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As filed with the Securities and Exchange Commission on November 22, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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U.S. RESTAURANT PROPERTIES, INC.
(Exact name of Registrant as specified in its charter)
MARYLAND 75-2687420
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
12240 INWOOD ROAD, SUITE 300
DALLAS, TEXAS 75244
(972) 387-1487
(Address, including zip code, and telephone number, including area code, of
Registrants' principal executive offices)
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FRED H. MARGOLIN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
12240 INWOOD ROAD, SUITE 300
DALLAS, TEXAS 75244
(972) 387-1487
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
KENNETH L. BETTS, ESQ.
LOCKE LIDDELL & SAPP LLP
2200 ROSS AVENUE, SUITE 2200
DALLAS, TEXAS 75201
(214) 740-8000
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Approximate date of commencement of proposed sale to the public: from time to
time after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
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. [ ]
<TABLE>
<CAPTION>
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CALCULATION OF REGISTRATION FEE
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Title of Each Class of Securities Amount to be Proposed Maximum Proposed Maximum Aggregate Amount of
to be Registered Registered Aggregate Price Per Share(1) Offering Price Registration Fee
----------------------------------- --------------- ------------------------------ ---------------------------- ------------------
<S> <C> <C> <C> <C>
Shares of Common Stock, $.001 146,741 shares $10.34 $1,517,302 $401.00
par value per share
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</TABLE>
(1) Estimated solely for the purposes of calculating the registration for
pursuant to Rule 457(c) based on the high and low sales prices of the
common shares on the New York Stock Exchange on November 16, 2000
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED NOVEMBER 22, 2000
PROSPECTUS
U.S. RESTAURANT PROPERTIES, INC.
146,741 SHARES OF COMMON STOCK
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By this prospectus, our selling stockholders are offering and selling
up to 146,741 shares of common stock. We will not receive any proceeds from the
sale of shares.
The selling stockholders may offer the common stock through public or
private transactions, on the New York Stock Exchange at the prevailing market
price, or at privately negotiated prices. We will pay all of the costs and
expenses incurred with the registration of the resale of the common stock under
the federal securities laws. The selling stockholders will pay all costs
associated with any sales of the common stock, including any discounts,
commissions and applicable transfer taxes.
Our common stock is listed on the New York Stock Exchange under the
symbol "USV." On November 20, 2000, the closing sale price on the New York Stock
Exchange for our common stock was $10.625 per share.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE SECURITIES DISCUSSED IN THE
PROSPECTUS, NOR HAVE THEY DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR
ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SEC IS DECLARED EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
The date of this Prospectus is November ______, 2000
<PAGE> 3
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with
the SEC. This prospectus only provides you with a general description of the
securities being offered by the selling shareholder. You should read this
prospectus together with the additional information described under the heading
"WHERE YOU CAN FIND MORE INFORMATION" on page 17.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
We have made statements in this prospectus and may make statements in a
prospectus supplement that are "forward-looking" in that they do not discuss
historical fact, but instead note future expectations, projections, intentions
or other items relating to the future. These forward-looking statements include
those made in the documents incorporated by reference in this prospectus.
Forward-looking statements are subject to known and unknown risks,
uncertainties and other facts that may cause our actual results or performance
to differ materially from those contemplated by the forward-looking statements.
Many of those factors are noted in conjunction with the forward-looking
statements in the text. Other important factors that could cause actual results
to differ include:
o Our inability to effect acquisitions due to limited access to
financing. This inability could result in decreased market penetration,
adverse effects on results of operations and other adverse results.
o The effect of economic conditions. If an economic downturn occurs, the
demand and rents for neighborhood and community shopping centers could
fall and adversely affect our financial condition and results of
operations. Our financial condition and results of operations could
also be adversely affected if our tenants are unable to make lease
payments or fail to renew their leases.
o Failure to qualify as a REIT. We elected to be taxed as a REIT for
federal income tax purposes for our taxable year ended December 31,
1999, and expect to continue to elect REIT status. Although we believe
that we were organized and have been operating in conformity with the
requirements for qualification as a REIT under the Internal Revenue
Code, we cannot assure you that we will continue to qualify as a REIT.
Qualification as a REIT involves the application of highly technical
and complex Internal Revenue Code provisions for which there are only
limited judicial or administrative interpretations. If in any taxable
year we fail to qualify as a REIT, we would not be allowed a deduction
for distributions to stockholders for computing taxable income and
would be subject to federal taxation at regular corporate rates. Unless
entitled to statutory relief, we would also be disqualified from
treatment as a REIT for the four taxable years following the year
during which qualification was lost. As a result, our ability to make
distributions to our stockholders would be adversely affected. See
"Federal Income Tax Consequences." - REIT Qualification" on page 5.
o The cost of capital. Our cost depends on many factors, some of which
are beyond our control, including interest rates, ratings, prospects
and outlook.
o Actions of our competitors. We seek to remain competitive in the
restaurant and service station real estate markets that we currently
serve. We do, however, compete with a number of other real estate
oriented companies, some of which have greater resources than we do.
o Changes in government regulations, tax rates and similar matters. For
example, changes in real estate and zoning laws, environmental
uncertainties and natural disasters could adversely affect our
financial condition and results of operations.
o Other risks are detailed in our SEC reports or filings.
We do not promise to update forward-looking information to reflect
actual results or changes in assumptions or other factors that could
affect those statements.
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THE COMPANY
We are a Dallas, Texas-based real estate investment trust (or REIT). As
a REIT, we are generally not subject to federal income tax. We are, however,
subject to a number of organizational and operational requirements and
limitations.
We focus on acquiring, owning, managing and selectively developing
restaurant properties. In addition to our restaurant properties, we acquire
strategically located service stations and develop co-branded facilities
combining fast food and convenience stores with service station operations in a
single site.
At September 30, 2000, we owned 878 properties in 48 states. We
generally lease these properties to fast food and casual dining chain
restaurants affiliated with national or regional brands. These brands include:
o Burger King(R)
o Arby's(R)
o Dairy Queen(R)
o Hardee's(R)
o Chili's(R)
o Pizza Hut(R)
o Grandy's(R)
o Taco Cabana(R)
Our service stations are affiliated with major oil companies, including
Exxon Mobil(R) and Texaco(R). Our leases are generally "triple net leases" which
typically require the tenant to be responsible for property operating costs,
including property taxes, insurance and maintenance.
In addition to our ownership of restaurant and service station
properties, we selectively provided debt financing to owner/operators of
restaurant properties from August 1997 through January 2000.
We conduct our operations primarily through U.S. Restaurant Properties
Operating L.P., a Delaware limited partnership. At September 30, 2000, we owned
a 92.33% limited partnership interest in this operating partnership. The sole
general partner of this operating partnership is one of our wholly-owned
subsidiaries.
We are a Maryland corporation whose common stock is traded on the New
York Stock Exchange under the symbol "USV."
Our principal executive offices are located at 12240 Inwood Road, Suite
300, Dallas, Texas 75244. Our telephone number is (972) 387-1487.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the common stock
offered by this prospectus.
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SELLING STOCKHOLDERS
The following list sets forth (1) the name of the selling stockholders;
(2) the amount of shares owned by them before this offering; and (3) the amount
of shares being offered hereunder for the selling stockholders' account. None of
the selling stockholders has been an affiliate within the past three years. We
granted registration rights to the selling stockholders in connection with the
issuance of convertible limited partnership units in U.S. Restaurant Properties
Operating, L.P. in exchange for certain real estate properties and billboards
and associated guaranty agreements that provided that the selling stockholders
would be guaranteed a specified value 24 months after the date of the initial
property transaction and a stock guaranty agreement associated with the purchase
with stock of certain fast food locations that provided that the stockholder
would be guaranteed a specified value three years after the closing of the real
estate transaction.
<TABLE>
<CAPTION>
Shares Owned Before Shares Offered In Shares Owned After
Name this Offering this Offering this Offering(1)
---- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Richard Cannata 23,699 4,100 19,599
Steven Cannata 23,699 4,100 19,599
Carmine Vano 23,699 4,100 19,599
Francis Vano 23,699 4,100 19,599
Donald M. Cepiel, Sr. 110,915 20,915 90,000
Frances C. Seib 105,479 18,250 87,229
Seib Enterprises 18,983 3,349 15,634
Midon Investment Group 11,754 2,072 9,682
Carole Cannata 14,222 2,461 11,761
Jones Enterprises 241,273 41,768 199,505
Ronald McCormick 375 66 309
Ray Kearney 375 66 309
Lincoln Trust Company, Trustee
f/b/o Scott Rohrman 1,729 1,729 -
Nicholas D. Ricco 8,276 8,276 -
David Buring 4,878 4,878 -
Jill Buring 4,878 4,878 -
Martin Belz Family, Ltd. 3,584 3,584 -
Thomas and Lynda Brockway 6,170 6,170 -
Ken Sossaman 5,139 5,139 -
Amy and Pamela Friedman Trust 6,740 6,740 -
</TABLE>
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(1) Assumes that all of the shares being offered hereunder will be sold.
PLAN OF DISTRIBUTION
The selling stockholders may offer the common stock through public or
private transactions, on the New York Stock Exchange at the prevailing market
price, or at privately negotiated or fixed prices. We will pay all of the costs
and expenses incurred with the registration of the resale of the common stock
under the Securities Act. If the selling stockholders use a broker-dealer to
sell its common stock, either the selling stockholders or the purchasers will
pay all costs associated with any sales of the common stock, including any
discounts, commissions and applicable transfer or income taxes.
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FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following summary of material federal income tax consequences that
may be relevant to a holder of common stock or preferred stock is based on
current law, is for general information only and is not intended as tax advice.
The following discussion, which is not exhaustive of all possible tax
consequences, does not include a detailed discussion of any state, local or
foreign tax consequences. Nor does it discuss all of the aspects of federal
income taxation that may be relevant to a prospective stockholder in light of
his or her particular circumstances or to specific stockholders (including
insurance companies, tax-exempt entities, financial institutions or
broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States and stockholders holding securities as part of a
conversion transaction, a hedging transaction or as a position in a straddle for
tax purposes) who are subject to special treatment under the federal income tax
laws.
The statements in this discussion are based on current provisions of
the Code, existing, temporary and currently proposed Treasury Regulations under
the Code, the legislative history of the Code, existing administrative rulings
and practices of the IRS and judicial decisions. No assurance can be given that
legislative, judicial or administrative changes will not affect the accuracy of
any statements in this prospectus with respect to transactions entered into or
contemplated prior to the effective date of those changes. Any change could
apply retroactively to transactions preceding the date of the change. We do not
plan to request any rulings from the IRS concerning our tax treatment and the
statements in this prospectus are not binding on the IRS or any court. Thus, we
can provide no assurance that these statements will not be challenged by the IRS
or that a challenge will not be sustained by a court.
THIS DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX
PLANNING. EACH PROSPECTIVE PURCHASER OF COMMON STOCK OR PREFERRED STOCK IS
ADVISED TO CONSULT WITH HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX
CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF COMMON
STOCK OR PREFERRED STOCK IN AN ENTITY ELECTING TO BE TAXED AS A REIT, INCLUDING
THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF ANY PURCHASE,
OWNERSHIP, DISPOSITION AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX
LAWS.
We have elected to be treated as a REIT under Sections 856 through 860
of the Code for federal income tax purposes commencing with our taxable year
ended December 31, 1997. We believe that we have been organized and have
operated in a manner that qualifies for taxation as a REIT under the Code. We
also believe that we will continue to operate in a manner that will preserve our
status as a REIT. We cannot, however, assure you that the REIT requirements will
be met in the future.
We have received an opinion from Locke Liddell & Sapp LLP, our legal
counsel, to the effect that we qualified as a REIT under the Code for our
taxable year ended December 31, 1999, we have been organized and our manner of
operation has been in conformity with the requirements for qualification and
taxation as a REIT as of the date of this prospectus and that our proposed
manner of operation and diversity of equity ownership should enable us to
continue to satisfy the requirements for qualification as a REIT in calendar
year 2000 if we operate in accordance with the method of operations described
herein including our representations concerning our intended method of
operation. However, you should be aware that opinions of counsel are not binding
on the IRS or on the courts, and, if the IRS were to challenge these
conclusions, no assurance can be given that these conclusions would be sustained
in court. The opinion of Locke Liddell & Sapp LLP is based on various
assumptions as well as on representations made by us as to factual matters,
including representations described in this prospectus and a factual
representation letter provided by us. The rules governing REITs are highly
technical and require ongoing compliance with a variety of tests that depend,
among other things, on future operating results, asset diversification,
distribution levels and diversity of stock ownership. Locke Liddell & Sapp LLP
will not monitor our compliance with these requirements. While we expect to
satisfy these tests, and will use our best efforts to do so, no assurance can be
given that we will qualify as a REIT for any particular year, or that the
applicable law will not change and adversely affect us and our stockholders. See
"--Failure to Qualify as a REIT." The following is a summary of the material
federal income tax considerations affecting us as a REIT and our stockholders.
This summary is qualified in its entirety by the applicable Code provisions,
relevant rules and regulations promulgated under the Code, and administrative
and judicial interpretations of the Code and these rules and regulations.
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REIT QUALIFICATION
We must be organized as an entity that would, if we do not maintain our
REIT status, be taxable as a regular corporation. We cannot be a financial
institution or an insurance company. We must be managed by one or more
directors. Our taxable year must be the calendar year. Our beneficial ownership
must be evidenced by transferable shares. Our capital stock must be held by at
least 100 persons during at least 335 days of a taxable year of 12 months or
during a proportionate part of a taxable year of less than 12 months. Not more
than 50% of the value of the shares of our capital stock may be held, directly
or indirectly, applying the applicable constructive ownership rules of the Code,
by five or fewer individuals at any time during the last half of each of our
taxable years. We must also meet other tests, described below, regarding the
nature of our income and assets and the amount of our distributions.
Our outstanding common stock is owned by a sufficient number of
investors and in appropriate proportions to permit us to satisfy the stock
ownership requirements described above. To protect against violations of these
stock ownership requirements, our articles of incorporation provide that no
person is permitted to own, applying constructive ownership tests set forth in
the Code, more than 9.8% of the outstanding common stock (except for QSV
Properties, Inc. which can initially own up to 12% of our outstanding common
stock, subject to future reduction, and Pacific Life which can own up to 12% of
our common stock) or 9.8% of the outstanding preferred stock. In addition, our
articles of incorporation contain restrictions on transfers of capital stock, as
well as provisions that automatically convert shares of stock into excess stock
to the extent that the ownership otherwise might jeopardize our REIT status.
These restrictions, however, may not ensure that we will, in all cases, be able
to satisfy the stock ownership requirements. If we fail to satisfy these stock
ownership requirements, except as provided in the next sentence, our status as a
REIT will terminate. However, if we comply with the rules contained in
applicable Treasury Regulations that require us to ascertain the actual
ownership of our shares and we do not know, or would not have known through the
exercise of reasonable diligence, that we failed to meet the 50% requirement
described above, we will be treated as having met this requirement.
See the section below entitled "Failure to Qualify as a REIT."
To monitor our compliance with the share ownership requirements, we are
required to and we do maintain records disclosing the actual ownership of shares
of common stock. To do so, we will demand written statements each year from the
record holders of the percentages of shares in which the record holders are to
disclose the actual owners of the shares (i.e., the persons required to include
in gross income the REIT dividends). A list of those persons failing or refusing
to comply with this demand will be maintained as part of our records.
Stockholders who fail or refuse to comply with the demand must submit a
statement with their tax returns disclosing, among other things, the actual
ownership of the shares.
We currently satisfy, and expect to continue to satisfy, each of the
requirements discussed above. We also currently satisfy, and expect to continue
to satisfy, the requirements that are separately described below concerning the
nature and amounts of our income and assets and the levels of required annual
distributions.
SOURCES OF GROSS INCOME. In order to qualify as a REIT for a particular
year, we also must meet two tests governing the sources of our income - a 75%
gross income test and a 95% gross income test. These tests are designed to
ensure that a REIT derives its income principally from passive real estate
investments. The Code allows a REIT to own and operate a number of its
properties through wholly-owned subsidiaries which are "qualified REIT
subsidiaries." The Code provides that a qualified REIT subsidiary is not treated
as a separate corporation, and all of its assets, liabilities and items of
income, deduction and credit are treated as assets, liabilities and items of
income, deduction and credit of the REIT.
In the case of a REIT which is a partner in a partnership or any other
entity that is treated as a partnership for federal income tax purposes, the
Treasury Regulations provide that the REIT will be deemed to own its
proportionate share of the assets of the partnership. Also, the REIT will be
deemed to be entitled to its proportionate share of the income of the
partnership. The character of the assets and gross income of the partnership
retains the same character in the hands of the REIT for purposes of Section 856
of the Code, including satisfying the gross income tests and the asset tests.
Thus, our proportionate share of the assets and items of income of U.S.
Restaurant Properties Operating L.P. (including U.S. Restaurant Properties
Operating L.P.'s share of these items for any partnership in which it owns an
interest) are treated as our assets and items of income for purposes of applying
the requirements described in this prospectus, including the income and asset
tests described below. We have included a brief summary
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of the rules governing the federal income taxation of partnerships and their
partners below in "-Tax Aspects of the Partnerships." We have control of U.S.
Restaurant Properties Operating L.P. through ownership of its general partner
and will continue to operate it in a manner consistent with the requirements for
qualification as a REIT.
75% GROSS INCOME TEST. At least 75% of a REIT's gross income for each
taxable year must be derived from specified classes of income that principally
are real estate related. The permitted categories of principal importance to us
are:
(1) rents from real property;
(2) interest on loans secured by real property;
(3) gain from the sale of real property or loans secured by real
property, excluding gain from the sale of property held
primarily for sale to customers in the ordinary course of our
business;
(4) income from the operation and gain from the sale of property
acquired in connection with the foreclosure of a mortgage
securing that property;
(5) distributions on, or gain from the sale of, shares of other
qualifying REITs;
(6) abatements and refunds of real property taxes;
(7) amounts received as consideration for entering into agreements
to make loans secured by real
property or to purchase or lease real property; and
(8) "qualified temporary investment income" (described below).
In evaluating our compliance with the 75% gross income test, as well as
the 95% gross income test described below, gross income does not include gross
income from "prohibited transactions." In general, a prohibited transaction is
one involving a sale of property held primarily for sale in the ordinary course
of our business, not including property acquired through foreclosure, and
sometimes not including property we have held for at least four years.
We expect that substantially all of our operating gross income will be
considered rent from real property and interest income. Rent from real property
is qualifying income for purposes of the gross income tests only if specific
conditions are satisfied. Rent from real property includes charges for services
customarily rendered to tenants and rent attributable to personal property
leased together with the real property, so long as the personal property rent is
not more than 15% of the total rent received or accrued under the lease for the
taxable year. We do not expect to earn material amounts in these categories.
Rent from real property generally does not include rent based on the
income or profits derived from the property. However, rent based on a percentage
of gross receipt or sales is permitted as rent from real property, and we will
have leases where rent is based on a percentage of gross receipt or sales. We
generally do not intend to lease property and receive rentals based on the
tenant's income or profit, except in limited cases which should not jeopardize
our status as a REIT. Also excluded from "rents from real property" is rent
received from a person or corporation in which we (or any of our 10% or greater
owners) directly or indirectly through the constructive ownership rules
contained in Section 318 and Section 856(d)(5) of the Code, own a 10% or greater
interest. We receive some rental income from tenants of which we constructively
own a 10% or greater interest, but not in amounts sufficient to jeopardize our
status as a REIT.
A third exclusion from qualifying rent income covers amounts received
with respect to real property if we furnish services to the tenants or manage or
operate the property, other than through an "independent contractor" from whom
we do not derive any income. The obligation to operate through an independent
contractor generally does not apply, however, if the services we provide are
"usually or customarily rendered" in connection with the rental of space for
occupancy only and are not considered rendered primarily for the convenience of
the tenant (applying standards that govern in evaluating whether rent from real
property would be unrelated business taxable income when received by a tax
exempt owner of the property). Further, if the value of the non-customary
service income with respect to a property, valued at no less than 150% of our
direct cost of performing those services, is 1% or less of the total income
derived from the property, then the provision of these non-customary services
shall not prohibit the rental income (except the non-customary service income)
from qualifying as "rents from real property."
We will, in most instances, directly operate and manage our assets
without using an "independent contractor." We believe that the only material
services generally to be provided to tenants will be those usually or
customarily rendered in connection with the rental of space for occupancy only.
We do not intend to provide services that might be
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<PAGE> 9
considered rendered primarily for the convenience of the tenants, including
hotel, health care or extensive recreational or social services. Consequently,
we believe that substantially all of our rental income will be qualifying income
under the gross income tests, and that our provision of services will not cause
the rental income to fail to be included under that test.
Upon the ultimate sale of our properties, any gains realized also are
expected to constitute qualifying income, as gain from the sale of real property
(not involving a prohibited transaction).
95% GROSS INCOME TEST. In addition to earning 75% of our gross income
from the sources listed above, 95% of our gross income for each taxable year
must come either from those sources, or from dividends, interest or gains from
the sale or other disposition of stock or other securities that do not
constitute property held primarily for sale in the ordinary course of our
business. This test permits a REIT to earn a significant portion of its income
from traditional "passive" investment sources that are not necessarily real
estate related. The term "interest" (under both the 75% and 95% tests) does not
include amounts that are based on the income or profits of any person, unless
the computation is based only on a fixed percentage of receipts or sales.
FAILING THE 75% OR 95% TESTS; REASONABLE CAUSE. As a result of the 75%
and 95% tests, REITs generally are not permitted to earn more than 5% of their
gross income from active sources, including brokerage commissions or other fees
for services rendered. From time to time, we may receive that income. This type
of income will not qualify for the 75% test or 95% test but is not expected to
be significant and that income, together with other nonqualifying income
(including rent from related party tenants, as discussed above), is expected to
be at all times less than 5% of our annual gross income. While we do not
anticipate that we will earn substantial amounts of nonqualifying income, if
nonqualifying income exceeds 5% of our gross income, we could lose our status as
a REIT. We may establish subsidiaries of which we will hold less than 10% of the
voting stock to hold assets generating non-qualifying income. The gross income
generated by these subsidiaries would not be included in our gross income.
However, dividends we receive from these subsidiaries would be included in our
gross income and qualify for the 95% income test.
If we fail to meet either the 75% or 95% income tests during a taxable
year, we may still qualify as a REIT for that year if (1) we report the source
and nature of each item of our gross income in our federal income tax return for
that year; (2) the inclusion of any incorrect information in our return is not
due to fraud with intent to evade tax; and (3) the failure to meet the tests is
due to reasonable cause and not to willful neglect. It is not possible, however,
to state whether in all circumstances we would be entitled to the benefit of
this relief provision. For example, if we fail to satisfy the gross income tests
because nonqualifying income that we intentionally accrue or receive causes us
to exceed the limits on nonqualifying income, the IRS could conclude that our
failure to satisfy the tests was not due to reasonable cause. If these relief
provisions do not apply to a particular set of circumstances, we will not
qualify as a REIT. As discussed below, even if these relief provisions apply,
and we retain our status as a REIT, a tax would be imposed with respect to our
non-qualifying income. We would be subject to a 100% tax based on the greater of
the amount by which we fail either the 75% or 95% income tests for that year.
See "--Taxation as a REIT."
PROHIBITED TRANSACTION INCOME. Any gain that we realize on the sale of
any property held as inventory or other property held primarily for sale to
customers in the ordinary course of business (including our share of any gain
realized by U.S. Restaurant Properties Operating L.P. and its subsidiary
partnerships), will be treated as income from a prohibited transaction that is
subject to a 100% penalty tax. This prohibited transaction income may also
adversely affect our ability to satisfy the income tests for qualification as a
REIT. Under existing law, whether property is held as inventory or primarily for
sale to customers in the ordinary course of a trade or business depends on all
the facts and circumstances surrounding the particular transaction. U.S.
Restaurant Properties Operating L.P. and its subsidiary partnerships intend to
hold their properties for investment with a view to long-term appreciation, to
engage in the business of acquiring, developing and owning their properties, and
to make occasional sales of the properties as are consistent with their
investment objectives. The IRS may contend, however, that one or more of these
sales is subject to the 100% penalty tax.
CHARACTER OF ASSETS OWNED. At the close of each calendar quarter of our
taxable year, we also must meet two tests concerning the nature of our
investments. First, at least 75% of the value of our total assets generally must
consist of real estate assets, cash, cash items (including receivables) and
government securities. For this purpose, "real estate assets" include interests
in real property, interests in loans secured by mortgages on real property or by
interests in real property, shares in other REITs and options, but excluding
mineral, oil or gas royalty interests. The temporary investment of new capital
in
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debt instruments also qualifies under this 75% asset test, but only for the
one-year period beginning on the date we receive the new capital. Second,
although the balance of our assets generally may be invested without
restriction, we will not be permitted to own (1) securities of any one
non-governmental issuer that represent more than 5% of the value of our total
assets or (2) more than 10% of the outstanding voting securities of any single
issuer. A REIT, however, may own 100% of the stock of a qualified REIT
subsidiary, in which case the assets, liabilities and items of income, deduction
and credit of the subsidiary are treated as those of the REIT. In evaluating a
REIT's assets, if the REIT invests in a partnership, it is deemed to own its
proportionate share of the assets of the partnership. See "--Recent
Legislation."
After initially meeting the asset tests at the close of any quarter, we
will not lose our status as a REIT for failure to satisfy the asset tests at the
end of a later quarter solely by reason of changes in asset values. If we fail
to satisfy the asset tests because we acquire securities or other property
during a quarter or increase our interests in U.S. Restaurant Properties
Operating L.P., we can cure this failure by disposing of sufficient
nonqualifying assets within 30 days after the close of that quarter. We intend
to take all action within the 30 days after the close of any quarter as may be
required to cure any noncompliance. If we fail to cure noncompliance with the
asset tests within this time period, we would cease to qualify as a REIT.
ANNUAL DISTRIBUTIONS TO STOCKHOLDERS. To maintain our REIT status, we
generally must distribute as a dividend to our stockholders in each taxable year
at least 95% of our net ordinary income. Capital gain is not required to be
distributed. More precisely, we must distribute an amount equal to (1) 95% of
the sum of (a) our "REIT taxable income" before deduction of dividends paid and
excluding any net capital gain and (b) any net income from foreclosure property
less the tax on that income, minus (2) limited categories of "excess noncash
income," including, income attributable to leveled stepped rents, cancellation
of indebtedness and original issue discount income. REIT taxable income is
defined to be a modified form of the taxable income of the REIT, computed as if
it were an ordinary corporation. For example, taxable income is modified in that
the deduction for dividends paid is allowed, but neither net income from
property acquired through foreclosure, nor net income from prohibited
transactions, is included. In addition, the REIT may carry over, but not carry
back, a net operating loss for 20 years following the year in which it was
incurred.
A REIT may satisfy the 95% distribution test with dividends paid during
the taxable year and with dividends paid after the end of the taxable year if
they meet the following tests. Dividends paid in January that were declared
during the last calendar quarter of the prior year and were payable to
stockholders of record on a date during the last calendar quarter of that prior
year are treated as paid on December 31 of the prior year. Other dividends
declared before the due date of our tax return for the taxable year, including
extensions, also will be treated as paid in the prior year if they are paid (1)
within 12 months of the end of that taxable year and (2) no later than our next
regular distribution payment. Dividends that are paid after the close of a
taxable year that do not qualify under the rule governing payments made in
January (described above) will be taxable to the stockholders in the year paid,
even though we may take them into account for a prior year. A nondeductible
excise tax equal to 4% will be imposed for each calendar year to the extent that
dividends declared and distributed or deemed distributed before December 31 are
less than the sum of (a) 85% of our "ordinary income" plus (b) 95% of our
capital gain net income plus (c) any undistributed income from prior periods.
To be entitled to a dividends paid deduction, the amount distributed by
a REIT must not be preferential. For example, every stockholder of the class of
stock to which a distribution is made must be treated the same as every other
stockholder of that class, and no class of stock may be treated otherwise than
in accordance with its dividend rights as a class.
We will be taxed at regular corporate rates to the extent that we
retain any portion of our taxable income. For example, if we distribute only the
required 95% of our taxable income, we would be taxed on the retained 5%.
Occasionally, we may not have sufficient cash or other liquid assets to meet the
distribution requirement. This could arise because of competing demands for our
funds, or due to timing differences between tax reporting and cash receipts and
disbursements (i.e., income may have to be reported before cash is received, or
expenses may have to be paid before a deduction is allowed). Although we do not
anticipate any difficulty in meeting this requirement, no assurance can be given
that necessary funds will be available. In the event these circumstances do
occur, then, in order to meet the 95% distribution requirement, we may cause our
operating partnership to arrange for short-term, or possibly long-term,
borrowings to permit the payment of required dividends.
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If we fail to meet the 95% distribution requirement because of an
adjustment to our taxable income by the IRS, we may be able to cure the failure
retroactively by paying a "deficiency dividend," as well as applicable interest
and penalties, within a specified period. See "--Recent Legislation."
TAXATION AS A REIT
As a REIT, we generally will not be subject to corporate income tax to
the extent we currently distribute our REIT taxable income to our stockholders.
This treatment effectively eliminates the "double taxation" imposed on
investments in most corporations. Double taxation refers to taxation that occurs
once at the corporate level when income is earned and once again at the
stockholder level when that income is distributed. We generally will be taxed
only on the portion of our taxable income that we retain, which will include any
undistributed net capital gain, because we will be entitled to a deduction for
dividends paid to stockholders during the taxable year. A dividends paid
deduction is not available for dividends that are considered preferential within
any given class of shares or as between classes except to the extent that class
is entitled to a preference. We do not anticipate that we will pay any of those
preferential dividends. Because excess stock will represent a separate class of
outstanding shares, the fact that those shares will not be entitled to dividends
should not adversely affect our ability to deduct our dividend payments.
Even as a REIT, we will be subject to tax in the following
circumstances:
(1) we would be subject to tax on any income or gain from
property acquired through foreclosure at the highest corporate rate
(currently 35%);
(2) a confiscatory tax of 100% applies to any net income from
prohibited transactions which are, in general, sales or other
dispositions of property held primarily for sale to customers in the
ordinary course of business;
(3) if we fail to meet either the 75% or 95% source of income
tests described above, but still qualify for REIT status under the
reasonable cause exception to those tests, a 100% tax would be imposed
equal to the amount obtained by multiplying (a) the greater of the
amount, if any, by which it failed either the 75% income test or the
95% income test, times (b) a fraction intended to reflect our
profitability;
(4) we will be subject to the alternative minimum tax on items
of tax preference, excluding items specifically allocable to our
stockholders;
(5) if we should fail to distribute with respect to each
calendar year at least the sum of (a) 85% of our REIT ordinary income
for that year, (b) 95% of our REIT capital gain net income for that
year, and (c) any undistributed taxable income from prior years, we
would be subject to a 4% excise tax on the excess of the required
distribution over the amounts actually distributed;
(6) under regulations that are to be promulgated, we also may
be taxed at the highest regular corporate tax rate on any built-in gain
attributable to assets that we acquire in specific tax-free corporate
transactions, to the extent the gain is recognized during the first ten
years after we acquire those assets. Built-in gain is the excess of (a)
the fair market value of the asset over (b) our adjusted basis in the
asset, in each case determined as of the beginning of the ten-year
recognition period. The results described in this paragraph with
respect to the recognition of built-in gain assume that we will make an
election pursuant to the temporary regulations; and
(7) we will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital
gains.
FAILURE TO QUALIFY AS A REIT
For any taxable year in which we fail to qualify as a REIT and
applicable relief provisions are not available, we would be taxed at regular
corporate rates, including alternative minimum tax rates on all of our taxable
income. Distributions to our stockholders would not be deductible in computing
that taxable income, and distributions would no longer be required to be made.
Any corporate level taxes generally would reduce the amount of cash available
for distribution to our stockholders and, because the stockholders would
continue to be taxed on the distributions they receive, the net after tax yield
to the stockholders from their investment likely would be reduced substantially.
As a result, failure to qualify as a REIT during any taxable year could have a
material adverse effect on an investment in our common stock or preferred stock.
If we lose our
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REIT status, unless relief provisions apply, we would not be eligible to elect
REIT status again until the fifth taxable year which begins after the taxable
year during which our election was terminated. It is not possible to state
whether in all circumstances we would be entitled to this statutory relief.
TAX ASPECTS OF THE PARTNERSHIPS
Substantially all of our investments are held indirectly through U.S.
Restaurant Properties Operating L.P. and its subsidiary partnerships and single
member limited liability companies. In general, these are all "pass-through"
entities which are not subject to federal income tax. Rather, partners or
members are allocated their proportionate shares of the items of income, gain,
loss, deduction and credit of a partnership, and are potentially subject to tax
thereon, without regard to whether the partners or members receive a
distribution from the entity. We will include in our income our proportionate
share of these items for purposes of the various REIT income tests and in the
computation of our REIT taxable income. Moreover, for purposes of the REIT asset
tests, we will include our proportionate share of assets held by U.S. Restaurant
Properties Operating L.P. and its subsidiaries.
Our interests in U.S. Restaurant Properties Operating L.P. and its
subsidiaries involve special tax considerations, including the possibility that
the IRS might challenge the status of U.S. Restaurant Properties Operating L.P.
and its subsidiary partnerships as partnerships (as opposed to associations
taxable as corporations) for federal income tax purposes. If U.S. Restaurant
Properties Operating L.P. or any of its subsidiary partnerships were treated as
an association, that entity would be taxable as a corporation and therefore be
subject to an entity-level tax on its income. In that situation, the character
of our assets and items of gross income would change. A reclassification could
prevent us from satisfying the REIT income tests. More important, a
reclassification would prevent us from satisfying the asset tests if we were
viewed as owning 10% of the voting securities of any issuer or if the 5% asset
test was violated. This, in turn, would prevent us from qualifying as a REIT. In
addition, a change in the tax status of U.S. Restaurant Properties Operating
L.P. or a subsidiary might be treated as a taxable event. If so, we might incur
a tax liability without any related cash distributions.
Treasury Regulations that apply for tax periods beginning on or after
January 1, 1997, provide that a domestic business entity not otherwise organized
as a corporation and which has at least two members (an "eligible entity") may
elect to be treated as a partnership for federal income tax purposes. Unless it
elects otherwise, an eligible entity in existence prior to January 1, 1997, will
have the same classification for federal income tax purposes that it claimed
under the entity classification Treasury Regulations in effect prior to this
date. In addition, an eligible entity which did not exist, or did not claim a
classification, prior to January 1, 1997, will be classified as a partnership
for federal income tax purposes unless it elects otherwise. U.S. Restaurant
Properties Operating L.P. and its subsidiaries have consistently claimed and
intend to claim classification as partnerships under the final regulations and
have not elected otherwise, and, as a result, we believe these partnerships will
be classified as partnerships for federal income tax purposes.
Even if U.S. Restaurant Properties Operating L.P. is taxable as a
partnership under these Treasury Regulations, it could be treated as a
corporation under the publicly traded partnership rules of Section 7704 of the
Code. A partnership may avoid the application of the publicly traded partnership
rules if 90% of its income is qualifying income. Qualifying income includes
rents from real property and interest. We anticipate that we will satisfy the
90% qualifying income test. However, the REIT rules and the publicly traded
partnership rules use different standards to determine what qualifies as rents
from real property. Therefore, we will need to monitor compliance with both the
REIT rules and the publicly traded partnership rules.
The Treasury Regulations described above also provide that an eligible
entity with a single owner can elect to be disregarded as an entity separate
from its owner. In fact, this type of entity formed after January 1, 1997 will
be disregarded as an entity separate from its owner unless it elects otherwise.
U.S. Restaurant Properties Operating L.P. has consistently claimed and intends
to claim classification of its single member limited liability companies as
disregarded entities under the final regulations, and, as a result, we believe
these entities will be classified as disregarded entities for federal income tax
purposes.
A partnership agreement will generally determine the allocation of
income and losses among partners. These allocations, however, will be
disregarded for tax purposes if they do not comply with the provisions of
Section 704(b) of the Code and the Treasury Regulations promulgated thereunder.
Generally, Section 704(b) and the Treasury Regulations require that partnership
allocations respect the economic arrangement of the partners.
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If an allocation is not recognized for federal income tax purposes, the
item subject to the allocation will be reallocated in accordance with the
partners' interests in the partnership. This reallocation will be determined by
taking into account all of the facts and circumstances relating to the economic
arrangement of the partners with respect to that item. U.S. Restaurant
Properties Operating L.P.'s allocations of taxable income and loss are intended
to comply with the requirements of Section 704(b) of the Code and the Treasury
Regulations thereunder.
Under Section 704(c) of the Code, income, gain, loss and deduction
attributable to appreciated or depreciated property that is contributed to a
partnership in exchange for an interest in the partnership must be allocated in
a manner so that the contributing partner is charged with the unrealized gain or
benefits from the unrealized loss associated with the property at the time of
the contribution. The amount of the unrealized gain or unrealized loss is
generally equal to the difference between the fair market value of contributed
property at the time of contribution and the adjusted tax basis of the property
at the time of contribution. We refer to this difference as a "book-tax
difference." These allocations are solely for federal income tax purposes and do
not affect the book capital accounts or other economic or legal arrangements
among the partners. The partnership agreement of U.S. Restaurant Properties
Operating L.P. requires that these allocations be made in a manner consistent
with Section 704(c) of the Code.
In general, the partners of U.S. Restaurant Properties Operating L.P.
who acquired their limited partnership interests through a contribution of
appreciated property will be allocated depreciation deductions for tax purposes
which are lower than these deductions would have been if they had been
determined on a pro rata basis. In addition, in the event of the disposition of
any of the contributed assets which have a book-tax difference, all income
attributable to the book-tax difference will generally be allocated to the
limited partner who contributed the property, and we will generally be allocated
only our share of capital gains attributable to appreciation, if any, occurring
after the date of contribution. These allocations will tend to eliminate the
book-tax difference over the life of U.S. Restaurant Properties Operating L.P.
However, the special allocation rules of Section 704(c) do not always entirely
eliminate the book-tax difference on an annual basis or with respect to a
specific taxable transaction including a sale. Thus, the carryover basis of the
contributed assets in the hands of U.S. Restaurant Properties Operating L.P. may
cause us or other partners to be allocated lower depreciation and other
deductions. We could possibly be allocated an amount of taxable income in the
event of a sale of contributed assets in excess of the economic or book income
allocated to us or other partners as a result of the sale. An allocation might
cause us or other partners to recognize taxable income in excess of cash
proceeds, which might adversely affect our ability to comply with our U.S.
Restaurant Properties Operating L.P. distribution requirements.
Any property acquired by U.S. Restaurant Properties Operating L.P. in a
taxable transaction will initially have a tax basis equal to its fair market
value, and Section 704(c) of the Code will not apply.
TAXATION OF TAXABLE U.S. STOCKHOLDERS
Except as discussed below, distributions generally will be taxable to
taxable U.S. stockholders as ordinary income to the extent of our current or
accumulated earnings and profits. We may generate cash in excess of our net
earnings. If we distribute cash to stockholders in excess of our current and
accumulated capital earnings and profits (other than as a capital gain
dividend), the excess cash will be deemed to be a return of capital to each
stockholder to the extent of the adjusted tax basis of the stockholder's shares.
Distributions in excess of the adjusted tax basis will be treated as gain from
the sale or exchange of the shares of stock. A stockholder who has received a
distribution in excess of our current and accumulated earnings and profits may,
upon the sale of the shares, realize a higher taxable gain or a smaller loss
because the basis of the shares as reduced will be used for purposes of
computing the amount of the gain or loss. Distributions we make, whether
characterized as ordinary income or as capital gains, are not eligible for the
dividends received deduction for corporations. For purposes of determining
whether distributions to holders of common stock are out of current or
accumulated earnings and profits, our earnings and profits will be allocated
first to the outstanding preferred stock, if any, and then to the common stock.
Dividends we declare in October, November or December of any year and
payable to a stockholder of record on a specified date in any of these months
shall be treated as both paid by us and received by the stockholder on December
31 of that year, provided we actually pay the dividend on or before January 31
of the following calendar year. Stockholders may not include in their own income
tax returns any of our net operating losses or capital losses.
Distributions that we properly designate as capital gain dividends will
be taxable to taxable U.S. stockholders as gains from the sale or disposition of
a
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capital asset to the extent that they do not exceed our actual net capital gain
for the taxable year. Depending on the period of time the tax characteristics of
the assets which produced these gains, and on designations, if any, which we may
make, these gains may be taxable to non-corporate U.S. stockholders at a 20% or
25% rate. U.S. stockholders that are corporations may, however, be required to
treat up to 20% of capital gain dividends as ordinary income.
We may elect to retain, rather than distribute as a capital gain
dividend, our net long-term capital gains. If we make this election, we would
pay tax on our retained net long-term capital gains. In addition, to the extent
we designate, a U.S. stockholder generally would:
o include its proportionate share of our undistributed long-term capital
gains in computing its long-term capital gains in its return for its
taxable year in which the last day of our taxable year falls;
o be deemed to have paid the capital gains tax imposed on us on the
designated amounts included in the U.S. stockholder's long-term capital
gains;
o receive a credit or refund for the amount of tax deemed paid by it;
o increase the adjusted basis of its common stock by the difference
between the amount of includable gains and the tax deemed to have been
paid by it; and
o in the case of a U.S. stockholder that is a corporation, appropriately
adjust its earnings and profits for the retained capital gains in
accordance with Treasury Regulations to be prescribed by the IRS.
Distributions we make and gain arising from the sale or exchange by a
U.S. stockholder of our shares will not be treated as income from a passive
activity, within the meaning of Section 469 of the Code, since income from a
passive activity generally does not include dividends and gain attributable to
the disposition of property that produces dividends. As a result, U.S.
stockholders subject to the passive activity rules will generally be unable to
apply any "passive losses" against this income or gain. Distributions we make,
to the extent they do not constitute a return of capital, generally will be
treated as investment income for purposes of computing the investment interest
limitation. Gain arising from the sale or other disposition of our shares,
however, will sometimes not be treated as investment income.
Generally, gain or loss realized by a stockholder upon the sale of
common stock or preferred stock will be reportable as capital gain or loss. If a
stockholder receives a long-term capital gain dividend from us and has held the
shares of stock for six months or less, any loss incurred on the sale or
exchange of the shares is treated as a long-term capital loss to the extent of
the corresponding long-term capital gain dividend received.
In any year in which we fail to qualify as a REIT, the stockholders
generally will continue to be treated in the same fashion described above,
except that none of our dividends will be eligible for treatment as capital
gains dividends, corporate stockholders will qualify for the dividends received
deduction and the stockholders will not be required to report any share of our
tax preference items.
RECENT LEGISLATION
The rules dealing with Federal income taxation are constantly under
review by Congress, the IRS and the Treasury Department. For example, on
December 17, 1999, the President signed into law the Ticket to Work and Work
Incentives Improvement Act of 1999, which contains changes in federal income tax
laws that, beginning after December 31, 2000, will affect REITs. Under the new
legislation, REITs may own stock in "taxable REIT subsidiaries," corporations
that may provide services to tenants of the REIT and others without
disqualifying the rents that the REIT receives from its tenants. A taxable REIT
subsidiary is a corporation in which a REIT owns stock, directly or indirectly,
and with respect to which the corporation and the REIT have made a joint
election to treat the corporation as a taxable REIT subsidiary. Although a REIT
may own up to 100% of the stock of a taxable REIT subsidiary, (i) the value of
all securities in taxable REIT subsidiaries held by the REIT may not exceed 20%
of the value of the total assets of the REIT; and (ii) any dividends received by
the REIT from its taxable REIT subsidiaries will not constitute qualifying
income under the 75% income test. In addition, the new legislation limits the
deduction of interest paid by a taxable REIT subsidiary to the REIT and limits
the amount of rental payments that may be made by a taxable REIT subsidiary to
the REIT.
The new legislation imposes a tax on a REIT equal to 100% of
redetermined rents, redetermined deductions and excess interest. Redetermined
rents are generally rents from real property which would
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otherwise be reduced on distribution, apportionment or allocation to clearly
reflect income as a result of services furnished or rendered by a taxable REIT
subsidiary to tenants of the REIT. There are a number of exceptions with regard
to redetermined rents, which are summarized below.
o Redetermined rents do not include amounts received directly or
indirectly by a REIT for customary services.
o Redetermined rents do not include de minimus payments received by the
REIT with respect to non-customary services rendered to the tenants of
a property owned by the REIT that do not exceed 1% of all amounts
received by the REIT with respect to the property.
o The redetermined rent provisions do not apply with respect to any
services rendered by a taxable REIT subsidiary to the tenants of the
REIT, as long as the taxable REIT subsidiary renders a significant
amount of similar services to persons other than the REIT and to
tenants who are unrelated to the REIT or the taxable REIT subsidiary or
the REIT tenants, and the charge for these services is substantially
comparable to the charge for similar services rendered to such
unrelated persons.
o The redetermined rent provisions do not apply to any services rendered
by a taxable REIT subsidiary to a tenant of a REIT if the rents paid by
tenants leasing at least 25% of the net leasable space in the REIT's
property who are not receiving such services are substantially
comparable to the rents paid by tenants leasing comparable space who
are receiving the services and the charge for the services is
separately stated.
o The redetermined rent provisions do not apply to any services rendered
by a taxable REIT subsidiary to tenants of a REIT if the gross income
of the taxable REIT subsidiary from these services is at least 150% of
the taxable REIT subsidiary's direct cost of rendering the services.
o The Secretary has the power to waive the tax that would otherwise be
imposed on redetermined rents if the REIT establishes to the
satisfaction of the Secretary that rents charged to tenants were
established on an arms' length basis even though a taxable REIT
subsidiary provided services to the tenants.
Redetermined deductions are deductions, other than redetermined rents,
of a taxable REIT subsidiary if the amount of these deductions would be
decreased on distribution, apportionment or allocation to clearly reflect income
between the taxable REIT subsidiary and the REIT. Excess interest means any
deductions for interest payments made by a taxable REIT subsidiary to the REIT
to the extent that the interest payments exceed a commercially reasonable rate
of interest.
Under the new legislation, a REIT will be prohibited from owning more
than 10%, by vote or by value, of the securities, other than specified debt
securities, of a non-REIT C corporation. This does not, however, apply to
taxable REIT subsidiaries, qualified REIT subsidiaries and non-qualified
corporate subsidiaries in which the REIT does not own more than 10% of the
voting securities, provided the non-qualified subsidiary was established on or
before July 12, 1999, does not engage in a new line of business or acquire any
substantial asset (other than pursuant to a binding contract in effect as of
July 12, 1999, a tax-free exchange, an involuntary conversion or a
reorganization with another non-qualified corporate subsidiary) and the REIT
does not acquire any new securities in such subsidiary (other than pursuant to a
binding contract in effect as of July 12, 1999 or a reorganization with another
non-qualified corporate subsidiary). Under the new legislation, a REIT may
convert existing non-qualified corporate subsidiaries into taxable REIT
subsidiaries in a tax-free reorganization at any time prior to January 1, 2004.
Under the new legislation, the 95% distribution requirement discussed
above is reduced to 90% of REIT taxable income.
Under the new legislation, the basis for determining whether more than
15% of the rents is received by a REIT from a property are attributable to
personal property is based upon a comparison of the fair market value of the
personal property leased by the tenant as compared to the fair market value of
all of the property leased by the tenant, rather than the adjusted basis of such
personal property compared to the adjusted basis of all such property.
Changes to the Federal laws and interpretations thereof could adversely
affect the tax consequences of an investment in our common shares. We cannot
predict whether, when, in what forms, or with what effective dates, these or any
other provisions could become effective.
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BACKUP WITHHOLDING
We will report to our stockholders and the IRS the amount of dividends
paid during each calendar year and the amount of tax withheld, if any. If a
stockholder is subject to backup withholding, we will be required to deduct and
withhold from any dividends payable to that stockholder a tax of 31%. These
rules may apply (1) when a stockholder fails to supply a correct taxpayer
identification number, (2) when the IRS notifies us that the stockholder is
subject to the rules or has furnished an incorrect taxpayer identification
number, or (3) in the case of corporations or others within exempt categories,
when they fail to demonstrate that fact when required. A stockholder that does
not provide a correct taxpayer identification number may also be subject to
penalties imposed by the IRS. Any amount withheld as backup withholding may be
credited against the stockholder's federal income tax liability. We also may be
required to withhold a portion of capital gain distributions made to
stockholders who fail to certify their non-foreign status.
The United States Treasury has recently issued final regulations
regarding the withholding and information reporting rules discussed above. In
general, these final regulations do not alter the substantive withholding and
information reporting requirements but unify current certification procedures
and clarify reliance standards. These final regulations are general but unify
current certification procedures and clarify reliance standards. These final
regulations are generally effective for payments made on or after January 1,
2000, subject to the applicable transition rules. Prospective investors should
consult their own tax advisors concerning the adoption of these final
regulations and the potential effect on their ownership of common stock or
preferred stock.
TAXATION OF TAX EXEMPT ENTITIES
In general, a tax exempt entity that is a stockholder will not be
subject to tax on distributions or gain realized on the sale of shares. In
Revenue Ruling 66-106, the IRS confirmed that a REIT's distributions to a tax
exempt employees' pension trust did not constitute unrelated business taxable
income. A tax exempt entity may be subject to unrelated business taxable income,
however, to the extent that it has financed the acquisition of its shares with
"acquisition indebtedness" within the meaning of the Code. The Revenue
Reconciliation Act of 1993 has modified the rules for tax exempt employees'
pension and profit sharing trusts which qualify under Section 401(a) of the Code
and are exempt from tax under Section 501(a) of the Code for tax years beginning
after December 31, 1993. In determining the number of stockholders a REIT has
for purposes of the "50% test" described above under "--REIT Qualification,"
generally, any stock held by one of these trusts will be treated as held
directly by its beneficiaries in proportion to their interests in the trust and
will not be treated as held by the trust.
One of these trusts owning more than 10% of a REIT may be required to
treat a percentage of dividends from the REIT as unrelated business taxable
income. The percentage is determined by dividing the REIT's gross income (less
direct expenses related thereto) derived from an unrelated trade or business for
the year (determined as if the REIT were one of these trusts) by the gross
income of the REIT for the year in which the dividends are paid. However, if
this percentage is less than 5%, dividends are not treated as unrelated business
taxable income. These unrelated business taxable income rules apply only if the
REIT qualifies as a REIT because of the change in the 50% test discussed above
and if the trust is "predominantly held" by these trusts. A REIT is
predominantly held by these trusts if at least one pension trust owns more than
25% of the value of the REIT or a group of pension trusts each owning more than
10% of the value of the REIT collectively own more than 50% of the value of the
REIT. We do not currently meet either of these requirements.
For social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans exempt from
federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of
the Code, respectively, income from an investment in our capital stock will
constitute unrelated business taxable income unless the organization is able to
deduct an amount properly set aside or placed in reserve for specific purposes
so as to offset the unrelated business taxable income generated by the
investment in our capital stock. These prospective investors should consult
their own tax advisors concerning the "set aside" and reserve requirements.
TAXATION OF FOREIGN INVESTORS
The rules governing federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
stockholders are complex and no attempt will be made herein to provide more than
a summary of these rules. Prospective non-U.S. stockholders should consult with
their own tax advisors to determine the impact of federal, state and local
income tax laws with regard to an investment in shares of common stock or
preferred stock, including any reporting requirements, as well as the tax
treatment of an investment under the laws of their home country.
15
<PAGE> 17
Dividends that are not attributable to gain from any sales or exchanges
we make of United States real property interests and which we do not designate
as capital gain dividends will be treated as dividends of ordinary income to the
extent that they are made out of our current or accumulated earnings and
profits. Those 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. However, if income from the investment in the
common stock or preferred stock is treated as effectively connected with the
non-U.S. stockholder's conduct of a United States trade or business, the
non-U.S. stockholder generally will be subject to a tax at graduated rates, in
the same manner as U.S. stockholders are taxed with respect to those dividends,
and may also be subject to the 30% branch profits tax in the case of a
stockholder that is a foreign corporation. For withholding tax purposes, we are
currently required to treat all distributions as if made out of our current and
accumulated earnings and profits and thus we intend to withhold at the rate of
30%, or a reduced treaty rate if applicable, on the amount of any distribution
(other than distributions designated as capital gain dividends) made to a
non-U.S. stockholder unless (1) the non-U.S. stockholder files on IRS Form 1001
claiming that a lower treaty rate applies or (2) the non-U.S. stockholder files
an IRS Form 4224 claiming that the dividend is effectively connected income.
Under the Treasury Regulations, which are generally effective for
distributions on or after January 1, 2000, we would not be required to withhold
at the 30% rate on distributions we reasonably estimate to be in excess of our
current and accumulated earnings and profits. Dividends in excess of our current
and accumulated earnings and profits will not be taxable to a stockholder to the
extent that they do not exceed the adjusted basis of the stockholder's shares,
but rather will reduce the adjusted basis of those shares. To the extent that
those dividends exceed the adjusted basis of a non-U.S. stockholder's shares of
stock, they 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 his
shares, as described below. If it cannot be determined at the time a dividend is
paid whether or not a dividend will be in excess of current and accumulated
earnings and profits, the dividend will be subject to withholding. We do not
intend to make quarterly estimates of that portion of dividends that are in
excess of earnings and profits, and, as a result, all dividends will be subject
to withholding. However, the non-U.S. stockholder may seek a refund of those
amounts from the IRS.
For any year in which we qualify as a REIT, distributions that are
attributable to gain from our sales or exchanges 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. Under this act, those
dividends are taxed to a Non-U.S. stockholder as if the gain were effectively
connected with a United States business. Non-U.S. stockholders would thus be
taxed at the normal capital gain rates applicable to U.S. stockholders subject
to applicable alternative minimum tax and a special alternative minimum tax in
the case of nonresident alien individuals. Also, dividends subject to this act
may be subject to a 30% branch profits tax in the hands of a corporate non-U.S.
stockholder not entitled to treaty exemption. We are required by the Code and
applicable Treasury Regulations to withhold 35% of any dividend that could be
designated as a capital gain dividend. This amount is creditable against the
non-U.S. stockholder's tax liability under this act.
Gain recognized by a non-U.S. stockholder upon a sale of shares
generally will not be taxed under this act if we are 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 shares was held directly or
indirectly by foreign persons. It is currently anticipated that we will be a
"domestically controlled REIT," and therefore the sale of shares will not be
subject to taxation under this act. Because the shares of common stock will be
publicly traded, however, no assurance can be given that we will remain a
"domestically controlled REIT." However, gain not subject to this act will be
taxable to a non-U.S. stockholder if (1) investment in the shares of common
stock or preferred stock is effectively connected with the non-U.S.
stockholder's United States trade or business, in which case the non-U.S.
stockholder will be subject to the same treatment as U.S. stockholders with
respect to that gain, and may also be subject to the 30% branch profits tax in
the case of a corporate non-U.S. stockholder, or (2) 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 has a "tax home" in the United States, in
which case the nonresident alien individual will be subject to a 30% withholding
tax on the individual's capital gains. If we were not a domestically controlled
REIT, whether or not a non-U.S. stockholder's sale of shares of common stock or
preferred stock would be subject to tax under this act would depend on whether
or not the shares of common stock or preferred stock were regularly
16
<PAGE> 18
traded on an established securities market (including the New York Stock
Exchange) and on the size of selling non-U.S. stockholder's interest in our
capital stock. If the gain on the sale of shares were to be subject to taxation
under this act, the non-U.S. stockholder will be subject to the same treatment
as U.S. stockholders with respect to that gain (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals) and the purchaser of shares of common stock or
preferred stock may be required to withhold 10% of the gross purchase price.
STATE AND LOCAL TAXES
We, and our stockholders, may be subject to state or local taxation in
various state or local jurisdictions, including those in which it or they
transact business or reside. Consequently, prospective stockholders should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in our capital stock.
WHERE YOU CAN FIND MORE INFORMATION
We are a public company and file annual, quarterly and special reports,
proxy statements and other information with the SEC. You may read and copy any
document we file at the SEC's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You can request copies of these documents by writing to
the SEC and paying a fee for the copying cost. Please call the SEC at
1-800-SEC-0330 for more information about the operation of the public reference
room. Our SEC filings are also available to the public at the SEC's web site at
http://www.sec.gov. In addition, you may read and copy our SEC filings at the
offices of the New York Stock Exchange, 20 Broad Street, New York, New York
10005.
This prospectus is only part of a registration statement we filed with
the SEC under the Securities Act of 1933, as amended, and therefore omits
certain information contained in the registration statement. We have also filed
exhibits and schedules to the registration statement that we have excluded from
this prospectus, and you should refer to the applicable exhibit or schedule for
a complete description of any statement referring to any contract or document.
You may inspect or obtain a copy of the registration statement, including
exhibits and schedules, as described in the previous paragraph.
INCORPORATION OF DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file
with it. This means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus and the information we file later with
the SEC will automatically update and supersede this information.
We incorporate by reference the documents listed below and any future
filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 until this offering is completed:
o Annual Report on Form 10-K for the year ended December 31, 1999 (File
No. 001-13089).
o Quarterly Report on Form 10-Q for the quarter ended March 31, 2000
(File No. 001-13089).
o Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (File
No. 001-13089).
o Quarterly Report on Form 10-Q for the quarter ended September 30, 2000
(File No. 001-13089).
o Current Report on Form 8-K filed August 4, 2000 (File No. 001-13089).
o The description of our common stock contained in our registration
statement on Form 8-A filed June 13, 1997 (File No. 001-13089).
You may request copies of these filings at no cost by writing or
telephoning our Investor Relations Department at the following address and
telephone number:
U.S. Restaurant Properties, Inc.
12240 Inwood Road
Suite 300
Dallas, Texas 75244 (972) 387-1487 x 147
17
<PAGE> 19
LEGAL MATTERS
The validity of the securities issued hereunder, as well as legal
matters described under "Federal Income Tax Considerations," will be passed upon
by Locke Liddell & Sapp LLP, Dallas, Texas, and other legal matters will be
passed upon for any underwriters, dealers or agents by the counsel named in the
applicable prospectus supplement.
EXPERTS
Our consolidated financial statements and the related financial
statement schedule and those of our predecessor, U.S. Restaurant Properties
Master L.P., incorporated in this prospectus by reference from our Annual Report
on Form 10-K for the year ended December 31, 1999 have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their report which is
incorporated by reference herein, and have been so incorporated in reliance upon
the report of that firm given upon their authority as experts in accounting and
auditing.
18
<PAGE> 20
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the fees and expenses (not including
underwriting commissions and fees) in connection with the issuance and
distribution of the securities being registered hereunder. Except for the
Securities and Exchange Commission registration fee, all amounts are estimates.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............................. $ 401
Accounting fees and expenses.................................................... 10,000
Attorneys' fees and expenses.................................................... 15,000
Miscellaneous expenses.......................................................... 4,599
---------
Total.................................................................. $ 30,000
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Charter obligates the Company to indemnify and advance
expenses to present and former directors and officers to the maximum extent
permitted by Maryland law. The Maryland General Corporation Law (the "MGCL")
permits a corporation, subject to certain limitations, to indemnify its present
and former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities, unless it is established that (i)
the act or omission of the director or officer was material to the matter giving
rise to the proceeding and (a) was committed in bad faith or (b) was the result
of active and deliberate dishonesty, (ii) the director or officer actually
received an improper personal benefit in money, property or services or (iii) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. The Company's Board of
Directors may make further provision for indemnification of directors and
officers as may be permitted by law.
The MGCL permits the Charter of a Maryland corporation to include a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages, except to the extent that
(i) it is proved that the person actually received an improper benefit or profit
in money, property or services or (ii) a judgment or other final adjudication is
entered in a proceeding based on a finding that the person's action, or failure
to act, was the result of active and deliberate dishonesty and was material to
the cause of action adjudicated in the proceeding. The Charter contains a
provision providing for elimination of the liability of its directors or
officers to the Company or its stockholders for money damages to the maximum
extent permitted by Maryland law from time to time.
ITEM 16. EXHIBITS.
3.1 Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-3 (File No. 333-34263))
3.2 Bylaws of the Company (incorporated by reference to Exhibit
3.2 to the Company's Registration Statement on Form S-4 (File
No. 333-21403))
4.1 Specimen of Common Stock Certificate (incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-4 (File No. 333-21403))
5.1 Opinion of Locke Liddell & Sapp LLP
15.1 Awareness Letter of Deloitte & Touche LLP
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Locke Liddell & Sapp LLP (contained in its opinion
filed as Exhibit 5.1)
II-1
<PAGE> 21
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high and of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with
respect to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement;
provided, however, that subparagraphs (i) and (ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
registrants pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) If the registrant is a foreign private issuer, to file a
post-effective amendment to the registration statement to include any financial
statements required by Rule 3-19 of this chapter at the start of any delayed
offering or throughout a continuous offering. Financial statements and
information otherwise required by Section 10(a)(3) of the Act need not be
furnished, provided, that the registrant includes in the prospectus, by means of
a post-effective amendment, financial statements required pursuant to this
paragraph (a)(4) and other information necessary to ensure that all other
information in the prospectus is at least as current as the date of those
financial statements. Notwithstanding the foregoing, with respect to
registration statements on Form F-3, a post-effective amendment need not be
filed to include financial statements and information required by Section
10(a)(3) of the Act or Rule 3-19 of this chapter if such financial statements
and information are contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the Form
F-3.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrants' annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at the time
shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrants of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-2
<PAGE> 22
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 this Registration Statement on Form S-3 and has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on November 21, 2000.
U.S. RESTAURANT PROPERTIES, INC.
By: /s/ Fred H. Margolin
---------------------------------------
Fred H. Margolin
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Fred H. Margolin Chairman of the Board of Directors, November 21, 2000
------------------------------------------ President and Chief Executive Officer
Fred H. Margolin and Director (Principal Executive
Officer)
/s/ Barbara A. Erhart Chief Financial Officer November 21, 2000
------------------------------------------ (Principal Financial Officer)
Barbara A. Erhart
/s/ Steven Dawson Director November 21, 2000
------------------------------------------
Steven Dawson
/s/ Gerald H. Graham Director November 21, 2000
------------------------------------------
Gerald H. Graham
/s/ George Mileusnic Director November 21, 2000
------------------------------------------
George Mileusnic
/s/ David K. Rolph Director November 21, 2000
------------------------------------------
David K. Rolph
/s/ Darrel L. Rolph Director November 21, 2000
------------------------------------------
Darrel L. Rolph
/s/ Robert J. Stetson Director November 21, 2000
------------------------------------------
Robert J. Stetson
/s/ Eugene G. Taper Director November 21, 2000
------------------------------------------
Eugene G. Taper
</TABLE>
II-3
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-3 (File No.
333-34263))
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement on Form S-4 (File No.
333-21403))
4.1 Specimen of Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-4
(File No. 333-21403))
5.1 Opinion of Locke Liddell & Sapp LLP
15.1 Awareness Letter of Deloitte & Touche LLP
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Locke Liddell & Sapp LLP (contained in its opinion
filed as Exhibit 5.1)
</TABLE>
