165,000,000) may be sold, including
1,500,000 shares ($15,000,000) which is available only to stockholders
who elect to participate in the Company's 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.
As of December 31, 1997, the Company had received subscription proceeds
of $11,325,402 (1,132,540 shares), including $1,056 (106 shares)
through the reinvestment plan.
3. Other Assets:
Other assets at December 31, 1997, consisted of acquisition fees and
miscellaneous acquisition expenses which will be allocated to future
Properties.
B-10
<PAGE>
CNL AMERICAN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Year Ended December 31, 1997 and the Period
June 12, 1996 (Date of Inception) through
December 31, 1996
4. Stock Issuance Costs:
The Company has incurred certain expenses of its offering of shares,
including commissions, marketing support and due diligence expense
reimbursement fees, filing fees, legal, accounting, printing and escrow
fees, which have been deducted from the gross proceeds of the offering.
Preliminary costs incurred prior to raising capital were advanced by an
affiliate of the Company, CNL Real Estate Advisors, Inc. (the
"Advisor"). The Advisor has agreed to pay all organizational and
offering expenses (excluding commissions and marketing support and due
diligence expense reimbursement fees) which exceed three percent of the
gross offering proceeds received from the sale of shares of the
Company.
As of December 31, 1997, the Company had incurred $2,304,561 in
organizational and offering costs, including $906,032 in commissions
and marketing support and due diligence expense reimbursement fees (see
Note 6). Of this amount $2,284,561 has been treated as stock issuance
costs and $20,000 has been treated as organization costs. The stock
issuance costs have been charged to stockholders' equity subject to the
three percent cap described above.
5. Distributions:
For the year ended December 31, 1997, 100 percent of the distributions
were considered to be ordinary income for federal income tax purposes.
No amounts distributed to stockholders for the year ended December 31,
1997, are required to be or have been treated by the Company as a
return of capital for purposes of calculating the stockholders' return
on their invested capital.
6. Related Party Transactions:
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.
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, the Advisor purchased the Company's
outstanding common stock from CNL Fund Advisors, Inc. and became the
sole stockholder of the Company.
B-11
<PAGE>
CNL AMERICAN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Year Ended December 31, 1997 and the Period
June 12, 1996 (Date of Inception) through
December 31, 1996
6. Related Party Transactions - Continued:
CNL Securities Corp. is entitled to receive commissions amounting to
7.5% of the total amount raised from the sale of shares for services in
connection with the offering of the shares, a substantial portion of
which has been or will be paid as commissions to other broker-dealers.
During the year ended December 31, 1997, the Company incurred $849,405
of such fees of which $792,832 were or will be paid by CNL Securities
Corp. as commissions to other broker-dealers.
In addition, CNL Securities Corp. is entitled to receive a marketing
support and due diligence expense reimbursement fee equal to 0.5% of
the total amount raised from the sale of shares, a portion of which may
be reallowed to other broker-dealers. During the year ended December
31, 1997, the Company incurred $56,627 of such fee, the majority of
which were reallowed to other broker-dealers and from which all bona
fide due diligence expenses were paid.
CNL Securities Corp. will also receive a soliciting dealer servicing
fee payable annually by the Company beginning on December 31 of the
year following the year in which the offering is completed in the
amount of 0.20% of the stockholders' investment in the Company. As of
December 31, 1997, no such fees had been incurred.
The Advisor is entitled to receive acquisition fees for services in
finding, negotiating the leases of and acquiring properties on behalf
of the Company 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. During
the year ended December 31, 1997, the Company incurred $509,643 of such
fees. Such fees are included in other assets at December 31, 1997.
B-12
<PAGE>
CNL AMERICAN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Year Ended December 31, 1997 and the Period
June 12, 1996 (Date of Inception) through
December 31, 1996
6. Related Party Transactions - Continued:
The due to related parties consisted of the following at December 31:
1997 1996
---------- --------
Due to CNL Securities Corp.:
Commissions $100,709 $ -
Marketing support and due
diligence expense reim-
bursement fee 7,268 -
-------- -------
107,977 -
-------- -------
Due to CNL Real Estate Advisors,
Inc.:
Expenditures incurred for
organizational and offering
expenses on behalf of the
Company 21,729 357,896
Accounting and administrative
services 17,376 28,665
Acquisition fees 46,172 -
-------- -------
85,277 386,561
-------- --------
$193,254 $386,561
======== ========
B-13
<PAGE>
CNL AMERICAN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Year Ended December 31, 1997 and the Period
June 12, 1996 (Date of Inception) through
December 31, 1996
6. Related Party Transactions - Continued:
The Advisor and its affiliates provide accounting and administrative
services to the Company (including accounting and administrative
services in connection with the offering of shares) on a day-to-day
basis. For the year ended December 31, 1997 and the period June 12,
1996 (date of inception) through December 31, 1996, the expenses
incurred for these services were classified as follows:
June 12, 1996
(Date of
Inception)
Year Ended through
December 31, December 31,
1997 1996
------------ ---------------
Deferred offering costs $ - $ 28,665
Stock issuance costs 185,335 -
General operating and
administrative expenses 6,889 -
-------- --------
$192,224 $ 28,665
======== =========
7. Subsequent Events:
During the period January 1, 1998 through January 22, 1998, the Company
received subscription proceeds of 130,262 shares ($1,302,620) of common
stock.
On January 1, 1998, the Company declared distributions of $28,814 or
$0.025 per share of common stock, payable in March 1998, to
stockholders of record on January 1, 1998.
On January 16, 1998, the Company declared distributions of $0.025 per
share of common stock to stockholders of record on February 1, 1998,
also payable in March 1998.
B-14
<PAGE>
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., 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.
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 June 30, 1997. 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 July 1992 and June 1997.
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 July 1992 and June 1997. 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 June 30, 1997.
Table III - Operating Results of Prior Programs
Table III presents a summary of operating results for the period from
inception through June 30, 1997, of the Prior Public Programs, the offerings of
which became fully subscribed between July 1992 and June 1997.
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 July 1992 and June 30,
1997.
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
Fund XI, Fund XII, Fund XIII, Fund XIV,
Ltd. Ltd. Ltd. Ltd.
---------- ---------- ---------- ----------
<S><C>
Dollar amount offered $40,000,000 $45,000,000 $40,000,000 $45,000,000
=========== =========== =========== ===========
Dollar amount raised 100.0% 100.0% 100.0% 100.0%
----------- ----------- ----------- -----------
Less offering expenses:
Selling commissions
and discounts (8.5) (8.5) (8.5) (8.5)
Organizational expenses (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)
----------- ----------- ----------- -----------
(12.0) (12.0) (12.0) (12.0)
----------- ----------- ----------- -----------
Reserve for operations -- -- -- --
----------- ----------- ----------- ----------
Percent available for
investment 88.0% 88.0% 88.0% 88.0%
=========== =========== =========== ===========
Acquisition costs:
Cash down payment 83.0% 83.0% 82.5% 82.5%
Acquisition fees paid
to affiliates 5.0 5.0 5.5 5.5
Loan costs -- -- -- --
----------- ----------- ----------- ----------
Total acquisition costs 88.0% 88.0% 88.0% 88.0%
=========== =========== =========== ===========
Percent leveraged
(mortgage financing
divided by total
acquisition costs) -- -- -- --
Date offering began 3/18/92 9/29/92 3/31/93 8/27/93
Length of offering (in
months) 6 6 5 6
Months to invest 90% of
amount available for
investment measured
from date of offering 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 "Initial Offering of Shares"). The Initial Offering
of Shares of CNL American Properties Fund, Inc. commenced April 19,
1995, and upon completion of the Initial Offering of Shares on February
6, 1997, had received subscription proceeds of $150,591,765 (15,059,177
shares), including $591,765 (59,177 shares) issued pursuant to the
Reinvestment Plan. Pursuant to a Registration Statement on Form S-11
under the Securities Act of 1933, as amended, effective January 31,
1997, CNL American Properties Fund, Inc. registered for sale
$275,000,000 of shares of common stock (the "1997 Offering of Shares").
The 1997 Offering of Shares of CNL American Properties Fund, Inc.
commenced following the completion of the Initial Offering of Shares on
February 6, 1997.
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.
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 $150,591,765 $30,000,000
=========== =========== ============ ===========
Dollar amount raised 100.0% 100.0% 91.3% 100.0%
----------- ----------- ------------ -----------
Less offering expenses:
Selling commissions
and discounts (8.5) (8.5) (7.5) (8.5)
Organizational expenses (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)
----------- ----------- ------------ -----------
(12.0) (12.0) (11.0) (12.0)
----------- ----------- ------------ -----------
Reserve for operations -- -- -- --
----------- ----------- ------------ -----------
Percent available for
investment 88.0% 88.0% 89.0% 88.0%
=========== =========== ============ ===========
Acquisition costs:
Cash down payment 82.5% 82.5% 84.5% 83.5%
Acquisition fees paid
to affiliates 5.5 5.5 4.5 4.5
Loan costs -- -- -- --
----------- ----------- ------------ -----------
Total acquisition costs 88.0% 88.0% 89.0% 88.0%
=========== =========== ============ ===========
Percent leveraged
(mortgage financing
divided by total
acquisition costs) -- -- -- --
Date offering began 2/23/94 9/02/94 4/19/95 9/02/95
Length of offering (in 6 9 22 12
months)
Months to invest 90% of
amount available for
investment measured 10 11 23 15
from date of offering
</TABLE>
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-4
<PAGE>
TABLE II
COMPENSATION TO SPONSOR
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund XI, Fund XII, Fund XIII, Fund XIV,
Ltd. Ltd. Ltd. Ltd.
---------- ---------- ---------- ----------
<S><C>
Date offering commenced 3/18/92 9/29/92 3/31/93 8/27/93
Dollar amount raised $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 3,825,000 3,400,000 3,825,000
Real estate commissions - - - -
Acquisition fees 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) 200,000 225,000 200,000 225,000
----------- ----------- ----------- -----------
Total amount paid to sponsor 5,600,000 6,300,000 5,800,000 6,525,000
=========== =========== =========== ===========
Dollar amount of cash generated
from operations before
deducting payments to
sponsor:
1997 (6 months) 1,841,174 1,981,123 1,708,175 1,856,053
1996 3,734,852 4,089,655 3,494,528 3,841,163
1995 3,758,271 3,928,473 3,482,461 3,823,939
1994 3,574,474 3,933,486 3,232,046 2,897,432
1993 3,434,512 3,320,549 1,148,550 329,957
1992 1,525,462 63,401 - -
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):
1997 (6 months) 48,260 49,885 48,767 48,170
1996 133,138 137,966 126,947 134,867
1995 106,086 109,111 103,083 114,095
1994 76,533 84,524 83,046 84,801
1993 78,926 73,789 27,003 8,220
1992 30,237 2,031 - -
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 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: 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 "Initial Offering of Shares"). The Initial Offering
of Shares of CNL American Properties Fund, Inc. commenced April 19,
1995, and upon completion of the Initial Offering of Shares on February
6, 1997, had received subscription proceeds of $150,591,765 (15,059,177
shares), including $591,765 (59,177 shares) issued pursuant to the
Reinvestment Plan. Pursuant to a Registration Statement on Form S-11,
as amended, effective January 31, 1997, CNL American Properties Fund,
Inc. registered for sale $275,000,000 of shares of common stock (the
"1997 Offering of Shares"). The 1997 Offering of Shares of CNL
American Properties Fund, Inc. commenced following the completion of
the Initial Offering of Shares on February 6, 1997. The amounts shown
represent the combined results of the Initial Offering of Shares and
the 1997 Offering of Shares as of June 30, 1997.
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
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 1) (Note 2)
<S><C>
Date offering commenced 2/23/94 9/02/94 4/19/95 and 2/6/97 9/02/95
Dollar amount raised $40,000,000 $45,000,000 $223,843,177 $30,000,000
=========== =========== ============ ===========
Amount paid to sponsor from
proceeds of offering:
Selling commissions and
discounts 3,400,000 3,825,000 16,788,238 2,550,000
Real estate commissions - - - -
Acquisition fees 2,200,000 2,475,000 10,072,943 1,350,000
Marketing support and
due diligence expense
reimbursement fees
(includes amounts
reallowed to
unaffiliated entities) 200,000 225,000 1,119,216 150,000
----------- ----------- ------------ -----------
Total amount paid to sponsor 5,800,000 6,525,000 27,980,397 4,050,000
=========== =========== ============ ===========
Dollar amount of cash generated
from operations before
deducting payments to
sponsor:
1997 (6 months) 1,716,242 1,938,911 6,583,211 1,232,910
1996 3,557,073 3,911,609 5,817,143 1,340,159
1995 3,361,477 2,619,840 566,475 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):
1997 (6 months) 42,619 50,756 269,208 53,768
1996 122,391 157,883 334,603 107,211
1995 122,107 138,445 68,016 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 1,385,384 5,254,083 -
Notes - - - -
Amount paid to sponsors
from property sales and
refinancing:
Real estate commissions - - - -
Incentive fees - - - -
Other - - - -
</TABLE>
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 June 30, 1997, CNL Income Fund
XVIII, Ltd. had sold 2,219,221 Units, representing $22,192,212 of
capital contributed by limited partners, and 17 properties had been
acquired. From commencement of the offering through June 30, 1997,
total selling commissions and discounts were $1,886,338, due diligence
expense reimbursement fees were $110,961, and acquisition fees were
$998,650, for a total amount paid to sponsor of $2,995,949. 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 June 30, 1997, of $490,897. CNL Income Fund XVIII, Ltd. made
payments of $33,405 to the sponsor from operations for this period.
C-6
<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 (Note 5) 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
Decrease 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
============ ============ ============ ============
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
6 months
1995 1996 1997
------------ ------------ ------------
<S><C>
Gross revenue $ 3,820,990 $ 3,877,311 $ 1,847,371
Equity in earnings of unconsolidated
joint ventures 118,384 118,211 105,163
Profit from sale of properties (Note 5) 0 213,685 0
Interest income 51,192 51,381 21,104
Less: Operating expenses (237,126) (247,569) (136,290)
Interest expense 0 0 0
Depreciation and amortization (481,226) (478,198) (229,919)
Minority interests in income of
consolidated joint ventures (70,038) (70,116) (34,598)
------------ ------------ ------------
Net income - GAAP basis 3,202,176 3,464,705 1,572,831
============ ============ ============
Taxable income
- from operations 2,985,221 2,965,514 1,447,710
============ ============ ============
- from gain on sale 0 0 0
============ ============ ============
Cash generated from operations
(Notes 2 and 4) 3,652,185 3,601,714 1,792,914
Cash generated from sales (Note 5) 0 1,044,750 0
Cash generated from refinancing 0 0 0
------------ ------------ ------------
Cash generated from operations, sales
and refinancing 3,652,185 4,646,464 1,792,914
Less: Cash distributions to investors
(Note 6)
- from operating cash flow (3,500,023) (3,540,024) (1,790,012)
- from sale of properties 0 0 0
- from cash flow from prior period 0 0 0
------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 152,162 1,106,440 2,902
Special items (not including sales and
refinancing):
Limited partners' capital
contributions 0 0 0
General partners' capital
contributions 0 0 0
Minority interests' capital
contributions 0 0 0
Organization costs 0 0 0
Syndication costs 0 0 0
Acquisition of land and buildings 0 0 0
Investment in direct financing
leases 0 0 0
Increase in restricted cash 0 (1,044,750) 0
Decrease in restricted cash 0 0 1,044,750
Investment in joint ventures 0 0 (1,044,750)
Reimbursement of syndication and
acquisition costs paid on behalf
of CNL Income Fund XI, Ltd. by
related parties 0 0 0
Increase in other assets 0 0 0
Distributions to holders of minority
interests (54,227) (58,718) (29,095)
------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 97,935 2,972 (26,193)
============ ============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 74 73 36
============ ============ ============
- from recapture 0 0 0
============ ============ ============
Capital gain (loss) 0 0 0
============ ============ ============
</TABLE>
C-8
<PAGE>
TABLE III - CNL INCOME FUND XI, LTD. (continued)
<TABLE>
<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%
</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, resulting in a gain of
$213,685 for financial reporting purposes. 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, 1995 and 1996, are reflected in the 1994, 1995, 1996 and
1997 columns, respectively, for distributions on a cash basis due to
the payment of such distributions in January 1994, 1995, 1996 and 1997,
respectively. As a result of 1994, 1995, 1996 and 1997 distributions
being presented on a cash basis, distributions declared and unpaid as
of December 31, 1994, 1995 and 1996, and June 30, 1997 are not included
in the 1994, 1995, 1996 and 1997 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-9
<PAGE>
<TABLE>
<CAPTION>
6 months
1995 1996 1997
------------ ------------ ------------
<S><C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 79 81 39
- from capital gain 0 5 0
- from investment income from
prior period 9 3 2
- from return of capital (Note 3) 0 0 4
------------ ------------ ------------
Total distributions on GAAP basis
(Note 6) 88 89 45
============ ============ ============
Source (on cash basis)
- from sales 0 0 0
- from refinancing 0 0 0
- from operations 88 89 45
- from cash flow from prior
period 0 0 0
------------ ------------ ------------
Total distributions on cash basis
(Note 6) 88 89 45
============ ============ ============
Total cash distributions as a
percentage of original $1,000
investment (Notes 7 and 8) 8.85% 8.85% 8.75%
Total cumulative cash distributions
per $1,000 investment from inception 277 366 411
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% 100%
</TABLE>
C-10
<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
(Note 7) 0 0 0 0
Interest income 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
Payment of lease costs 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
============ ============ ============ ============
</TABLE>
C-11
<PAGE>
<TABLE>
<CAPTION>
6 months
1995 1996 1997
------------ ------------ ------------
<S><C>
Gross revenue $ 4,404,792 $ 4,264,273 $ 2,058,864
Equity in earnings of joint ventures 81,582 200,499 141,356
Profit (Loss) from sale of properties
(Note 7) 0 (15,355) 0
Interest income 84,197 88,286 37,968
Less: Operating expenses (228,404) (279,341) (132,808)
Interest expense 0 0 0
Depreciation and amortization (327,795) (315,319) (159,551)
------------ ------------ ------------
Net income - GAAP basis 4,014,372 3,943,043 1,945,829
============ ============ ============
Taxable income
- from operations 3,262,046 3,275,495 1,617,525
============ ============ ============
- from gain (loss) on sale 0 (41,506) 0
============ ============ ============
Cash generated from operations
(Notes 2 and 5) 3,819,362 3,951,689 1,931,238
Cash generated from sales (Note 7) 0 1,640,000 0
Cash generated from refinancing 0 0 0
------------ ------------ ------------
Cash generated from operations, sales
and refinancing 3,819,362 5,591,689 1,931,238
Less: Cash distributions to investors
(Note 6)
- from operating cash flow (3,819,362) (3,870,008) (1,912,504)
- from sale of properties 0 0 0
- from return of capital (Note 4) 0 0 0
- from cash flow from prior period (5,645) 0 0
------------ ------------ ------------
Cash generated (deficiency) after cash
distributions (5,645) 1,721,681 18,734
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 0 (55,000)
Investment in direct financing
leases 0 0 0
Loan to tenant of joint venture,
net of repayments 7,008 7,741 4,171
Investment in joint ventures 0 (1,645,024) 0
Increase in restricted cash 0 0 0
Payment of lease costs 0 0 (24,052)
Reimbursement of syndication and
acquisition costs paid on behalf
of CNL Income Fund XII, Ltd. by
related parties 0 0 0
Increase in other assets 0 0 0
Other 0 0 0
------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 1,363 84,398 (56,147)
============ ============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 72 72 36
============ ============ ============
- from recapture 0 0 0
============ ============ ============
Capital gain (loss) 0 (1) 0
============ ============ ============
</TABLE>
C-12
<PAGE>
TABLE III - CNL INCOME FUND XII, LTD. (continued)
<TABLE>
<CAPTION>
1991 6 months
(Note 1) 1992 1993 1994 1995 1996 1997
----------- --------- --------- --------- --------- --------- --------
<S><C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 5 46 84 85 86 43
- from capital gain 0 0 0 0 0 0 0
- from investment income from
prior period 0 0 0 0 0 0 0
- from return of capital (Note 3) 0 7 0 0 0 0 0
----------- --------- --------- --------- --------- --------- ---------
Total distributions on GAAP basis
(Note 6) 0 12 46 84 85 86 43
=========== ========= ========= ========= ========= ========= =========
Source (on cash basis)
- from sales 0 0 0 0 0 0 0
- from refinancing 0 0 0 0 0 0 0
- from operations 0 6 46 84 85 86 43
- from return of capital (Note 4) 0 6 0 0 0 0 0
- from cash flow from prior period 0 0 0 0 0 0 0
----------- --------- --------- --------- --------- --------- ---------
Total distributions on cash basis
(Note 6) 0 12 46 84 85 86 43
=========== ========= ========= ========= ========= ========= =========
Total cash distributions as a
percentage of original $1,000
investment (Notes 8 and 9) 0.00% 5.00% 6.75% 8.50% 8.60% 8.50% 8.50%
Total cumulative cash distributions
per $1,000 investment from inception 0 12 58 142 227 313 356
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% 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 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, 1995 and 1996, are reflected in the 1994, 1995, 1996 and
1997 columns, respectively, for distributions on a cash basis due to
the payment of such distributions in January 1994, 1995, 1996 and 1997,
respectively. As a result of 1994, 1995, 1996 and 1997 distributions
being presented on a cash basis, distributions declared and unpaid as
of December 31, 1994, 1995 and 1996, and June 30, 1997 are not included
in the 1994, 1995, 1996 and 1997 totals, respectively.
C-13
<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-14
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XIII, LTD.
<TABLE>
<CAPTION>
1992 6 months
(Note 1) 1993 1994 1995 1996 1997
---------- ------------ ------------ ------------ ------------ ------------
<S> <C>
Gross revenue $ 0 $ 966,564 $ 3,558,447 $ 3,806,944 $ 3,685,280 $ 1,796,451
Equity in earnings of joint ventures 0 1,305 43,386 98,520 60,654 70,503
Profit (Loss) from sale of properties
(Notes 4 and 5) 0 0 0 (29,560) 82,855 0
Provision for loss on land and net
investment in direct financing leases
(Note 8) 0 0 0 0 0 (41,202)
Interest income 0 181,568 77,379 51,410 49,820 18,246
Less: Operating expenses 0 (59,390) (183,311) (214,705) (253,360) (128,593)
Interest expense 0 0 0 0 0 0
Depreciation and amortization 0 (148,170) (378,269) (393,435) (393,434) (197,265)
---------- ------------ ------------ ------------ ------------ ------------
Net income - GAAP basis 0 941,877 3,117,632 3,319,174 3,231,815 1,518,140
========== ============ ============ ============ ============ ============
Taxable income
- from operations 0 978,535 2,703,252 2,920,859 2,972,159 1,387,838
========== ============ ============ ============ ============ ============
- from gain (loss) on sale 0 0 0 0 0 0
========== ============ ============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 1,121,547 3,149,000 3,379,378 3,367,581 1,659,408
Cash generated from sales (Notes 4 and 5) 0 0 0 286,411 550,000 0
Cash generated from refinancing 0 0 0 0 0 0
---------- ------------ ------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 1,121,547 3,149,000 3,665,789 3,917,581 1,659,408
Less: Cash distributions to investors
(Note 6)
- from operating cash flow 0 (528,364) (2,800,004) (3,350,014) (3,367,581) (1,659,408)
- from sale of properties 0 0 0 0 0 0
- from cash flow from prior period 0 0 0 0 (32,427) (40,596)
---------- ------------ ------------ ------------ ------------ ------------
Cash generated (deficiency) after
cash distributions 0 593,183 348,996 315,775 517,573 (40,596)
Special items (not including sales
and refinancing):
Limited partners' capital
contributions 0 40,000,000 0 0 0 0
General partners' capital
contributions 1,000 0 0 0 0 0
Syndication costs 0 (3,932,017) (181) 0 0 0
Acquisition of land and buildings 0 (19,691,630) (5,764,308) (336,116) 0 0
Investment in direct financing leases 0 (6,760,624) (1,365,075) 0 0 0
Investment in joint ventures 0 (314,998) (545,139) (140,052) 0 (550,000)
Increase in restricted cash 0 0 0 0 (550,000) 0
Decrease in restricted cash 0 0 0 0 0 550,000
Loan to tenant 0 0 0 0 0 (190,997)
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) 0 0
Increase in other assets 0 (454,909) 9,226 0 0 0
Other 0 0 0 954 0 0
---------- ------------ ------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 1,000 8,639,025 (7,341,517) (162,513) (32,427) (231,593)
========== ============ ============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 33 67 72 74 34
========== ============ ============ ============ ============ ============
- from recapture 0 0 0 0 0 0
========== ============ ============ ============ ============ ============
Capital gain (loss) (Notes 4 and 5) 0 0 0 0 0 0
========== ============ ============ ============ ============ ============
C-15
<PAGE>
TABLE III - CNL INCOME FUND XIII, LTD. (continued)
</TABLE>
<TABLE>
<CAPTION>
1992 6 months
(Note 1) 1993 1994 1995 1996 1997
-------- -------- -------- ------- -------- --------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 18 70 82 78 38
- from capital gain 0 0 0 0 2 0
- from investment income from prior
period 0 0 0 2 5 5
-------- -------- -------- -------- -------- --------
Total distributions on GAAP basis (Note 6) 0 18 70 84 85 43
======== ======== ======== ======== ======== ========
Source (on cash basis)
- from sales 0 0 0 0 0 0
- from refinancing 0 0 0 0 0 0
- from operations 0 18 70 84 84 42
- from cash flow from prior period 0 0 0 0 1 1
-------- -------- -------- -------- -------- --------
Total distributions on cash basis (Note 6) 0 18 70 84 85 43
======== ======== ======== ======== ======== ========
Total cash distributions as a percentage
of original $1,000 investment (Note 7) 0.00% 5.33% 7.56% 8.44% 8.50% 8.50%
Total cumulative cash distributions per
$1,000 investment from inception 0 18 88 172 257 300
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% 100%
</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,
resulting in a gain of $82,855 for financial reporting purposes.
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, 1995
and 1996, are reflected in the 1994, 1995, 1996 and 1997
columns, respectively, for distributions on a cash basis due to
the payment of such distributions in January 1994, 1995, 1996
and 1997, respectively. As a result of 1994, 1995, 1996 and
1997 distributions being presented on a cash basis,
distributions declared and unpaid as of December 31, 1994, 1995
and 1996, and June 30, 1997, are not included in the 1994, 1995,
1996 and 1997 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 6 above)
Note 8: During the six months ended June 30, 1997, the partnership
recorded an allowance for loss on land and net investment in the
direct financing lease of $41,202, for financial reporting
purposes, relating to one of its properties. The loss represents
the difference between the property's land carrying value and
the carrying value of the net investment in the direct financing
lease, as compared to the estimated net realizable value, based
on the anticipated sales price of this property from a third
party.
Note 9: Certain data for columns representing less than 12 months have been
annualized.
C-17
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XIV, LTD.
<TABLE>
<CAPTION>
1992 6 months
(Note 1) 1993 1994 1995 1996 1997
--------- ------------ ------------ ------------ ------------ ------------
<S> <C>
Gross revenue $ 0 $ 256,234 $ 3,135,716 $ 4,017,266 $ 3,999,813 $ 1,964,870
Equity in earnings of joint ventures 0 1,305 35,480 338,717 459,137 152,823
Profit (Loss) from sale of properties
(Note 4) 0 0 0 (66,518) 0 0
Interest income 0 27,874 200,499 50,724 44,089 23,015
Less: Operating expenses 0 (14,049) (181,980) (248,840) (246,621) (148,962)
Interest expense 0 0 0 0 0 0
Depreciation and amortization 0 (28,918) (257,640) (340,112) (340,089) (170,055)
-------- ------------ ------------ ------------ ------------ -----------
Net income - GAAP basis 0 242,446 2,932,075 3,751,237 3,916,329 1,821,691
======== ============ ============ ============ ============ ===========
Taxable income
- from operations 0 278,845 2,482,240 3,162,165 3,236,329 1,594,605
======== ============ ============ ============ ============ ===========
- from gain on sale 0 0 0 0 0 47,256
======== ============ ============ ============ ============ ===========
Cash generated from operations
(Notes 2 and 3) 0 321,737 2,812,631 3,709,844 3,706,296 1,807,883
Cash generated from sales (Note 4) 0 0 0 696,012 0 0
Cash generated from refinancing 0 0 0 0 0 0
-------- ------------ ------------ ------------ ------------ -----------
Cash generated from operations, sales
and refinancing 0 321,737 2,812,631 4,405,856 3,706,296 1,807,883
Less: Cash distributions to investors
(Note 5)
- from operating cash flow 0 (9,050) (2,229,952) (3,543,751) (3,706,296) (1,807,883)
- from sale of properties 0 0 0 0 0 0
- from cash flow from prior period 0 0 0 0 (6,226) (48,377)
-------- ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 312,687 582,679 862,105 (6,226) (48,377)
Special items (not including sales and
refinancing):
Limited partners' capital
contributions 0 28,785,100 16,214,900 0 0 0
General partners' capital
contributions 1,000 0 0 0 0 0
Syndication costs 0 (2,771,892) (1,618,477) 0 0 0
Acquisition of land and buildings 0 (13,758,004) (11,859,237) (964,073) 0 0
Investment in direct financing leases 0 (4,187,268) (5,561,748) (75,352) 0 0
Investment in joint ventures 0 (315,209) (1,561,988) (1,087,218) (7,500) 0
Return of capital from joint venture 0 0 0 0 0 51,950
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 0
Increase in other assets 0 (444,267) 0 0 0 0
Other 0 0 0 5,530 0 0
-------- ------------ ------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 1,000 6,914,932 (4,180,609) (1,259,585) (13,726) 3,573
======== ============ ============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 16 56 70 71 35
======== ============ ============ ============ ============ ============
- from recapture 0 0 0 0 0 0
======== ============ ============ ============ ============ ============
Capital gain (loss) (Note 4) 0 0 0 0 0 1
======== ============ ============ ============ ============ ============
</TABLE>
C-19
<PAGE>
TABLE III - CNL INCOME FUND XIV, LTD. (continued)
<TABLE>
<CAPTION>
1992 6 months
(Note 1) 1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- ----------- -----------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 1 51 79 83 40
- from capital gain 0 0 0 0 0 0
- from return of capital 0 0 0 0 0 0
- from investment income from prior
period 0 0 0 0 0 1
----------- ----------- ----------- ----------- ----------- -----------
Total distributions on GAAP basis (Note 5) 0 1 51 79 83 41
=========== =========== =========== =========== =========== ===========
Source (on cash basis)
- from sales 0 0 0 0 0 0
- from refinancing 0 0 0 0 0 0
- from operations 0 1 51 79 83 40
- from cash flow from prior period 0 0 0 0 0 1
----------- ----------- ----------- ----------- ----------- -----------
Total distributions on cash basis (Note 5) 0 1 51 79 83 41
=========== =========== =========== =========== =========== ===========
Total cash distributions as a percentage
of original $1,000 investment (Note 6) 0.00% 4.50% 6.50% 8.06% 8.25% 8.25%
Total cumulative cash distributions
per $1,000 investment from inception 0 1 52 131 214 255
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% 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, 1995
and 1996, are reflected in the 1994, 1995, 1996 and 1997
columns, respectively, for distributions on a cash basis due to
the payment of such distributions in January 1994, 1995, 1996
and 1997, respectively. As a result of 1994, 1995, 1996 and
1997 distributions being presented on a cash basis,
distributions declared and unpaid as of December 31, 1994, 1995
and 1996, and June 30, 1997 are not included in the 1994, 1995,
1996 and 1997 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-21
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XV, LTD.
<TABLE>
<CAPTION>
1993 6 months
(Note 1) 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C>
Gross revenue $ 0 $ 1,143,586 $ 3,546,320 $ 3,632,699 $ 1,799,379
Equity in earnings of joint ventures 0 8,372 280,606 392,862 117,311
Profit (Loss) from sale of properties
(Note 4) 0 0 (71,023) 0 0
Interest income 0 167,734 88,059 43,049 24,263
Less: Operating expenses 0 (62,926) (228,319) (235,319) (123,377)
Interest expense 0 0 0 0 0
Depreciation and amortization 0 (70,848) (243,175) (248,232) (124,149)
------------ ------------ ------------ ------------ ------------
Net income - GAAP basis 0 1,185,918 3,372,468 3,585,059 1,693,427
============ ============ ============ ============ ============
Taxable income
- from operations 0 1,026,715 2,861,912 2,954,318 1,430,120
============ ============ ============ ============ ============
- from gain on sale 0 0 0 0 47,256
============ ============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 1,116,834 3,239,370 3,434,682 1,673,623
Cash generated from sales (Note 4) 0 0 811,706 0 0
Cash generated from refinancing 0 0 0 0 0
------------ ------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 1,116,834 4,051,076 3,434,682 1,673,623
Less: Cash distributions to investors
(Note 5)
- from operating cash flow 0 (635,944) (2,650,003) (3,200,000) (1,673,623)
- from sale of properties 0 0 0 0 0
- from cash flow from prior period (6,377)
Cash generated (deficiency) after cash ------------- ------------ ----------- ------------ --------------
distributions 0 480,890 1,401,073 234,682 (6,377)
Special items (not including sales and
refinancing):
Limited partners' capital contra-
bunions 0 40,000,000 0 0 0
General partners' capital contra-
bunions 1,000 0 0 0 0
Syndication costs 0 (3,892,003) 0 0 0
Acquisition of land and buildings 0 (22,152,379) (1,625,601) 0 0
Investment in direct financing
leases 0 (6,792,806) (2,412,973) 0 0
Investment in joint venture 0 (1,564,762) (720,552) (129,939) 0
Return of capital from joint venture 0 0 0 0 51,950
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 0
Increase in other assets 0 (187,757) 0 0 0
Other (38) (6,118) 25,150 0 0
------------ ------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 962 4,786,868 (3,356,410) 104,743 45,573
============ ============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 33 71 73 35
============ ============ ============ ============ ============
- from recapture 0 0 0 0 0
============ ============ ============ ============ ============
Capital gain (loss) (Note 4) 0 0 0 0 1
============ ============ ============ ============ ============
</TABLE>
C-23
<PAGE>
TABLE III - CNL INCOME FUND XV, LTD. (continued)
<TABLE>
<CAPTION>
1993 6 months
(Note 1) 1994 1995 1996 1997
------------ -------------- ------------ -------- -------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 21 66 80 42
- from capital gain 0 0 0 0 0
Total distributions on GAAP basis (Note 5) 0 21 66 80 42
============ ============ ============ ============ =======
Source (on cash basis)
- from sales 0 0 0 0 0
- from refinancing 0 0 0 0 0
- from operations 0 21 66 80 42
------------ ------------ ------------ ------------ =======
Total distributions on cash basis (Note 5) 0 21 66 80 42
============ ============ ============ ============ =======
Total cash distributions as a percentage
of orginal $1,000 investment (Notes 6
and 7). 0 5.00% 7.25% 8.20% 8.00%
Total cumulative cash distributions per
$1,000 investment from inception 0 21 87 167 209
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: 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,
1995 and 1996 are reflected in the 1995, 1996 and 1997 columns,
respectively, due to the payment of such distributions in January 1995,
1996 and 1997, respectively. As a result of distributions being
presented on a cash basis, distributions declared and unpaid as of
December 31, 1994, 1995 and 1996, and June 30, 1997 are not included in
the 1994, 1995, 1996 and 1997 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 6 months
(Note 1) 1994 1995 1996 1997
------------ ------------ ------------ -------- -------------
<S><C>
Gross revenue $ 0 $ 186,257 $ 2,702,504 $ 4,343,390 $ 2,145,424
Equity in earnings from joint venture 0 0 0 19,668 36,620
Profit from sale of properties (Notes 4
and 5) 0 0 0 124,305 41,148
Interest income 0 21,478 321,137 75,160 34,155
Less: Operating expenses 0 (10,700) (274,595) (261,878) (134,647)
Interest expense 0 0 0 0 0
Depreciation and amortization 0 (9,458) (318,205) (552,447) (282,050)
------------ ------------ ------------ ------------ -------------
Net income - GAAP basis 0 187,577 2,430,841 3,748,198 1,840,650
============ ============ ============ ============ =============
Taxable income
- from operations 0 189,864 2,139,382 3,239,830 1,598,010
============ ============ ============ ============ =============
- from gain on sale (Notes 4 and 5) 0 0 0 0 41,148
============ ============ ============ ============ =============
Cash generated from operations
(Notes 2 and 3) 0 205,148 2,481,395 3,753,726 1,888,155
Cash generated from sales (Notes 4 and 5) 0 0 0 775,000 610,384
Cash generated from refinancing 0 0 0 0 0
------------ ------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 205,148 2,481,395 4,528,726 (2,498,539)
Less: Cash distributions to investors
(Note 4)
- from operating cash flow 0 (2,845) (1,798,921) (3,431,251) 1,800,000
- from sale of properties 0 0 0 0 0
------------ ------------ ------------ ------------ ----------
Cash generated (deficiency) after cash
distributions 0 202,303 682,474 1,097,475 698,539
Special items (not including sales and
refinancing):
Limited partners' capital contri-
butions 0 20,174,172 24,825,828 0 0
General partners' capital contri-
butions 1,000 0 0 0 0
Syndication costs 0 (1,929,465) (2,452,743) 0 0
Acquisition of land and buildings 0 (13,170,132) (16,012,458) (2,355,627) (29,257)
Investment in direct financing 0
leases 0 (975,853) (5,595,236) (405,937)
Investment in joint venture 0 0 0 (775,000) 0
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) 0
Collection of overpayment of acqui-
sition and syndication costs paid
by related parties on behalf of the
partnership 0 0 0 0 0
Increase in other assets 0 (443,625) (58,720) 0 0
Other (36) (20,714) 20,714 0 0
------------ ------------ ------------ ------------ --------
Cash generated (deficiency) after cash
distributions and special items 964 2,982,532 1,004,290 (2,441,583) 669,282
============ ============ ============ ============ =========
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 17 53 71 35
============ ============ ============ ============ ========
- from recapture 0 0 0 0 0
============ ============ ============ ============ ========
Capital gain (loss) (Notes 4 and 5) 0 0 0 0 1
============ ============ ============ ============ ========
C-27
<PAGE>
TABLE III - CNL INCOME FUND XVI, LTD. (continued)
</TABLE>
<TABLE>
<CAPTION>
1993 6 months
(Note 1) 1994 1995 1996 1997
------------ ------------ ------------ -------- ---------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 1 45 76 39
- from capital gain 0 0 0 0 1
- from investment income from
prior period 0 0 0 0 0
------------ ------------ ------------ ------------ ------
Total distributions on GAAP basis (Note 6) 0 1 45 76 40
============ ============ ============ ============ ======
Source (on cash basis)
- from sales 0 0 0 0 0
- from refinancing 0 0 0 0 0
- from operations 0 1 45 76 40
------------ ------------ ------------ ------------ ------
Total distributions on cash basis (Note 6) 0 1 45 76 40
============ ============ ============ ============ ======
Total cash distributions as a percentage
of original $1,000 investment (Note 7) 0.00% 4.50% 6.00% 7.88% 8.00%
Total cumulative cash distributions per
$1,000 investment from inception 0 1 46 122 162
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: 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: In April 1996, CNL Income Fund XVI, Ltd. sold one of its properties
and received net sales proceeds of $775,000, resulting in a gain of
$124,305 for financial reporting purposes. 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 5: In March 1997, CNL Income Fund XVI, Ltd. sold one of its properties and
received net sales proceeds of $610,384, resulting in a gain of $41,148
for financial reporting purposes.
Note 6: Distributions declared for the quarters ended December 31, 1994,
1995 and 1996 are reflected in the 1995, 1996 and 1997 columns,
respectively, due to the payment of such distributions in January 1995,
1996 and 1997, respectively. As a result of distributions being
presented on a cash basis, distributions declared and unpaid as of
December 31, 1994, 1995 and 1996, and June 30, 1997 are not included in
the 1994, 1995, 1996 and 1997 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 6 above)
Note 8: Certain data for columns representing less than 12 months have been
annualized.
C-29
<PAGE>
TABLE III Operating Results
of Prior Programs CNL AMERICAN
PROPERTIES FUND, INC.
<TABLE>
<CAPTION>
6 months
1994 1995 1996 1997
(Note 1) (Note 2) (Note 2) (Note 2)
------------ ------------ ------------ ----------
<S> <C>
Gross revenue $ 0 $ 539,776 $ 4,363,456 $ 4,972,237
Equity in earnings of joint venture 0 0 0 0
Interest income 0 119,355 1,843,228 1,742,997
Less: Operating expenses 0 (186,145) (908,924) (893,009)
Interest expense 0 0 0 0
Depreciation and amortization 0 (104,131) (521,871) (579,404)
Minority interest in income of
consolidated joint venture 0 (76) (29,927) (15,726)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 368,779 4,745,962 5,227,095
============ ============ ============ ============
Taxable income
- from operations (Note 7) 0 379,935 4,894,262 6,696,419
============ ============ ============ ============
- from gain on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 3 and 4) 0 498,459 5,482,540 6,314,003
Cash generated from sales (Note 6) 0 0 0 5,254,083
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 498,459 5,482,540 11,568,086
Less: Cash distributions to investors
- from operating cash flow 0 (498,459) (5,439,404) (6,282,470)
- from sale of properties 0 0 0 0
- from other 0 (136,827) 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 (136,827) 43,136 5,285,616
Special items (not including sales and
refinancing):
Subscriptions received from
stockholders 0 38,454,158 100,792,991 84,646,030
Sale of common stock to CNL Fund
Advisors, Inc. 200,000 0 0 0
Contributions from minority interest 0 200,000 97,419 0
Distributions to holder of minority
interest 0 0 (39,121) (17,035)
Stock issuance costs (19) (3,680,704) (8,486,188) (8,145,622)
Acquisition of land and buildings 0 (18,835,969) (36,104,148) (75,111,847)
Investment in direct financing
leases 0 (1,364,960) (13,372,621) (14,391,675)
Proceeds from sale of equipment direct
financing leases 0 0 0 962,274
Investment in mortgage notes
receivable 0 0 (13,547,264) (4,401,982)
Collections on mortgage notes
receivable 0 0 133,850 117,192
Proceeds of borrowing on line of
credit 0 0 3,666,896 2,888,163
Payment on line of credit 0 0 (145,080) (1,653,321)
Payment of loan costs 0 0 (54,533) (6,101)
Reimbursement of organization, acquisition,
and deferred offering and stock issuance
costs paid on behalf of CNL American Properties
Fund, Inc. by related parties (199,036) (2,500,056) (939,798) (1,524,434)
Increase in other assets 0 (628,142) (1,103,896) 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 945 11,507,500 30,941,643 (11,352,742)
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations (Note 7) 0 20 61 38
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-31
<PAGE>
TABLE III - CNL AMERICAN PROPERTIES FUND, INC. (continued)
<TABLE>
<CAPTION>
6 months
1994 1995 1996 1997
(Note 1) (Note 2) (Note 2) (Note 2)
------------ ------------ ------------ ----------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 19 59 29
- from capital gain 0 0 0 0
- from investment income from
prior period 0 0 0 0
- from return of capital 0 14 8 6
------------ ------------ ------------ ------------
Total distributions on GAAP basis 0 33 67 35
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 26 67 35
- from return of capital 0 7 0 0
------------ ------------ ------------ ------------
Total distributions on cash basis 0 33 67 35
============ ============ ============ ============
Total cash distributions as a percentage
of original $1,000 investment (Note 5) 0.00% 3.34% 6.73% 7.05%
Total cumulative cash distributions per
$1,000 investment from inception 0 33 100 135
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 6) 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, effective March 29, 1995, CNL American
Properties Fund, Inc. registered for sale $165,000,000 of shares of
common stock (the "Initial Offering of Shares"). The Initial Offering
of Shares of CNL American Properties Fund, Inc. commenced April 19,
1995, and upon completion of the Initial Offering of Shares on February
6, 1997, had received subscription proceeds of $150,591,765 (15,059,177
shares), including $591,765 (59,177 shares) issued pursuant to the
Reinvestment Plan. Pursuant to a Registration Statement on Form S-11,
as amended, effective January 31, 1997, CNL American Properties Fund,
Inc. registered for sale $275,000,000 of shares of common stock (the
"1997 Offering of Shares"). The 1997 Offering of Shares of CNL
American Properties Fund, Inc. commenced following the completion of
the Initial Offering of Shares on February 6, 1997. Activities through
June 1, 1995, were devoted to organization of CNL American Properties
Fund, Inc. and operations had not begun.
Note 2: The amounts shown represent the combined results of the Initial
Offering of Shares and the 1997 Offering of Shares.
Note 3: Cash generated from operations includes cash received from tenants,
less cash paid for expenses, plus interest received.
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 American Properties Fund, Inc.
Note 5: Total cash distributions as a percentage of original $1,000
investment are calculated based on actual distributions declared for
the period.
Note 6: In May 1997, CNL American Properties Fund, Inc. sold four of its
properties to the tenant for $5,254,083, which was equal to the
carrying value of the properties at the time of sale. As a result, no
gain or loss was recognized for financial reporting purposes.
Note 7: Taxable income presented is before the dividends paid deduction.
Note 8: Certain data for columns representing less than 12 months have been
annualized.
C-32
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XVII, LTD.
<TABLE>
<CAPTION>
1995 6 months
(Note 1) 1996 1997
------------ ------------ --------
<S> <C>
Gross revenue $ 0 $ 1,195,263 $ 1,237,898
Equity in earnings of unconsolidated
joint ventures 0 4,834 45,358
Interest income 12,153 244,406 48,537
Less: Operating expenses (3,493) (169,536) (103,397)
Interest expense 0 0 0
Depreciation and amortization (309) (179,208) (188,038)
Minority interest in income of
consolidated joint venture 0 (10,432)
------------ ------------ ------------
Net income - GAAP basis 8,351 1,095,759 1,029,926
============ ============ ============
Taxable income
- from operations 12,153 1,114,964 1,138,900
============ ============ ============
- from gain on sale 0 0 0
============ ============ ============
Cash generated from operations
(Notes 2 and 3) 9,012 1,232,948 1,179,142
Cash generated from sales 0 0 0
Cash generated from refinancing 0 0 0
------------ ------------ ------------
Cash generated from operations, sales
and refinancing 9,012 1,232,948 1,179,142
Less: Cash distributions to investors
(Note 4)
- from operating cash flow (1,199) (703,681) (1,015,084)
- from sale of properties 0 0 0
------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 7,813 529,267 164,058
Special items (not including sales and
refinancing):
Limited partners' capital contri-
butions 5,696,921 24,303,079 0
General partners' capital contri-
butions 1,000 0 0
Contributions from minority interest 0 140,676 278,170
Syndication costs (604,348) (2,407,317) 0
Acquisition of land and buildings (332,928) (19,735,346) (1,978,419)
Investment in direct financing
leases 0 (1,784,925) (1,009,775)
Investment in joint ventures 0 (201,501) (934,196)
Increase in restricted cash 0 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) (26,068)
Increase in other assets (221,282) 0 0
Distributions to holder of minority
interest 0 0 (16,943)
Other (410) 410 0
------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 4,198,859 517,860 (3,523,173)
============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 36 37 38
============ ============ ============
- from recapture 0 0 0
============ ============ ============
Capital gain (loss) 0 0 0
============ ============ ============
</TABLE>
C-33
<PAGE>
TABLE III - CNL INCOME FUND XVII, LTD. (continued)
<TABLE>
<CAPTION>
1995 6 months
(Note 1) 1996 1997
------------ ------------ --------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 4 23 34
- from capital gain 0 0 0
- from investment income from
prior period 0 0 0
------------ ------------ ------------
Total distributions on GAAP basis (Note 4) 0 23 34
============ ============ ============
Source (on cash basis)
- from sales 0 0 0
- from refinancing 0 0 0
- from operations 4 23 34
------------ ------------ ------------
Total distributions on cash basis (Note 4) 4 23 34
============ ============ ============
Total cash distributions as a percentage
of original $1,000 investment (Note 5) 5.00% 5.50% 7.25%
Total cumulative cash distributions per
$1,000 investment from inception 4 27 61
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 98% 100%
</TABLE>
Note 1: 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. ("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 October 11,
1996, 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 XVII, Ltd.
Note 4: Distributions declared for the quarters ended December 31, 1995 and
1996 are reflected in the 1996 and 1997 columns, respectively, due to
the payment of such distributions in January 1996 and 1997,
respectively. As a result of distributions being presented on a cash
basis, distributions declared and unpaid as of December 31, 1996 and
June 30, 1997 are not included in the 1996 and 1997 totals,
respectively.
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-34
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
===================================================================================================================================
Selling Price, Net of
Including Closing and
Closing Costs and GAAP Adjustments
Soft Costs
------------------------------------------ --------------------
Purchase Total
Cash money Adjustments acquisition
received Mortgage mortgage resulting cost, capital
net of balance taken from Original improvements
Date Date of closing at time back by application mortgage closing and
Property Acquired Sale costs of sale program of GAAP Total financing soft costs (1)
===================================================================================================================================
<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 0 $955,000
Wendy's -
Fairfield, CA 07/01/87 10/03/94 1,018,490 0 0 0 1,018,490 0 861,500
CNL Income Fund II, Ltd.:
Golden Corral -
Salisbury, NC 05/29/87 07/21/93 746,800 0 0 0 746,800 0 642,800
Pizza Hut -
Graham, TX 08/24/87 07/28/94 261,628 0 0 0 261,628 0 205,500
Golden Corral -
Medina, OH 11/18/87 11/30/94 626,582 0 0 0 626,582 0 743,000
Denny's -
Show Low, AZ (8) 05/22/87 01/31/97 620,800 0 0 0 620,800 0 484,185
KFC -
Eagan, MN 06/01/87 06/02/97 623,882 0 42,000 0 665,882 0 601,100
CNL Income Fund III, Ltd.:
Wendy's -
Chicago, IL 06/02/88 01/10/97 496,418 0 0 0 496,418 0 591,362
Perkins -
Bradenton, FL 06/30/88 03/14/97 1,310,001 0 0 0 1,310,001 0 1,080,500
Pizza Hut -
Kissimmee, FL 02/23/88 04/08/97 673,159 0 0 0 673,159 0 474,755
Burger King -
Roswell, GA 06/08/88 06/20/97 257,981 0 685,000 0 942,981 0 775,226
CNL Income Fund IV, Ltd.:
Taco Bell -
York, PA 03/22/89 04/27/94 712,000 0 0 0 712,000 0 616,501
Burger King -
Hastings, MI 08/12/88 12/15/95 518,650 0 0 0 518,650 0 419,936
Wendy's -
Tampa, FL 12/30/88 09/20/96 1,049,550 0 0 0 1,049,550 0 828,350
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 0 986,418
Ponderosa -
St. Cloud, FL (6) 06/01/89 10/24/96 73,713 0 1,057,299 0 1,131,012 0 996,769
Franklin National Bank -
Franklin, TN 06/26/89 01/07/97 960,741 0 0 0 960,741 0 1,138,164
</TABLE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
===========================================================
Cost of Properties
Closing Costs and GAAP Adjustments
Excess
(deficiency)
of property
operating cash
receipts over
cash
Property Total expenditures
========================================================
<S> <C>
CNL Income Fund, Ltd.:
Burger King -
San Dimas, CA $955,000 $214,021
Wendy's -
Fairfield, CA 861,500 156,990
CNL Income Fund II, Ltd.:
Golden Corral -
Salisbury, NC 642,800 104,000
Pizza Hut -
Graham, TX 205,500 56,128
Golden Corral -
Medina, OH 743,000 (116,418)
Denny's -
Show Low, AZ (8) 484,185 136,615
KFC -
Eagan, MN 601,100 64,782
CNL Income Fund III, Ltd.:
Wendy's -
Chicago, IL 591,362 (94,944)
Perkins -
Bradenton, FL 1,080,500 229,501
Pizza Hut -
Kissimmee, FL 474,755 198,404
Burger King -
Roswell, GA 775,226 167,755
CNL Income Fund IV, Ltd.:
Taco Bell -
York, PA 616,501 95,499
Burger King -
Hastings, MI 419,936 98,714
Wendy's -
Tampa, FL 828,350 221,200
CNL Income Fund V, Ltd.:
Perkins -
Myrtle Beach, SC (2) 986,418 53,582
Ponderosa -
St. Cloud, FL (6) 996,769 134,243
Franklin National Bank -
Franklin, TN 1,138,164 (177,423)
</TABLE>
C-35
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
===============================================================================================
Including Closing and
Soft Costs
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
===============================================================================================
<S> <C>
Shoney's -
Smyrna, TN 03/22/89 05/13/97 636,788 0 0 0
CNL Income Fund VI, Ltd.:
Hardee's -
Batesville, AR 11/02/89 05/24/94 791,211 0 0 0
Hardee's -
Heber Springs, AR 02/13/90 05/24/94 638,270 0 0 0
Hardee's -
Little Canada, MN 11/28/89 06/29/95 899,503 0 0 0
Jack in the Box -
Dallas, TX 06/28/94 12/09/96 982,980 0 0 0
Denny's -
Show Low, AZ (8) 05/22/87 01/31/97 349,200 0 0 0
CNL Income Fund VII, Ltd.:
Taco Bell -
Kearns, UT 06/14/90 05/19/92 700,000 0 0 0
Hardee's -
St. Paul, MN 08/09/90 05/24/94 869,036 0 0 0
Perkins -
Florence, SC (3) 08/28/90 08/25/95 0 0 1,160,000 0
Church's Fried Chicken -
Jacksonville, FL (4) 04/30/90 12/01/95 0 0 240,000 0
Shoney's -
Colorado Springs, CO 07/03/90 07/24/96 1,044,909 0 0 0
Hardee's -
Hartland, MI 07/10/90 10/23/96 617,035 0 0 0
Hardee's -
Columbus, IN 09/04/90 05/30/97 223,590 0 0 0
CNL Income Fund VIII, Ltd.:
Denny's -
Ocoee, FL 03/16/91 07/31/95 1,184,865 0 0 0
Church's Fried Chicken -
Jacksonville, FL (4) 09/28/90 12/01/95 0 0 240,000 0
Church's Fried Chicken -
Jacksonville, FL (5) 09/28/90 12/01/95 0 0 220,000 0
Ponderosa -
Orlando, FL (6) 12/17/90 10/24/96 0 0 1,353,775 0
</TABLE>
<TABLE>
<CAPTION>
=============================================================================================
Cost of Properties
Selling Price, Net of
Closing Costs and GAAP Adjustments
Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property Total financing soft costs (1) Total expenditures
=============================================================================================
<S> <C>
Shoney's -
Smyrna, TN 636,788 0 554,200 554,200 82,588
CNL Income Fund VI, Ltd.:
Hardee's -
Batesville, AR 791,211 0 605,500 605,500 185,711
Hardee's -
Heber Springs, AR 638,270 0 532,893 532,893 105,377
Hardee's -
Little Canada, MN 899,503 0 821,692 821,692 77,811
Jack in the Box -
Dallas, TX 982,980 0 964,437 964,437 18,543
Denny's -
Show Low, AZ (8) 349,200 0 272,354 272,354 76,846
CNL Income Fund VII, Ltd.:
Taco Bell -
Kearns, UT 700,000 0 560,202 560,202 139,798
Hardee's -
St. Paul, MN 869,036 0 742,333 742,333 126,703
Perkins -
Florence, SC (3) 1,160,000 0 1,084,905 1,084,905 75,095
Church's Fried Chicken -
Jacksonville, FL (4) 240,000 0 233,728 233,728 6,272
Shoney's -
Colorado Springs, CO 1,044,909 0 898,739 893,739 151,170
Hardee's -
Hartland, MI 617,035 0 841,642 841,642 (224,607)
Hardee's -
Columbus, IN 223,590 0 219,676 219,676 3,914
CNL Income Fund VIII, Ltd.:
Denny's -
Ocoee, FL 1,184,865 0 949,199 949,199 235,666
Church's Fried Chicken -
Jacksonville, FL (4) 240,000 0 238,153 238,153 1,847
Church's Fried Chicken -
Jacksonville, FL (5) 220,000 0 215,845 215,845 4,155
Ponderosa -
Orlando, FL (6) 1,353,775 0 1,179,210 1,179,210 174,565
</TABLE>
C-36
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
===============================================================================================
Including Closing and
Soft Costs
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
===============================================================================================
<S> <C>
CNL Income Fund IX, Ltd.:
Burger King -
Woodmere, OH 05/31/91 12/12/96 918,445 0 0 0
Burger King -
Alpharetta, GA 09/20/91 06/30/97 1,053,571 0 0 0
CNL Income Fund X, Ltd.:
Shoney's -
Denver, CO 03/04/92 08/11/95 1,050,186 0 0 0
CNL Income Fund XI, Ltd.:
Burger King -
Philadelphia, PA 09/29/92 11/07/96 1,044,750 0 0 0
CNL Income Fund XII, Ltd.:
Golden Corral -
Houston, TX 12/28/92 04/10/96 1,640,000 0 0 0
CNL Income Fund XIII, Ltd.:
Checkers -
Houston, TX 03/31/94 04/24/95 286,411 0 0 0
Checkers -
Richmond, VA 03/31/94 11/21/96 550,000 0 0 0
CNL Income Fund XIV, Ltd.:
Checkers -
Knoxville, TN 03/31/94 03/01/95 339,031 0 0 0
Checkers -
Dallas, TX 03/31/94 03/01/95 356,981 0 0 0
TGI Friday's -
Woodridge, NJ (7) 01/01/95 09/27/96 1,753,533 0 0 0
Wendy's -
Woodridge, NJ (7) 11/28/94 09/27/96 747,058 0 0 0
CNL Income Fund XV, Ltd.:
Checkers -
Knoxville, TN 05/27/94 03/01/95 263,221 0 0 0
Checkers -
Leavenworth, KS 06/22/94 03/01/95 259,600 0 0 0
Checkers -
Knoxville, TN 07/08/94 03/01/95 288,885 0 0 0
TGI Friday's -
Woodridge, NJ (7) 01/01/95 09/27/96 1,753,533 0 0 0
</TABLE>
<TABLE>
<CAPTION>
==============================================================================================
Cost of Properties
Selling Price, Net of
Closing Costs and GAAP Adjustments
Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property Total financing soft costs (1) Total expenditures
==============================================================================================
<S> <C>
CNL Income Fund IX, Ltd.:
Burger King -
Woodmere, OH 918,445 0 918,445 918,445 0
Burger King -
Alpharetta, GA 1,053,571 0 713,866 713,866 339,705
CNL Income Fund X, Ltd.:
Shoney's -
Denver, CO 1,050,186 0 987,679 987,679 62,507
CNL Income Fund XI, Ltd.:
Burger King -
Philadelphia, PA 1,044,750 0 818,850 818,850 225,900
CNL Income Fund XII, Ltd.:
Golden Corral -
Houston, TX 1,640,000 0 1,636,643 1,636,643 3,357
CNL Income Fund XIII, Ltd.:
Checkers -
Houston, TX 286,411 0 286,411 286,411 0
Checkers -
Richmond, VA 550,000 0 413,288 413,288 136,712
CNL Income Fund XIV, Ltd.:
Checkers -
Knoxville, TN 339,031 0 339,031 339,031 0
Checkers -
Dallas, TX 356,981 0 356,981 356,981 0
TGI Friday's -
Woodridge, NJ (7) 1,753,533 0 1,510,245 1,510,245 243,288
Wendy's -
Woodridge, NJ (7) 747,058 0 672,746 672,746 74,312
CNL Income Fund XV, Ltd.:
Checkers -
Knoxville, TN 263,221 0 263,221 263,221 0
Checkers -
Leavenworth, KS 259,600 0 259,600 259,600 0
Checkers -
Knoxville, TN 288,885 0 288,885 288,885 0
TGI Friday's -
Woodridge, NJ (7) 1,753,533 0 1,510,245 1,510,245 243,288
</TABLE>
C-37
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
===============================================================================================
Including Closing and
Soft Costs
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
===============================================================================================
<S> <C>
Wendy's -
Woodridge, NJ (7) 11/28/94 09/27/96 747,058 0 0 0
CNL Income Fund XVI, Ltd.:
Long John Silver's -
Appleton, WI 06/24/95 04/24/96 775,000 0 0 0
Checker's -
Oviedo, FL 11/14/94 02/28/97 610,384 0 0 0
CNL American Properties
Fund, Inc.:
TGI Friday's -
Orange, CT 10/30/95 05/08/97 1,312,799 0 0 0
TGI Friday's -
Hazlet, NJ 07/15/96 05/08/97 1,324,109 0 0 0
TGI Friday's -
Marlboro, NJ 08/01/96 05/08/97 1,372,075 0 0 0
TGI Friday's -
Hamden, CT 08/26/96 05/08/97 1,245,100 0 0 0
</TABLE>
<TABLE>
<CAPTION>
==============================================================================================
Cost of Properties
Selling Price, Net of
Closing Costs and GAAP Adjustments
Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property Total financing soft costs (1) Total expenditures
==============================================================================================
<S> <C>
Wendy's -
Woodridge, NJ (7) 747,058 0 672,746 672,746 74,312
CNL Income Fund XVI, Ltd.:
Long John Silver's -
Appleton, WI 775,000 0 613,838 613,838 161,162
Checker's -
Oviedo, FL 610,384 0 506,311 506,311 104,073
CNL American Properties
Fund, Inc.:
TGI Friday's -
Orange, CT 1,312,799 0 1,310,980 1,310,980 1,819
TGI Friday's -
Hazlet, NJ 1,324,109 0 1,294,237 1,294,237 29,872
TGI Friday's -
Marlboro, NJ 1,372,075 0 1,324,288 1,324,288 47,787
TGI Friday's -
Hamden, CT 1,245,100 0 1,203,136 1,203,136 41,964
</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.
(8) CNL Income Fund II, Ltd. owns a 64 percent interest and CNL Income Fund VI,
Ltd. owns a 36 percent interest in this joint venture. The amounts
presented for each of CNL Income Fund II, Ltd. and CNL Income Fund VI, Ltd.
represent each partnership's percent interest in the properties owned by
Show Low Joint Venture.
C-38
<PAGE>
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 Registered Representative. 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>
CNL AMERICAN REALTY FUND, INC.
- -------------------------------------------------------------------------------
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-----------------------------------------
<TABLE>
<S> <C>
Name (1st) |_| M |_| F Date of Birth (MM/DD/YY)
-------------------------- -------
Name (2nd) |_| M |_| F 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 custodian taxpayer
identification number.
Social Security # - Taxpayer ID# - -
----------- -------------------- ---------------------------------
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. Phone #( )
----------------------------------------------- ------- --------------------
5.---------------FORM OF OWNERSHIP----------------------------------------------
(Select only one)
|_|INDIVIDUAL-one signature required (1)
|_|HUSBAND AND WIFE, AS COMMUNITY PROPERTY- two signatures required (15)
|_|TENANTS IN COMMON-two signatures required (9)
|_|TENANTS BY THE ENTIRETY-two signatures required (31)
|_|S-CORPORATION (22)
|_|C-CORPORATION (5)
|_|IRA-custodian signature required (23)
|_|SEP-custodian signature required (38)
|_|TAXABLE TRUST (7)
|_|TAX-EXEMPT TRUST (20)
|_|JOINT TENANTS WITH RIGHT OF SURVIVORSHIP-all parties must sign (8)
|_|A MARRIED PERSON/SEPARATE PROPERTY-one signature required (34)
|_|KEOGH (H.R.10)-trustee signature required (24)
|_|CUSTODIAN -custodian signature required (33)
|_|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)
|_|IRREVOCABLE TRUST-trustee signature required (21)
|_| 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.
<PAGE>
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
-----------------------------------------------
Registered Representative
----------------------------------------------------
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 (RIA) (check here): This investment is
made through the RIA in its capacity as a RIA and not in its capacity as
a Registered Representative, if applicable. If an owner or principal or
any member of the RIA firm is a 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
- --------------------------------------------------------------------------------
Make check payable to : SOUTHTRUST ASSET MANAGEMENT COMPANY OF FLORIDA, N.A.,
ESCROW AGENT
Please remit check and For overnight delivery, please send to:
subscription document to:
CNL SECURITIES CORP. CNL SECURITIES CORP.
Attn: Investor Services Attn: Investor Services
P. O. Box 1033 400 E. South Street, Suite 500
Orlando, FL 32802-1033 Orlando, FL 32801 For Office Use Only
(800) 522-3863 (407) 422-1574
(800) 522-3863
Sub. #________________
Admit Date____________
Amount________________
Region________________
RSVP#_________________
- -------------------------------------------------------------------------------
<PAGE>
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 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.
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 D, 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 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.
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________________________
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 #__________________________________________________________________
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
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 at December 31, 1997 and 1996
(3) Statements of Earnings for the year ended December
31, 1997 and the period June 12, 1996 (date of
inception) through December 31, 1996
(4) Statements of Stockholders' Equity for the year ended
December 31, 1997 and the period June 12, 1996 (date
of inception) through December 31, 1996
(5) Statements of Cash Flows for the year ended December
31, 1997 and the period June 12, 1996 (date of
inception) through December 31, 1996
(6) Notes to Financial Statements
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
*1.2 Form of Participating Broker Agreement
*3.1 CNL American Realty Fund, Inc. Articles of
Incorporation
*3.2 Form of CNL American Realty Fund, Inc. Amended and
Restated Articles of Incorporation
*3.3 Form of CNL American Realty Fund, Inc. Bylaws
*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.)
- --------------------
* Previously filed.
II-1
<PAGE>
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.
*8 Opinion of Shaw, Pittman, Potts & Trowbridge
regarding certain material tax issues relating to CNL
American Realty Fund, Inc.
*10.1 Form of Escrow Agreement between CNL American Realty
Fund, Inc. and SouthTrust Asset Management Company of
Florida, N.A.
*10.2 Form of Advisory Agreement
*10.3 Form of Joint Venture Agreement
*10.4 Form of Indemnification and Put Agreement
*10.5 Form of Unconditional Guaranty of Payment and
Performance
*10.6 Form of Purchase Agreement
*10.7 Form of Lease Agreement including Rent Addendum,
Construction Addendum and Memorandum of Lease
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
*23.2 Consent of Shaw, Pittman, Potts & Trowbridge
(Contained in its opinion filed herewith as Exhibit 5
and incorporated herein by reference.)
23.3 Consent of Coopers & Lybrand L.L.P., Certified Public
Accountants, dated March 4, 1998 (Filed herewith.)
*27.1 Financial Data Schedule
*99.1 Consents of Certain Persons Named as Directors
- -------------------
* Previously filed.
II-2
<PAGE>
TABLE VI
ACQUISITION OF PROPERTIES BY PROGRAMS
Table VI presents information concerning the acquisition of
real properties by the public real estate limited partnerships and the unlisted
public REIT sponsored by Affiliates of the Company through June 30, 1997. 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.
<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>
AZ,CA,FL,GA, AL,DC,FL,GA,
AL,AZ,CO,FL, IA,IL,IN,KS, IL,IN,KS,MA,
AL,AZ,CA,FL, GA,IL,IN,LA, KY,MD,MI,MN, MD,MI,MS,NC,
GA,LA,MD,OK, MI,MN,MO,NC, MO,NC,NE,OK, OH,PA,TN,TX,
Locations TX,VA NM,OH,TX,WY TX VA
Type of property Restaurants Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 20 units 44 units 33 units 45 units
total square feet
of units 67,645 s/f 157,461 s/f 138,102 s/f 159,196 s/f
Dates of purchase 6/17/86 - 2/11/87- 10/04/87- 6/24/88-
12/17/87 6/11/97 6/11/97 12/31/96
Cash down payment (Note 1) $12,296,264 $23,683,368 $20,909,969 $27,611,441
Contract purchase price
plus acquisition fee $12,222,062 $23,524,561 $20,788,872 $27,506,106
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 74,202 158,807 121,097 105,335
----------- ----------- ----------- ------------
Total acquisition cost
(Note 1) $12,296,264 $23,683,368 $20,909,969 $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.
<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,GA,
FL,GA,IL,IN, IN,MA,MI,MN, AZ,CO,FL,GA,
MI,NH,NY,OH, NC,NE,NM,NY, IN,LA,MI,MN, AZ,FL,IN,LA,
SC,TN,TX,UT, OH,OK,PA,TN, OH,SC,TN,TX, MI,MN,NC,NY,
Locations WA TX,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 48 units 47 units 42 units
total square feet
of units 117,652 s/f 186,888 s/f 166,648 s/f 179,885 s/f
Dates of purchase 2/06/89- 7/13/89- 3/30/90- 9/13/90-
1/05/90 6/11/97 2/5/97 5/31/96
Cash down payment (Note 1) $22,113,522 $34,073,497 $28,968,733 $31,985,071
Contract purchase price
plus acquisition fee $21,706,859 $33,528,770 $28,296,750 $31,450,507
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 406,663 544,727 671,983 534,564
----------- ----------- ----------- ------------
Total acquisition cost
(Note 1) $22,113,522 $34,073,497 $28,968,733 $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%, 18%, and 79% interest in five
separate joint ventures. Four 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.
<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 40 units 49 units
total square feet
of units 180,843 s/f 203,466 s/f 176,062 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 1/28/97 5/31/96
Cash down payment (Note 1) $31,763,146 $36,036,814 $36,245,591 $40,840,795
Contract purchase price
plus acquisition fee $31,016,376 $35,320,865 $35,644,633 $40,339,796
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 746,770 715,949 600,958 500,999
----------- ----------- ----------- ------------
Total acquisition cost
(Note 1) $31,763,146 $36,036,814 $36,245,591 $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. In addition, the partnership owns a 72.5%
interest in one restaurant property held as a tenants-in-common
with an affiliate.
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.
<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, AL,CA,FL,GA, AZ,CA,CO,DC,
CO,FL,GA,IN, GA,KS,LA,MN, KS,KY,MN,MO, FL,GA,ID,IN,
KS,LA,MD,NC, MO,MS,NC,NJ, MS,NC,NJ,NM, KS,MN,MO,NC,
OH,PA,SC,TN, NV,OH,SC,TN, OH,OK,PA,SC, NM,NV,OH,TN,
Locations TX,VA TX,VA TN,TX,VA TX,UT,WI
Type of property Restaurants Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 49 units 62 units 54 units 44 units
total square feet
of units 159,378 s/f 184,689 s/f 166,249 s/f 169,867 s/f
Dates of purchase 5/18/93- 9/27/93- 4/28/94- 10/21/94-
1/28/97 1/10/97 1/10/97 10/04/96
Cash down payment (Note 1) $35,455,235 $42,392,436 $38,227,474 $40,197,565
Contract purchase price
plus acquisition fee $35,087,109 $41,961,701 $37,834,633 $39,805,020
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 368,126 430,735 392,841 392,545
----------- ----------- ----------- ------------
Total acquisition cost
(Note 1) $35,455,235 $42,392,436 $38,227,474 $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% and a 63.03% interest in
two restaurant properties held separately as tenants-in-common
with affiliates.
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 six restaurant properties.
Note 16: The partnership owns a 50% interest in a joint venture which owns
six 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.
<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 19 and 20) (Note 18)
<S> <C>
AL,AZ,CA,CO,
DE,FL,GA,IA,
ID,IL,IN,KY,
MD,MI,MN,MO,
NC,NE,NM,NV,
OH,OK,OR,PA, CA,FL,GA,IL, CA,GA,KY,MD,
TN,TX,UT,VA, IN,MI,NC,NV, MN,NC,NV,OH,
Locations WA,WV OH,SC,TN,TX TN,TX
Type of property Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 174 units 27 units 17 units
total square feet
of units 811,502 s/f 113,774 s/f 84,401 s/f
Dates of purchase 6/30/95 - 12/20/95 - 12/27/96 -
6/19/97 2/5/97 5/21/97
Cash down payment (Note 1) $159,182,267 $24,443,059 $18,411,910
Contract purchase price
plus acquisition fee $158,707,412 $24,406,400 $18,359,382
Other cash expenditures
expensed - - -
Other cash expenditures
capitalized 474,855 36,659 52,528
----------- -------------- -----------
Total acquisition cost
(Note 1) $159,182,267 $24,443,059 $18,411,910
=========== ============= ===========
</TABLE>
Note 18: The partnership owns an 80% and 21% interest in two separate joint
ventures. Each joint venture owns one restaurant property. In
addition, the partnership owns a 19.73%, 27.5% and 36.97% interest
in three restaurant properties held separately as
tenants-in-common with affiliates.
Note 19: 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 "Initial Offering of Shares"). The
Initial Offering of Shares of CNL American Properties Fund, Inc.
commenced April 19, 1995, and upon completion of the Initial
Offering of Shares on February 6, 1997, had received subscription
proceeds of $150,591,765 (15,059,177 shares), including $591,765
(59,177 shares) issued pursuant to the Reinvestment Plan. Pursuant
to a Registration Statement on Form S-11, as amended, effective
January 31, 1997, CNL American Properties Fund, Inc. registered
for sale $275,000,000 of shares of common stock (the "1997
Offering of Shares"). The 1997 Offering of Shares of CNL American
Properties Fund, Inc. commenced following the completion of the
Initial Offering of Shares on February 6, 1997. The amounts shown
represent the combined results of the the Initial Offering of
Shares and the 1997 Offering of Shares as of June 30, 1997.
Note 20: CNL American Properties Fund, Inc. owns an 85.47% interest in a
joint venture which owns one restaurant property.
II-3
<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
Post-Effective Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Orlando,
State of Florida, on the 4th day of March, 1998.
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-4
<PAGE>
Pursuant to the requirements of the Securities Act of 1933,
this Post-Effective Amendment No. 2 to the Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated.
Signature Title Date
/s/James M. Seneff, Jr. Chairman of the Board and March 4, 1998
- ------------------------ Chief Executive Officer
JAMES M. SENEFF, JR. (Principal Executive Officer)
/s/Robert A. Bourne Director and President March 4, 1998
- ------------------------ (Principal Financial and
ROBERT A. BOURNE Accounting Officer)
/s/G. Richard Hostetter Independent Director March 4, 1998
- ------------------------
G. RICHARD HOSTETTER
/s/J. Joseph Kruse Independent Director March 4, 1998
- -----------------------
J. JOSEPH KRUSE
/s/Richard C. Huseman Independent Director March 4, 1998
- -----------------------
RICHARD C. HUSEMAN
II-5
<PAGE>
EXHIBIT INDEX
Exhibits Page
*1.1 Form of Managing Dealer Agreement
*1.2 Form of Participating Broker Agreement
*3.1 CNL American Realty Fund, Inc. Articles of Incorporation
*3.2 Form of CNL American Realty Fund, Inc. Amended and Restated
Articles of Incorporation
*3.3 Form of CNL American Realty Fund, Inc. Bylaws
*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.
*8 Opinion of Shaw, Pittman, Potts & Trowbridge regarding certain
material tax issues relating to CNL American Realty Fund, Inc.
*10.1 Form of Escrow Agreement between CNL American Realty Fund,
Inc. and SouthTrust Asset Management Company of Florida, N.A.
*10.2 Form of Advisory Agreement
*10.3 Form of Joint Venture Agreement
*10.4 Form of Indemnification and Put Agreement
*10.5 Form of Unconditional Guaranty of Payment and Performance
*10.6 Form of Purchase Agreement
*10.7 Form of Lease Agreement including Rent Addendum, Construction
Addendum and Memorandum of Lease
- ------------------
* Previously filed.
II-6
<PAGE>
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
*23.2 Consent of Shaw, Pittman, Potts & Trowbridge (Contained in its
opinion filed herewith as Exhibit 5 and incorporated herein by
reference.)
23.3 Consent of Coopers & Lybrand L.L.P., Certified Public
Accountants, dated March 4, 1998 (Filed herewith.)
*27.1 Financial Data Schedule
*99.1 Consents of Certain Persons Named as Directors
- -------------------
* Previously filed.
II-7
<PAGE>
EXHIBIT 23.3
Consent of Coopers & Lybrand L.L.P.,
Certified Public Accountants,
dated March 4, 1998
<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 January 22, 1998 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.
- -------------------------------
Coopers & Lybrand L.L.P.
Orlando, Florida
March 4, 1998
