<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 30, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
WILSHIRE REAL ESTATE INVESTMENT TRUST INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN GOVERNING INSTRUMENTS)
C/O WILSHIRE FINANCIAL SERVICES GROUP INC.
1776 SW MADISON STREET
PORTLAND, OREGON 97205
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICER)
----------------
LAWRENCE A. MENDELSOHN
C/O WILSHIRE FINANCIAL SERVICES GROUP INC.
1776 SW MADISON STREET
PORTLAND, OREGON 97205
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
COPIES TO:
JAMES M. WADDINGTON, ESQ. DHIYA EL-SADEN, ESQ.
PROSKAUER ROSE LLP GIBSON, DUNN & CRUTCHER LLP
1585 BROADWAY 333 SOUTH GRAND AVENUE
NEW YORK, NEW YORK 10036 LOS ANGELES, CALIFORNIA 90071
(212) 969-3000 (213) 229-7000
(212) 969-2900 (TELECOPY) (213) 229-7520 (TELECOPY)
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after the effective date of this
Registration Statement.
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 number of the earliest 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, please 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. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF CLASS MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES BEING AMOUNT BEING OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3)
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<S> <C> <C> <C> <C>
Common Stock, par value
$0.01 per share....... 23,000,000 $16.00 $368,000,000.00 $111,515.15
</TABLE>
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(1) Includes 3,000,000 shares that are issuable upon exercise of the
Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) The filing fee has been computed in accordance with Rule 457(a).
THIS REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THIS 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, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 30, 1997
PROSPECTUS
20,000,000 SHARES
[LOGO OF WILSHIRE REAL ESTATE INVESTMENT TRUST INC.]
COMMON STOCK
------------
Wilshire Real Estate Investment Trust Inc. ("WREIT" and, together with its
subsidiaries on a consolidated basis, the "Company") is a newly organized
Maryland corporation that will elect to be taxed as a real estate investment
trust ("REIT") under the Internal Revenue Code of 1986. Wilshire Realty
Services Corporation (the "Manager" or "WRSC"), a subsidiary of Wilshire
Financial Services Group Inc. ("WFSG"), will manage the day-to-day operations
of the Company, subject to the supervision of WREIT's Board of Directors.
Of the 20,000,000 shares of common stock, par value $0.0001 per share, of
WREIT (the "Common Stock") offered hereby (the "Offering"), 1,980,000 shares
will be sold to WFSG at the initial public offering price net of any
underwriting discounts or commissions. After such sale WFSG will own
approximately 9.9% of the Common Stock of the Company, assuming that the
Underwriters do not exercise their over-allotment option.
It is currently anticipated that the initial public offering price for shares
of Common Stock will be between $14.00 and $16.00 per share. Prior to the
Offering, there has been no market for the shares of Common Stock of the
Company. The public offering price will be determined by negotiation between
the Company and the Underwriters. See "Underwriting." An application has been
submitted for approval for quotation on the Nasdaq National Market under the
symbol "WREI."
----------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK INCLUDING, AMONG OTHERS:
. The Company intends to invest in non-investment grade, subordinated
mortgage-backed securities;
. The Company intends to invest in foreclosed real properties and commercial
and multi-family mortgage loans which are in default or for which default
is likely or imminent;
. The Company intends to invest in international real properties and
mortgage loans, which carry additional risks, including fluctuations in
foreign currency exchange rates, heightened risks of political and economic
instability in certain areas of the world and the Manager's limited
experience in international business and legal requirements;
. The Company's investments (particularly those in mortgage-backed
securities) will be sensitive to changes in prevailing interest rates,
prepayments on mortgage loans and losses due to borrower default or
otherwise;
. Only approximately 52.5% of the net proceeds from the Offering will be
invested initially;
. The Company intends to leverage its investments, in amounts to be
determined by the Manager and, ultimately, WREIT's Board of Directors,
which could lead to reduced or negative cash flow and reduced liquidity;
. Certain officers and directors of the Company are officers and directors
of WFSG and the Manager, and WFSG may sell assets to the Company from time
to time;
. The Company may be taxed as a corporation if it fails to qualify as a
REIT; and
. Ownership of Common Stock by each stockholder other than WFSG is limited
to 9.8% of the outstanding Common Stock, which may deter third parties from
seeking to control or acquire the Company.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share.................................. $ $ $
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Total(3)(4)................................ $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses in connection with the Offering, estimated at
$1.6 million, which will be payable by the Company.
(3) The Company has granted the several Underwriters a 30-day option to
purchase up to 3,000,000 additional shares of Common Stock to cover over-
allotments. If all such shares of Common Stock are purchased, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company, before expenses of this Offering, will be $ , $ and $ ,
respectively. See "Underwriting."
(4) The total Price to Public and the total Proceeds to Company reflect the
sale of 1,980,000 shares of Common Stock to WFSG and shares of Common
Stock to certain directors, officers and employees of WFSG and members of
their immediate families, in each case, net of the Underwriting Discounts
and Commissions.
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to approval of certain legal matters by counsel for the Underwriters and
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the shares of Common Stock will be made in New York,
New York on or about , 1997.
----------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC. PRUDENTIAL SECURITIES INCORPORATED
BLACK & COMPANY, INC.
The date of this Prospectus is , 1997.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZATION, THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT
POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
TABLE OF CONTENTS
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PROSPECTUS SUMMARY........................................................ 1
ORGANIZATION AND RELATIONSHIPS............................................ 8
RISK FACTORS.............................................................. 9
Investment Activity Risks................................................ 9
Credit and Prepayment Risks from Ownership of Mortgage-Backed Securities
in Pools of Residential and Commercial Mortgage Loans................... 9
Default Risks Associated with Distressed Mortgage Loans.................. 10
International Investments Are Subject to Currency Conversion Risks and
Differences in Foreign Laws and Markets................................. 10
Limited Available Investments May Inhibit Company's Objectives........... 10
Competition.............................................................. 10
Commercial Properties May Have Unleased Space............................ 10
Risk of Loss from Subordinated Position.................................. 11
Real Property Is Illiquid and its Value May Decrease..................... 11
Value of Real Property Dependent on Conditions Beyond Company's Control.. 11
The Company's Insurance Will Not Cover All Losses........................ 11
Real Properties with Environmental Problems Will Increase Costs and May
Create Liability for the Company........................................ 11
Compliance with Americans with Disabilities Act and Other Changes in
Governmental Rules and Regulations May Be Costly........................ 12
Economic and Business Risks.............................................. 12
Interest Rate Changes May Adversely Affect the Company's Investments..... 12
Leverage Can Reduce Income Available for Distribution.................... 13
Potential Interest Rate Mismatch between Asset Yields and Borrowing
Rates................................................................... 13
The Company May Not Be Able to Borrow Money on Favorable Terms........... 13
Adverse Changes in General Economic Conditions Can Adversely Affect
Company's Business...................................................... 13
Conflicts of Interest.................................................... 13
Conflicts of Interest in the Business of the Company..................... 13
Legal and Tax Risks...................................................... 14
Tax Risks................................................................ 14
Ownership Limitation May Restrict Business Combination Opportunities..... 15
</TABLE>
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PAGE
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<S> <C>
Preferred Stock May Prevent Change in Control........................... 15
Maryland Anti-Takeover Statutes May Restrict Business Combination
Opportunities.......................................................... 16
Board of Directors May Change Certain Policies and Management Fees
Without Shareholder Consent............................................ 16
Loss of Investment Company Act Exemption Would Adversely Affect the
Company................................................................ 16
One Action Considerations............................................... 16
Plans Should Consider ERISA Risks of Investing in Common Stock.......... 16
Limitation on Liability of Manager and Officers and Directors of the
Company................................................................ 17
Regulation of Manager's Affiliates...................................... 17
Other Risks............................................................. 17
Newly Organized Corporation............................................. 17
External Management of the Company...................................... 17
Risk That Market for Common Stock Will Not Develop...................... 17
Possible Changes in Price of Common Stock Due to Changes in Yields...... 18
Future Offerings of Capital Stock....................................... 18
Possible Adverse Effects on Share Price Arising from Shares Eligible for
Future Sale............................................................ 18
Market Interest Rates Could Adversely Impact the Market Price of the
Common Shares.......................................................... 18
OPERATING POLICIES AND OBJECTIVES........................................ 19
General................................................................. 19
The Experience of WFSG and Affiliates................................... 19
U.S. Commercial Investments............................................. 20
Mortgage-Backed Securities.............................................. 22
International Investments............................................... 27
Other Real Estate Related Investments................................... 28
Portfolio Management.................................................... 29
MANAGEMENT OF OPERATIONS................................................. 31
Wilshire Financial Services Group Inc................................... 31
Wilshire Realty Services Corporation.................................... 32
The Management Agreement................................................ 33
Stock Options........................................................... 36
Certain Relationships; Conflicts of Interest............................ 37
SERVICING AGREEMENTS..................................................... 39
THE COMPANY.............................................................. 40
Directors Who Are Executive Officers.................................... 40
Independent Directors................................................... 40
Executive Officers Who Are Not Directors................................ 40
DISTRIBUTION POLICY...................................................... 42
</TABLE>
i
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PAGE
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YIELD CONSIDERATIONS RELATED TO THE COMPANY'S INVESTMENTS................. 42
Mortgage-Backed Securities............................................... 42
U.S. Commercial Properties............................................... 44
Mortgage Loans........................................................... 44
INITIAL INVESTMENTS....................................................... 45
General.................................................................. 45
The Initial U.S. Commercial Investments.................................. 46
Initial Mortgage-Backed Securities....................................... 55
The International Investments............................................ 57
YIELD CONSIDERATIONS RELATED TO THE INITIAL MORTGAGE-BACKED SECURITIES.... 58
General.................................................................. 58
Modeling Assumptions..................................................... 58
CAPITALIZATION............................................................ 61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES... 61
DESCRIPTION OF CAPITAL STOCK.............................................. 62
General.................................................................. 62
Common Stock............................................................. 62
Preferred Stock.......................................................... 62
Restrictions on Transfer................................................. 62
Dividend Reinvestment Plan............................................... 64
Reports to Stockholders.................................................. 64
Transfer Agent and Registrar............................................. 64
Listing of the Common Stock.............................................. 64
CERTAIN PROVISIONS OF MARYLAND LAW AND OF WREIT'S CHARTER AND BYLAWS...... 65
Board of Directors....................................................... 65
Amendment................................................................ 65
Business Combinations.................................................... 65
Control Share Acquisitions............................................... 66
Operations............................................................... 66
Dissolution of the Company............................................... 66
Advance Notice of Director Nominations and New Business.................. 66
Possible Anti-Takeover Effect of Certain Provisions of Maryland Law and
of the Charter and Bylaws............................................... 67
COMMON STOCK AVAILABLE FOR FUTURE SALE.................................... 67
OPERATING PARTNERSHIP AGREEMENT........................................... 68
General.................................................................. 68
General Partner Not to Withdraw.......................................... 68
Capital Contribution..................................................... 68
Redemption Rights........................................................ 69
Operations............................................................... 70
Distributions............................................................ 70
Allocations.............................................................. 70
Term..................................................................... 70
Tax Matters.............................................................. 70
</TABLE>
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FEDERAL INCOME TAX CONSIDERATIONS......................................... 71
Taxation of the Company.................................................. 71
Requirements for Qualification........................................... 72
Failure to Qualify....................................................... 79
Taxation of Taxable U.S. Stockholders.................................... 79
Taxation of Stockholders on the Disposition of the Common Stock.......... 81
Capital Gains and Losses................................................. 81
Information Reporting Requirements and Backup Withholding................ 81
Taxation of Tax-exempt Stockholders...................................... 81
Taxation of Non-U.S. Stockholders........................................ 82
State and Local Taxes.................................................... 84
Foreign Taxes............................................................ 84
Sale of the Company's Property........................................... 84
ERISA CONSIDERATIONS...................................................... 85
Employee Benefit Plans, Tax-Qualified Retirement Plans, and IRAs......... 85
Status of WREIT under ERISA.............................................. 86
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND REAL PROPERTY INVESTMENTS..... 87
General.................................................................. 87
Types of Mortgage Instruments............................................ 88
Interests in Real Property............................................... 88
Leases and Rents......................................................... 88
Condemnation and Insurance............................................... 88
Foreclosure.............................................................. 89
Bankruptcy Laws.......................................................... 91
Default Interest and Limitations on Prepayments.......................... 92
Forfeitures in Drug and RICO Proceedings................................. 92
Environmental Risks...................................................... 93
Applicability of Usury Laws.............................................. 94
Americans with Disabilities Act.......................................... 94
Ground Lease Risks....................................................... 95
Due on Sale and Due on Encumbrance....................................... 95
Subordinate Financing.................................................... 95
Acceleration on Default.................................................. 95
Certain Laws and Regulations; Types of Mortgaged Property................ 96
Soldiers' and Sailors' Civil Relief Act of 1940.......................... 96
USE OF PROCEEDS........................................................... 96
UNDERWRITING.............................................................. 97
LEGAL MATTERS............................................................. 98
EXPERTS................................................................... 98
ADDITIONAL INFORMATION.................................................... 99
The Company.............................................................. 99
Wilshire Financial Services Group Inc. .................................. 99
GLOSSARY OF TERMS......................................................... 100
FINANCIAL STATEMENT....................................................... F-1
</TABLE>
ii
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus. Unless otherwise indicated,
the information contained in this Prospectus assumes that (i) the transactions
relating to the formation of the Company are consummated, (ii) the
Underwriters' overallotment option is not exercised and (iii) the offering
price (the "Offering Price") of the Common Stock is $15.00 per share. Unless
the context otherwise requires, all references in this Prospectus to the (i)
"Company" shall mean Wilshire Real Estate Investment Trust Inc. ("WREIT") and
its subsidiaries, including (a) Wilshire Real Estate General Inc. (the "General
Partner"), and (b) Wilshire Real Estate Partnership L.P. (the "Operating
Partnership") and (ii) "Common Stock" shall mean WREIT's common shares, par
value $0.0001 per share. Capitalized terms used but not defined herein shall
have the meanings set forth in the Glossary beginning on page 101.
THE COMPANY
WREIT is a newly organized Maryland corporation that will elect to be taxed
as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). The
Company will be managed by Wilshire Realty Services Corporation (the "Manager"
or "WRSC"), a wholly-owned subsidiary of Wilshire Financial Services Group Inc.
("WFSG"). See "Management of Operations." The Company intends to invest
primarily in the following: (i) distressed commercial and multi-family mortgage
loans and commercial and multi-family real properties in the United States
("U.S. Commercial Investments"); (ii) subordinated interests in mortgage-backed
securities ("Mortgage-Backed Securities"), primarily residential Mortgage-
Backed Securities (other than Mortgage-Backed Securities backed by mortgage
loans and/or real properties previously owned by WFSG or its affiliates); and
(iii) international performing and distressed mortgage loans and real
properties ("International Investments," and together with U.S. Commercial
Investments and Mortgage-Backed Securities, the "Primary Investments").
So long as the Management Agreement is in effect, WFSG will not invest in any
particular Primary Investments unless the Company has declined to make the
investment at the direction of the Independent Directors of the Company.
PRIMARY INVESTMENTS
With respect to the Company's U.S. Commercial and International Investments,
the Company currently expects to invest primarily in loans and real properties
with a principal balance at origination and/or appraised value of $5 million or
less because management believes that the market for these loans and properties
is less competitive and potentially more profitable than the market for larger
balance commercial loans and properties. The Company generally will evaluate
and purchase smaller pools of loans (those with an aggregate unpaid principal
balance of less than $20 million) for which the Company believes there is
currently less competitive demand. The Company believes that its willingness to
purchase smaller pools of loans enhances its acquisition opportunities and
allows the Company to develop long-term relationships and repeat business with
private financial institutions.
U.S. Commercial Investments. U.S. Commercial Investments will consist of
distressed commercial and multi-family mortgage loans ("Distressed U.S.
Commercial Loans") and commercial and multi-family real properties located in
the United States ("U.S. Commercial Properties"), including properties acquired
by a mortgage lender or other party (including the Company) at foreclosure or
by deed in lieu of foreclosure ("Foreclosed Properties"). The expertise of the
Company's management and the infrastructure and historical experience of WFSG
in sourcing, underwriting, servicing and financing pools of smaller balance
commercial assets should enhance the Company's ability to purchase such assets
at attractive prices.
The Company expects to acquire U.S. Commercial Investments from a wide
variety of sources, including banks, savings institutions, finance companies,
leasing companies, mortgage companies, insurance companies and governmental
agencies. The Company generally anticipates holding its assets for at least the
minimum period
1
<PAGE>
(generally four years) required by U.S. tax rules relating to REITs. See
"Operating Policies and Procedures--The Company's Assets" and "Risk Factors--
Investment Activity Risks--Default Risks Associated with Distressed Loans."
Mortgage-Backed Securities. Mortgage-Backed Securities will consist primarily
of residential, non-investment grade, subordinated interests in Mortgage-Backed
Securities, and to a lesser extent, residential and commercial investment-grade
senior and subordinated interests in Mortgage-Backed Securities. Mortgage-
Backed Securities offer the potential of a higher yield relative to more senior
classes, but carry greater credit risk, including a substantially greater risk
of loss of principal and non-payment of interest than senior, investment grade
rated classes. The Company believes that the size and liquidity of the market
for Mortgage-Backed Securities and the relatively small size of those classes
may from time to time result in the underpricing of those securities and
provide the Company with attractive acquisition opportunities and
diversification. The Company believes that the experience of its management in
acquiring pools of loans will allow WRSC to effectively evaluate the risks
associated with the pool of loans and Mortgage-Backed Securities that supports
an issue of Mortgage-Backed Securities being considered for purchase and
effectively price those securities. The Company may also seek to acquire
Mortgage-Backed Securities which (i) management believes are likely to
experience a ratings upgrade as a result of payment history, prepayment or
default experience or otherwise (and the Company may initiate a review of such
rating by requesting that one or more ratings agencies re-rate the related
Mortgage-Backed Securities) and (ii) are secured by pools of mortgage loans
originated under guidelines with which management is familiar due to previous
acquisitions of pools of loans originated thereunder. The Company has obtained
special servicing rights with respect to certain underlying mortgage loans and
will in the future attempt to obtain, where appropriate and feasible, such
special servicing rights. See "Operating Policies and Procedures-- The
Company's Assets" and "Risk Factors--Investment Activity Risks--Credit and
Prepayment Risks from Ownership of Mortgage-Backed Securities in Pools of
Residential and Commercial Loans."
International Investments. International Investments will consist of (i)
performing and distressed commercial and multi-family mortgage loans and
residential mortgage loans secured by real properties located outside the
United States (collectively, "International Mortgage Loans"); (ii) commercial
and multi-family real properties and residential real properties ("Residential
Properties") located outside the United States ("International Real
Properties"); and (iii) international Foreclosed Properties. International
Investments may take the form of direct ownership, participation interests,
mortgage-backed securities, investment in holding companies or other indirect
ownership methods to accommodate local law requirements.
The Company's focus on International Investments is based on two primary
factors: (i) difficulties in the European economies and (ii) the introduction
of U.S.-style lending and secondary financing techniques in foreign economies
(i.e., Western Europe and Latin America). In much of Europe, real properties
have generally experienced a sharp decline in value, resulting in higher
mortgage loan default rates and the need for financial institutions to dispose
of distressed mortgage loans and raise new capital. The Company believes it can
acquire such distressed loans and enhance their value through WFSG's expertise
in loan acquisitions, U.S.-style loan servicing and aggressive work-out
approaches. The Company also believes it can finance its acquisitions through
local currencies and through U.S.-style financing techniques. See "Primary
Investments."
OTHER REAL ESTATE RELATED INVESTMENTS
Although the Company is expected to invest principally in the Primary
Investments, the Company may also acquire or originate other mortgage loans or
real properties such as performing or distressed residential mortgage loans and
performing commercial loans in the United States (collectively, "Other Real
Estate Related Assets"). The Company will take an opportunistic approach to its
investments and, accordingly, the Company may invest in Other Real Estate
Related Assets at any time.
2
<PAGE>
INITIAL INVESTMENTS
At the Closing of this Offering (the "Closing"), the Company will acquire
from WFSG or its affiliates (i) U.S. Commercial Investments for approximately
$52.8 million; (ii) Mortgage-Backed Securities for approximately $98.4 million;
and (iii) International Investments in the United Kingdom for approximately
$5.4 million (collectively, the "Initial Investments"). The balance of the net
proceeds of the Offering, constituting up to approximately 47.5% of the total
net proceeds, will be invested by the Company as opportunities arise. Certain
of the U.S. Commercial Investments will be acquired from Wilshire Properties 1
Inc. ("Wilshire Properties 1") and Wilshire Properties 2 Inc. ("Wilshire
Properties 2"). Wilshire Properties 1 and Wilshire Properties 2, all of the
outstanding shares of which are owned by Messrs. Wiederhorn and Mendelsohn,
will acquire approximately 376,874 units of partnership interest of the
Operating Partnership (the "Units") (which will comprise 1.8% of Units of the
Operating Partnership or 1.6% if the Underwriters' over-allotment option is
exercised in full) on the Closing Date in exchange for the contribution of
certain assets to the Operating Partnership. These properties will be purchased
subject to mortgage indebtedness of $5.6 million. WFSG has granted the Company
an option to purchase for up to approximately $110.0 million all or a portion
of up to 50% of WFSG's interest in two portfolios of International Investments
in France. The Company is currently evaluating the suitability of such
investments under U.S. tax and French law. See "Initial Investments."
LEVERAGE
The Company expects to leverage its assets in addition to the debt it will
assume with the purchase of the Initial Investments, after the proceeds of the
Offering have been fully invested, primarily through repurchase agreements,
secured term loans, warehouse lines of credit, mortgage loans, issuance of
Mortgage-Backed Securities and other borrowing arrangements. The Company
intends to use the proceeds from its borrowings to invest in additional assets
and, in turn, to borrow against such assets and to repeat this process of
borrowing and investing until it has significantly leveraged its portfolio of
assets.
HEDGING
The Company may hedge all or a portion of the interest rate risk associated
with borrowings and foreign currency exchange rate risks associated with
international investments through interest rate swaps, interest rate futures
and foreign currency swaps and futures. To a lesser extent, the Company may
hedge its interest rate risk through the use of interest rate caps and floors.
The Company also may engage in a variety of interest rate risk management
techniques for the purpose of managing the effective maturity of its assets.
RISK FACTORS
An investment in the Common Stock involves various risks, and prospective
investors should consider carefully the matters discussed under "Risk Factors"
prior to an investment in the Company. Such risks include, among others:
. The Company intends to acquire significant amounts of non-investment
grade Mortgage-Backed Securities. These investments may be subject to a
greater risk of loss of principal and non-payment of interest than
investments in senior, investment grade rated securities.
. Foreclosed Properties (which may now or in the future have significant
amounts of unleased space) may not generate sufficient revenue to provide
a return on the investment after meeting operating expenses and interest
expense.
. The Company's international operations will be subject to most of the
same risks associated with its U.S. operations as well as additional
risks, such as fluctuations in foreign currency exchange rates, unexpected
changes in regulatory requirements, heightened risks of political and
economic instability in certain geographic locations, difficulties in
managing international operations, potentially adverse tax consequences,
enhanced accounting and control expenses and the burden of complying with
a wide
3
<PAGE>
variety of foreign laws. In addition, the management of WRSC has limited
experience in the purchasing and servicing of real property loans and
managing real properties in foreign countries and its ability to evaluate
and effectively price loan pool and real property acquisitions abroad may
be subject to greater risk. Accordingly, there can be no assurance that
one or more of these factors will not have a materially adverse effect on
the Company's operations.
. In periods of declining interest rates, prepayments on mortgage loans and
Mortgage-Backed Securities generally increase and the Company likely will
have to reinvest such funds in lower-yielding investments. Conversely, in
periods of rising interest rates, prepayments on mortgage loans and
Mortgage-Backed Securities generally decrease and the value of the
Company's fixed-rate investments generally declines.
. Borrower default, hazard losses and state or foreign law enforceability
issues may result in losses on the Company's investment in mortgage loans
and Mortgage-Backed Securities.
. Certain of the Company's real estate investments will require significant
management resources, are illiquid, and may decrease in value because of
changes in economic conditions.
. The Company's borrowings are likely to include repurchase agreements and
other borrowings secured by the Company's assets. A decline in the market
value of those assets could limit the Company's ability to borrow or
result in lenders initiating margin calls, requiring the Company to sell
assets under adverse market conditions in order to maintain liquidity. If
these sales are made at prices lower than the carrying value of the
assets, the Company will experience losses. If borrowing costs increase,
or if the cash flow generated by the Company's assets decrease, the
Company's use of leverage will increase the likelihood that the Company
will experience reduced or negative cash flow.
. The Company's performance may be affected adversely if the Company fails
to hedge effectively against foreign currency exchange rate risks and
interest rate risks. Losses may result if a hedge does not correlate
correctly to the risks being hedged.
. The Company's performance may be affected adversely by fluctuations in
currency rates.
. Only approximately 52.5% of the net proceeds from the Offering will be
invested initially. The Company may face significant competition in
acquiring additional assets that meet its investment objectives.
. Certain directors and officers of the Company are also directors and
officers of WRSC and WFSG which may cause conflicts of interest in the
Company's dealings with WRSC and WFSG, including the purchase of assets
from WFSG. The Company, WFSG and WRSC may have competing business
interests which could result in decisions with respect to the Company that
reflect the interests of WFSG and do not fully reflect the interests of
WREIT's stockholders. In addition, the Company must rely on the experience
of WRSC's management generally, and in particular the Independent
Directors will generally rely on information provided by WRSC to review
transactions of the Company with WFSG and its affiliates.
. WREIT, a company with no operating history, will invest in highly
competitive businesses.
. To maintain its exemption from regulation under the Investment Company
Act of 1940, as amended (the "Investment Company Act"), the Company, among
other things, must maintain certain percentages of its investments in
assets that qualify for exemption from such regulation, which requirement
may restrict the Company's ability to invest in various types of assets.
. In order to qualify as a REIT, WREIT must satisfy certain requirements
concerning the nature of its assets and income, which may restrict WREIT
's ability to invest in various types of assets, to dispose of assets and
to invest in certain activities related to its core business. In addition,
WREIT must distribute at least 95% of its taxable income (other than net
capital gain) each year. Under certain circumstances WREIT could recognize
income for tax purposes without any corresponding cash payment which could
result in WREIT needing to sell assets, borrow money or raise capital in
order to satisfy this distribution requirement. WREIT may be taxed as a
corporation if it fails to qualify as a REIT.
. Ownership of Common Stock by each stockholder other than WFSG is limited
to 9.8% of the outstanding Common Stock, which may deter third parties
from seeking to control or acquire the Company.
4
<PAGE>
THE MANAGER
The business and investment affairs of the Company will be managed by WRSC, a
newly formed Delaware corporation wholly-owned by WFSG, pursuant to a
management agreement (the "Management Agreement") which will become effective
on the Closing. WFSG is primarily engaged in the acquisition, servicing and
resolution of pools of performing, sub-performing and non-performing
residential and commercial mortgage loans, as well as foreclosed real estate in
the United States and foreign countries, currently France and the United
Kingdom. European subsidiaries of WFSG opened offices in Paris and London in
September 1996. WFSG currently has approximately 16 employees in France and 22
employees in the United Kingdom. WFSG also acquires mortgage-backed securities,
originates residential mortgage and manufactured housing loans through
correspondents and services loans for third parties. At June 30, 1997, WFSG had
total assets of approximately $1.2 billion, and stockholders' equity of
approximately $68.9 million. WFSG through its subsidiaries will provide WRSC
with substantially all of the managerial and administrative services required
in connection with the operations of the Company.
MANAGEMENT AGREEMENT
Pursuant to the Management Agreement WRSC, subject to the supervision of
WREIT's Board of Directors, will formulate operating strategies for the
Company, arrange for the acquisition of assets by the Company, arrange for
various types of financing for the Company, including repurchase agreements,
secured term loans, warehouse lines of credit, mortgage loans and the issuance
of Mortgage-Backed Securities, monitor the performance of the Company's assets
and provide certain administrative and managerial services in connection with
the operation of the Company. For performing these services, WRSC will receive
the following compensation, fees and other benefits (including reimbursement of
out-of-pocket expenses):
<TABLE>
<CAPTION>
FEE AMOUNT
- --- ------
<S> <C>
Base Management Fee(1)...... Equal to 1% per annum of the first $1.0 billion of
Average Invested Assets, 0.75% of the next $500.0
million of Average Invested Assets and 0.50% of
Average Invested Assets above $1.5 billion.
Incentive Fee(1)............ Based on the amount, if any, by which the
Company's Funds from Operations plus certain gains
(minus certain losses) exceed a hurdle rate.
Expense Reimbursement ...... Reimbursement of due diligence costs and out-of-
pocket expenses.
</TABLE>
- --------
(1) For a detailed explanation of the calculation of the base management and
incentive fees payable to WRSC, see "Management of Operations--Management
Fees."
The Board of Directors of the Company will adjust the base management fee
after the first two years to align the fee more closely with the actual costs
of such services. See "Management of Operations."
The Company will grant WRSC and certain of its directors options to purchase
2,000,000 shares of Common Stock (2,300,000 shares if the Underwriters exercise
their over-allotment option in full) or, at the option of the Company, units of
limited partnership interest in the Operating Partnership ("Units") at a price
per share (or Unit) equal to the initial offering price of the Common Stock.
WRSC may cause the Operating Partnership to redeem any Units so purchased for
cash, or, at the election of the General Partner, shares of Common Stock on a
one-for-one basis. One quarter of WRSC's options will become exercisable on
each of the first four anniversaries of the Closing. Unexercised options will
terminate on the tenth anniversary of the Closing. See "Management of
Operations--Stock Options."
5
<PAGE>
SERVICING AGREEMENT
The Company generally expects to acquire Primary Investments and Other Real
Estate Related Assets on a "servicing released" basis (i.e., the Company will
have the right to service the loans or other assets it purchases). The Company
will enter into a loan servicing agreement (the "WCC Servicing Agreement") with
Wilshire Credit Corporation ("WCC"), an affiliate of the Company pursuant to
which WCC will act as a servicer for the Company and provide loan and real
property management services, including billing, portfolio administration and
collection services for the Company's U.S. Commercial Investments, Mortgaged-
Backed Securities when applicable and Other Real Estate Related Assets in the
United States. The Company will also enter into a loan servicing agreement (the
"European Servicing Agreement" and, together with the WCC Servicing Agreement,
the "Servicing Agreements") with WFSG's two European servicing subsidiaries
(the "European Servicers"), pursuant to which the European Servicers will act
as servicers for the Company and provide loan and real property management
services in France and the United Kingdom. As the Company acquires assets in
other countries, the Company anticipates entering into similar servicing
arrangements with WFSG affiliates in such countries. Under the Servicing
Agreements, the Company has agreed to pay each of WCC and the European
Servicers a servicing fee at or below market rates for each pool of loans or
real estate assets that they service for the Company and to reimburse them for
certain out-of-pocket costs associated with servicing such assets. The
Management Agreement will provide that the Manager will monitor the servicing
activities of WCC and the European Servicers.
CONFLICTS OF INTEREST
The Company will be managed by WRSC, a wholly-owned subsidiary of WFSG. The
European Servicers, wholly-owned subsidiaries of WFSG, and WCC will provide
servicing and asset management services for the Company. WCC is currently owned
by Andrew A. Wiederhorn and Lawrence A. Mendelsohn, the principal shareholders
of WFSG. WFSG and WCC are currently structuring a transaction in which WCC
would become a subsidiary of WFSG, which is likely to be completed shortly
after the Closing of this Offering. In addition, certain other subsidiaries of
WFSG will provide further servicing and asset management services for the
Company. WFSG will own 9.9% of the outstanding shares of Common Stock in WREIT
immediately after the Closing. In addition, Wilshire Properties 1 and Wilshire
Properties 2 will acquire approximately 376,874 Units (which comprise 1.8% of
Units of the Operating Partnership or 1.6% if the Underwriters' over-allotment
option is exercised in full) on the Closing Date in exchange for the
contribution of certain assets to the Operating Partnership. See "Initial
Investments." Because of the Company's relationship with WRSC, WCC and WFSG,
the Company will be subject to various potential conflicts of interest. In
addition, two of the members of the Board of Directors of the Company and all
of its officers are employed by WRSC or its affiliates.
A majority of the Company's Board of Directors will be unaffiliated with WRSC
(the "Independent Directors"). The Independent Directors are expected to
approve the execution of the Management Agreement and general guidelines for
the Company's investments, borrowings and operations (the "Guidelines"), as
well as transactions or agreements between the Company and WFSG or its
affiliates. Although WRSC will perform the day-to-day operations of the
Company, the Independent Directors will review all transactions on a quarterly
basis to measure compliance with the Guidelines. In such a review, the
Independent Directors will generally rely primarily on information provided by
WRSC. A majority of the Independent Directors are required, pursuant to the
Management Agreement, to approve in advance any purchase of assets from WFSG or
its affiliates or any other significant transaction not contemplated under the
Management Agreement or the Servicing Agreements, relying, however, primarily
on information provided by WRSC.
The Management Agreement does not limit the right of WRSC or WFSG to engage
in business or to render services to others that compete with the Company.
While the Management Agreement is in effect, however, WFSG will not invest in
any particular Primary Investments unless the Company has declined to make the
investment at the direction of the Independent Directors. Additionally, WFSG
has agreed to not sponsor another REIT that would invest in the Primary
Investments.
6
<PAGE>
The Company will acquire the Initial Investments from WFSG or its affiliates
soon after the Closing. The Company may also acquire other Primary Investments
and Other Real Estate Related Assets from WFSG or its affiliates in the future.
In addition, the Company may, but has no current plans to, invest as a co-
participant with WFSG or its affiliates in loans originated or acquired by such
affiliates.
THE OFFERING
<TABLE>
<S> <C>
Shares offered to the public(1)(2)(3)................................ 18,020,000
Shares to be outstanding after the Offering(2)(3).................... 20,000,000
Nasdaq Symbol........................................................ WREI
</TABLE>
- --------
(1) Excludes 1,980,000 shares of Common Stock to be acquired by WFSG at the
Closing.
(2) Assumes that the Underwriters' option to purchase up to an additional
3,000,000 shares to cover over-allotments is not exercised.
(3) Excludes 6,000,000 shares reserved for issuance under the Option Plan.
Options for 2,000,000 of Common Stock (2,300,000 if the Underwriters
exercise their over-allotment option in full) are expected to be granted to
the Manager and the Independent Directors at Closing.
USE OF PROCEEDS
The Company has contracted with WFSG and its affiliates to purchase the
Initial Investments upon completion of this Offering for a purchase price of
approximately $145.3 million in cash, plus the assumption of certain debt and
the issuance of Units. The Company intends temporarily to invest the balance of
the net proceeds of this Offering in readily marketable, investment-grade,
interest-bearing securities until the Company finds Primary Investments or
Other Real Estate Related Assets in which to invest. See "Operating Policies
and Objectives."
DISTRIBUTION POLICY
WREIT intends to make distributions to its stockholders of at least 95% of
the Company's taxable income each year (subject to certain adjustments) so as
to qualify for the tax benefits accorded to REITs under the Code. WREIT intends
to make distributions at least quarterly. It is anticipated that the first
distribution to stockholders will be made promptly after the first full
calendar quarter following the Closing Date.
TAX STATUS OF THE COMPANY
WREIT intends to qualify and will elect to be taxed as a REIT under sections
856 through 860 of the Code, commencing with its short taxable year ending
December 31, 1997. If WREIT qualifies for taxation as a REIT, WREIT generally
will not be subject to federal corporate income tax on its taxable income that
is distributed to its stockholders. A REIT is subject to a number of
organizational and operational requirements, including a requirement that it
currently distribute at least 95% of its annual taxable income (other than net
capital gain). Although WREIT does not intend to request a ruling from the
Internal Revenue Service (the "Service") as to its REIT status, WREIT has
received an opinion of its legal counsel that WREIT qualifies as a REIT, which
opinion is based on certain assumptions and representations about WREIT's
ongoing businesses and investment activities and other matters. No complete
assurance can be given that WREIT will be able to comply with such assumptions
and representations in the future. Furthermore, such opinion is not binding on
the Service or on any court. Failure to qualify as a REIT would render WREIT
subject to federal income tax (including any applicable alternative minimum
tax) on its taxable income at regular corporate rates and distributions to
WREIT's stockholders would not be deductible. Even if WREIT qualifies for
taxation as a REIT, the Company may be subject to certain federal, state and
local taxes on its income and property. WREIT will adopt the calendar year as
its tax year. In connection with WREIT's election to be taxed as a REIT,
WREIT's Charter imposes restrictions on the transfer of the Common Stock. See
"Risk Factors--Legal Risks--Tax Risks" and "Federal Income Tax Considerations--
Taxation of the Company."
7
<PAGE>
ORGANIZATION AND RELATIONSHIPS
WRSC will manage the day-to-day operations of the Company, subject to the
supervision of WREIT's Board of Directors. The relationship among WREIT, its
affiliates and WRSC is depicted in the picture shown below.
[FLOWCHART OF ORGANIZATION AND RELATIONSHIPS]
(1) WREIT, a Maryland corporation taxable as a REIT, will issue
approximately 10% of its common stock to WFSG and approximately 90% of its
common stock to public investors.
(2) WREIT will incorporate and capitalize a qualified REIT subsidiary, the
General Partner.
(3) The General Partner, WREIT, Wilshire Properties 1 and Wilshire
Properties 2 will hold all of the outstanding Units in the Operating
Partnership, with the General Partner holding Units constituting a 1% general
partnership interest. In the future, the Company may seek to acquire
additional assets and issue Units in payment of some or all of the purchase
price therefor.
(4) The Operating Partnership will assign to WCC any special servicing
rights and obligations (other than the right to direct foreclosure) received
in connection with Mortgage-Backed Securities acquisitions. WCC is currently
owned by Messrs. Wiederhorn and Mendelsohn. WCC and the European Servicers
will provide loans and real property management services to the Company. See
"Servicing Agreements."
(5) WFSG will incorporate and capitalize WRSC.
(6) WRSC will enter into a Management Agreement with WREIT and the Operating
Partnership, pursuant to which WRSC will formulate operating strategies and
provide certain managerial and administrative functions for the entities shown
within the box on the chart (collectively, the "Company"), subject to the
supervision of WREIT's Board of Directors.
8
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements which can be identified
by the use of forward-looking terminology such as "may," "will," "should,"
"expect," "anticipate," "estimate," or "continue" or the negatives thereof or
other comparable terminology. The Company's actual results could differ
materially from those described in such forward-looking statements as a result
of certain factors, including those set forth in the following risk factors
and the other factors described elsewhere in this Prospectus.
An investment in the Common Stock involves various risks. Before purchasing
shares of Common Stock offered hereby, prospective investors should give
special consideration to the information set forth below, in addition to the
information set forth elsewhere in this Prospectus.
INVESTMENT ACTIVITY RISKS
CREDIT AND PREPAYMENT RISKS FROM OWNERSHIP OF MORTGAGE-BACKED SECURITIES IN
POOLS OF RESIDENTIAL AND COMMERCIAL MORTGAGE LOANS. The Company intends to
acquire a significant amount of Mortgage-Backed Securities, including "first
loss" unrated, credit support subordinated classes. A first loss security is
the most subordinated class of a multi-class issuance of pass-through or debt
securities and is the first to bear the loss upon a default on the underlying
collateral. Such classes are subject to special risks, including a
substantially greater risk of loss of principal and non-payment of interest
than more senior, rated classes. While the market values of most subordinated
classes tend to react less to fluctuations in interest rate levels than more
senior, rated classes, the market values of subordinated classes tend to be
more sensitive to changes in economic conditions than more senior classes. As
a result of these and other factors, Mortgage-Backed Securities generally are
not actively traded and may not provide holders thereof with liquidity.
The yield to maturity on Mortgage-Backed Securities of the type the Company
intends to acquire will be extremely sensitive to the default and loss
experience of the underlying mortgage loans and the timing of any such
defaults or losses. Because the Mortgage-Backed Securities of the type the
Company intends to acquire generally have less credit support than senior
classes, to the extent there are realized losses on the mortgage loans
comprising the mortgage collateral for such classes, the Company may not
recover the full amount or, indeed, any of its initial investment in such
Mortgage-Backed Securities.
When the Company acquires Mortgage-Backed Securities, it may not acquire the
right to service the underlying mortgage loans, even those that become
defaulted, although the Company generally will seek to obtain the rights to
service those loans, including oversight and management of the resolution of
such mortgage loans by modification, foreclosure, deed in lieu of foreclosure
or otherwise ("Special Servicing"). As a result of senior classes of mortgage-
backed securities, the underlying mortgage loans may not be serviced in the
same manner as they would be serviced by the Company or in a manner that is
more advantageous to the Company as the holder of the subordinated classes of
mortgage-backed securities.
The subordination of Mortgage-Backed Securities to more senior classes may
adversely affect the yield on the Mortgage-Backed Securities even if realized
losses are not ultimately allocated to such classes. On any payment date,
interest and principal are paid on the more senior classes before interest and
principal are paid with respect to the unrated or non-investment grade credit
support classes. Typically, interest deferred on these credit support classes
is payable on subsequent payment dates to the extent funds are available, but
such deferral may not itself bear interest. Such deferral of interest will
adversely affect the yield on the Mortgage-Backed Securities.
The yield of the Mortgage-Backed Securities also will be affected by the
rate and timing of payments of principal (including prepayments, repurchase,
defaults and liquidations) on the mortgage loans underlying a series of
Mortgage-Backed Securities. The rate of principal payments may vary
significantly over time depending on a variety of factors such as the level of
prevailing mortgage loan interest rates and economic, demographic, tax, legal
and other factors. Prepayments on the mortgage loans underlying a series of
Mortgage-Backed Securities are generally allocated to the more senior classes
of Mortgage-Backed Securities for specified periods
9
<PAGE>
or based on over-collaterization levels. As a result, prepayments of principal
from the mortgage loans are not received by the holders of subordinated
Mortgage-Backed Securities for a period of time. As a result, the weighted-
average lives of the Mortgage-Backed Securities may be longer than would be
the case if, for example, prepayments were allocated pro rata to all classes
of Mortgage-Backed Securities. To the extent that the holder of Mortgage-
Backed Securities is not paid compensating interest on interest shortfalls due
to prepayments, liquidations or otherwise, the yield on the Mortgage-Backed
Securities may be affected adversely.
DEFAULT RISKS ASSOCIATED WITH DISTRESSED MORTGAGE LOANS. The Company intends
to purchase distressed mortgage loans, as well as mortgage loans that have had
a history of delinquencies. These distressed mortgage loans may presently be
in default or may have a greater than normal risk of future defaults and
delinquencies, as compared to a pool of newly originated, high quality loans
of comparable type, size and geographic concentration. Returns on an
investment of this type depend on accurate pricing of such investment, the
borrower's ability to make required payments or, in the event of default, the
ability of the loan's servicer (including WCC or the European Servicers) to
foreclose and liquidate the mortgage loan. There can be no assurance that the
servicer can liquidate a defaulted mortgage loan in a cost effective manner or
in a timely fashion. See "Certain Legal Aspects of Mortgage Loans and Real
Property Investments."
INTERNATIONAL INVESTMENTS ARE SUBJECT TO CURRENCY CONVERSION RISKS AND
DIFFERENCES IN FOREIGN LAWS AND MARKETS. The Company may invest in real
estate, or mortgage loans secured by real estate, located outside the United
States. The Company's international operations will be subject to most of the
same risks associated with its U.S. operations as well as additional risks,
such as fluctuations in foreign currency exchange rates, unexpected changes in
regulatory requirements, heightened risks of political and economic
instability in certain geographic locations, difficulties in managing
international operations, potentially adverse tax consequences, enhanced
accounting and control expenses and the burden of complying with a wide
variety of foreign laws. Legal systems abroad may differ in a number of
respects from the U.S. legal system, including requiring transfer taxes and
value-added taxes on certain transfers imposing limits on usurious interest
rates and subjecting lenders to liability for inappropriate lending. In
addition, the management of WRSC has limited experience in the purchasing and
servicing of real estate loans and managing real estate in foreign countries,
and its ability to evaluate and effectively price loan pool and real estate
acquisitions abroad may be subject to a higher risk of error. Moreover,
investments in foreign assets are subject to currency conversion risks.
LIMITED AVAILABLE INVESTMENTS MAY INHIBIT COMPANY'S OBJECTIVES. The results
of the Company's operations are dependent upon the availability of
opportunities for the acquisition of assets. There can be no assurance,
however, that the Company will identify investments that meet its criteria or
that any such investment will produce a satisfactory return to the Company. At
the Closing, 47.5% of the net proceeds of this Offering will not be invested
in Primary Investments.
COMPETITION. In acquiring its assets, the Company will compete with other
REITs, investment banking firms, savings and loan associations, banks,
mortgage bankers, insurance companies, mutual funds, other lenders, and other
entities purchasing similar assets, many of which have established operating
histories and procedures, may have access to greater capital and other
resources, and may have other advantages over the Company in conducting
certain businesses and providing certain services. Increased competition for
the acquisition of real properties, mortgage loans and Mortgage-Backed
Securities or a diminishment in the available supply could result in higher
prices and thus lower yields on such real properties, mortgage loans and
Mortgage-Backed Securities which could further narrow the yield spread over
borrowing costs. In addition, the Company's competitors may seek to establish
relationships with the financial institutions and other firms from whom the
Company intends to acquire such assets. There can be no assurance that the
Company will be able to acquire sufficient real estate assets at spreads above
the Company's cost of funds to achieve the Company's yield objectives.
COMMERCIAL PROPERTIES MAY HAVE UNLEASED SPACE. The Company intends to invest
in commercial and multi-family properties in the U.S. and abroad (the
"Commercial Properties") or mortgage loans secured by the Commercial
Properties (the "Commercial Mortgage Loans"), which may have significant
amounts of unleased space or space which becomes vacant during the period of
the Company's investment. The Company is subject
10
<PAGE>
to the risk that a property cannot be leased to the extent necessary to
produce sufficient revenue both to meet operating expenses and debt service
and to provide a return on the investment.
RISK OF LOSS FROM SUBORDINATED POSITION. The Company may originate or
acquire loans secured by Commercial Properties, including loans that are
subordinate to first liens on such real estate. Loans that are subordinate to
first liens on real estate are subject to greater risks of loss than first
lien mortgage loans. An overall decline in the real estate market could
adversely affect the value of the real property securing such loans such that
the aggregate outstanding balance of the second-lien loan and the balance of
the more senior loan on the real property exceed the value of the real
property.
REAL PROPERTY IS ILLIQUID AND ITS VALUE MAY DECREASE. Real property
investments are relatively illiquid. The ability of the Company to vary its
portfolio in response to changes in economic and other conditions will be
limited. No assurances can be given that the fair market value of any of the
Commercial Properties or Commercial Mortgage Loans secured by Commercial
Properties will not decrease in the future.
VALUE OF REAL PROPERTY DEPENDENT ON CONDITIONS BEYOND COMPANY'S CONTROL. The
Company expects to invest in real properties or mortgage loans secured by real
properties, which are subject to varying degrees of risk generally incident to
the ownership of real property. In the case of real properties (or related
Commercial Mortgage Loans), the underlying value of such Commercial Properties
(or related Commercial Mortgage Loans) and the Company's income and ability to
make distributions to its stockholders are dependent upon the ability of WRSC
or the management company to operate the Commercial Properties in a manner
sufficient to maintain or increase revenues in excess of operating expenses
and debt service or, in the case of real property leased to a single lessee,
the ability of the lessee to make rent payments. The value of real properties
or mortgage loans may be adversely affected by adverse changes in national or
local economic conditions, competition from other properties offering the same
or similar services, changes in interest rates and in the availability, cost
and terms of mortgage funds, the impact of present or future environmental
legislation and compliance with environmental laws, the ongoing need for
capital improvements (particularly in older structures), changes in real
estate tax rates and other operating expenses, adverse changes in governmental
rules and fiscal policies, exchange rates, civil unrest, acts of God,
including earthquakes, hurricanes and other natural disasters (which may
result in uninsured losses), acts of war, adverse changes in zoning laws, and
other factors which are beyond the control of the Company.
THE COMPANY'S INSURANCE WILL NOT COVER ALL LOSSES. The Company intends and
will require borrowers under Commercial Mortgage Loans and mortgage loans
secured by residential properties ("Residential Mortgage Loans") to maintain
comprehensive insurance on each of the Commercial Properties and residential
properties ("Residential Properties"), including liability and fire and
extended coverage, in amounts sufficient to permit the replacement of the
properties in the event of a total loss, subject to applicable deductibles.
The Company will endeavor to obtain, or cause to be obtained, coverage of the
type and in the amount customarily obtained by owners of properties similar to
the Commercial Properties and Residential Properties. There are certain types
of losses, however, generally of a catastrophic nature, such as earthquakes,
floods and hurricanes, that may be uninsurable or not economically insurable.
Inflation, changes in building codes and ordinances, environmental
considerations, and other factors also might make it infeasible to use
insurance proceeds to replace a property if it is damaged or destroyed. Under
such circumstances, the insurance proceeds received by the Company might not
be adequate to restore its economic position with respect to the affected
Commercial Property and Residential Properties.
REAL PROPERTIES WITH ENVIRONMENTAL PROBLEMS WILL INCREASE COSTS AND MAY
CREATE LIABILITY FOR THE COMPANY. Operating costs and the value of real
property may be affected by the obligation to pay for the cost of complying
with existing environmental laws, ordinances and regulations, as well as the
cost of future legislation. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may be liable for the costs of removal or
remediation of hazardous or toxic substances on, under or in such property.
Such laws often impose liability whether or not the owner or operator knew of,
or was responsible for, the presence of such hazardous or toxic substances.
Therefore, an environmental liability could have a material adverse effect on
the underlying value of the real property, the Company's income and cash
available for distribution to Stockholders.
11
<PAGE>
The Company may obtain Phase I environmental assessments on Commercial
Properties prior to their acquisition. The purpose of Phase I environmental
assessments is to identify existing and potential environmental contamination
that is made apparent from historical reviews of the properties, reviews of
certain public records, preliminary investigations of the sites and
surrounding properties and screening for the presence of hazardous substances,
toxic substances and underground storage tanks. However, the Company will
exercise judgment on this issue and may choose not to obtain Phase I
environmental assessments on certain Commercial Properties prior to its
acquisition and to purchase loans without Phase I environmental assessments on
the underlying property if it deems that to do so is prudent. Further, even if
a Phase I environmental assessment is obtained, there is no assurance it will
reveal all existing and potential environmental risks and liabilities, and
there is no assurance that there will be no unknown or material environmental
obligations or liabilities.
COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT AND OTHER CHANGES IN
GOVERNMENTAL RULES AND REGULATIONS MAY BE COSTLY. Under the Americans with
Disabilities Act of 1990 (the "ADA"), all U.S. public properties are required
to meet certain federal requirements related to access and use by disabled
persons. Commercial Properties acquired by the Company in the U.S. may not be
in compliance with the ADA. If a property is not, the Company will be required
to make modifications to such property to bring it in compliance, or face the
possibility of an imposition of fines or an award of damages to private
litigants. In addition, changes in governmental rules and regulations or
enforcement policies (including foreign governmental rules) affecting the use
and operation of the Commercial Properties and Residential Properties,
including changes to building codes and fire and life-safety codes, may occur.
If the Company were required to make substantial modifications at the
Commercial Properties to comply with the ADA or other changes in governmental
rules and regulations, the Company's ability to make expected distributions to
its stockholders could be adversely affected. If U.S. properties that secure
U.S. mortgage loans are found not to be in compliance with the ADA, their
value could be diminished and thus the Company's security impaired.
ECONOMIC AND BUSINESS RISKS
INTEREST RATE CHANGES MAY ADVERSELY AFFECT THE COMPANY'S INVESTMENTS. The
Company's operating results depend in part on the difference between the
interest income earned on interest-earning assets and the interest expense
incurred in connection with its interest-bearing liabilities. Changes in the
general level of interest rates can affect the Company's income by affecting
the spread between the Company's interest-earning assets and interest-bearing
liabilities, as well as, among other things, the value of the Company's
interest-earning assets and its ability to realize gains from the sale of
assets and the average life of the Company's interest-earning assets.
Interest rates are highly sensitive to many factors, including governmental
monetary and tax policies, domestic and international economic and political
considerations, and other factors beyond the control of the Company. The
Company may employ a hedging strategy to limit the effects of changes in
interest rates on its operations, including engaging in interest rate swaps,
caps, floors and interest rate futures. The use of these types of instruments
to hedge a portfolio carries certain risks, including the risk that losses on
a hedge position will reduce the funds available for distribution to
shareholders and, indeed, that such losses may exceed the amount invested in
such instruments. There is no perfect hedge for any investment, and a hedge
may not perform its intended use of offsetting losses on an investment.
Moreover, with respect to certain of the instruments used as hedges for the
Company's portfolio, the Company is exposed to the risk that the
counterparties with which the Company contracts may fail to perform, which may
render the Company unable to enter into an offsetting transaction with respect
to an open position. If the Company anticipates that the income from any such
hedging transaction will not be qualifying income for REIT income test
purposes, the Company may conduct part or all of its hedging activities
through a to-be-formed corporate subsidiary that is fully subject to federal
corporate income taxation. See "Federal Income Tax Considerations--
Requirements for Qualification--Income Tests." The profitability of the
Company may be adversely affected during any period as a result of changing
interest rates.
The value of Mortgage-Backed Securities is significantly affected by
prepayment rates on the mortgage loans comprising the mortgage collateral for
such securities. Prepayment rates on Mortgage-Backed Securities are influenced
by changes in current interest rates and a variety of economic, geographic and
other factors and
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cannot be predicted with certainty. In periods of declining mortgage interest
rates, prepayments on Mortgage-Backed Securities generally increase. If
general interest rates also decline, the amounts available for reinvestment by
the Company during such periods are likely to be reinvested at lower interest
rates than the Company was earning on the Mortgage-Backed Securities that were
prepaid. Mortgage-Backed Securities may decrease in value as a result of
increases in interest rates and may benefit less than other fixed-income
securities from declining interest rates because of the risk of prepayment. In
general, changes in both prepayment rates and interest rates will change the
total return on Mortgage-Backed Securities, which in turn will affect the
amount available for distribution to stockholders. Under certain interest rate
or prepayment rate scenarios, the Company may fail to recoup fully its cost of
acquisition of such investments.
LEVERAGE CAN REDUCE INCOME AVAILABLE FOR DISTRIBUTION. After the initial
"start-up" period, the Company intends to leverage its portfolio through
borrowings, generally through the use of repurchase agreements, bank credit
facilities, warehouse lines of credit on pools of real estate and mortgage
loans, term loans, and other borrowings. The percentage of leverage used will
vary depending on the Company's and prospective lenders' estimate of the
stability of the portfolio's cash flow. To the extent that changes in market
conditions cause the cost of such financing to increase relative to the income
that can be derived from the assets acquired, the Company may reduce the
amount of leverage it utilizes.
Leverage creates an opportunity for increased net income, but at the same
time creates risks. For example, leverage can reduce the net income available
for distributions to stockholders. The Company will leverage assets only when
there is an expectation that it will enhance returns, although there can be no
assurance that the Company's use of leverage will prove to be beneficial.
Moreover, there can be no assurance that the Company will be able to meet its
debt service obligations and, to the extent that it cannot, the Company risks
the loss of some or all of its assets.
POTENTIAL INTEREST RATE MISMATCH BETWEEN ASSET YIELDS AND BORROWING
RATES. The Company's borrowings may be at interest rates based on indexes and
repricing terms similar to, but of somewhat shorter maturities than, the
interest rate indexes and repricing terms of various of the Company's variable
rate assets. While the historical spread between relevant short-term interest
rate indexes has been relatively stable, there have been periods, such as the
1979 through 1982 high interest environment, when the spread between those
indexes was volatile. Further, certain of the Company's assets will bear fixed
rates of interest and have long term maturities. There can be no assurance
that such fixed rate of interest will exceed the variable rate of interest on
related borrowings. Interest rate mismatches could impact the Company's net
income in a material and adverse way, thus negatively impacting the Company's
financial condition, dividend yield and the market price of the Common Stock.
THE COMPANY MAY NOT BE ABLE TO BORROW MONEY ON FAVORABLE TERMS. The ability
of the Company to achieve its investment objectives through leverage will
depend on the Company's ability to borrow money on favorable terms. The
Company has entered into limited borrowing arrangements at the present time,
and there can be no assurance that the Company will be able to enter into
further arrangements enabling it to borrow money on favorable terms. See
"Leverage."
ADVERSE CHANGES IN GENERAL ECONOMIC CONDITIONS CAN ADVERSELY AFFECT
COMPANY'S BUSINESS. The Company's success is dependent upon the general
economic conditions in the geographic areas in which a substantial number of
its investments are located. Adverse changes in economic conditions in the
countries in which the Company conducts substantial business, or in the
economic conditions of the regions in which the Company conducts substantial
business likely would have an adverse effect on real estate values, interest
rates and, accordingly, the Company's business.
CONFLICTS OF INTEREST
CONFLICTS OF INTEREST IN THE BUSINESS OF THE COMPANY. The Company will be
subject to various potential conflicts of interest arising from its
relationship with WFSG and its affiliates. Moreover, two of the members of
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the Board of Directors and all of its officers are employed by WRSC as its
affiliates. With a view toward protecting the interests of the Company's
stockholders, the Charter of the Company provides that, a majority of the
Board of Directors must be unaffiliated with WFSG.
The Company has contracted with WFSG and its affiliates to purchase the
Initial Investments at the Closing for an aggregate purchase price of
approximately $145.3 million in cash, plus the assumption of certain debt and
the issuance of Units. WFSG will realize a gain as a result of the purchase by
the Company of such assets. The Operating Partnership has also agreed to
acquire from two affiliates of WFSG, Wilshire Properties 1 and Wilshire
Properties 2, all of the outstanding shares of which are owned by Messrs.
Wiederhorn and Mendelsohn, certain U.S. commercial real property in exchange
for Units.
From time to time, mortgage lenders offer for sale large pools of real
property assets containing assets which WFSG has granted a right of first
refusal to the Company pursuant to a competitive bidding process. In such a
case, WFSG may choose an unaffiliated entity with which to submit a joint bid
for the pool, as long as WFSG takes title only to the real property assets as
to which a right of first refusal has not been granted. In the alternative
WFSG may, but is not required to, invite the Company to submit a joint bid for
such a pool. If the Company and WFSG are successful bidders on such a pool, in
general the Company would take title to the real property assets as to which a
right of first refusal has been granted. The Company may, but does not
currently intend to, participate in mortgage loans as a co-participant with
WFSG or its affiliates.
The Management Agreement does not limit or restrict the right of WFSG or any
of its officers, directors, employees or affiliates from engaging in any
business, subject to the limit of the Company's right of first refusal with
respect to the Primary Investments, or rendering services of any kind to any
other person, including the purchase of or rendering advice to others
purchasing real property assets that meet the Company's policies and criteria.
WFSG expects to continue to purchase real property assets in the future, and
has no obligation to make investment opportunities available to the Company
except with respect to Primary Investments. Moreover, WFSG and its affiliates
have no obligation to offer Mortgage-Backed Securities to the Company if the
mortgage loans collateralizing such Mortgage-Backed Securities were owned by
WFSG or one of its affiliates. As a consequence, the opportunity for the
Company to invest in Other Real Estate Related Assets will be limited if such
investment opportunities would be attractive to WFSG or one of its affiliates.
WFSG and its affiliates will not invest in any particular Primary Investments
unless a majority of the Independent Directors have decided that the Company
should not invest in such asset. In deciding whether to invest in such an
asset, the Independent Directors may consider, among other factors, whether
the asset is well-suited for the Company and whether the Company is
financially able to take advantage of the investment opportunity.
LEGAL AND TAX RISKS
TAX RISKS. WREIT intends to operate in a manner so as to qualify as a REIT
for federal income tax purposes. Although WREIT does not intend to request a
ruling from the Internal Revenue Service (the "Service") as to its REIT
status, WREIT has received an opinion of its legal counsel that, based on
certain assumptions and representations, it so qualifies. Investors should be
aware, however, that opinions of counsel are not binding on the Service or any
court. The REIT qualification opinion only represents the view of counsel to
WREIT based on counsel's review and analysis of existing law, and conditioned
upon certain representations made by WREIT as to factual matters, including
representations and regarding the nature of WREIT properties and the future
conduct of its business. Furthermore, both the validity of the opinion and the
continued qualification of WREIT as a REIT will depend on WREIT's satisfaction
of certain asset, income, organizational, distribution and stockholder
ownership requirements on a continuing basis. If WREIT were to fail to qualify
as a REIT in any taxable year, WREIT would be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates, and distributions to stockholders would not be
deductible by WREIT in computing its taxable income. Any such corporate tax
liability could be substantial and would reduce the amount of cash available
for distribution to stockholders, which in turn could have an adverse impact
on the value of, and trading prices for, the Common Stock. Unless entitled to
relief under certain Code
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provisions, WREIT also would be disqualified from taxation as a REIT for the
four taxable years following the year during which WREIT ceased to qualify as
a REIT.
WREIT must distribute annually at least 95% of its net taxable income
(excluding any net capital gain) in order to avoid corporate income taxation
of the earnings that it distributes. In addition, WREIT will be subject to a
4% nondeductible excise tax on the amount, if any, by which certain
distributions paid by it with respect to any calendar year are less than the
sum of (i) 85% of its ordinary income for that year, (ii) 95% of its capital
gain net income for that year, and (iii) 100% of its undistributed taxable
income from prior years.
WREIT intends to make distributions to its stockholders to comply with the
95% distribution requirement and to avoid the nondeductible excise tax.
However, differences in timing between the recognition of taxable income and
the actual receipt of cash could require the Company to borrow funds or sell
assets on a short-term basis to meet the 95% distribution requirement and to
avoid the nondeductible excise tax. The requirement to distribute a
substantial portion of WREIT's net taxable income could cause WREIT (i) to
sell assets in adverse market conditions, (ii) to distribute amounts that
represent a return of capital, or (iii) to distribute amounts that would
otherwise be spent on future acquisitions, unanticipated capital expenditures,
or repayment of debt. See "Federal Income Tax Considerations--Income Tests"
and "--Asset Tests."
The REIT rules require that at least 75% of the Company's gross income be
from real estate-related sources, except that for the one-year period
following the Offering, gross income for purposes of this test will include
any income from stock or debt instruments acquired with proceeds of the
Offering. Depending on the yield of the Company's other investments and
certain other factors, and inasmuch as % of the proceeds of the Offering
will initially be invested in assets that produce real estate-related income,
the Company may be required to identify and purchase real estate-related
investments sooner than it otherwise would, in order to satisfy the 75% gross
income requirement. See "Federal Income Tax Considerations--Income Tests."
Ownership by the Company of the Primary Investments involves special
considerations in applying the various REIT qualification tests. For instance,
in order to maintain its REIT qualification, the Company may be prohibited
from disposing of properties, including properties acquired through
foreclosure or deed in lieu of foreclosure, when a disposition otherwise would
be in the best interests of the Company. As an alternative, the Company may be
required to transfer such property to a taxable corporation owned in part by
the Company, in which case there would be a corporate level income tax on any
gain recognized upon the sale. The Company also will be prohibited from
providing certain services to tenants of properties that it may acquire
through foreclosure or deed in lieu of foreclosure, which may deter the
Company from pursuing remedies that otherwise would be available to the
Company upon a loan default. In addition, a portion of the interest that the
Company receives from distressed mortgage loans may not be includible in
determining whether the Company satisfies the 75% gross income requirement,
and as a result the Company may be required to forego making certain
investments that it otherwise would deem advisable. The REIT requirements also
restrict the Company's ability to acquire certain interests in corporations or
other entities, possibly preventing the acquisition of International
Investments that otherwise would be in the best interests of the Company.
OWNERSHIP LIMITATION MAY RESTRICT BUSINESS COMBINATION OPPORTUNITIES. In
order for the Company to maintain its qualification as a REIT, not more than
50% in value of its outstanding shares of capital stock may be owned, directly
or indirectly, by five or fewer individuals (as defined in the Code to include
certain entities). For the purpose of preserving the Company's REIT
qualification, the Charter generally prohibits direct or indirect ownership of
more than 9.8% (or, with respect to WFSG, 20%) of the number of outstanding
shares of Common Stock or any series of Preferred Stock (the "Ownership
Limitation"). The Ownership Limitation could have the effect of discouraging a
takeover or other transaction in which holders of some, or a majority, of the
shares of Common Stock might receive a premium for their shares of Common
Stock over the then prevailing market price or which such holders might
believe to be otherwise in their best interests. See "Description of Capital
Stock--Restrictions on Transfer" and "Federal Income Tax Considerations--
Requirements for Qualification."
PREFERRED STOCK MAY PREVENT CHANGE IN CONTROL. The Charter authorizes the
Board of Directors to issue up to 25,000,000 shares of preferred stock and to
establish the preferences and rights of any shares of
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preferred stock issued. Although the Company has no current intention to issue
any series of preferred stock in the foreseeable future, the issuance of any
series of preferred stock could have the effect of delaying or preventing a
change in control of the Company even if a majority of the Company's Common
Stockholders believed such change of control was in their best interest. See
"Description of Capital Stock--Preferred Stock."
MARYLAND ANTI-TAKEOVER STATUTES MAY RESTRICT BUSINESS COMBINATION
OPPORTUNITIES. As a Maryland corporation, WREIT is subject to various
provisions of Maryland law, imposing certain restrictions and require certain
procedures with respect to certain stock purchases and business combinations.
See "Certain Provisions of Maryland Law and of WREIT's Charter and Bylaws--
Business Combinations."
BOARD OF DIRECTORS MAY CHANGE CERTAIN POLICIES AND MANAGEMENT FEES WITHOUT
SHAREHOLDER CONSENT. The major policies of the Company, including its
investment policy and other policies with respect to acquisitions, financing,
growth, operations, debt and distributions, are determined by its Board of
Directors. The Board of Directors may amend or revise these and other
policies, or approve transactions that deviate from these policies, from time
to time without a vote of the stockholders. The effect of any such changes may
be positive or negative. The Company cannot change its policy of seeking to
maintain its qualification as a REIT without the approval of the holders of
two-thirds of the outstanding shares of Common Stock. The Board of Directors
may amend the management fees payable to WRSC under the Management Agreement
after its initial two-year term without the vote of its stockholders. See
"Policies and Objectives with Respect to Certain Activities" and "Certain
Provisions of Maryland Law and of the Company's Charter and Bylaws."
LOSS OF INVESTMENT COMPANY ACT EXEMPTION WOULD ADVERSELY AFFECT THE
COMPANY. The Company believes that it will not be, and intends to conduct its
operations so as not to become, regulated as an investment company under the
Investment Company Act. The Investment Company Act exempts entities that,
directly or through majority-owned subsidiaries, are "primarily engaged in the
business of purchasing or otherwise acquiring mortgages and other liens on and
interests in real estate" ("Qualifying Interests"). Under current
interpretations by the Staff of the Securities and Exchange Commission (the
"Commission"), in order to qualify for this exemption, the Company, among
other things, must maintain at least 55% of its assets in Qualifying Interests
and also may be required to maintain an additional 25% in Qualifying Interests
or other real estate-related assets. The assets that the Company may acquire
therefore may be limited by the provisions of the Investment Company Act. In
connection with its acquisition of Mortgage-Backed Securities the Company
intends, where available, to obtain foreclosure rights, by obtaining the
Special Servicing, with respect to the underlying mortgage loans, although
there can be no assurance that it will be able to do so on acceptable terms.
As a result of obtaining such rights, the Company believes that the related
Mortgage-Backed Securities will constitute Qualifying Interests for the
purpose of the Investment Company Act. The Company does not intend, however,
to seek an exemptive order, no-action letter or other form of interpretive
guidance from the Commission or its Staff on this position. If the Commission
or its staff were to take a different position with respect to whether such
Mortgage-Backed Securities constitute Qualified Interests, the Company could,
among other things, be required either (a) to change the manner in which it
conducts its operations to avoid being required to register as an investment
company or (b) to register as an investment company, either of which could
have an adverse effect on the Company and the market price for the Common
Stock.
ONE ACTION CONSIDERATIONS. Several states have laws that prohibit more than
one action to enforce a mortgage obligation, and some courts have construed
the term action broadly. In such jurisdictions, if the judicial action is not
conducted according to law, the Company may have no other recourse in
enforcing a mortgage obligation. See "Certain Legal Aspects of Mortgage Loans
and Real Property Investments--Foreclosure."
PLANS SHOULD CONSIDER ERISA RISKS OF INVESTING IN COMMON STOCK. The Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and section 4975
of the Code prohibit certain transactions that involve (i) certain pension,
profit-sharing, employee benefit, or retirement plans or individual retirement
accounts (each a "Plan") and (ii) the assets of a Plan. A "party in interest"
or "disqualified person" with respect to a Plan will be subject to (x) an
initial 5% excise tax on the amount involved in any prohibited transaction
involving the assets of the Plan and (y) an excise tax equal to 100% of the
amount involved if any
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prohibited transaction is not corrected. Consequently, the fiduciary of a Plan
contemplating an investment in the Common Stock should consider whether the
Company, any other person associated with the issuance of the Common Stock, or
any affiliate of the foregoing is or might become a "party in interest" or
"disqualified person" with respect to the Plan. In such a case, the
acquisition or holding of Common Stock by or on behalf of the Plan could be
considered to give rise to a prohibited transaction under ERISA and the Code.
See "ERISA Considerations--Employee Benefit Plans, Tax Qualified Retirement
Plans, and IRAs."
LIMITATION ON LIABILITY OF MANAGER AND OFFICERS AND DIRECTORS OF THE
COMPANY. The Charter of the Company contains a provision which, subject to
certain exceptions, eliminates the liability of a director or officer to the
Company or its stockholders for monetary damages for any breach of duty as a
director or officer. This provision does not eliminate such liability to the
extent that it is proved that the director or officer engaged in willful
misconduct or a knowing violation of criminal law or of any federal or state
securities law.
The Company will indemnify WRSC and its officers and directors from any
action or claim brought or asserted by any party by reason of any allegation
that WRSC or one or more of its officers or directors is otherwise accountable
or liable for the debts or obligations of the Company or its affiliates. In
addition, WRSC and its officers and directors will not be liable to the
Company, and the Company will indemnify WRSC and its officers and directors,
for acts performed pursuant to the Management Agreement, except for claims
arising from acts constituting bad faith, willful misconduct, gross negligence
or reckless disregard of their duties under the Management Agreement. See
"Management of Operations--Limits of Responsibility."
REGULATION OF MANAGER'S AFFILIATES. WRSC is a wholly-owned subsidiary of
WFSG. Certain of WFSG's subsidiaries are subject to extensive government
supervision and regulation, intended primarily for the protection of
depositors. In addition, each of WFSG, WCC and their respective subsidiaries
are subject to changes in federal and state laws, including changes in tax
laws that could materially affect the real estate industry, as well as changes
in regulations, governmental policies and accounting principles. Such changes
may increase WFSG's, WCC's and their respective subsidiaries costs of doing
business and assist their competitors. Any such added burdens may adversely
affect WRSC's ability to carry out its management functions or WCC to provide
mortgage loan servicing and Special Servicing for the Company or may have an
effect on the ability of WRSC and its affiliates to enter into other
arrangements with the Company.
OTHER RISKS
NEWLY ORGANIZED CORPORATION. The Company has no operating history, and its
operating policies and strategies are untried. The Company will be dependent
upon the experience and expertise of the Management of WRSC in administering
its day-to-day operations. Certain officers, directors and employees of the
Management of and WRSC and its affiliates have experience in managing real
estate assets and Mortgage-Backed Securities, including Mortgage-Backed
Securities. However, such officers, directors and employees have never managed
a REIT. There can be no assurance that WRSC will be able to implement
successfully the strategies that the Company intends to pursue.
EXTERNAL MANAGEMENT OF THE COMPANY. The Company will be managed by WRSC,
subject to the supervision of the Board of Directors. Thus, the Company will
depend on the services of WRSC and its officers and employees for the success
of the Company. Moreover, WRSC's personnel are employees of WFSG, WCC or the
European Servicers, and accordingly the Company's success depends in part on
the continuing ability of WFSG, WCC and the European Servicers to hire and
retain knowledgeable personnel. This ability may be affected, in turn, by the
continued financial health of WFSG, WCC and the European Servicers. The
Company is also subject to the risk that WRSC will terminate the Management
Agreement and that no suitable replacement can be found to manage the Company.
RISK THAT MARKET FOR COMMON STOCK WILL NOT DEVELOP. Prior to this offering,
there has not been a public market for the shares of Common Stock offered
hereby. The initial public offering price will be determined by the Company
and representatives of the Underwriters. There can be no assurance that the
price at which the shares of Common Stock will sell in the public market after
the offering will not be lower than the
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price at which they are sold by the Underwriter. The Common Stock has been
approved for quotation on the Nasdaq National Market. Quotation on the Nasdaq
National Market does not ensure, however, that an active market will develop
for the Company's Common Stock.
POSSIBLE CHANGES IN PRICE OF COMMON STOCK DUE TO CHANGES IN YIELDS. The
Company's earnings will be derived primarily from the expected positive spread
between the yield on the Company's real estate assets and the costs to the
Company of its borrowings. This expected positive spread will not necessarily
be larger in high interest rate environments than in low interest rate
environments. In periods of high interest rates, however, the net income of
the Company, and therefore the dividend yield on the Common Stock, may be less
attractive compared to alternative investments of equal or lower risk, which
could impact adversely the price of the Common Stock.
FUTURE OFFERINGS OF CAPITAL STOCK. The Company may increase its capital
resources in the future by making additional offerings of its Common Stock,
securities convertible into its Common Stock or preferred stock. The actual or
perceived effect of such offerings may be the dilution of the book value or
earnings per share of the Common Stock outstanding, which may result in the
reduction of the market price of the Common Stock.
POSSIBLE ADVERSE EFFECTS ON SHARE PRICE ARISING FROM SHARES ELIGIBLE FOR
FUTURE SALE. No prediction can be made as to the effect, if any, of future
sales of Common Stock, or the availability of shares for future sales, on the
market price of the Common Stock. Sales of substantial amounts of Common Stock
(including Common Stock issued upon the exercise of options or the redemption
of Units), or the perception that such sales could occur, may adversely affect
prevailing market prices for the Common Stock.
Wilshire Properties 1 and Wilshire Properties 2 will acquire approximately
376,874 Units at the Closing in exchange for the contribution of certain
assets to the Company. After Units have been held for at least one year,
holders thereof may cause the Operating Partnership to redeem such Units for
cash, or at the option of the General Partner, shares of Common Stock on a
one-for-one basis.
At the Closing, WFSG and its affiliates will purchase 1,980,000 shares of
Common Stock and will receive an option to purchase an additional 2,000,000
shares (2,300,000 shares if the Underwriters exercise their over-allotment
option in full). Under the Underwriting Agreement, WFSG has agreed not to
offer, sell, contract to sell, or otherwise dispose of any such shares without
the prior written consent of the Underwriters for a period of two years from
the date of the Prospectus so long as WRSC continues to serve as the Manager.
The Company and Messrs. Wiederhorn and Mendelsohn, have agreed not to offer,
sell, contract to sell, or otherwise dispose of any Common Stock 180 days from
the date of the Prospectus (other than pursuant to the Option Plan), without
the prior written consent of the Underwriters, subject to certain limited
exceptions. The Underwriters, at any time and without notice, may release all
or any portion of the Common Stock subject to the foregoing lock-up
agreements. Following the expiration of the foregoing restrictions, any Common
Stock issued to a limited partner in the Operating Partnership upon redemption
of its Units may be sold in the public market pursuant to registration
statements which the Company will be obligated to file pursuant to the
exercise of registration rights that have been granted by the Company or
available exemptions from registration. See "Common Stock Available for Future
Sale" and "Underwriting."
MARKET INTEREST RATES COULD ADVERSELY IMPACT THE MARKET PRICE OF THE COMMON
SHARES. One of the factors that will influence the market prices of the Common
Stock will be the annual yield on the price paid for Common Stock from
distributions by the Company. An increase in market interest rates may lead
prospective purchasers of the Common Stock to demand a higher annual yield
from future distributions. Such an increase in the required yield from
distributions may adversely affect the market price of the Common Shares. In
addition, the market value of the Common Stock could be affected substantially
by other general market conditions. Numerous other factors, such as government
regulatory action and modification of tax laws, could have a significant
effect on the future market price of the Common Stock.
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OPERATING POLICIES AND OBJECTIVES
GENERAL. The Company intends to invest in (i) U.S. Commercial Investments;
(ii) Mortgage-Backed Securities; and (iii) International Investments. There
can be no assurances that the Company will be able to acquire such assets,
that the terms or results of such acquisitions will be beneficial to the
Company, or that the Company will achieve its objectives. See "Risk Factors."
Although the Company expects that its primary emphasis will be on the
acquisition of assets described above, future acquisitions may include Other
Real Estate Related Assets. Subject to the REIT qualification rules, the
Company also may invest in assets, including foreign entities, which are
necessary in order to acquire International Investments or to facilitate the
Company's acquisition of its Primary Investments or Other Real Estate Related
Assets.
As of the Closing, approximately $52.8 million of the net proceeds will be
used for U.S. Commercial Investments, $98.4 million for Mortgage-Backed
Securities and $5.4 million for International Investments.
The Guidelines establish certain parameters for the operations of the
Company, including quantitative and qualitative limitations on the Company's
assets that may be acquired. The Guidelines are to assist and instruct WRSC
and to establish restrictions applicable to transactions with affiliates of
WFSG or with unrelated third parties. A majority of the Independent Directors
will be asked to approve in advance any purchase of assets from WFSG or its
affiliates or any other significant transaction not contemplated under the
Management Agreement or the Servicing Agreements, relying, however, primarily
on information provided by WRSC. The Independent Directors will review the
Company's transactions with unrelated third parties on a quarterly basis to
measure compliance with the Guidelines.
The Company has no predetermined limitations or targets for concentration of
property type or geographic location. Instead, the Company plans to make
acquisition decisions through asset and collateral analysis, evaluating
investments on a case-by-case basis. To the extent that the Company's assets
become concentrated in a few regions or countries, the return on an investment
in the Common Stock will become more dependent on the economy of such regions
or countries.
To create yields commensurate with its investment objectives, the Company
intends to borrow funds under repurchase agreements, secured term loans,
warehouse lines of credit, mortgage loans, issuance of Mortgage-Backed
Securities or other borrowing arrangements, in each case pledging its assets
as collateral security for its repayment obligations. The Company intends to
use the proceeds from securitizations and borrowings to invest in additional
real estate assets and, in turn, to borrow against those newly acquired
assets. The Company's strategy is to repeat this process to the extent
opportunities to use leverage are available and WRSC determines and advises
(and the Independent Directors agree) that using leverage is prudent and
consistent with maintaining an acceptable level of risk until the Company has
significantly leveraged its portfolio of assets. There can be no assurances
that the Company will be able to acquire appropriate assets other than the
Initial Investments, that the terms or results of the Company's acquisitions
will be beneficial to it, or that the Company will achieve its objectives. See
"Risk Factors."
The Company will acquire the Initial Investments from WFSG and its
affiliates. See "Initial Investments."
THE EXPERIENCE OF WFSG AND AFFILIATES. WFSG is primarily engaged in the
acquisition, servicing and resolution of pools of performing, sub-performing
and non-performing residential and commercial mortgage loans, as well as
foreclosed real estate in the United States and foreign countries, currently
France and England. WFSG also acquires mortgage-backed securities, originates
residential mortgage and manufactured housing loans through correspondents,
and services loans for third parties. At June 30, 1997, WFSG and its
subsidiaries had total assets of approximately $1.2 billion, of which
approximately $788.0 million consisted of loans and $136.0 million consisted
of foreclosed real estate and $189.7 million consisted of Mortgage-Backed
Securities.
WFSG acquires pools of loans that, at the time of acquisition, consist
primarily of either (i) non-performing loans that because of their delinquent
status, are available for purchase at prices that reflect a significant
discount
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from their unpaid principal balances ("Discounted Loans") or (ii) performing
and sub-performing loans that are available for purchase at prices that more
closely approximate their unpaid principal balances ("Non-Discounted Loans").
As of June 30, 1997, WFSG held approximately $395.8 million of Discounted
Loans and $392.2 million of Non-Discounted Loans. WFSG generally seeks to
acquire smaller pools of loans (those with an aggregate unpaid principal
balance of less than $20.0 million) for which there is currently less
competitive demand. Since 1991, WFSG and its affiliates have purchased and
serviced over 450 pools of loans for an aggregate purchase price of
approximately $2.5 billion. Comprehensive criteria and procedures have been
established for evaluating the risks associated with mortgage loans and the
real estate securing those loans. In reviewing a pool of loans for possible
acquisition, WFSG's management develops a detailed model from which it
estimates the costs of servicing the loans in that pool and the amount and
timing of cash flows that can be expected to be generated from the loans to
establish an appropriate purchase price.
In addition to pools of loans, WFSG also acquires various classes of
mortgage-backed securities. WFSG's management believes that its experience in
acquiring pools of loans allows it to more effectively evaluate the risks
associated with the pool of loans underlying an issue of mortgage-backed
securities and effectively price those securities. Management also believes
that the size and liquidity of the market for subordinate classes of mortgage-
backed securities and the relatively small size of those classes may from time
to time result in the underpricing of those securities in the market, thus
providing WFSG with attractive acquisition opportunities.
Although many of the Company's prospective competitors may have access to
greater capital and have other advantages, the Company believes that WFSG's
ability to value mortgage loans, real property and mortgage-backed securities
will provide the Company with the means to compete. No assurances can be made,
however, in this regard.
It has been the experience of WFSG's management that there is less
competitive demand for smaller pools of loans (those with an aggregate unpaid
principal balance of less than $20.0 million) as evidenced by WFSG's
management's ability to realize higher yields on such pools and thus the
Company will primarily focus on pools of this size. Further, the Company
believes that its willingness to purchase smaller pools of loans enhances its
acquisition opportunities and allows the Company to develop long-term
relationships and repeat business with private financial institutions.
Investing in real estate located in foreign countries creates risks
associated with the uncertainty of foreign laws and markets and risks related
to currency conversion, especially in certain geographic areas. See "Risk
Factors--Foreign Real Properties Are Subject to Currency Conversion Risks and
Differences in Foreign Laws and Markets." The Company may be subject to
foreign income tax with respect to its investments in foreign real estate.
However, any foreign tax credit that otherwise would be available to the
Company for U.S. federal income tax purposes will not flow through to the
Company's stockholders.
U.S. COMMERCIAL INVESTMENTS. The Company also expects to invest in U.S.
Commercial Properties and Distressed U.S. Commercial Loans.
U.S. Commercial Properties. The Company intends to invest in Commercial
Properties located in the United States, including Commercial Properties
acquired by a mortgage lender at foreclosure, or by receipt of a deed in lieu
of foreclosure, and other distressed commercial and multi-family real
properties.
The Company expects to acquire U.S. Commercial Properties solely for its own
portfolio. From time to time, however, the Company and a co-investor may
submit a joint bid to acquire a pool of U.S. Commercial Properties in order to
enhance the prospects of submitting a successful bid. If successful, the
Company and the co-investor generally would split up the acquired assets in an
agreed-upon manner, although in certain instances the Company and the co-
investor may continue to have a joint interest in the acquired assets.
The Company's policy will be to conduct an investigation and evaluation of
the properties in a portfolio of U.S. Commercial Properties before purchasing
such a portfolio. Prior to purchasing assets, WRSC will
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generally identify and contact real estate brokers and/or appraisers in the
market area of the subject properties to obtain rent and sale comparables and
broker price opinions ("BPOs") for each material asset in a portfolio. This
information is used to supplement due diligence that is performed by WRSC's
employees.
WRSC's due diligence, on behalf of the Company, will generally include the
review of market studies for each market within a portfolio. The studies
typically will include area economic data, employment trends, absorption rates
and market rental rates. WRSC will supplement this information with data from
WFSG's proprietary mortgage loan database, which contains, among other things,
listings of property values and loan loss experience in local markets for
similar assets. Due diligence will also include site inspections by WRSC's
employees or agents of most properties in a portfolio and a review of
available asset files and documentation. To the extent possible those will
include examinations of available legal documents, litigation files,
correspondence, title reports, operating statements, appraisals and
engineering and environmental reports. The information compiled is then
analyzed to determine a valuation for each property.
The property valuation process utilizes a variety of tools which may include
various proprietary financial models that have been developed by WFSG and will
be available to the Company through the Management Agreement. Sources of
information examined to determine value may include: (a) current and
historical operating statements; (b) existing appraisals; (c) BPOs; (d) rent
and sales comparables; (e) industry statistics and reports regarding operating
expenses such as those compiled by the Institute of Real Estate Management;
(f) leases; (g) information from WFSG's proprietary mortgage loan database;
and (h) deferred maintenance observed during site inspections or described in
structural reports, and correspondence found in the loan files.
WRSC develops projections of net operating income and cash flows taking into
account lease rollovers, tenant improvement costs and leasing commissions.
WRSC will compare its estimates of revenue and expenses to historical
operating statements and estimates provided in BPOs, appraisals and general
industry and regional statistics. Market capitalization rates and discount
rates are then applied to the cash flow projections to estimate values. These
values are then compared to available appraisals, BPOs and market sale
comparables to determine recommended bid prices for each asset. The bids take
into account projected holding periods, capital costs and projected profit
expectations. Recommended bid prices are then reviewed with senior management
and a decision whether to bid is made. The amount offered by the Company
generally will be the price that WRSC estimates is sufficient to generate an
acceptable risk-adjusted return on the Company's investment.
After the Company acquires U.S. Commercial Properties, including Foreclosed
Properties, the Company's goal will be to improve management of the property
so as to increase the cash flow from the property. The Company will value its
holdings of Foreclosed Property at the lower of cost or fair value less
estimated costs of sale. The Company will periodically re-evaluate Foreclosed
Property to determine that it is being carried at the lower of cost or fair
value less estimated costs of sale. If cash flows can be increased and the
property stabilized, the Company may begin to seek an opportunity to sell the
property, subject to the REIT qualification rules. Although the period during
which the Company will hold U.S. Commercial Properties will vary considerably
from asset to asset, the Company believes that most such properties will be
held in its portfolio more than four years and generally fewer than ten years.
If the Company is offered the opportunity to purchase U.S. Commercial
Properties that are likely to be held for fewer than four years, the Company
intends to establish a corporation to make the purchase in which the Operating
Partnership will hold a 95% non-voting ownership interest. Such a corporation
will not be eligible for taxation as a qualified REIT subsidiary, and any
profits that it earns on its activities will be subject to federal corporate
income tax before they are distributable to the Company. If the Company
purchases a U.S. Commercial Property with the intent to hold it in the
Operating Partnership for more than four years, but an opportunity arises to
sell the property sooner, the Company will consider certain strategies, such
as a like-kind exchange with a then newly established corporation, to reduce
any negative tax consequences relating to the sale.
Although the Company believes that a permanent market for the acquisition of
U.S. Commercial Properties has emerged in recent years within the private
sector, there can be no assurance that the Company will be able to acquire the
desired amount and type of U.S. Commercial Properties in future periods or
that there will not be
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significant inter-period variations in the amount of such acquisitions. See
"Risk Factors--Investment Activity Risks--Available Investments." Moreover,
there can be no assurance that the Company will be effective in making any
asset acquired more valuable than the price paid to acquire it. See "Risk
Factors--Investment Activity Risks."
Distressed U.S. Commercial Loans. The Company plans to purchase Distressed
U.S. Commercial Loans. Since the late 1980s, a significant market for the
purchase of pools of mortgage loans has developed in the United States.
Today's market is comprised primarily of pools of loans sold by banks, savings
institutions, finance companies, leasing companies, mortgage companies and
insurance companies. Management believes that private financial institutions
in order to reduce their servicing costs and more effectively employ their
capital are increasingly outsourcing the resolution of loans, particularly
those that are sub-performing and non-performing, to specialized companies
with the experience and infrastructure to most efficiently manage those loans.
The Company expects to acquire Distressed U.S. Commercial Loans from a wide
variety of sources. The Company will obtain information on available pools of
loans from several sources, including referrals from sellers with whom WFSG
and its affiliates have transacted business in the past. Pools of loans
generally are acquired in auctions through competitive bids or in negotiated
transactions. The competition for larger pools of loans generally is more
intense and often involves competitive bids. Generally, the Company will
evaluate and purchase smaller pools of loans (those with an aggregate unpaid
principal balance of less than $20.0 million) in negotiated transactions and
auctions for which the Company believes there is currently less competitive
demand. In addition, the Company generally targets Distressed Commercial
Loans. Generally, these Commercial Loans had original principal balances of
less than $5 million. Management believes that there is less competition for,
and higher margins on, smaller balance Distressed Commercial Loans.
Prior to making an offer to purchase a pool of loans, WRSC, on behalf of the
Company, will conduct an investigation and evaluation of the individual loans
comprising the pool of loans and or the separate parcels of real estate in the
pool. This examination typically consists of an analysis of the information
provided by the seller (generally, the credit and collateral files for the
loans), other relevant material that may be available (including tax records)
and the underlying collateral. The Company will compare this data with WFSG's
proprietary mortgage loan database, which contains among other things,
listings of property values and loan loss experience in local markets for
similar assets, obtain value opinions from third parties and, in some cases,
conduct site inspections. In addition, for all loans, the Company will
generally obtain a BPO on each parcel of real property. The Company will also
review information on the local economy and real estate markets including the
amount of time generally required to complete foreclosure on real property in
the jurisdiction in which the property is located. In connection with its
review of a pool of loans being considered for acquisition, the Company will
review each loan or property in such pool of loans and design a preliminary
servicing plan for each loan and property that is intended to maximize the
cash flow from such loan or property.
WRSC's acquisition personnel, who will conduct the due diligence review of
each pool of loans being considered for purchase, will recommend to management
the price to be offered for the pool by using a proprietary modeling system
that focuses on, among other things, the anticipated future cash flow from
each component loan or property. In evaluating anticipated cash flow, the
Company will make a number of assumptions concerning the overall pool of loans
based on its review of each loan or property, including assumptions as to the
percentage of loans to be foreclosed, the timing of the receipt of payments
and the expenses associated with servicing the loans. If an offer is accepted
by the seller, the Company and the seller will enter into a loan sale
agreement, which generally contains representations and warranties by the
seller concerning the loans being sold and an agreement by the seller to
repurchase any loan found to be in breach of those representations and
warranties.
MORTGAGE-BACKED SECURITIES. The Company intends to acquire Mortgage-Backed
Securities backed by one- to four-family residential mortgage loans
("Residential Mortgage-Backed Securities"), and to a lesser extent, commercial
or multi-family mortgage loans ("Commercial Mortgage-Backed Securities").
Mortgage-Backed Securities typically are divided into two or more classes,
sometimes called "tranches." The senior
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classes are higher "rated" securities, which would be rated from low
investment grade "BBB" to higher investment grade "AAA." The junior,
subordinated classes typically would include one or more lower rated, non-
investment grade classes, which would be rated "BB" or lower, or unrated. The
Company may also seek to acquire Mortgage-Backed Securities which (i)
management believes are likely to experience a ratings upgrade as a result of
payment history, prepayment or default experience or otherwise (and the
Company may initiate a review of such rating by requesting that one or more
rating agencies re-rate the related Mortgage-Backed Securities) and (ii) are
secured by pools of mortgage loans originated under guidelines with which
management is familiar due to previous acquisitions of pools of loans
originated thereunder.
For accounting purposes, the Company is expected to assign a risk-adjusted
yield to Mortgage-Backed Securities it acquires based on assumptions as to
losses and prepayments on the underlying mortgage loans. Cash received in
respect of Mortgage-Backed Securities will be applied to interest at the
relevant risk-adjusted yield and the remainder will be applied to defease
principal. The Company generally will seek to assign conservative risk-
adjusted yields. To the extent the Company determines that, in light of actual
default and prepayment experience, anticipated future cash flow in respect of
a Mortgage-Backed Security will result in a lower risk-adjusted yield, the
Company will assign a new, lower risk-adjusted yield. Even if actual default
and prepayment experience is more favorable than the assumed experience, the
Company generally will not increase risk-adjusted yields, but will instead
defease more principal. Furthermore, if the cash received is less than the
accrued yield on the Mortgage-Backed Securities, but the Company still
anticipates a return equal to or in excess of its risk adjusted yield for such
Mortgage-Backed Securities, then the amount by which the cash is less than the
accrued yield will be added to its basis in the Mortgage-Backed Securities.
Mortgage-Backed Securities generally are issued either as pass-through
certificates or notes ("Pass-Through Certificates") or collateralized mortgage
obligations ("CMOs" or "CMO Bonds"). Pass-Through Certificates generally
evidence undivided interests in trusts or debt of the trust, the primary
assets of which are generally mortgage loans. CMO Bonds are debt obligations
of special purpose corporations, owner trusts or other special purpose
entities secured by mortgage loans or Mortgage-Backed Securities. Pass-Through
Certificates and CMO Bonds may be issued or sponsored by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage bankers, commercial banks, investment banks and other entities.
Private Mortgage-Backed Securities are not guaranteed by an entity having the
credit status of a governmental agency or instrumentality and generally are
structured with one or more of the types of credit enhancement described
below. In addition, Mortgage-Backed Securities may be illiquid. See "Risk
Factors--Investment Activity Risks --Credit and Prepayment Risks from
Ownership of Mortgage-Backed Securities in Pools of Residential and Commercial
Mortgage Loans."
In most mortgage loan securitizations, a series of Mortgage-Backed
Securities is issued in multiple classes in order to obtain investment-grade
ratings for the senior classes and thus increase their marketability. Each
class of Mortgage-Backed Securities may be issued with a specific fixed or
variable coupon rate and has a stated maturity or final scheduled distribution
date. Principal prepayments on the mortgage loans comprising the mortgage
collateral may cause the Mortgage-Backed Securities to be retired
substantially earlier than their stated maturities or final scheduled
distribution dates, although, with respect to commercial mortgage loans, there
generally are penalties for or limitations on the ability of the borrower to
prepay the loan. Interest is paid or accrued on Mortgage-Backed Securities on
a periodic basis, typically monthly.
The credit quality of Mortgage-Backed Securities depends on the credit
quality of the underlying mortgage collateral. Among the factors determining
the credit quality of the underlying mortgage loans will be the ratio of the
mortgage loan balances to the value of the properties securing the mortgage
loans, the purpose of the mortgage loans (e.g., refinancing or new purchase),
the amount of the mortgage loans, their terms and the geographic
diversification of the location of the properties, the credit quality of the
borrower, and, in the case of commercial mortgage loans, the creditworthiness
of tenants.
Moreover, the principal of and interest on the underlying mortgage loans may
be allocated among the several classes of mortgage-backed securities in many
ways, and the credit rating of a particular class results
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primarily from the order and timing of the receipt of cash flow generated from
the underlying mortgage loans. Mortgage-Backed Securities carry significant
credit risks. Typically, in a "senior-subordinated" structure, the Mortgage-
Backed Securities provide credit protection to the senior classes by absorbing
losses from loan defaults or foreclosures before such losses are allocated to
senior classes. Moreover, typically, as long as the more senior tranches of
securities are outstanding, all prepayments on the mortgage loans generally
are paid to those senior tranches, until certain overcollateralization targets
are met in the case of Residential Mortgage-Backed Securities, or until the
end of a lock-out period, which typically is five years or more in the case of
Commercial Mortgage-Backed Securities. In some instances, particularly with
respect to Mortgage-Backed Securities in securitizations, the holders of
Mortgage-Backed Securities are not entitled to receive greater than pro-rata
scheduled payments of principal until the more senior tranches are paid in
full or in certain other limited circumstances. Because of this structuring of
the cash flows from the underlying mortgage loans, Mortgage-Backed Securities
in a typical securitization are subject to a substantially greater risk of
non-payment than are those of more senior tranches. Accordingly, the Mortgage-
Backed Securities are assigned lower credit ratings, or no ratings at all.
Neither the Mortgage-Backed Securities nor the underlying mortgage loans are
guaranteed by agencies or instrumentalities of the U.S. government or by other
governmental entities and accordingly are subject, among other things, to
credit risks. See "Risk Factors--Investment Activity Risks--Credit and
Prepayment Risk from Ownership of Mortgage-Backed Securities in Pools of
Commercial and Residential Mortgage Loans."
As a result of the typical "senior-subordinated" structure, the Mortgage-
Backed Securities will be extremely sensitive to losses on the underlying
mortgage loans. For example, if the Company owns a $10 million Mortgage-Backed
Security backed by a $100 million pool of underlying mortgage loans, where all
other Mortgage-Backed Securities issued on such pool are senior, a 7% loss on
the underlying mortgage loans would result in a 70% loss on the Mortgage-
Backed Security. Accordingly, the holder of the Mortgage-Backed Security is
particularly interested in minimizing the loss frequency (the percentage of
the loan balances that default over the life of the mortgage collateral) and
the loss severity (the amount of loss on defaulted mortgage loans, i.e., the
principal amount of the mortgage loan unrecovered after applying any recovery
to the expenses of foreclosure and accrued interest) on the underlying
mortgage loans.
The loss frequency on a pool of mortgage loans will depend upon a number of
factors, many of which will be beyond the control of the Company or the
applicable servicer. Among other things, the default frequency will reflect
broad conditions in the economy generally and real estate particularly,
economic conditions in the local area in which the underlying mortgaged
property is located, the loan-to-value ratio of the mortgage loan, the purpose
of the loan, and the debt service coverage ratio (with respect to commercial
mortgage loans). The loss severity will depend upon many of the same factors
described above, and will also be influenced by the servicer's ability to
foreclose on the defaulted mortgage loan and sell the underlying mortgaged
property. For a discussion of certain legal issues affecting the servicer's
ability to foreclose on a mortgage loan, and the legal impediments to the sale
of the underlying mortgaged property. See "Certain Legal Aspects of Mortgage
Loans and Real Property Investments" and "Federal Income Tax Considerations--
Requirements for Qualification Income Tests." These legal issues may extend
the time of foreclosure proceedings or may require the expenditure of
additional sums to sell the underlying mortgaged property, in either case
increasing the amount of loss with respect to the loan.
Losses on mortgage loans are measured two ways, loss frequency and loss
severity. Loss frequency is estimated by using industry standard predictive
models, supplemented by WFSG's historical data and experience. Loss severity
is estimated by projecting the net resolution proceeds expected to be derived
from the loans based upon WFSG's proprietary in-house computer models which
are then subject to stress testing. This net resolution analysis reviews all
potential forms of resolution, including full payoff, discounted payoff,
reinstatement, foreclosure and sale, deed-in-lieu and sale, and takes into
account, among other things, real estate value (including BPOs), carrying
costs (including, but not limited to, property taxes, insurance and
maintenance) and average months to foreclose, and liquidate, if applicable, in
the particular state. Because the rating agencies tend to be conservative in
their rating of Mortgage-Backed Securities and many investors purchase
Mortgage-Backed Securities primarily on the basis of ratings, the downgrade of
the rating on a Mortgage-Backed Security may
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result in a decline in the price of the security which is disproportionate to
the actual decline in value and result in a potential buying opportunity for a
sophisticated investor, like WRSC, capable of evaluating the underlying
mortgage collateral.
With respect to Commercial Mortgage-Backed Securities, WRSC determines on a
loan-by-loan basis which loans will undergo a full-scope review and which
loans will undergo a more streamlined "desktop analysis." Although the choice
is a subjective one, considerations that influence the choice for scope of
review often include loan size, debt service coverage ratio, loan to value
ratio, loan maturity, lease rollover, property type and geographic location. A
full-scope review may include, among other factors, a property site
inspection, tenant-by-tenant rent roll analysis, review of historical income
and expenses for each property securing the loan, a review of major leases for
each property (if available); recent appraisals (if available), engineering
and environmental reports (if available), and a BPO review. For those loans
that are selected for the more streamlined desktop analysis, WRSC's evaluation
may include a review of the property operating statements, summary loan level
data, third party reports, and a BPO review, each as available. If WRSC's
review of such information does not reveal any unusual or unexpected
characteristics or factors, no further due diligence will be performed. After
completing the review of the documentation and the property inspection, the
information compiled will be analyzed to determine collateral value for each
property securing the loans. Based on these factors, WRSC will determine a
resolution value for each loan for purposes of projecting future cash flows
after adjustments for estimated future losses.
Determining a resolution value is a subjective process, requiring,
ultimately, a business judgment. In making this determination, WRSC will
evaluate some of the following characteristics of the Mortgage-Backed
Securities: (i) the type of collateral (residential multi-family mortgage
collateral, or office, hotel, industrial or retail mortgage collateral); (ii)
the payment status of the underlying mortgage (performing, non-performing or
sub-performing); (iii) the actual mortgage prepayment and default history;
(iv) the ratio of the unpaid mortgage balance to the current property value;
(v) the current income and cash flows generated by commercial real estate as
compared to the debt service requirements and (vi) the region of the country
or the county in which the collateral is concentrated. However, which of these
characteristics (if any) are important and how important each characteristic
may be to the evaluation of a particular Mortgage-Backed Securities depends on
the individual circumstances. Since there are so many characteristics to
consider, each Mortgage-Backed Security, must be analyzed individually, taking
into consideration both objective data as well as subjective analysis.
After completing the foregoing evaluations, WRSC will model the structure of
the residential or commercial Mortgage-Backed Security securitization based on
the disclosure documents that reveal the payment structure of the Mortgage-
Backed Securities and the characteristics of the underlying mortgage
collateral. This modeling is done in order to estimate future cash flows to be
received by the Mortgage-Backed Security, after adjustments for estimated
future losses. Using that information, WRSC will determine the price at which
it would effect the purchase of the Subordinated Interest on behalf of the
Company.
The Company also intends in certain instances to acquire Special Servicing
rights with respect to the mortgage loans underlying Mortgage-Backed
Securities in which the Company owns a subordinated interest. Such Special
Servicing rights will give the Company, among other things, some control over
the timing of foreclosures on such mortgage loans and, thus, may enable the
Company to reduce losses on such mortgage loans. No assurances can be made,
however, that the Company will be able to acquire such Special Servicing
rights or that losses on the mortgage loans will not exceed the Company's
expectations. Although the Company's strategy is to purchase Mortgage-Backed
Securities at a price designed to return the Company's investment and generate
a profit thereon, there can be no assurance that such goal will be met, or
that the Company's investment in a subordinated interest will be returned in
full or at all. See "Risk Factors--Investment Activity Risks" and "--Economic
and Business Risks."
Moreover, many of the Mortgage-Backed Securities to be acquired by the
Company will not have been registered under the Securities Act, but instead
initially were sold in private placements. Because Mortgage-Backed Securities
acquired in private placements have not been registered under the Securities
Act, they will be subject to certain restrictions on resale and, accordingly,
will have more limited marketability and liquidity.
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Although there are exceptions, most issuers of multi-class Mortgage-Backed
Securities elect to be treated, for federal income tax purposes, as REMICs.
Residential Mortgage-Backed Securities. The Company intends to acquire
Subordinated Interests in Residential Mortgage-Backed Securities backed by
"non-conforming" mortgage loans, that is, one- to four-family mortgage loans
that do not qualify for sale to FHLMC or FNMA. Typically, non-conforming
mortgage loans do not meet agency guarantee criteria because their principal
balance exceeds agency limits (e.g., $214,600 is the current single-family
mortgage loan limit of both FNMA and FHLMC). Sometimes the mortgage loans or
the borrower does not meet other agency credit underwriting standards or other
requirements.
A typical Residential Mortgage-Backed Securities series allocates the cash
flow on the underlying mortgage loans so that the Subordinated Interests
shield the more senior classes from losses due to defaults on the underlying
residential mortgage loans, resulting in substantially greater credit risk to
the Subordinated Interests.
In addition to creating credit support for the more senior classes, another
general goal in allocating cash flows from the mortgage loans to the various
classes of a securitization, particularly a Residential Mortgage-Backed
Securities issuance, is to create certain tranches on which the expected cash
flows have a higher degree of predictability than the cash flow on the
underlying mortgage loans. As a general matter, the more predictable the cash
flow is on a particular Residential Mortgage-Backed Securities tranche, the
lower the anticipated yield will be on that tranche at the time of issuance
relative to prevailing market yields on certain other Residential Mortgage-
Backed Securities. As part of the process of creating more predictable cash
flows on certain tranches of a non-conforming mortgage loan securitization,
one or more tranches generally must be created that absorb most of the changes
in the cash flows from the mortgage collateral. The yields on these tranches
generally are higher than prevailing market yields on mortgage-backed
securities with similar expected average lives. Due to the uncertainty of the
cash flows on these tranches, the market prices of, and yields on, these
tranches are more volatile.
Although subordinated interests in Residential Mortgage-Backed Securities
bear substantial credit risk, because of the "shifting interest" structure
typically provided, such subordinated interests tend to be less subject to a
substantial prepayment risk. A shifting interest structure shifts all
prepayments of principal to the more senior, generally investment-grade,
Residential Mortgage-Backed Securities classes in order to increase the
outstanding percentage of subordination. After this initial period during
which prepayments are shifted to the more senior Residential Mortgage-Backed
Securities classes, prepayments then are made pro rata or more likely phased
in over a five-year period until all classes are receiving their pro rata
share. The net effect on the subordinated classes is a degree of call
protection because the principal amounts of the subordinated classes are not
reduced by prepayments of the mortgage loans, generally for at least five
years. The "shifting interest" mechanism creates a subordinated interest in
Residential Mortgage-Backed Securities with a longer but more predictable
average life.
In certain limited circumstances, the Company may, to a lesser extent,
acquire subordinated interests in Residential Mortgage-Backed Securities
secured by lower credit quality mortgage loans known as "B," "C" and "D"
mortgage loans, based on price, availability of Special Servicing, and
additional appraisal information. B, C and D mortgage loans are loans made to
borrowers who have credit histories of a lower overall quality than "A"
borrowers. These credit histories generally result from previous repayment
difficulties, brief job histories, previous bankruptcies or other causes.
Except with respect to loans originated under programs sponsored by HUD, the
loan-to-value ratio for a B, C and D mortgage loan is typically stated to be
significantly lower than the loan-to-value of an "A" mortgage loan, and the
pass-through coupon of a B, C and D mortgage loan is typically higher than the
coupon on an A mortgage loan. As a result of the typically lower loan-to-value
ratios and higher yields on B, C and D mortgage loans, the Company believes
these Residential Mortgage-Backed Securities may justify accepting the higher
credit risk associated with such borrowers.
Commercial Mortgage-Backed Securities. Unlike Residential Mortgage-Backed
Securities, which typically are backed by thousands of single family mortgage
loans, Commercial Mortgage-Backed Securities are backed
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generally by a more limited number of commercial or multi-family mortgage
loans with larger principal balances than those of single family mortgage
loans. As a result, a loss on a single mortgage loan underlying an issue of
Commercial Mortgage-Backed Securities will have a greater negative effect on
the yield of such Commercial-Backed Securities, particularly the subordinated
interests in such Commercial Mortgage-Backed Securities.
The Company believes that there will be opportunities to invest in
subordinated interests in Commercial Mortgage-Backed Securities. Increasingly,
owners of commercial mortgage loans are choosing to securitize their
portfolios. However, no assurances can be made that appropriate opportunities
for investment in Commercial Mortgage-Backed Securities will continue to be
available.
Special Servicing. The Company intends generally to acquire Special
Servicing rights with respect to the mortgage loans underlying Mortgage-Backed
Securities it purchases when available. Acquiring these rights will give the
Company some ability to mitigate losses characteristic of defaulted mortgage
loans.
The terms of Special Servicing agreements vary considerably, and the Company
cannot predict with certainty the precise terms of the Special Servicing
agreements into which it will enter. In general, however, the Company will
attempt to negotiate Special Servicing agreements that will permit the Company
to service, or to direct the servicing of, mortgage loans that are more than
90-days delinquent. At that point, the Company would have the right (and the
obligation) to decide whether to begin foreclosure proceedings or to seek
alternatives to foreclosure, such as forbearance agreements, partial payment
forgiveness, repayment plans, loan modification plans, loan sales and loan
assumption plans. Thus, the Company will have within its control, subject to
obligations to the related senior classes, some ability to minimize losses on
mortgage loans underlying Mortgage-Backed Securities owned by the Company.
Because the Operating Partnership generally will be the entity that acquires
the Mortgage-Backed Securities, it also will acquire the related Special
Servicing rights, if any. The Operating Partnership intends to assign to WCC,
all of its Special Servicing rights and obligations (other than the right to
direct foreclosure). It is expected that most or all of the Special Servicing
compensation will be paid to WCC, and thus the Company may benefit from the
ability to direct certain of the Special Servicing activities but not from
receipt of material amounts of Special Servicing fees.
Because the acquisition and Special Servicing of troubled real estate is one
of WCC's business focuses, WCC has an established network of real estate
professionals throughout the United States to assist its asset management
activities. WFSG and WCC maintain working relationships with approved
engineers, environmental consultants, real estate brokers and local counsel
nationwide, and call upon these local advisors for assistance when
appropriate. See "Servicing Agreements."
The Company will seek to resolve Distressed U.S. Commercial Loans as
expeditiously as possible, generally within one to two years. The Company's
servicing plan for such loans will consist of foreclosure, compromise, a
discounted payoff or, in some cases, reinstatement. Distressed U.S. Commercial
Loans may become Foreclosed Property on the Company's balance sheet if the
Company obtains title to the underlying properties through foreclosure or
otherwise as part of its resolution of those loans. See "Risk Factors--Default
Risk Associated with Distressed Mortgage Loans."
The legal aspects of the mortgage loans that underlie the Mortgage-Backed
Securities owned and to be acquired by the Company affect the value of those
assets. For a discussion of certain legal aspects of mortgage loans, see
"Certain Legal Aspects of Mortgage Loans and Real Property."
INTERNATIONAL INVESTMENTS. The Company's International Investments may
consist of performing and non-performing Commercial Mortgage Loans and
Residential Mortgage Loans or Commercial Properties and Residential Properties
located outside the United States, including Foreclosed Properties. The
Company's focus on International Investments is based on two primary factors:
(i) difficulties in the European economies and (ii) the introduction of U.S.-
style lending and secondary financing techniques in foreign economies (i.e.,
Western
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Europe and Latin America). In much of Europe, real properties have generally
experienced a sharp decline in value, resulting in higher mortgage loan
default rates and the need for financial institutions to dispose of distressed
mortgage loans and raise new capital. The Company believes it can acquire such
distressed loans and enhance their value through WFSG's expertise in loan
acquisitions, U.S.-style loan servicing and aggressive work-out approaches.
The Company also believes it can finance its acquisitions through local
currencies and through U.S.-style financing techniques.
In addition, in recent years lenders in the United States have entered the
European market with U.S. mortgage lending techniques, including expedited
approval and closing procedures, which are more efficient than the techniques
traditionally offered by European financial institutions. This has resulted in
an increase in mortgage production in Europe and the need for secondary
financing sources. The Company intends to exploit these opportunities through
wholesale acquisitions and direct origination. In Latin America, U.S.
secondary financing sources have recently begun extending credit to local loan
originators, thereby increasing loan origination volume. The Company intends
to use such secondary financing sources to originate government-guaranteed
loans or to buy wholesale in certain Latin American markets.
The Company believes that U.S-style loan servicing, as opposed to certain
foreign customary procedures, with its automated systems and detailed investor
reporting and aggressive work-out approaches, results in enhanced or quicker
access to cash flow, thereby increasing the value of the assets. Most
purchasers of distressed loans in the United Kingdom and France are U.S.-based
and have utilized U.S.-style servicing and investor reporting. With the
exception of recently originated loans, the prevailing loan servicing and
reporting systems in the United Kingdom and France are less technologically
developed and more labor intensive than those in the United States. WFSG's
loan servicing operations in the United Kingdom and France utilize WCC's U.S.-
based servicing system, which has been adapted for servicing loans in each
such country.
WFSG has established offices in the United Kingdom and France with a total
of approximately 38 full-time employees as of June 30, 1997, including the
former chief executive officer of Securum Holdings N.V., a Swedish banking
company responsible for the resolution of distressed real estate loans made by
Swedish banks throughout Europe. Upon the closing of this Offering, the
Company intends to engage WFSG to service loans in the United Kingdom and
France.
In the future, management of the Company intends to also consider
International Investments in the rest of Western Europe, Latin America and
other regions.
OTHER REAL ESTATE RELATED INVESTMENTS
Construction Financing and Loans Subject to Prior Liens. The Company may
take advantage of opportunities to provide construction or rehabilitation
financing on commercial property, lending generally 85% to 90% of total
project costs, and taking a first lien mortgage to secure the debt. The
Company also may invest in loans that are subordinate to first lien mortgage
loans on commercial real estate. For example, on a commercial property subject
to a first lien mortgage loan with a principal balance equal to 70% of the
value of the property, the Company could lend the owner of the property
(typically a partnership) an additional 15% to 20% of the value of the
property. Typically the loan would be secured, either by the property subject
to the first lien (giving the Company a second lien position) or by a
controlling equity interest in the owner. If the equity interest is pledged,
then the Company would be in a position to make decisions with respect to the
operation of the property in the event of a default by the owner. These loans
generally would provide the Company with the right to receive a stated
interest rate on the loan balance plus a percentage of net operating income
(where such amounts would not jeopardize WREIT's status as a REIT) or gross
revenues from the property, payable to the Company on an ongoing basis, and a
percentage of any increase in value of the property, payable upon maturity or
refinancing of the loan, or otherwise would allow the Company to charge an
interest rate that would provide an attractive risk-adjusted return.
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Sale Leaseback Transactions. In addition, the Company may participate in
sale leaseback transactions, in which the Company would purchase improved or
unimproved real estate and then lease such real estate back to the seller
under a long-term triple net lease. The Company also may provide financing
necessary to build commercial improvements on the land, to refinance existing
debt on the property or to provide additional funds to operate the business.
After participating in a number of these transactions, the Company may pool
the leased real estate, and issue debt backed by the real estate and the
related leases in a securitization transaction.
Other Mortgage-Backed Securities. The Company may invest not only in classes
of Mortgage-Backed Securities but also in other classes of Mortgage-Backed
Securities. For example, the Company may invest in IOs, which are entitled to
no (or only nominal) payments of principal, but only to payments of interest.
The holder of an IO may be entitled to receive a stated rate of interest on a
notional principal balance equal to the principal balance of the mortgage
collateral, that portion that bears interest in excess of a certain rate on
one or more classes of that Mortgage-Backed Securities (such as where the
mortgage collateral (or portion thereof) carries an 8.5% interest rate after
servicing costs, and the holders of the other classes are entitled to receive
8.0% interest, leaving 0.5% for the holder of the IO). Alternatively, the
holder of an IO may be entitled to a variable rate of interest on a nominal
principal balance that adjusts based upon adjustment in the interest rate of
the underlying mortgage collateral. The Company will seek to purchase IOs to
hedge against maturity extension risk in the event that the Company encounters
slower than anticipated prepayments while still achieving an acceptable return
on the purchase of such IOs.
Because IOs often pay at a relatively small rate of interest on a large
notional principal balance, an accelerated reduction of that principal balance
will have an adverse effect on the anticipated yield to maturity of such IO.
Accordingly, if the underlying mortgage collateral prepays (including
prepayments as a result of default and repurchases by the seller) at a rate
faster than anticipated, the weighted average life of the IO will be reduced,
and the yield to maturity adversely affected. Conversely, if the underlying
mortgage collateral prepays at a rate slower than anticipated, the weighted
average life of the IO will be extended, with the consequent positive effect
on the anticipated yield to maturity.
Residential mortgage loans typically do not have any prepayment penalty,
with the result that prepayments tend to increase during periods of falling
interest rates, and decrease during periods of rising interest rates. However,
prepayments are dependent upon a number of other factors as well (such as the
number of jobs available in the area, general economic conditions and the
borrower's need for additional cash). Commercial loans often carry prepayment
restrictions, or require that the borrower pay a prepayment penalty (which
generally is not for the benefit of the holder of the IO). In any event, it is
very difficult to predict the prepayment pattern for any particular Mortgage
Collateral, which makes it harder to predict the actual yield with respect an
IO.
PORTFOLIO MANAGEMENT
The following describes some of the investment management practices that the
Company may employ from time to time to earn income, facilitate portfolio
management (including managing the effect of maturity or interest rate
sensitivity) and mitigate risk (such as the risk of changes in interest
rates). There can be no assurance that the Company will not amend or deviate
from these policies or adopt other policies in the future.
Leverage and Borrowing. The Company intends to leverage its assets after the
proceeds of the Offering have been fully invested, primarily through
repurchase agreements, secured term loans, warehouse lines of credit, mortgage
loans, issuance of Mortgage Backed Securities and other borrowing
arrangements. The Company does not intend to borrow funds from WRSC or its
affiliates. If changes in market conditions cause the cost of such financing
to increase relative to the income that can be derived from securities
purchased with the proceeds thereof, the Company may reduce the amount of
leverage it utilizes. The real properties which the Operating Partnership is
purchasing from Wilshire Properties 1 and Wilshire Properties 2 are subject to
existing indebtedness of $5.6 million, which the Operating Partnership will
assume at Closing.
Leverage creates an opportunity for increasing return on investment but, at
the same time, creates additional risk. For example, leveraging magnifies
changes in the return on an investment to the Company and affects the
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<PAGE>
amounts available for distribution to stockholders. Although the amount owed
will be fixed, the Company's assets may change in value during the time the
debt is outstanding. Leverage will create interest expenses for the Company
which can exceed the revenues from the leveraged assets. See "Risk Factors--
Economic and Business Risks."
To the extent that leveraging permits the Company to acquire a large amount
of assets, the net income can be greater than would be generated by fewer
assets on a unleveraged basis. If the incremental revenues derived from the
additional assets acquired with borrowed funds exceed the interest expense the
Company will have to pay, the Company's return on investment will be greater
than if borrowing had not been used. Conversely, if the incremental additional
revenues from the larger asset base acquired using borrowed funds are not
sufficient to cover the cost of borrowing, the net income of the Company will
be less than if borrowing had not been used. See "Risk Factors--Economic and
Business Risks--Use of Leverage."
Under certain circumstances, and notwithstanding adverse interest rate or
market conditions, the Company may use leverage to obtain sufficient cash to
make required distributions of dividends or to fund share repurchases and
tender offers when such leveraging is deemed to be in the best interests of
stockholders.
Repurchase Agreements. The Company intends to enter into repurchase
agreements, which are agreements under which the Company would sell assets to
a third party with the commitment that the Company repurchase such assets from
the purchaser at a fixed price on an agreed date. Repurchase agreements may be
characterized as loans to the Company from the other party that are secured by
the underlying assets. The repurchase price reflects the purchase price plus
an agreed market rate of interest.
Bank Credit Facilities. The Company intends to borrow money through various
bank credit facilities or term loans, which will have varying interest rates,
which may be fixed or adjustable, and have varying maturities.
Mortgage-Backed Securities And Warehouse Lines of Credit. The Company may
purchase mortgage loans or other real property assets and issue Mortgage-
Backed Securities collateralized by such assets. Moreover, the Company may
issue Mortgage-Backed Securities collateralized by previously issued Mortgage-
Backed Securities in transactions known as "resecuritizations."
Interest Rate Risk Management Techniques. The Company may engage in a
variety of interest rate risk management techniques for the purpose of
managing the effective maturity or its interest rate spread. These techniques
also may be used to attempt to protect against changes in the market value of
the Company's assets or liabilities resulting from general trends in debt
markets. Any such transaction is subject to risks, and may limit the potential
earnings on the Company's investment in real estate related assets. Such
techniques may include puts and calls on securities or indices of securities,
interest rate futures contracts and options on such contracts, interest rate
swaps (the exchange of fixed-rate payments for floating-rate payments), or
other such transactions. Applicable REIT qualification rules may limit the
Company's ability to use certain of these techniques, except through a
corporate subsidiary that is fully subject to corporate income taxation. See
"Federal Income Tax Considerations--Requirements for Qualification--Income
Tests."
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<PAGE>
MANAGEMENT OF OPERATIONS
WILSHIRE FINANCIAL SERVICES GROUP INC.
The Experience of WFSG and its Affiliates. WFSG is primarily engaged in the
acquisition, servicing and resolution of pools of performing, sub-performing
and non-performing residential and commercial mortgage loans, as well as
foreclosed real estate. WFSG also acquires mortgage-backed securities,
originates residential mortgage and manufactured housing loans through
correspondents and services loans for third parties. At June 30, 1997, WFSG
and its subsidiaries had total assets of approximately $1.2 billion, of which
approximately $788.0 million consisted of loans, $136.0 million consisted of
foreclosed real estate and $189.7 consisted of Mortgage-Backed Securities.
WFSG acquires pools of loans that at the time of acquisition, consist
primarily of either (i) non-performing loans that because of their delinquent
status, are available for purchase at prices that reflect a significant
discount from their unpaid principal balances ("Discounted Loans") or (ii)
performing and subperforming loans that are available for purchase at prices
that more closely approximate their unpaid principal balances ("Non-Discounted
Loans"). As of June 30, 1997, WFSG had approximately $395.8 million of
Discounted Loans and approximately $392.2 million of Non-Discounted Loans.
WFSG generally seeks to acquire smaller pool of loans (those with an aggregate
unpaid principal balance of less than $20.0 million) for which there is
currently less competitive demand. Since 1991, WFSG and its affiliates have
purchased and serviced over 450 pools of loans for an aggregate purchase price
of approximately $2.5 billion. Comprehensive criteria and procedures have been
established for evaluating the risks associated with mortgage loans and the
real estate securing those loans. In reviewing a pool of loans for possible
acquisition, management develops a detailed model from which it estimates the
costs of servicing the loans in that pool and the amount and timing of cash
flows that can be expected to be generated from the loans to establish an
appropriate purchase price.
WFSG plans to continue to build on its technology-driven specialty servicing
platforms so as to effectively and efficiently service loan pools to maximize
the timing and amount of cash flow from such loan pools and better evaluate
and price potential loan acquisitions. In addition to pools of loans, WFSG
also acquires various classes of Mortgage-Backed Securities. Management
believes that its experience in acquiring pools of loans allows it to more
effectively evaluate the risks associated with the pool of loans underlying an
issue of Mortgage-Backed Securities and effectively price those securities.
Management also believes that the size and liquidity of the market for
subordinate classes of Mortgage-Backed Securities and the relatively small
size of those classes may from time to time result in the underpricing of
those securities in the market, thus providing WFSG with attractive
acquisition opportunities.
Although many of the Company's prospective competitors may have access to
greater capital, the Company believes that the experience of WFSG in managing,
servicing and resolving real estate assets will provide the Company with the
means to compete. No assurances can be made, however, in this regard. WFSG
through its subsidiaries will provide WRSC with substantially all of the
administrative and managerial services in connection with the operations of
the Company.
WFSG's executive offices are located at 1776 SW Madison Street, Portland,
Oregon 97205, and the telephone number of its executive offices is (503) 223-
5600.
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WILSHIRE REALTY SERVICES CORPORATION
WRSC is a wholly-owned subsidiary of WFSG. The following tables set forth
certain information about the directors and executive officers of WRSC.
Messrs. Wiederhorn and Mendelsohn are also directors of the Company. No
director or executive officer is related by blood, marriage or adoption to any
other director or executive officer of the Company or WRSC or any of their
respective affiliates.
Directors of WRSC
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
- ---- --- ----------------
<S> <C> <C>
Andrew A. Wiederhorn................ 31 Chairman of the Board, CEO, Secretary,
Treasurer and Director
Lawrence A. Mendelsohn.............. 36 President and Director
</TABLE>
Executive Officers Who Are Not Directors
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
- ---- --- ----------------
<S> <C> <C>
Chris Tassos....................................... 40 Executive Vice President
Philip D. Vincent.................................. 43 Executive Vice President
Bo G. Aberg........................................ 48 Senior Vice President
Peter O'Kane....................................... 31 Senior Vice President
Glenn J. Ohl....................................... 43 Chief Financial Officer
</TABLE>
The principal occupation for the last five years of each director and
executive officers of WRSC, as well as some other information, is set forth
below.
Andrew A. Wiederhorn is the Chairman of the Board of Directors, Chief
Executive Officer, Secretary, Treasurer, and a director of both WRSC and WFSG.
In 1987 Mr. Wiederhorn founded WCC and continues to serve as the Chief
Executive Officer of WCC and certain of its affiliates. Mr. Wiederhorn
received his B.S. degree in Business Administration from the University of
Southern California.
Lawrence A. Mendelsohn is the President and a director of WRSC. He is also
the President and a director of WFSG, and since October 1996 Mr. Mendelsohn
serves as the President of WCC and certain of its affiliates. From February
1993 until October 1996, he was the Executive Vice President of WCC and
certain of its affiliates. From January 1992 until February 1993 Mr.
Mendelsohn was Vice President, Principal and Head of Capital Markets for
Emerging Markets of Bankers Trust New York Corporation/BT Securities
Corporation. From August 1987 until January 1992 Mr. Mendelsohn was the Vice
President, Senior Options Principal and Head of Proprietary Trading for
Equities, Equity Options and Distressed Debt for J.P. Morgan and Co./J.P.
Morgan Securities. Mr. Mendelsohn received an A.B. degree in Economics from
the University of Chicago, an M.A. degree in International Politics from the
University of Texas, an M.S. degree in Business Research from the University
of Southern California and a Ph.D./ABD in Finance from the University of
Southern California.
Chris Tassos is an Executive Vice President of WRSC. Mr. Tassos is also
Executive Vice President and Chief Financial Officer of WFSG. Since August,
1997, Mr. Tassos has been the Executive Vice President of Finance of WCC
previously serving as the Senior Vice President from August, 1995 until
August, 1997. From March 1992 until February 1995 he was the Chief Financial
Officer and/or Senior Vice President of Finance of Long Beach Mortgage Company
(formerly Long Beach Bank). Mr. Tassos received a B.A. degree from California
State University, Fullerton. From July 1979 until April 1984 and May 1985
until September 1990 Mr. Tassos was an auditor for Deloitte & Touche LLP.
Phillip D. Vincent is an Executive Vice President of WRSC and Executive Vice
President, Loan Servicing of WFSG. Mr. Vincent was Senior Vice President, Loan
Servicing of WFSG from October 1996 until June 1997. Mr. Vincent was Senior
Vice President and Chief Administrative Officer of the J.E. Robert Company,
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Inc., one of the largest real estate and mortgage investment managers in the
U.S., from April 1995 until July 1996, Senior Vice President and Managing
Officer of The J.E. Robert Company, Inc. from June 1992 until September 1995,
and Vice President and Division Manager of The J.E. Robert Company, Inc. from
January 1991 until May 1992. Mr. Vincent is a member of the American Institute
of Certified Public Accountants. Mr. Vincent received a B.S. degree in Finance
from Oklahoma State University.
Bo G. Aberg is a Senior Vice President of WRSC. Mr. Aberg is also Senior
Vice President, European Operations of WFSG. From November 1994 to September
1996, Mr. Aberg was Chief Executive Officer of Securum Holding B.V., a Kingdom
of Sweden owned work-out company in Europe. From September 1992 to November
1994, Mr. Aberg was Chief Executive Officer of Securum Real Estate Group,
Malmo, Sweden. From January 1982 to September 1992 Mr. Aberg held several
positions within the PK Group (a Swedish banking group), and from September
1974 to January 1982 he was a Chartered Accountant for Hagstroms Revisions
Byra AB Sweden (now Ernst & Young). Mr. Aberg received the equivalent of a
B.S. degree in Economics (Ekonomexanon) and an academic degree in Law
(Jurkandexamen) both from the University of Stockholm, Sweden.
Peter O'Kane is a Senior Vice President of WRSC. Mr. O'Kane is also Senior
Vice President, Loan Acquisitions of WFSG from June, 1997. Mr. O'Kane was Vice
President, Loan Acquisitions form October 1996 until June 1997. From May 1994
until October 1996 Mr. O'Kane was the Vice President, Loan Acquisitions of WCC
and its affiliates. From September 1992 until April 1994 Mr. O'Kane was an
Asset Manager, Investment Division of J.E. Robert Company, Inc. From September
1991 until September 1992 Mr. O'Kane was a staff consultant with Arthur
Andersen & Company. From March 1990 until August 1991 Mr. O'Kane was an
analyst for GranCorp, Inc., a real estate investment company. Mr. O'Kane
received a B.A. degree from the University of Washington.
Glenn J. Ohl is the Chief Financial Officer of WRSC. He is also the Senior
Vice President and Chief Financial Officer of Wilshire Funding Corporation
("WFC") and WCC. Mr. Ohl was Chief Financial Officer of WFC from November 1996
until June 1997. From August 1995 until October 1996 Mr. Ohl was the Senior
Vice President and Corporate Treasurer of CWM Mortgage Holdings, Inc., an
affiliate of Countrywide Credit Industries Inc., a residential financing
company. From September 1992 until August 1995 Mr. Ohl was the Executive Vice
President and Chief Financial Officer of ARCS Mortgage, Inc., a financing
company. Mr. Ohl received a B.A. degree from Franklin and Marshall College and
an M.B.A. degree from New York University.
Officers, directors and other personnel have significant experience in
mortgage finance and the operation of commercial real estate; however, none
have previously managed a REIT. See "Risk Factors--Newly Organized
Corporation."
THE MANAGEMENT AGREEMENT
The Company will enter into the Management Agreement with WRSC for an
initial term expiring on the second anniversary of the Closing Date.
Thereafter, the Management Agreement will automatically renew for successive
one-year periods unless either party delivers a notice of termination at least
120 days prior to the end of the then current term. The Company may terminate,
or decline to extend the term of, the Management Agreement without cause at
any time after the first two years upon 60 days written notice by a majority
vote of the Independent Directors or by a vote of the holders of a majority of
the outstanding shares of Common Stock; provided that a termination fee, equal
to the sum of the base management fee and incentive management fee earned
during the twelve months preceding such termination, will be due. In addition,
the Company has the right to terminate the Management Agreement upon the
occurrence of certain specified events, including a material breach by WRSC of
any provision contained in the Management Agreement, without the payment of
any termination fee.
WRSC at all times will be subject to the supervision of the Company's Board
of Directors and will have only such functions and authority as the Company
may delegate to it. WRSC will be responsible for the day-to-
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<PAGE>
day operations of the Company and will perform (or cause to be performed) such
services and activities relating to the assets and operations of the Company
as WRSC deems to be appropriate, including (or cause to be performed):
(i) serving as the Company's consultant with respect to formulation of
investment criteria and preparation of policy Guidelines by the Board of
Directors;
(ii) representing the Company in connection with the purchase and
commitment to purchase assets, the sale and commitment to sell assets, and
the maintenance and administration of its portfolio of assets;
(iii) furnishing reports and statistical and economic research to the
Company regarding the Company's activities and the services performed for
the Company by WRSC;
(iv) monitoring and providing to the Board of Directors on an ongoing
basis price information and other data obtained from certain nationally
recognized dealers that maintain markets in assets identified by the Board
of Directors from time to time, and providing data and advice to the Board
of Directors in connection with the identification of such dealers;
(v) providing executive and administrative personnel, office space and
office services required in rendering services to the Company;
(vi) administering the day-to-day operations of the Company and
performing and supervising the performance of such other administrative
functions necessary in the management of the Company as may be agreed upon
by WRSC and the Board of Directors, including the collection of revenues
(other than servicing) and the payment of the Company's debts and
obligations and maintenance of appropriate computer services to perform
such administrative functions;
(vii) communicating on behalf of the Company with the holders of any
equity or debt securities of the Company as required to satisfy the
reporting and other requirements of any governmental bodies or agencies or
trading markets and to maintain effective relations with such holders;
(viii) to the extent not otherwise subject to an agreement executed by
the Company, designating a servicer for mortgage loans sold to the Company
and arranging for the monitoring and administering of such servicers;
(ix) advising the Company in connection with policy decisions to be made
by the Board of Directors;
(x) engaging in hedging activities on behalf of the Company, consistent
with the Company's status as a REIT and with the Guidelines;
(xi) upon request by and in accordance with the directions of the Board
of Directors, investing or reinvesting any money of the Company; and
(xii) advising the Company regarding the maintenance of its status as a
REIT and monitoring compliance with the various REIT qualification tests
and other rules set out in the Code and Treasury Regulations thereunder.
Portfolio Management. WRSC will perform portfolio management services on
behalf of the Company and the Operating Partnership pursuant to the Management
Agreement with respect to the Company's investments. Such services will
include, but not be limited to, consulting with the Company on purchase and
sale opportunities, collection of information and submission of reports
pertaining to the Company's assets, interest rates, and general economic
conditions, periodic review and evaluation of the performance of the Company's
portfolio of assets, acting as liaison between the Company and banking,
mortgage banking, investment banking and other parties with respect to the
purchase, financing and disposition of assets, and other customary functions
related to portfolio management. WRSC may enter into subcontracts with other
parties, including its affiliates, to provide any such services to the
Company.
Monitoring Services. WRSC will perform monitoring services on behalf of the
Company pursuant to the Management Agreement with respect to the Company's
portfolio of Mortgage Loans and Special Servicing rights. Such monitoring
services will include, but not be limited to, the following activities:
negotiating Special Servicing agreements; serving as the Company's consultant
with respect to the Special Servicing of mortgage
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<PAGE>
loans; collection of information and submission of reports pertaining to the
mortgage loans and to moneys remitted to WRSC or the Company; acting as a
liaison between the servicers of the mortgage loans and the Company and
working with servicers to the extent necessary to improve their servicing
performance; with respect to mortgage loans for which the Company is Special
Servicer, periodic review and evaluation of the performance of each servicer
to determine its compliance with the terms and conditions of the related
servicing agreement; review of and recommendations as to fire losses, easement
problems and condemnation, delinquency and foreclosure procedures with regard
to mortgage loans; review of servicers' delinquency, foreclosure and other
reports on mortgage loans; supervising claims filed under any mortgage
insurance policies; and enforcing the obligation of any servicer to repurchase
mortgage loans. WRSC may enter into subcontracts with other parties, including
WFSG and its affiliates, to provide any such services for WRSC.
Management Fees and Expenses. WRSC will receive a base management fee equal
to 1% per annum, of the first $1.0 billion of the Average Invested Assets, and
0.75% of the next $500.0 million of the Average Invested Assets and 0.50% of
the Average Invested Assets above $1.5 billion. The term "Average Invested
Assets" for any period means the average of the aggregate book value of the
assets of the Company, including the assets of all of its direct and indirect
subsidiaries, before reserves for depreciation or bad debts or other similar
noncash reserves, computed by taking the daily average of such values during
such period. WRSC will not receive any management fee for the period prior to
the sale of the shares of Common Stock offered hereby. The base management fee
is intended to compensate WRSC for its costs in providing management services
to the Company. The Board of Directors of the Company may adjust the base
management fee in the future if necessary to align the fee more closely with
the actual costs of such services.
WRSC shall be entitled to receive incentive compensation for each fiscal
quarter in an amount equal to the product of (A) 25% of the dollar amount by
which (1)(a) Funds from Operations (before the incentive fee) of the Company
per share of Common Stock (based on the weighted average number of shares
outstanding) (b) plus gains (or minus losses) from debt restructuring and
sales of property per share of Common Stock (based on the weighted average
number of shares outstanding), exceed (2) an amount equal to (a) the weighted
average of the price per share at the initial offering and the prices per
share at any secondary offerings by the Company multiplied by (b) the Ten-Year
U.S. Treasury Rate plus five percent per annum multiplied by (B) the weighted
average number of shares of Common Stock outstanding during such period.
"Funds from Operations" as defined by the National Association of Real Estate
Investment Trusts ("NAREIT") means net income (computed in accordance with
GAAP) excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation and amortization on real estate assets, and after
adjustments for unconsolidated partnerships and joint ventures. Funds from
Operations does not represent cash generated from operating activities in
accordance with GAAP and should not be considered as an alternative to net
income as an indication of the Company's performance or to cash flows as a
measure of liquidity or ability to make distributions. As used in calculating
WRSC's compensation, the term "Ten Year U.S. Treasury Rate" means the
arithmetic average of the weekly average yield to maturity for actively traded
current coupon U.S. Treasury fixed interest rate securities (adjusted to
constant maturities of ten years) published by the Federal Reserve Board
during a quarter, or, if such rate is not published by the Federal Reserve
Board, any Federal Reserve Bank or agency or department of the federal
government selected by the Company. If the Company determines in good faith
that the Ten Year U.S. Treasury Rate cannot be calculated as provided above,
then the rate shall be the arithmetic average of the per annum average yields
to maturities, based upon closing asked prices on each business day during a
quarter, for each actively traded marketable U.S. Treasury fixed interest rate
security with a final maturity date not less than eight nor more than twelve
years from the date of the closing asked prices as chosen and quoted for each
business day in each such quarter in New York City by at least three
recognized dealers in U.S. government securities selected by the Company.
The ability of the Company to generate Funds from Operations in excess of
the Ten Year U.S. Treasury Rate, and of WRSC to earn the incentive
compensation described in the preceding paragraph, is dependent upon the level
and volatility of interest rates, the Company's ability to react to changes in
interest rates and to utilize successfully the operating strategies described
herein, and other factors, many of which are not within the Company's control.
35
<PAGE>
Because employees of WRSC and its affiliates will perform certain due
diligence tasks that purchasers of real estate (including managers of REITs)
typically hire outside consultants to perform, WRSC will be reimbursed for (or
charge the Company directly for) WRSC's out of pocket costs in performing such
due diligence on assets purchased or considered for purchase by the Company.
The Company does not expect to maintain an office or to employ full-time
personnel. WRSC and its affiliates will track the time their employees spend
in performing such due diligence tasks and will be entitled to reimbursement
for the allocated portion of the salary and benefits of such employees.
Expense reimbursement will be made quarterly.
The management fees are payable in arrears. WRSC's base and incentive fees
and due diligence and other expenses shall be calculated by WRSC within 45
days after the end of each quarter, and such calculation shall be promptly
delivered to the Company. The Company is obligated to pay such fees and
expenses within 60 days after the end of each fiscal quarter.
<TABLE>
<CAPTION>
FEE AMOUNT
- --- ------
<S> <C>
Base Management Fee.......... Equal to 1% per annum of the first $1.0 billion of
Average Invested Assets, 0.75% of the next $500.0
million of Average Invested Assets and 0.50% of
Average Invested Assets above $1.5 billion.
Incentive Fee................ Based on the amount, if any, by which the
Company's Funds from Operations plus certain gains
(minus certain losses) exceed a hurdle rate.
Expense Reimbursement........ Reimbursement of due diligence costs and out-of-
pocket expenses.
</TABLE>
Limits of Responsibility.
Pursuant to the Management Agreement, WRSC will not assume any
responsibility other than to render the services called for thereunder and
will not be responsible for any action of the Company's Board of Directors in
following or declining to follow its advice or recommendations. WRSC, its
directors and its officers will not be liable to the Company, any subsidiary
of the Company, the Independent Directors, the Company's stockholders or any
subsidiary's stockholders for acts performed in accordance with and pursuant
to the Management Agreement, except by reason of acts constituting bad faith,
willful misconduct, gross negligence or reckless disregard of their duties
under the Management Agreement. The Company has agreed to indemnify WRSC, its
directors and its officers with respect to all expenses, losses, damages,
liabilities, demands, charges and claims arising from acts of WRSC not
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of duties, performed in good faith in accordance with and pursuant
to the Management Agreement.
The Management Agreement does not limit or restrict the right of WRSC or any
of its officers, directors, employees or Affiliates from engaging in any
business or rendering services of any kind to any other person, including the
purchase of, or rendering advice to others purchasing, assets that meet the
Company's policies and criteria. WRSC has agreed, however, to give the Company
right of first refusal with respect to International Investments, U.S.
Commercial Investments and Mortgage-Backed Securities, subject to certain
exceptions. See "Risk Factors--Potential Conflicts of Interest" and "--Certain
Relationships; Conflicts of Interest."
STOCK OPTIONS
The Company intends to adopt a non-qualified stock option plan (the "Option
Plan"), which provides for options to purchase shares of Common Stock (or, at
the election of the Company, Units that may be redeemed for cash, or, at the
election of the General Partner, shares of Common Stock on a one-for-one
basis). See "Operating Partnership--Redemption Rights." The maximum aggregate
number of shares of Common Stock that may be issued pursuant to options
granted under the Option Plan is 6,000,000 shares.
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<PAGE>
Before Closing, the Company will grant to WRSC and the Independent Directors
options under the Option Plan, representing the right to acquire 2,000,000
shares of Common Stock (2,300,000 assuming the Underwriters exercise their
over-allotment option in full), at an exercise price per share equal to the
initial offering price of the Common Stock. If the price per share equal to
the initial offering price of the Common Stock. If the options could be
exercised immediately, they would represent 11.0% of the number of shares of
Common Stock outstanding after completion of this Offering. However, the
options cannot be exercised immediately. One quarter of WRSC's options become
exercisable on each of the first four anniversaries of the Closing. The
options terminate on the tenth anniversary of the Closing.
Upon the Closing, the Company will grant each Independent Director an option
to purchase 5,000 shares of Common Stock at an exercise price equal to the
initial offering price. In the future, newly elected Independent Directors
will receive options to purchase 5,000 shares of Common Stock at the closing
price on the day that they join the Board. These options shall vest
immediately with the recipient. In addition, on the last trading day of each
calendar quarter, the Company will automatically grant each Independent
Director a non-statutory stock option to purchase 1,500 of shares of Common
Stock at 110% of the fair market value on that day. Each of these director
options will vest and be exercisable as follows: one-third on each of the
first, second and third anniversaries of the grant date and will terminate
(unless sooner terminated under the terms of the Option Plan) ten years after
the date of grant. If such a director ceases to be a member of the board for
any reason other than death or disability, the currently vested options will
terminate on the first anniversary of the date the director ceases to be a
board member. If such a director dies or becomes disabled while a member of
the board, these options will terminate on the second anniversary of the date
the director dies or becomes disabled. Under the Option Plan, the Company
could grant restricted stock and stock appreciation rights to Independent
Directors in addition to these "automatic" quarterly option grants.
The Board of Directors may amend the Option Plan any time, except that
approval by WREIT's stockholders is required for any amendment that increases
the aggregate number of shares of Common Stock that may be issued pursuant to
the Option Plan, increases the maximum number of shares of Common Stock that
may be issued to any person, changes the class of persons eligible to receive
such options, modifies the period within which the options may be granted,
modifies the period within which the options may be exercised or the terms
upon which options may be exercised, or increases the material benefits
accruing to the participants under the Option Plan.
CERTAIN RELATIONSHIPS; CONFLICTS OF INTEREST
The Company, on the one hand, and WFSG and its affiliates, on the other,
will enter into a number of relationships other than those governed by the
Management Agreement, some of which may give rise to conflicts of interest.
Moreover, two of the members of the Board of Directors of the Company and all
of its officers are also employed by WFSG or its affiliates.
The Guidelines establish certain parameters for the operations of the
Company, including quantitative and qualitative limitations on the Company's
assets that may be acquired. The Guidelines are to assist and instruct WRSC
and to establish restrictions applicable to transactions with affiliates of
WFSG or with unrelated third parties. A majority of the Independent Directors
will be asked to approve in advance any purchase of assets from WFSG or its
affiliates or any other significant transaction not contemplated under the
Management Agreement or the Servicing Agreements.
Although the Independent Directors will review the Guidelines quarterly and
will monitor compliance with those Guidelines, investors should be aware that,
in conducting this review, the Independent Directors will rely primarily on
information provided to them by WRSC. WRSC will obtain price evaluations
concerning the price for Mortgage-Backed Securities and appraisals for real
estate and loans purchased from WRSC or its affiliates, but the Independent
Directors are likely to rely substantially on information and analysis
provided by WRSC to evaluate the Company's Guidelines, compliance therewith
and other matters relating to the Company's investments. Moreover, Price
Evaluations and appraisals are not always reliable indicators of the value of
assets.
37
<PAGE>
In particular, price evaluations of Mortgage-Backed Securities generally are
obtained from the entity providing the financing of the Mortgage-Backed
Securities. Moreover, the market for unregistered Mortgage-Backed Securities
is illiquid, and therefore accurate prices are difficult to estimate. See
"Risk Factors--Other Risks--Conflicts of Interest in the Business of the
Company."
If the Independent Directors determine in their periodic review of
transactions that a particular transaction does not comply with the
Guidelines, then the Independent Directors will consider what corrective
action, if any, can be taken. If the transaction is one with WRSC or an
affiliate of WRSC, then WRSC will be required to repurchase the asset at the
purchase price to the Company.
Moreover, if transactions are consummated that materially and adversely
deviate from the Guidelines, then the Independent Directors will have the
option, under the terms of the Management Agreement, to terminate WRSC.
The Management Agreement does not limit or restrict the right of WRSC or any
of its officers, directors, employees or affiliates from engaging in any
business or rendering services of any kind to any other person, including
rendering advice to others with respect to purchasing real estate related
assets that meet the Company's policies and criteria.
WFSG and its affiliates will not invest in any particular Primary
Investments unless a majority of the Independent Directors have decided that
the Company should not invest in such asset. In deciding whether to invest in
such an asset, the Independent Directors may consider, among other factors,
whether the asset is well-suited for the Company and whether the Company is
financially able to take advantage of the investment opportunity. However,
WFSG and its affiliates have no obligation to offer Mortgage-Backed Securities
to the Company if the mortgage loans collateralizing such Mortgage-Backed
Securities are owned by WFSG or one of its affiliates. Moreover, WFSG has no
obligation to reveal to the Company any business opportunities to invest in
Other Real Estate Related Assets. As a consequence, the opportunity for the
Company to invest in Other Real Estate Related Assets will be limited if such
investment opportunities would be attractive to WFSG or one of its affiliates.
The Company has contracted with WFSG and its affiliates to purchase the
Initial Investments at the Closing for an aggregate purchase price of
approximately $145.3 million in cash, plus the assumption of certain debt and
the issuance of Units. WFSG will realize a gain as a result of the purchase by
the Company of such assets. The Operating Partnership has also agreed to
acquire from two affiliates of WFSG, Wilshire Properties 1 and Wilshire
Properties 2, all of the outstanding shares of which are owned by Messrs.
Wiederhorn and Mendelsohn, certain U.S. commercial real property in exchange
for approximately 376,874 Units, which comprise approximately 1.8% of the
Operating Partnership (1.6% if Underwriters' over-allotment option is
exercised in full).
From time to time, mortgage lenders offer for sale large pools of mortgage
loans and real properties pursuant to a competitive bidding process. In such a
case, WFSG or its affiliates may choose an unaffiliated entity with which to
submit a joint bid for the pool, as long as WFSG or its affiliates takes title
only to assets as to which it has not given the Company the right of first
refusal.
WFSG will purchase 1,980,000 shares of Common Stock on the Closing Date at a
price equal to the public offering price, net of any underwriting discounts or
commissions. This purchase will result in WFSG's ownership of approximately
9.9% of the total shares offered hereby, exclusive of the Underwriters' over-
allotment option. WRSC also will receive stock options pursuant to the
Company's Option Plan. See "Management of Operations--Stock Options."
WFSG is expected to retain its shares of the Company for at least two years
after the Company's initial public offering of shares of Common Stock, but may
dispose of its shares any time thereafter in accordance with the provisions of
Rule 144 under the Securities Act of 1933. Notwithstanding the foregoing, if
the Company terminates the Management Agreement, WRSC may require the Company
to register for public resale its shares of Common Stock acquired pursuant to
the Option Plan. See "Management of Operations--Stock Options."
38
<PAGE>
The market in which the Company expects to purchase assets is characterized
by rapid evolution of products and services and, thus, there may in the future
be relationships between the Company, WFSG, and its affiliates in addition to
those described herein.
SERVICING AGREEMENTS
The Company generally expects to acquire Primary Investments and Other Real
Estate Related Assets on a "servicing released" basis (i.e., the Company will
have the right to service the loans or other assets it purchases). The Company
will enter into the WCC Servicing Agreement with WCC, pursuant to which WCC
will act as a servicer for the Company and provide loan and real property
management services, including billing, portfolio administration and
collection services for the Company's U.S. Commercial Investments, Mortgaged-
Backed Securities when applicable and Other Real Estate Related Assets in the
United States. The Company will also enter the European Servicing Agreement
with the European Servicers, pursuant to which the European Servicers will act
as servicers for the Company and provide loan and real property management
services in France and the United Kingdom. As the Company acquires assets in
other counties, the Company anticipates entering into similar servicing
arrangements with WFSG affiliates in such counties. Under the Servicing
Agreements, the Company has agreed to pay each of WCC and the European
Servicers a servicing fee at or below market rates for each pool of loans or
real estate assets that they service for the Company and to reimburse them for
certain out-of-pocket costs associated with servicing such assets. The
Management Agreement will provide that the Manager will monitor the servicing
activities of WCC and the European Servicers.
WCC is primarily engaged in the specialty loan servicing and resolution
business. At June 30, 1997, WCC was servicing (i) approximately $2.5 billion
aggregate principal amount of loans for WFSG; (ii) approximately $1.2 billion
aggregate principal amount of loans for third parties (including approximately
$532.5 million of loans previously securitized by WFSG and its affiliates);
and (iii) approximately $19.7 million aggregate principal amount of loans
owned by WCC. The European Servicers are currently servicing approximately
$15.0 million aggregate principal balance of loans and real property. WCC has
developed specialized procedures and proprietary software designed to
effectively service performing, non-performing and sub-performing loans, which
procedures and software have been adapted for French and United Kingdom
requirements and are used by the European Servicers. WCC and the European
Servicers design a servicing plan for each underlying loan or property. WCC
and the European Servicers then actively service each loan and property to
maximize cash flow.
39
<PAGE>
THE COMPANY
WREIT was incorporated in the State of Maryland on October 24, 1997 and will
elect to be taxed as a REIT under the Code. The principal executive offices of
the Company are located at 1776 SW Madison Street, Portland, Oregon 97205. The
Company's telephone number is (503) 223-5600.
The following tables set forth certain information about the directors and
executive officers of WREIT.
Directors Who Are Executive Officers
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
- ---- --- ----------------
<S> <C> <C>
Andrew A. Wiederhorn................ 31 Chairman of the Board, Chief Executive
Officer, Secretary, Treasurer and
Director
Lawrence A. Mendelsohn.............. 36 President and Director
Independent Directors
<CAPTION>
NAME AGE POSITION(S) HELD
- ---- --- ----------------
<S> <C> <C>
John C. Condas...................... 36 Director
David C. Egelhoff................... 48 Director
Steven Kapiloff..................... 36 Director
Executive Officers Who Are Not Directors
<CAPTION>
NAME AGE POSITION(S) HELD
- ---- --- ----------------
<S> <C> <C>
Chris Tassos........................ 40 Executive Vice President and Chief
Financial Officer
Bo G. Aberg......................... 48 Senior Vice President
</TABLE>
The principal occupation for the last five years of each Independent
Director of the Company, as well as some other information, is set forth
below.
John C. Condas has been a director of the Company since October 24, 1997.
Mr. Condas is a shareholder with the law firm of Jackson, DeMarco &
Peckenpaugh, where he specializes in real property, land use, financial
institutions and environmental litigation, as well as processing land use
entitlements. Mr. Condas received his A.B. with honors from the University of
Chicago, an M.A. in Urban Planning from University of California at Los
Angeles, and his J.D. from the University of Southern California.
David C. Egelhoff has been a director of the Company since October 24, 1997.
Mr. Egelhoff is President of Macadam Forbes, Inc. *ONCOR International, a
commercial real estate brokerage company headquartered in Portland, Oregon
since 1981. Mr. Egelhoff is a licensed real estate broker who has extensive
brokerage experience, including transactions with REITs. He is a member of the
Oregon and National Board of Realtors and the Builders and Owners Management
Association. Mr. Egelhoff received a degree in Finance and Marketing from the
University of Wisconsin-Madison in 1971.
Steven Kapiloff has been a director of the Company since October 24, 1997.
Mr Kapiloff is an attorney with the law firm of Winthrop, Stimson, Putnam &
Roberts in its Stamford, Connecticut office, where he represents owners and
developers of commercial real estate. Mr. Kapiloff received his undergraduate
degree in Economics from Boston University and his J.D. from the University of
Southern California.
For biographical information on Messrs. Wiederhorn, Mendelsohn, Tassos and
Aberg, see "Management of Operations--WRSC."
All directors will be elected at each annual meeting of WREIT's stockholders
for a term of one year, and hold office until their successors are elected and
qualified. All officers serve at the discretion of the Board of Directors.
Although the Company may have salaried employees, it currently does not have
employees and does not expect to employ anyone as long as the Management
Agreement is in force. The Company will pay an annual director's fee to each
Independent Director equal to $12,000, with no additional fee to be paid for
the first four meetings of the Board of Directors. Each Independent Director
will be paid a fee of $1,000 for each additional meeting of the Board of
Directors or committee thereof attended in person by such Independent Director
which is not a regularly scheduled quarterly meeting. For meetings attended
telephonically, the Independent Directors will be paid a fee of
40
<PAGE>
$100 per hour. All Independent Directors will be reimbursed for their costs
and expenses in attending all meetings of the Board of Directors. Directors
affiliated with WFSG, however, will not be separately compensated by the
Company. See "Stock Options."
Directors and executive officers of WREIT will be required to devote only so
much of their time to the Company's affairs as is necessary or required for
the effective conduct and operation of the Company's business. Because the
Management Agreement provides that WREIT will assume principal responsibility
for managing the affairs of the Company, the officers of the Company, in their
capacities as such, are not expected to devote substantial portions of their
time to the affairs of the Company. However, in their capacities as officers
or employees of WREIT, or its affiliates, they will devote such portion of
their time to the affairs of WREIT as is required for the performance of the
duties of WREIT under the Management Agreement.
The Bylaws of WREIT will provide that, except in the case of a vacancy, the
majority of the members of the Board of Directors will at all times after the
issuance of the shares offered hereby be Independent Directors. Vacancies
occurring on the Board of Directors among the Independent Directors will be
filled by the vote of a majority of the directors, including a majority of the
Independent Directors.
WREIT's Charter limits the liability of its directors and officers to WREIT
and its stockholders to the fullest extent permitted from time to time by
Maryland law. Maryland law presently permits the liability of directors and
officers to a corporation or its stockholders for money damages to be limited,
except (i) to the extent that it is proved that the director or officer
actually received an improper benefit or profit in money property or services
for the amount of the benefit or profit in money, property or services
actually received, or (ii) if a judgment or other final adjudication is
entered in a proceeding based on a finding that the director's or officer's
action, or failure to act, was the result of active and deliberate dishonesty
and was material to the cause of action adjudicated in the proceeding. This
provision does not limit the ability of WREIT or its stockholders to obtain
other relief, such as an injunction or rescission.
The Charter and Bylaws require WREIT to indemnify and hold harmless and,
without requiring a determination of the ultimate entitlement to
indemnification, pay reasonable expenses in advance of the final disposition
of any proceeding to its present and former directors and officers and certain
other parties to the fullest extent permitted from time to time by Maryland
law. The Maryland General Corporation Law ("MGCL") permits a corporation to
indemnify its directors, officers and certain other parties against judgments,
penalties, fines, settlements and reasonable expenses incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service to or at the request of the corporation, unless it is
established that (i) the act or omission of the indemnified party was material
to the matter giving rise to the proceeding and (x) was committed in bad faith
or (y) was the result of active and deliberate dishonesty, (ii) the
indemnified party actually received an improper personal benefit in money,
property or services or (iii) in the case of any criminal proceeding, the
indemnified party had reasonable cause to believe that the act or omission was
unlawful. Indemnification may be made against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by the director or
officer in connection with the proceeding. Indemnification is limited to court
ordered reimbursement for expenses; however, if the proceeding is one by or in
the right of the corporation, and the director or officer was adjudged to be
liable to the corporation or if the proceeding is one charging improper
personal benefit to the director or officer and the director or officer was
adjudged to be liable on the basis that personal benefit was improperly
received. The termination of any proceeding by conviction, or upon a plea of
nolo contendere or its equivalent, or an entry of any order of probation prior
to judgment, creates a rebuttal presumption that the director or officer did
not meet the requisite standard of conduct required for indemnification to be
permitted. Maryland law requires a corporation (unless its charter provides
otherwise, which WREIT's Charter does not) to indemnify a director or officer
who has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity. It is the position of the Commission that indemnification of
directors and officers for liabilities arising under the Securities Act is
against public policy and is unenforceable pursuant to Section 14 of the
Securities Act.
41
<PAGE>
DISTRIBUTION POLICY
In order to avoid corporate income taxation on the earnings that it
distributes, WREIT must distribute to its stockholders an amount at least
equal to (i) 95% of its REIT taxable income (determined before the deduction
for dividends paid and excluding any net capital gain) plus (ii) 95% of the
excess of its net income from foreclosure property over the tax imposed on
such income by the Code less (iii) any excess noncash income (as determined
under the Code). See "Federal Income Tax Considerations." The actual amount
and timing of distributions, however, will be at the discretion of the Board
of Directors and will depend upon the financial condition of WREIT in addition
to the requirements of the Code. It is anticipated that the first distribution
will be made in January 1998 for earnings in 1997 and thereafter on a
quarterly basis.
Subject to the distribution requirements referred to in the immediately
preceding paragraph, WREIT intends, to the extent practicable, to invest
substantially all of the principal from repayments, sales and refinancings of
the Company's assets in U.S. Commercial Property and Mortgage-Backed
Securities. WREIT may, however, under certain circumstances, make a
distribution of principal. Such distributions, if any, will be made at the
discretion of WREIT's Board of Directors.
It is anticipated that distributions generally will be taxable as ordinary
income to non-exempt stockholders of WREIT, although a portion of such
distributions may be designated by WREIT as long-term capital gain or may
constitute a return of capital. WREIT will furnish annually to each of its
stockholders a statement setting forth distributions paid during the preceding
year and their federal income tax status. For a discussion of the federal
income tax treatment of distributions by WREIT and certain adverse tax
consequences for stockholders associated with REMIC Residual Interests held by
the Company, see "Federal Income Tax Considerations--Taxation of the Company"
and "--Taxation of Taxable U.S. Stockholders."
YIELD CONSIDERATIONS RELATED TO THE COMPANY'S INVESTMENTS
Before purchasing any real estate related assets, the Company, with the
assistance of WRSC, will consider the expected yield of the investment. The
Company considers the expected yield of an investment to be a benchmark for
evaluating profitability of all types of assets over time. "Yield" or "yield
to maturity" is the interest rate that will make the present value of the
future cash flow from an investment equal to its price. Despite WFSG's
substantial experience in evaluating potential yields on Mortgage-Backed
Securities and real estate related assets, no assurances can be given that the
Company can make an accurate assessment of the actual yield to be produced by
an asset. Many factors beyond the control of the Company are likely to
influence the yield on the Company's investments, as described in more detail
below, such that the actual yield on an investment may vary substantially from
its expected yield.
MORTGAGE-BACKED SECURITIES
The yield to maturity on any class of Mortgage-Backed Securities will depend
upon, among other things, the price at which such class is purchased, the
interest rate for such class and the timing and aggregate amount of
distributions on the securities of such class, which in turn will depend
primarily on (i) whether there are any losses on the underlying loans
allocated to such class and (ii) whether and when there are any prepayments of
the related mortgage loans (which include both voluntary prepayments by the
obligors on the mortgage loans and prepayments resulting from liquidations due
to defaults and foreclosures).
The yield on the Mortgage-Backed Securities acquired by the Company will be
extremely sensitive to defaults on the mortgage loans comprising the mortgage
collateral for such securities and the severity of losses resulting from such
defaults, as well as the timing of such defaults and actual losses. The
Company's right as a holder of Mortgage-Backed Securities to distributions of
principal and interest will be subordinated to all of the more senior classes
of securities. Actual losses on the mortgage collateral (after default, where
the proceeds from the foreclosure sale of the real estate securing the loan
are less than the unpaid balance of the mortgage
42
<PAGE>
loan plus interest thereon and disposition costs) will be allocated first to
the subordinated classes prior to being allocated to the more senior classes.
The Mortgage-Backed Securities the Company intends to acquire with the
proceeds from this offering are subject to special risks, including a
substantially greater risk of loss of principal and non-payment of interest
than the more senior classes of such securities.
If the Company acquires Mortgage-Backed Securities with an anticipated yield
as of the acquisition date based on an assumed rate of default and severity of
loss on the mortgage loans comprising the mortgage collateral that is lower
than the actual default rate and severity of loss, its yield will be lower
than the Company initially anticipated. In the event of substantial losses,
the Company may not recover the full amount (or, indeed, any) of its
acquisition cost. The timing of actual losses also will affect the Company's
yield, even if the number of defaults and severity of loss are consistent with
the Company's anticipation. In general, the earlier a loss occurs, the greater
the adverse effect on the Company's yield. Additionally, the yield on
Commercial Mortgage-Backed Securities and Residential Mortgage-Backed
Securities collateralized by adjustable rate mortgage loans will vary
depending on the amount of and caps on the adjustments to the interest rates
of such mortgage loans. There can be no assurance as to the rate of
delinquency, severity of loss or the timing of any such losses on mortgage
loans underlying Mortgage-Backed Securities and thus as to the actual yield
received by the Company.
The aggregate amount of distributions on the Company's Mortgage-Backed
Securities and their yield also will be affected by the amount and timing of
principal prepayments on the mortgage loans underlying the Mortgage-Backed
Securities. To the extent that more senior tranches of Mortgage-Backed
Securities are outstanding, all prepayments of principal on the underlying
mortgage loans typically will be paid to the holders of more senior classes,
and typically none (or very little) will be paid to the Company during the
first five years, and in some cases a longer period, after the original issue
date of the related Mortgage-Backed Securities. This subordination of the
Mortgage-Backed Securities to more senior classes may affect adversely the
yield on the Mortgage-Backed Securities acquired by the Company. Even if there
are no actual losses on the mortgage loans, interest and principal payments
may be made on the more senior classes before interest and principal are paid
with respect to the Mortgage-Backed Securities. Typically, interest deferred
on Mortgage-Backed Securities is payable on subsequent payment dates to the
extent funds are available, but such deferral does not itself bear interest.
Such deferral of interest will reduce the actual yield on the Company's
Mortgage-Backed Securities.
Because the Company will acquire Mortgage-Backed Securities at a significant
discount from their outstanding principal balance, if the Company estimates
the yield on a security based on a faster rate of payment of principal than
actually occurs, the Company's yield on that security will be lower than the
Company anticipated. Whether and when there are any principal prepayments on
the mortgage loans will be affected by a variety of factors, including,
without limitation, the terms of the mortgage loans, the level of prevailing
interest rates, the availability of mortgage credit and economic, tax, legal
and other factors. Principal prepayments on mortgage loans secured by multi-
family residential and commercial properties are likely to be affected by
lock-out periods and prepayment premium provisions applicable to each of the
mortgage loans, and by the extent to which the servicer is able to enforce
such prepayment premium provisions. Moreover, the yield to maturity on such
Mortgage-Backed Securities may also be affected by any extension of the
scheduled maturity dates of the mortgage loans as a result of modifications of
the mortgage loans by the related servicer, if permitted.
The timing of any prepayments on the mortgage loans underlying Mortgage-
Backed Securities owned by the Company may significantly affect the Company's
yield to maturity, even if the average rate of principal payments is
consistent with the Company's expectation. In general, the earlier a
prepayment of principal of the mortgage loans, the greater the effect on an
investor's yield. The effect on the Company's yield of principal payments
occurring at a rate higher (or lower) than the rate anticipated by the Company
during any particular period may not be fully offset by a subsequent like
decrease (or increase) in the rate of principal payments.
Because the rate and timing of principal payments on the underlying mortgage
loans will depend on future events and on a variety of factors, no assurances
can be given as to such rate or the timing of principal payments on the
Mortgage-Backed Securities the Company owns or acquires.
43
<PAGE>
U.S. COMMERCIAL PROPERTIES
The yield on the Company's investments in real properties, including U.S.
Commercial Properties, will depend upon the price that the Company pays for
such investments, the costs of capital improvements and other costs of
managing the properties, the level of rents and other income generated by the
properties, the length of time between acquisition and disposition and the
price at which the Company ultimately disposes of such properties. The yield
of such an investment may be adversely affected by factors beyond the
Company's control, such as adverse changes in economic conditions,
neighborhood characteristics and competition from other properties offering
the same or similar services. See "Risk Factors--Investment Activity Risks."
The Company will rely on the substantial experience of WFSG, made available to
the Company through the Management Agreement, in acquiring, managing and
disposing of U.S. Commercial Property, and in predicting and managing problems
that arise. See "Management of Operations." No assurances can be given,
however, that the Company will be successful in this endeavor.
MORTGAGE LOANS
The yield to maturity on the Company's investment in mortgage loans will
depend, among other things, upon (i) whether there are any losses on such
mortgage loans, (ii) whether and when there are any prepayments of such
mortgage loans, (iii) the interest rates on such mortgage loans, and (iv) the
purchase price of such mortgage loans.
The yield to maturity on all mortgage loans will be sensitive to defaults by
the borrower and the severity of the losses that might result from such
defaults. Construction and junior lien loans will be particularly sensitive to
defaults because they generally have higher loan to value ratios than
traditional mortgage loans. The borrower generally will have an equity
investment of 10% to 15% of total project costs, but if the borrower defaults
there can be no assurance that losses will not exceed such amount. Because the
borrower's equity may not be adequate to protect the Company's investment, the
Company's yield on such loans is particularly sensitive to defaults.
If the Company acquires a mortgage loan at a significant discount from its
outstanding principal balance and the Company estimates the yield on the
mortgage loan based on a faster rate of payment of principal than actually
occurs, the Company's yield on that mortgage loan will be lower than the
Company anticipated. Conversely, if the Company acquires a mortgage loan at a
significant premium to its outstanding principal balance, estimating the yield
on such mortgage loan based on a slower rate of payment of principal than
actually occurs, the Company's yield on that mortgage loan will be lower than
anticipated.
Whether and when there are any principal prepayments on the mortgage loans
will be affected by a variety of factors, including, without limitation, the
terms of the mortgage loans, the level of prevailing interest rates, the
availability of mortgage credit and economic, tax, legal and other factors.
Principal prepayments on mortgage loans secured by multi-family residential
and commercial properties are likely to be affected by lock-out periods and
prepayment premium provisions applicable to each of the mortgage loans, and by
the extent to which the servicer is able to enforce such prepayment premium
provisions. Moreover, the yield to maturity on mortgage loans may also be
affected by any extension of the scheduled maturity dates of the mortgage
loans as a result of modifications of the mortgage loans by the servicer, if
permitted.
44
<PAGE>
INITIAL INVESTMENTS
GENERAL
At the Closing, the Company will acquire from WFSG or its affiliates (i)
U.S. Commercial Investments for approximately $52.8 million; (ii) Mortgage-
Backed Securities for approximately $98.4 million; and (iii) International
Investments in the United Kingdom for approximately $5.4 million
(collectively, the "Initial Investments").
The purchase of the Initial Investments by the Company was approved by the
Independent Directors. The balance of the net proceeds of the Offering,
constituting up to approximately 47.5% of the total net proceeds, will be
invested by the Company as opportunities arise. WFSG has granted the Company
an option to purchase for up to $110.0 million all or a portion of the
Company's 50% interest in two portfolios of International Investments in
France. The Company is currently evaluating the suitability of such
investments under U.S. tax and French law.
The Initial Investments include certain commercial real estate held by
Wilshire Properties 1 and Wilshire Properties 2, all of the outstanding shares
of which are owned by Messrs. Wiederhorn and Mendelsohn. The Operating
Partnership will issue approximately 376,874 Units (which will comprise
approximately 1.8% of the outstanding Units of the Operating Partnership, or
1.6% if the Underwriters' over-allotment option is exercised in full) to
Wilshire Properties 1 and Wilshire Properties 2 in consideration of the
acquisition of such properties. Wilshire Properties 1 and Wilshire Properties
2 may cause the Operating Partnership to redeem the Units for cash, or, at the
election of the General Partner, the Units may be exchanged for shares of
Common Stock on a one-for-one basis.
The purchase price for the Initial Investments was derived by considering a
number of factors, including the amount and timing of potential net cash flows
on the Initial Investments, the range of possible returns on such purchases
and the risks associated with such purchases, including the risk that the
ultimate return will be significantly affected by losses, if any, realized on
the underlying mortgage loans and other factors that are not controlled by the
Company, such as prepayment experience on the underlying mortgage loans. These
factors may result in a below market rate of return or a loss on the purchase
price in certain situations. See "Risk Factors--Credit and Prepayment Risks
from Ownership of Mortgage-Backed Securities in Pools of Commercial and
Residential Mortgage Loans." The number of Units to be issued in connection
with the acquisition of the commercial properties was based on recent
appraisals of these properties and the public offering price of the shares of
Common Stock.
The Company believes that the descriptions of the Initial Investments set
forth below are summaries of the material terms of the Initial Investments. In
the case of U.S. Commercial Investments, the material terms have been taken
from information provided by the servicer of those assets or information
provided by Wilshire Properties 1 and Wilshire Properties 2. The material
terms of the Mortgage-Backed Securities have been taken from the information
provided to the Company by the trustees of the series of the Mortgage-Backed
Securities. In the case of the International Investments, they have been taken
from information provided by WFSG or its affiliates. Such information with
respect to the Initial Investments which is within the control of third
parties has not been independently confirmed by the Company, WRSC or the
Underwriters, and is all the information on the subject that the Company
possesses or can acquire without unreasonable effort or expense.
The tables contained in this section present information as of September 30,
1997 for the aggregate principal balances for loans or Mortgage-Backed
Securities or various dates of appraisals or BPOs for the real properties. The
appraisal or BPO dates for all of the real properties were completed after
December 31, 1996. The totals in the charts may not add up to 100% due to
rounding.
45
<PAGE>
The Initial Investments will consist of the following:
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
BALANCE PURCHASE
CLASSIFICATION NUMBER OR APPRAISED VALUE PRICE(1)
- -------------- ------- ------------------- ------------
<S> <C> <C> <C>
U.S. Commercial Investments
Distressed U.S. Commercial Loans...... 210 $ 58,235,722 $ 37,115,883
U.S. Commercial Properties............ 40 15,667,000 15,667,000
Mortgaged-Back Securities.............. 28 557,903,330 98,387,783
International Investments.............. 23 14,950,913 5,416,223
------------
Total........................................................... $156,586,889
============
</TABLE>
- --------
(1) Purchase price will be paid from the net proceeds of this Offering, the
assumption of existing debt and the issuance of Units in the Operating
Partnership.
THE INITIAL U.S. COMMERCIAL INVESTMENTS
The Initial Distressed U.S. Commercial Loans
The Distressed U.S. Commercial Loans included in the Initial Investments
(the "Initial Distressed U.S. Commercial Loans") have, as of September 30,
1997, an aggregate principal balance of $58.2 million and are secured by
mortgages or deeds of trust on commercial real property. The Initial
Distressed U.S. Commercial Loans were originated by various unrelated parties
under different underwriting criteria at different times and were acquired by
WFSG at various times. Substantially all of the properties securing the
mortgage loans are not owner-occupied.
The Company will receive varying representations and warranties with respect
to certain of the Initial Distressed U.S. Commercial Loans. To the extent that
any representations and warranties were offered by the respective sellers of
such loans to WFSG, these representations and warranties will be transferred
to the Company to the extent such representations and warranties can be
transferred.
46
<PAGE>
CLASSIFICATION OF INITIAL DISTRESSED U.S. COMMERCIAL LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL
CLASSIFICATION NUMBER BALANCE OUTSTANDING BALANCE OUTSTANDING
- -------------- ------- -------------------- -------------------
<S> <C> <C> <C>
Performing Loans(1)............ 49 $14,852,637 25.50%
Sub-Performing Loans(2)........ 44 13,615,659 23.38%
Non-Performing Loans(3)........ 117 29,767,426 51.12%
--- ----------- ------
Total........................ 210 $58,235,722 100.00%
=== =========== ======
</TABLE>
- --------
(1) "Performing" means a loan that was not more than one payment delinquent as
of September 30, 1997 determined under the terms of the original loan
agreement or subsequent modification thereof. A "Performing" loan may have
been previously delinquent but has been brought current.
(2) "Sub-Performing" means a loan (x) that was, as of September 30, 1997, two
or more, but not more than 12, payments delinquent, determined under the
terms of the original loan agreement or subsequent modification thereof,
and (y) that had a ratio of the outstanding principal balance of such loan
to its appraised value expressed as a percentage of 90% or less, except
for those loans which the servicer otherwise believes cannot be brought
current.
(3) "Non-Performing" means a loan (x) that was, as of September 30, 1997, more
than 12 payments delinquent, determined under the terms of the original
loan agreement or subsequent modification thereof, or (y) that was, as of
September 30, 1997, two or more, but not more than 12 (determined under
the terms of the original loan agreement or subsequent modification
thereof) payments delinquent and had a ratio of the outstanding principal
balance of such loan to its appraised value in excess of 90%, or the
servicer otherwise believes that such loan will not be brought current.
DELINQUENCY STATUS OF INITIAL DISTRESSED U.S. COMMERCIAL LOANS
<TABLE>
<CAPTION>
PERCENTAGE
AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL
NUMBER OF PAYMENTS DELINQUENT NUMBER BALANCE OUTSTANDING BALANCE OUTSTANDING
- ----------------------------- ------- ------------------- -------------------
<S> <C> <C> <C>
Current.......................... 49 $14,852,637 25.50%
1-3 Payments..................... 7 1,281,784 2.20%
4-6 Payments..................... 9 2,687,088 4.61%
7-12 Payments.................... 31 10,303,635 17.69%
13-18 Payments................... 7 1,069,277 1.84%
19-24 Payments................... 10 2,080,467 3.57%
25 or more Payments.............. 97 25,960,834 44.58%
--- ----------- ------
Total.......................... 210 $58,235,722 100.00%
=== =========== ======
</TABLE>
47
<PAGE>
GEOGRAPHIC DISTRIBUTION OF REAL PROPERTIES SECURING INITIAL DISTRESSED U.S.
COMMERCIAL LOANS
<TABLE>
<CAPTION>
NUMBER OF INITIAL
DISTRESSED PERCENTAGE OF
U.S. COMMERCIAL AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL
LOCATION OF REAL PROPERTY LOANS BALANCE OUTSTANDING BALANCE OUTSTANDING
- ------------------------- ----------------- ------------------- -------------------
<S> <C> <C> <C>
Connecticut.............. 54 $19,401,474 33.32%
California............... 39 16,225,905 27.86%
New York................. 47 8,954,078 15.38%
New Jersey............... 33 5,470,070 9.39%
Oregon................... 1 3,348,691 5.75%
Georgia.................. 6 1,691,526 2.90%
Massachusetts............ 6 847,289 1.45%
Puerto Rico.............. 5 689,558 1.18%
Virginia................. 3 422,375 0.73%
Indiana.................. 1 411,483 0.71%
Texas.................... 3 148,048 0.25%
Pennsylvania............. 2 133,091 0.23%
Florida.................. 2 98,551 0.17%
Rhode Island............. 1 92,816 0.16%
Maryland................. 1 57,463 0.10%
North Carolina........... 1 52,188 0.09%
Arkansas................. 1 49,962 0.09%
Illinois................. 1 43,330 0.07%
Arizona.................. 1 35,549 0.06%
New Hampshire............ 1 31,524 0.05%
Tennessee................ 1 30,751 0.05%
--- ----------- ------
Total.................. 210 $58,235,722 100.00%
=== =========== ======
</TABLE>
TYPES OF REAL PROPERTY SECURING INITIAL DISTRESSED U.S. COMMERCIAL LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL
PROPERTY TYPE NUMBER BALANCE OUTSTANDING BALANCE OUTSTANDING
- ------------- ------ ------------------- -------------------
<S> <C> <C> <C>
Mixed Use Residential/Retail.... 47 $13,462,033 23.12%
Multi-Family.................... 31 10,947,877 18.80%
Retail.......................... 47 10,592,034 18.19%
Warehouse....................... 19 6,072,233 10.43%
Low Rise Office(1).............. 12 4,626,360 7.94%
Hotel and Motel................. 9 2,181,509 3.75%
Commercial Land................. 9 1,678,637 2.89%
Convalescent Facility........... 2 1,378,732 2.37%
Office Condominium(s)........... 14 1,095,637 1.88%
Medical/Dental Office........... 5 785,655 1.35%
Incubator Office/Warehouse...... 2 594,944 1.02%
Mini Warehouse.................. 2 481,144 0.83%
Commercial Other................ 11 4,338,927 7.45%
--- ----------- ------
Total......................... 210 $58,235,722 100.00%
=== =========== ======
</TABLE>
- --------
(1) Includes a loan secured by a low-rise office, retail and residential.
48
<PAGE>
INTEREST RATE TYPE OF INITIAL DISTRESSED U.S. COMMERCIAL LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL BALANCE
INTEREST RATE TYPE NUMBER BALANCE OUTSTANDING OUTSTANDING
- ------------------ ------ ------------------- -----------------------
<S> <C> <C> <C>
Fixed........................ 81 $18,378,140 31.56%
ARM.......................... 129 39,857,582 68.44%
--- ----------- ------
Total...................... 210 $58,235,722 100.00%
=== =========== ======
</TABLE>
MORTGAGE RATES OF INITIAL DISTRESSED U.S. COMMERCIAL LOANS(1)
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL BALANCE
MORTGAGE RATES NUMBER BALANCE OUTSTANDING OUTSTANDING
- -------------- ------ -------------------- -----------------
<S> <C> <C> <C>
Less than 7.00%................... 5 $ 371,911 0.64%
7.00%-7.49%....................... 3 2,108,580 3.62%
7.50%-7.99%....................... 8 3,080,243 5.29%
8.00%-8.49%....................... 10 3,935,188 6.76%
8.50%-8.99%....................... 19 6,737,308 11.57%
9.00%-9.49%....................... 12 2,123,259 3.65%
9.50%-9.99%....................... 11 5,700,396 9.79%
10.00%-10.49%..................... 25 6,318,780 10.85%
10.50%-10.99%..................... 35 6,652,402 11.42%
11.00%-11.49%..................... 18 3,066,609 5.27%
11.50%-11.99%..................... 14 3,104,505 5.33%
12.00%-12.49%..................... 10 2,955,042 5.07%
12.50%-12.99%..................... 13 7,201,725 12.37%
13.00%-13.49%..................... 6 774,980 1.33%
13.50%-13.99%..................... 4 1,610,777 2.77%
14.00%-14.99%..................... 7 1,015,454 1.74%
15.00%-15.99%..................... 4 395,340 0.68%
16.00%-16.99%..................... 1 525,000 0.90%
17.00% and Greater................ 5 558,222 0.96%
--- ----------- ------
Total........................... 210 $58,235,722 100.00%
=== =========== ======
</TABLE>
(1) The weighted average mortgage rate of the Initial Distressed U.S.
Commercial Loans is approximately 10.42%.
49
<PAGE>
LIEN POSITION OF INITIAL DISTRESSED U.S. COMMERCIAL LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL
LIEN POSITION NUMBER BALANCE OUTSTANDING BALANCE OUTSTANDING
- ------------- ------ ------------------- -------------------
<S> <C> <C> <C>
First Lien....................... 180 $48,208,521 82.78%
Second Lien...................... 25 7,701,320 13.22%
Third Lien....................... 3 1,543,977 2.65%
Fourth Lien...................... 1 370,421 0.64%
Fifth Lien....................... 1 411,483 0.71%
--- ----------- ------
Total.......................... 210 $58,235,722 100.00%
=== =========== ======
</TABLE>
YEAR OF ORIGINATION/MODIFICATION OF INITIAL DISTRESSED U.S. COMMERCIAL
LOANS(1)
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL
YEAR OF ORIGINATION/MODIFICATION NUMBER BALANCE OUTSTANDING BALANCE OUTSTANDING
- -------------------------------- ------ ------------------- -------------------
<S> <C> <C> <C>
Prior to 1985................... 10 $ 1,064,981 1.83%
1985............................ 3 307,779 0.53%
1986............................ 14 5,339,231 9.17%
1987............................ 25 3,938,687 6.76%
1988............................ 34 8,023,545 13.78%
1989............................ 26 8,298,267 14.25%
1990............................ 19 6,804,427 11.68%
1991............................ 16 4,473,340 7.68%
1992............................ 10 1,989,384 3.42%
1993............................ 11 2,081,362 3.57%
1994............................ 9 1,855,876 3.19%
1995............................ 12 2,958,208 5.08%
1996............................ 11 6,259,659 10.75%
1997............................ 6 2,621,876 4.50%
Unknown......................... 4 2,219,100 3.81%
--- ----------- ------
Total......................... 210 $58,235,722 100.00%
=== =========== ======
</TABLE>
- --------
(1) The weighted average seasoning of the Initial Distressed U.S. Commercial
Loans is approximately 80.8 months.
50
<PAGE>
DISTRIBUTION OF PRINCIPAL BALANCES OF INITIAL DISTRESSED U.S. COMMERCIAL
LOANS(1)
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL
RANGE OF PRINCIPAL BALANCES NUMBER BALANCE OUTSTANDING BALANCE OUTSTANDING
- --------------------------- ------ ------------------- -------------------
<S> <C> <C> <C>
$250,000 or less................ 141 $15,469,986 26.56%
$250,001-$500,000............... 39 13,714,815 23.55%
$500,001-$750,000............... 13 7,804,307 13.40%
$750,001-$1,000,000............. 10 8,854,618 15.20%
$1,000,001-$1,250,000........... 2 2,059,747 3.54%
$1,250,001-$1,500,000........... 2 2,578,356 4.43%
$1,500,001-$2,000,000........... 1 1,586,647 2.72%
Greater than $2,000,000......... 2 6,167,246 10.59%
--- ----------- ------
Total......................... 210 $58,235,722 100.00%
=== =========== ======
</TABLE>
- --------
(1) The average outstanding principal balance of the Initial Distressed U.S.
Commercial Loans is approximately $277,313.
STATED REMAINING TERM TO MATURITY OF INITIAL DISTRESSD U.S. COMMERCIAL
LOANS(1)
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL
STATED REMAINING TERM--MONTHS NUMBER BALANCE OUTSTANDING BALANCE OUTSTANDING
- ----------------------------- ------ ------------------- -------------------
<S> <C> <C> <C>
Matured Loans................... 82 $20,231,540 34.74%
1-60............................ 43 15,102,989 25.93%
61-120.......................... 37 7,938,282 13.63%
121-180......................... 14 2,212,187 3.80%
181-240......................... 15 5,698,925 9.79%
241-300......................... 11 4,235,739 7.27%
301-360......................... 8 2,816,060 4.84%
--- ----------- ------
Total......................... 210 $58,235,722 100.00%
=== =========== ======
</TABLE>
- --------
(1) The weighted average stated remaining term to maturity of the Initial
Distressed U.S. Commercial Loans (excluding matured loans) is
approximately 118.9 months.
51
<PAGE>
ORIGINAL/MODIFIED LOAN-TO-VALUE RATIOS OF INITIAL DISTRESSED U.S. COMMERCIAL
LOANS(1)
<TABLE>
<CAPTION>
PERCENTAGE OF
RANGE OF ORIGINAL/ AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL
MODIFIED LOAN-TO-VALUE RATIOS NUMBER BALANCE OUTSTANDING BALANCE OUTSTANDING
- ----------------------------- ------ ------------------- -------------------
<S> <C> <C> <C>
50.00% or less.................. 23 $ 5,230,808 8.94%
50.01%-55.00%................... 7 1,358,705 2.33%
55.01%-60.00%................... 13 3,369,771 5.79%
60.01%-65.00%................... 5 1,796,964 3.09%
65.01%-70.00%................... 17 3,291,463 5.65%
70.01%-75.00%................... 16 8,613,785 14.79%
75.01%-80.00%................... 15 2,992,614 5.14%
80.01%-85.00%................... 0 0 0.00%
85.01%-90.00%................... 4 1,358,271 2.33%
90.01%-95.00%................... 2 416,417 0.72%
95.01%-100.00%.................. 3 1,290,700 2.22%
100.01%-125.00%................. 4 691,181 1.19%
Greater than 125.00%............ 4 2,482,066 4.26%
Other(2)........................ 97 25,369,978 43.56%
--- ----------- ------
Total......................... 210 $58,235,722 100.00%
=== =========== ======
</TABLE>
- --------
(1) The weighted average loan to value ratio at origination/modification of
the Initial Distressed U.S. Commercial Loans (excluding "Other") is
approximately 75.00%.
(2) "Other" includes Initial Distressed U.S. Commercial Loans as to which the
mortgage loan file did not contain an appraisal at origination or
modification of such loans. The Company has obtained either an appraisal
or BPO on such loans in connection with or subsequent to acquisition.
52
<PAGE>
The Initial U.S. Commercial Properties
The U.S. Commercial Properties included in the Initial Investments (the
"Initial U.S. Commercial Properties") will consist of 40 properties with an
aggregate appraised value of approximately $15.6 million, of which four
properties with an appraised value of $11.3 million will be purchased from
Wilshire Properties 1 and Wilshire Properties 2 in exchange for Units. The 36
real properties being acquired from WFSG were acquired by WFSG through
foreclosure.
GEOGRAPHIC DISTRIBUTION OF INITIAL U.S. COMMERCIAL PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
STATE NUMBER OF REAL PROPERTIES APPRAISED VALUE APPRAISED VALUE
- ----- ------------------------- --------------- -------------------
<S> <C> <C> <C>
Oregon(1)........ 4 $11,275,000 71.97%
New York......... 13 1,273,300 8.13%
California....... 5 1,034,000 6.60%
Connecticut...... 6 678,200 4.33%
Florida.......... 3 670,000 4.28%
New Jersey....... 6 561,000 3.58%
Massachusetts.... 2 165,500 1.06%
Texas............ 1 10,000 0.06%
--- ----------- ------
Total.......... 40 $15,667,000 100.00%
=== =========== ======
</TABLE>
- --------
(1) One of the Oregon properties consists of three buildings.
TYPE OF REAL PROPERTIES SECURING INITIAL U.S. COMMERCIAL PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
PROPERTY TYPE NUMBER OF REAL PROPERTIES APPRAISED VALUE APPRAISED VALUE
- ------------- ------------------------- --------------- -------------------
<S> <C> <C> <C>
Low Rise Office......... 4 $ 4,724,900 30.16%
Industrial Park......... 1 4,175,000 26.65%
Warehouse............... 1 2,700,000 17.23%
Multi-Family............ 18 2,039,700 13.02%
Mixed Use
Residential/Retail..... 7 773,500 4.94%
Commercial Land......... 4 659,000 4.21%
Retail.................. 3 345,000 2.20%
Hotel and Motel......... 1 69,900 0.45%
Commercial Other........ 1 180,000 1.15%
--- ----------- ------
Total................. 40 $15,667,000 100.00%
=== =========== ======
</TABLE>
53
<PAGE>
The Company will acquire four commercial and industrial real estate
properties from Wilshire Properties 1 and Wilshire Properties 2. The following
table presents information concerning the properties to be acquired from
Wilshire Properties 1 and Wilshire Properties 2:
<TABLE>
<CAPTION>
RENT PER SQ. FT PERCENTAGE LEASED
LEASABLE NUMBER TOTAL ------------------ ------------------
DATE SQUARE OF ANNUALIZED DEC. 31, SEPT. 30, DEC. 31, SEPT. 30, APPRAISED
PROPERTY COMPLETED FOOTAGE TENANTS BASE RENT 1996 1997 1996 1997 VALUE(1)
-------- --------- -------- ------- ---------- -------- --------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1776 SW Madison Street,
Portland, Oregon....... 1961 15,000 1 $240,000 $13.00 $16.00 100% 100% $1,800,000
Taylor Street Buildings,
Portland, Oregon
1705 SW Taylor Street 1960 20,000
1723 SW Taylor Street 1960 4,600
919 SW 17th Avenue 1982 3,400
-------
Total Taylor Streets
Buildings............. 28,000 2 317,600 N/A(2) 11.34 N/A(2) 100% 2,600,000
Tigard Industrial Park,
9800-9920 SW Tigard
Street,
Tigard, Oregon......... 1974 113,841 6 513,895 4.44 4.50 100% 100% 4,175,000
2855 Prairie Road,
Eugene, Oregon......... 1965 84,912 1 270,108 2.93 3.18 100% 100% 2,700,000
</TABLE>
- --------
(1) Appraisals completed as of October 10, 1997.
(2) Not leased until January 1997.
Properties Acquired from Wilshire Properties 1
----------------------------------------------
1776 SW Madison Street. This three-story, brick office building is located
16 blocks from downtown Portland and is adjacent to the light-rail transit
line. The building, which is currently leased to WFSG and its affiliates,
serves as WFSG's corporate headquarters. This property, which was upgraded and
remodeled in 1996, was originally constructed in 1961.
Taylor Street Buildings. The Taylor Street Buildings consist of three
office/industrial buildings located 16 blocks from downtown Portland.
Currently the properties are occupied by WFSG and an affiliate of WFSG,
Wilshire Leasing Limited.
Properties Acquired from Wilshire Properties 2
----------------------------------------------
Tigard Industrial Park. This multi-tenant, industrial business park consists
of four buildings located on 7.7 acres close to I-5 and Highway 217. The
buildings are tilt-up concrete construction with 14 grade-level doors and 18
dock-high doors.
2855 Prairie Road. This building is located on 7.5 acres with access to the
I-5 freeway via Belt Line Road and to the Eugene-Springfield metropolitan and
Gateway areas. The property is served by an on-site rail spur, and the
property is within the West Eugene enterprise zone. Included in the 7.5 acres
are three acres of industrial land which may be developed.
The commercial properties being acquired by the Operating Partnership from
Wilshire Properties 1 and Wilshire Properties 2 have an aggregate appraised
value of approximately $11.3 million, and are subject to existing indebtedness
of approximately $5.6 million at interest rates ranging from 9.1% to 10.6%.
The indebtedness matures from September 1998 until November 2006 and will be
assumed by the Company. See "Operating Partnership Agreement." The Operating
Partnership will issue approximately 376,874 Units to Wilshire Properties 1
and Wilshire Properties 2 which represent approximately 1.8% of the
outstanding Units (1.6% if the Underwriters' over-allotment option is
exercised in full) in the Operating Partnership in consideration of the
acquisition of these properties which will be acquired subject to the existing
indebtedness. Each Unit is valued at the initial public offering price for a
share of Common Stock of the Company less the underwriting discount.
54
<PAGE>
INITIAL MORTGAGE-BACKED SECURITIES
The Initial Mortgage-Backed Securities included in the Initial Investments
(the "Initial Mortgage-Backed Securities") consist of 28 classes of Mortgage-
Backed Securities representing interests in 17 securitizations. All of the
securities to be purchased had issue dates ranging from January 1, 1994 to
November 30, 1997.
The Initial Mortgage-Backed Securities consist of private-label securities
backed by loans that were originated and are being serviced by unaffiliated
third parties ("Private-Label Securities") and Private-Label Securities backed
by loans that were previously held in the portfolio of WFSG or its affiliates
and for which WCC is continuing to act as servicer ("Retained Securities").
The purchase prices of the Initial Mortgage-Backed Securities will be
approximately $68.1 million for Private-Label Securities and approximately
$29.2 million for Retained Securities.
The purchase price for the Initial Mortgage-Backed Securities was derived by
considering a number of factors, including the amount and timing of potential
net cash flows on the Initial Mortgage-Backed Securities, the range of
possible returns on such purchases and the risks associated with such
purchases, including the risk that the ultimate return will be significantly
affected by losses, if any, realized on the underlying mortgage loans and
other factors that are not controlled by the Company, such as prepayment
experience on the underlying mortgage loans. These factors may result in a
below market rate of return or a loss on the purchase price in certain
situations. See "Risk Factors--Credit and Prepayment Risks from Ownership of
Mortgage-Backed Securities in Pools of Residential and Commercial Mortgage
Loans."
WFSG generally retains or, in certain cases, acquires Retained Securities
issued in connection with the securitization of its loans. The following table
sets forth information regarding the Company's Initial Mortgage-Backed
Securities as reported by September 30, 1997.
55
<PAGE>
INITIAL MORTGAGE-BACKED SECURITIES
<TABLE>
<CAPTION>
AGGREGATE CLASS BALANCE
-------------------------------------------
PERCENTAGE OF POOL PERCENTAGE
ISSUE COLLATERAL PAID DOWN SINCE AUGUST 31, PAID DOWN
ISSUE NAME CLASS RATING DATE TYPE ISSUANCE INITIAL 1997 SINCE ISSUANCE
- ---------------- ----- ------ -------- ------------ ------------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BSMSI 96-6 B3 Baa2 12/30/96 Residential 24.83% $ 5,427,000 $ 5,369,413 1.06%
B4 Ba2 12/30/96 Residential 24.83% 4,824,000 4,772,811 1.06%
CHASE 94-H B5 B 5/1/94 Residential 15.95% 250,000 240,618 3.75%
CSFBMSC 97-1R 1-B1 BB 9/22/97 Residential 0.55% 12,268,000 12,262,606 0.04%
1-B2 B 9/22/97 Residential 0.55% 3,225,000 3,223,582 0.04%
1-B3 B- 9/22/97 Residential 0.55% 6,852,000 6,852,000 0.00%
2-B1 BB 9/22/97 Residential 0.26% 5,007,000 4,994,594 0.25%
2-B2 B 9/22/97 Residential 0.26% 1,320,000 1,316,729 0.25%
2-B3 B- 9/22/97 Residential 0.26% 2,554,000 2,547,672 0.25%
CWMBS 94-Q B4 BB 9/1/94 Residential 28.56% 479,877 424,116 11.62%
GNMA9716 FIO AAA 10/30/97 Residential 20.88% 296,318,416(3) 234,458,698 20.88%
HMSI 97-2 B4 BB 4/1/97 Residential 3.91% 1,507,000 1,502,748 0.28%
HMSI 97-1 B3 BB 2/1/97 Residential 5.13% 3,887,000 3,866,640 0.52%
RFMSI 96-S4 B1 BB 2/1/96 Residential 11.70% 2,849,500 2,808,011 1.46%
SASI 94-4 M2 Baa3 3/1/94 Residential 28.99% 30,900,000 30,308,468 1.91%
SBMS 97-HUD2(1) B6 NR 11/30/97 Residential 0.00% 27,614,955 27,614,955 0.00%
SBMS VII 96-
LB3(1) CE NR 11/25/96 Residential 23.62% 4,897,473 4,897,474 0.00%
SBMS VII 97-B BB BB 10/27/97 Residential 0.69% 44,582,294 41,250,000 7.47%
SBMS VII 97-
LB1(1) CE NR 1/27/97 Residential 16.90% 5,059,267 5,059,267 0.00%
WFC 96-3(1) AIO AAA 12/1/96 Residential 11.20% 166,577,385 166,577,385 0.00%
WFC 96-3(1) B1 BB 12/1/96 Residential 65.63% 6,261,433 6,168,911 1.48%
WFC 96-3(1) B2 B 12/1/96 Residential 65.63% 4,870,004 4,798,039 1.48%
WFC 96-3(1) B3 NR 12/1/96 Residential 65.63% 12,522,867 12,337,813 1.48%
WFC 96-3(1) FIO AAA 12/1/96 Residential 65.63% 48,211,248 48,211,248 0.00%
WILSHIRE CON-
SUMER
95A(1) B NR 3/8/95 Consumer 54.46% 16,637,757 18,891,143 (13.54%)(2)
WILSHIRE MORT- Manufactured
GAGE 95A B NR 6/28/95 Housing 38.31% 5,006,883 5,177,238 (3.40%)(2)
WILSHIRE MORT-
GAGE
95-MA1(1) B NR 7/1/95 Home Equity 40.09% 5,912,302 6,904,130 (16.78%)(2)
WILSHIRE
MORTGAGE
95-MF1(1) B NR 7/1/95 Home Equity 41.10% 2,312,642 2,728,219 (17.97%)(2)
------------ ------------
TOTAL................................................................. $728,135,302 $665,564,528
============ ============
<CAPTION>
COMPANY INVESTMENT
--------------------------
PERCENTAGE
OF PURCHASE
ISSUE NAME CLASS AMOUNT PRICE
- ---------------- ---------- --------------- --------------
<S> <C> <C> <C>
BSMSI 96-6 50.0% $ 2,684,707 $ 2,684,707
50.0% 2,386,406 2,219,357
CHASE 94-H 100.0% 240,618 173,245
CSFBMSC 97-1R 50.0% 6,131,303 5,625,471
50.0% 1,611,791 1,365,474
50.0% 3,426,000 2,527,300
50.0% 2,497,297 2,210,785
50.0% 658,365 559,498
50.0% 1,273,836 909,016
CWMBS 94-Q 100.0% 424,116 399,135
GNMA9716 100.0% 234,458,698(4) 6,330,385
HMSI 97-2 100.0% 1,502,748 1,374,869
HMSI 97-1 50.0% 1,933,320 1,831,237
RFMSI 96-S4 100.0% 2,808,011 2,536,848
SASI 94-4 25.0% 7,577,117 6,251,122
SBMS 97-HUD2(1) 100.0% 27,614,955 8,284,487
SBMS VII 96-
LB3(1) 50.0% 2,448,737 8,693,017
SBMS VII 97-B 12.1% 4,999,500 4,699,530(5)
SBMS VII 97-
LB1(1) 50.0% 2,529,634 9,384,941
WFC 96-3(1) 100.0% 166,577,385(4) 2,498,661(5)
WFC 96-3(1) 50.0% 3,084,456 2,776,010
WFC 96-3(1) 50.0% 2,399,019 1,799,264
WFC 96-3(1) 50.0% 6,168,907 2,159,117
WFC 96-3(1) 100.0% 48,211,248(4) 723,169
WILSHIRE CON-
SUMER
95A(1) 50.0% 9,445,571 7,220,421
WILSHIRE MORT-
GAGE 95A 100.0% 5,177,238 3,999,985
WILSHIRE MORT-
GAGE
95-MA1(1) 100.0% 6,904,130 6,558,924
WILSHIRE
MORTGAGE
95-MF1(1) 100.0% 2,728,219 2,591,808(4)
------------ -----------
TOTAL...................... $557,903,330 $98,387,783
============ ===========
</TABLE>
- ----
(1) Special Servicing rights attached.
(2) Includes prepaid senior class principal due to application of excess
interest to senior class principal, thereby increasing subordinate class
balance.
(3) The pools of GNMA Securities which underlie this issue were accumulated
over a period of time prior to the issuance of this security and the
principal amount of such securities was $296,318,416 paid down to
$234,458,898 at the time of issuance.
(4) IO classes are notional classes and, as such, are not entitled to
distributions of principal.
(5) CE bonds represent subordinated principal plus a notional IO class.
56
<PAGE>
RATINGS OF INITIAL MORTGAGE-BACKED SECURITIES
<TABLE>
<CAPTION>
NET BOOK
RATING CATEGORY(1) VALUE
- ------------------ -----------
<S> <C>
AAA/Aaa1 to A-/A3................................................... $ 9,552,214
BBB+/Baa1 to BBB-/Baa3.............................................. 8,935,828
BB+/Ba1 to BB-/Ba3.................................................. 23,673,243
B+/B1 to B-/B3...................................................... 7,333,797
Unrated............................................................. 48,892,701
-----------
Total............................................................. $98,387,783
===========
</TABLE>
- --------
(1) Most recent rating by an independent rating agency.
The ratings of the Rating Agencies on mortgage pass-through certificates
address the likelihood of the receipt of all distributions to which such
holders are entitled. The ratings do not represent any assessment of (i) the
likelihood or frequency of principal prepayments on the underlying mortgage
loans, (ii) the degree to which such prepayments might differ from those
originally anticipated or (iii) whether and to what extent yield maintenance
premiums (if any) will be received. Also, a security rating does not represent
any assessment of the yield to maturity that investors may experience on any
security nor does it assess any possibility that the holders of the IOs might
not fully recover their investment in the event of rapid prepayments of the
underlying mortgage loans (including both voluntary and involuntary
prepayments). A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by
assigning the rating agency.
Structure and Subordination. The majority of the principal amount of the
Initial Mortgage-Backed Securities is subordinated in right of payment of
principal and interest, thus protecting the more senior securities from losses
on the underlying mortgage loans. In general, on any distribution date,
prepayments of principal will typically be distributed to the most senior
class of securities, and not to the Initial Mortgage-Backed Securities, as
long as the more senior securities are outstanding or certain
overcollateralization levels are not met. Generally, on any distribution date,
no interest is distributed to the Initial Mortgage-Backed Securities until
interest allocable to more senior classes for that distribution date has been
distributed. In addition, as losses are incurred on the underlying mortgage
loans, such losses will be borne by the most junior class of Mortgage-Backed
Securities then having an outstanding balance.
Restrictions on Transfer of Initial Mortgage-Backed Securities. Substantially
all of the Initial Mortgage-Backed Securities have not been registered under the
Securities Act or any state securities laws, and, accordingly, transfer of the
Initial Mortgage-Backed Securities is restricted. Moreover, the Initial
Mortgage-Backed Securities cannot be transferred to an ERISA plan or related
party except in certain limited circumstances. As a result, there is no liquid
market for the Initial Mortgage-Backed Securities.
THE INTERNATIONAL INVESTMENTS
At Closing the Company will purchase participation interests in two pools of
loans in the United Kingdom: (i) a pool of non-performing loans with an
aggregate outstanding principal balance of approximately $14.2 million which
because of their delinquent status, were purchased at prices that reflected a
significant discount from their unpaid principal balances, and (ii) a pool of
performing and sub-performing loans with an aggregate outstanding principal
balance of approximately $0.8 million which were purchased at prices that more
closely approximated their unpaid principal balances. The aggregate purchase
price for these loans in the United Kingdom will be approximately $5.4 million
based on September 30, 1997 exchange rates.
WFSG has granted the Company an option to purchase for up to $110.0 million
all or a portion of up to 50% of WFSG's interest in two portfolios of
International Investments in France. The foregoing amounts were based on
exchange rates as of September 30, 1997 in the United Kingdom at $1.6156 and
in France at $5.8898 to the U.S. Dollar, respectively.
57
<PAGE>
YIELD CONSIDERATIONS RELATED TO THE INITIAL MORTGAGE-BACKED SECURITIES
GENERAL.
The actual yield to maturity on the Initial Mortgage-Backed Securities will
depend upon, among other things, the interest rate for each class of Mortgage-
Backed Securities and the timing and aggregate amount of distributions on the
securities of such class, which in turn will depend primarily on losses and
prepayments on the related mortgage loans. See "Yield Considerations Related
to the Company's Investments." The yield to maturity on the Initial Mortgage-
Backed Securities will be extremely sensitive to the default and loss
experience of the underlying mortgage loans and the timing of any such
defaults or losses. See "Risk Factors--Investment Activity Risks."
The significance of the effect of potential realized losses on the
underlying mortgage loans is illustrated in the tables below. This information
is presented for analytical purposes only, and is not intended as an accurate
indicator or prediction of the actual defaults and losses that may occur in
the future with respect to the underlying mortgage loans. Actual defaults,
liquidations and losses are likely to differ in timing and amount from those
assumed (and may differ significantly). Investors in the Company are urged to
consider their own estimates as to possible levels and timing of defaults and
losses.
The Company will purchase each class of Initial Mortgage-Backed Securities
at a discount from its principal amount. Accordingly, if the Company
calculates the anticipated yield to maturity of any such class based on an
assumed rate of payment that is faster than that actually experienced on the
underlying mortgage loans, the actual yield may be lower than that so
calculated. The following tables show yield sensitivity to prepayments and
defaults for a sample of the larger Initial Mortgage-Backed Securities being
acquired by the Company.
MODELING ASSUMPTIONS.
(i) The loans prepay at the indicated constant prepayment rate ("CPR").
(ii) The loans default at the indicated conditional default rate ("CDR") or
the indicated default rate vector.
(iii) Distributions are received in cash, on the 25th day of each month,
commencing on November 25, 1997.
(iv) There are no repurchases of loans due to breaches of any
representations or warranties or pursuant to an optional termination.
(v) The purchases are made on the indicated settlement date.
(vi) The purchase price is the indicated purchase price for the applicable
bond.
(vii) All required payments are made during the applicable collection
periods, except for balances which are assumed to be in default.
(viii) All required principal and interest advances will be made.
(ix) Liquidation of the principal balance at the time of default occurs 12
months after the month of default.
(x) Upon default, losses of 25% of the defaulted unpaid principal balance
will be realized upon liquidation.
(xi) No amounts will be available in future periods to cover interest
shortfalls in prior periods.
(xii) No special servicing fees are assumed to be incurred.
(xiii) Six-Month LIBOR is equal to 5.781% per annum and remains constant.
The assumed percentages of liquidations and loss scenarios shown in the
tables below are for illustrative purposes only and the Company makes no
representations or warranties with respect to the reasonableness of the
assumptions or that the actual liquidation or loss severity experience of the
loans will in any way correspond to any of the assumptions.
58
<PAGE>
CSFBMSC 1997-1R, CLASS 1-B1
(PURCHASE PRICE OF 95.00% OF PRINCIPAL AMOUNT)
(SETTLEMENT DATE: 10/29/97)
<TABLE>
<CAPTION>
50.00% VECTOR(1)(2) 100.00% VECTOR(1)(2) 200.00% VECTOR(1)(2)
------------------- -------------------- --------------------
CPR BEY(3) BEY(3) BEY(3)
--- ------ ------ ------
<S> <C> <C> <C>
10.00% 8.91% 8.60% 1.76%
15.00% 9.12% 9.07% 5.95%
20.00% 9.32% 9.29% 7.78%
</TABLE>
- --------
(1) Assumed CDRs of underlying mortgage bonds:
<TABLE>
<CAPTION>
BOND CDR(2)
---- ------
<S> <C>
PHMS 92-11 1.00%
PHMS 92-14 1.25%
PHMS 93-B 0.40%
PHMS 93-G 0.40%
PHMS 93-L 0.20%
PHMS 94-D 0.10%
PHMS 94-E 0.20%
PHMS 95-D2 0.60%
PHMS 95-A 0.30%
PHMS 95-E 0.10%
</TABLE>
(2) 100% vector means CDR equal to 100% of the above CDRs, a 50% vector means
one-half of the CDRs above and a 200% vector means twice the CDRs above.
(3) BEY means Bond Equivalent Yield.
SBMS 1997-HUD2, CLASS B6
(PURCHASE PRICE OF 30.00% OF PRINCIPAL AMOUNT)
(SETTLEMENT DATE: 11/30/97)
<TABLE>
<CAPTION>
2.5% CDR 3.5% CDR 4.5% CDR
-------- -------- --------
CPR BEY(2) BEY(2) BEY(2)
--- ------ ------ ------
<S> <C> <C> <C>
5.00% 20.86% 14.83% 7.71%
8.00% 23.11% 17.97% 11.36%
Vector(1) 26.07% 22.25% 17.30%
</TABLE>
- --------
(1) 8% CPR for two years, 12% CPR for the third year, then 20% CPR thereafter.
(2) BEY means Bond Equivalent Yield.
59
<PAGE>
SBMS VII 1997-B, CLASS B
(PURCHASE PRICE OF 95.00% OF PRINCIPAL AMOUNT)
(SETTLEMENT DATE: 10/27/97)
<TABLE>
<CAPTION>
1.5% CDR 2.5% CDR 3.5% CDR
-------- -------- --------
CPR BEY(1) BEY(1) BEY(1)
--- ------ ------ ------
<S> <C> <C> <C>
20.00% 9.12% 8.99% 8.84%
25.00% 8.87% 8.73% 8.58%
30.00% 8.62% 8.47% 8.28%
</TABLE>
- --------
(1) BEY means Bond Equivalent Yield.
SBMS VII 1997-LB1, CLASS CE
(PURCHASE PRICE OF 371.00% OF PRINCIPAL AMOUNT)
(SETTLEMENT DATE: 10/25/97)
<TABLE>
<CAPTION>
1.5% CDR 2.5% CDR 3.5% CDR
-------- -------- --------
CPR BEY(1) BEY(1) BEY(1)
--- ------ ------ ------
<S> <C> <C> <C>
20.00% 22.41% 20.08% 17.70%
25.00% 17.30% 14.98% 12.65%
30.00% 12.14% 9.90% 7.66%
</TABLE>
- --------
(1) BEY means Bond Equivalent Yield.
The pre-tax yields set forth in the preceding tables were calculated by
determining the monthly discount rates that, when applied to the projected
future stream of cash flows to be paid on the Mortgage-Backed Securities,
would cause the present value of such projected future stream of cash flows to
equal the assumed aggregate purchase prices of such securities and converting
such monthly rates to semi-annual corporate bond equivalent rates. Such
calculations do not take into account variations that may occur in the
interest rates at which investors may be able to reinvest funds received by
them as distributions on such classes and consequently do not purport to
reflect the return on any investment in such classes when such reinvestment
rates are considered.
There can be no assurance that the assumptions used in preparing these
tables are accurate or that defaults and losses on the underlying mortgage
loans will not exceed those shown herein. Moreover, other Mortgage-Backed
Securities purchased by the Company in the future are likely to have different
characteristics.
60
<PAGE>
CAPITALIZATION
The total stockholders equity of the Company as adjusted to reflect the sale
of the shares of Common Stock offered hereby, is as follows:
<TABLE>
<CAPTION>
AS
ACTUAL ADJUSTED(1)
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Common Stock, par value $0.0001.............................. $[ ] $ 2
Authorized--200,000,000 shares
Outstanding--0 shares, 20,000,000 shares, as adjusted
Preferred Stock, par value $0.0001........................... 0 0
Authorized--25,000,000 shares
Outstanding--0 shares, 0 shares, as adjusted
Additional Paid-in Capital................................... [0] 247,298
--- --------
Total.................................................... $[ ] $247,300
=== ========
</TABLE>
- --------
(1) Assumes that the initial public offering price is $15.00 per share.
Includes 1,980,000 shares of Common Stock to be purchased by WFSG, after
deducting offering and organizational expenses estimated to be
$[22,000,000] payable by the Company, and assuming no exercise of the
Underwriters' over-allotment option to purchase up to an additional
3,000,000 shares of Common Stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES
WREIT has no operating history. WREIT's opening audited balance sheet as of
October 28, 1997, and related footnotes are presented elsewhere herein. The
Management's Discussion and Analysis of Liquidity and Capital Resources should
be read in conjunction with such opening balance sheet and related notes.
WREIT has been organized and will elect to qualify as a REIT under the Code
and, as such, anticipates distributing annually at least 95% of its taxable
income (other than net capital gain), subject to certain adjustments. Cash for
such distributions is expected to be generated from the Company's operations,
although the Company also may borrow funds to make distributions. The
Company's revenues will be derived from (i) ownership of U.S. Commercial
Properties; (ii) ownership of Mortgage-Backed Securities; (iii) International
Investments; (iv) ownership of Other Real Estate Related Assets; and (v)
interest and revenues from other (generally short-term) investments. See
"Distribution Policy" and "Federal Income Tax Considerations."
The principal sources of the Company's funds in the near term will be the
proceeds of this Offering. The proceeds of the Offering will fund the purchase
of the Initial Investments with the remainder to be used to fund the
operations of the Company and to acquire new assets. In this regard, WFSG has
granted the Company an option to purchase for appproximately $110.0 million,
all or a portion of up to 50% of WFSG's interest in two portfolios of
International Investments in France. The Company is currently evaluating the
suitability of such investment under U.S. tax and French law. The Company
plans to raise additional operating funds by leveraging its assets, primarily
through repurchase agreements, secured term loans warehouse lines of credit,
mortgage loans, issuance of Mortgage-Backed Securities and other borrowing
arrangements, which management believes will be sufficient to enable the
Company to meet its anticipated liquidity and capital requirements in the long
term. See "Operating Policies and Objectives" and "Use of Proceeds."
61
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Charter provides that WREIT may issue up to 225,000,000 shares of
capital stock, consisting of 200,000,000 shares of Common Stock, $0.0001 par
value per share, and 25,000,000 shares of preferred stock, $0.0001 par value
per share ("Preferred Stock"). Upon completion of the Offering, 20,000,000
shares of Common Stock (23,000,000 of the Underwriters' over-allotment option
is exercised in full) will be issued and outstanding, and 6,000,000 shares of
Common Stock will be reserved for issuance upon exercise of options, and no
Preferred Stock will be issued and outstanding.
COMMON STOCK
All outstanding shares of Common Stock will be duly authorized, fully paid
and nonassessable upon the Closing. Subject to the preferential rights of any
other shares or series of shares of capital stock, holders of Common Stock are
entitled to receive dividends if and when authorized and declared by the Board
of Directors of WREIT out of assets legally available therefor and to share
ratably in the assets of WREIT legally available for distribution to its
stockholders in the event of its liquidation, dissolution or winding-up after
payment of, or adequate provision for, all known debts and liabilities of
WREIT. WREIT currently intends to pay quarterly dividends.
Each outstanding share of Common Stock entitles the holder to one vote on
all matters submitted to a vote of stockholders, including the election of
directors, and, except as otherwise required by law or except as provided with
respect to any other class or series of shares of capital stock, the holders
of Common Stock will possess the exclusive voting power. There is no
cumulative voting in the election of directors, which means in all elections
of directors, each holder of Common Stock has the right to cast one vote for
each share of stock for each candidate.
PREFERRED STOCK
Pursuant to the Charter, Preferred Stock may be issued from time to time, in
one or more series, as authorized by the Board of Directors. Because the Board
of Directors has the power to establish the preferences and rights of each
class or series of Preferred Stock, the Board of Directors may afford the
holders of any series or class of Preferred Stock preferences, powers and
rights, voting or otherwise, senior to the rights of the holders of Common
Stock. The Board could also authorize the issuance of Preferred Stock with
terms and conditions which could have the effect of discouraging a takeover or
other transaction which holders of some, or a majority, of the shares of
Common Stock might believe to be in their best interests or in which holders
of some, or a majority, of the shares of Common Stock might receive a premium
for their shares of Common Stock over the then market price of such shares of
Common Stock. As of the date hereof, no shares of Preferred Stock are
outstanding.
RESTRICTIONS ON TRANSFER
For WREIT to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding shares of capital
stock. Specifically, not more than 50% in value of WREIT's outstanding capital
stock may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities) during the last half of a
taxable year, and WREIT must be beneficially owned by 100 or more persons
during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year. See "Federal Income Tax
Considerations--Requirements for Qualification."
Because the Board of Directors believes it is essential for WREIT to
continue to qualify as a REIT, the Charter, subject to certain exceptions and
waivers described below, provides that no person may own, or be deemed to own
by virtue of the attribution provisions of the Code, more than 9.8% (or, with
respect to WFSG, 20%) of the number of outstanding shares of Common Stock or
any series of Preferred Stock (the "Ownership Limitation").
Subject to certain exceptions described below, any purported transfer of
shares of Common Stock or Preferred Stock that would (i) result in any person
owning, directly or indirectly, shares of Common Stock or
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Preferred Stock in excess of the Ownership Limitation, (ii) result in the
shares of Common Stock and Preferred Stock, collectively, being owned by fewer
than 100 persons (determined without reference to any rules of attribution),
(iii) result in WREIT being "closely held" within the meaning of section
856(h) of the Code, or (iv) cause WREIT to own, actually or constructively,
10% or more of the ownership interests in a tenant of the Company's real
property, within the meaning of section 856(d)(2)(B) of the Code, will be
designated as "Shares-in-Trust" and transferred automatically to a trust (the
"Trust") effective on the day before the purported transfer of such shares of
Common Stock or Preferred Stock. The record holder of the shares of Common
Stock or Preferred Stock that are designated as Shares-in-Trust (the
"Prohibited Owner") will be required to submit such number of shares of Common
Stock or Preferred Stock to WREIT for registration in the name of the Trust.
The trustee of the Trust (the "Trustee") will be designated by WREIT, but will
not be affiliated with WREIT. The beneficiary of the Trust (the "Beneficiary")
will be one or more charitable organizations that are named by WREIT.
Shares-in-Trust will remain issued and outstanding shares of Common Stock or
Preferred Stock and will be entitled to the same rights and privileges as all
other shares of the same class or series. The Trustee will receive all
dividends and distributions on the Shares-in-Trust and will hold such
dividends or distributions in trust for the benefit of the Beneficiary. The
Trustee will vote all Shares-in-Trust. The Trustee will designate a permitted
transferee of the Shares-in-Trust, provided that the permitted transferee (i)
purchases such Shares-in-Trust for valuable consideration and (ii) acquires
such Shares-in-Trust without such acquisition resulting in a transfer to
another Trust.
The Prohibited Owner with respect to Shares-in-Trust will be required to
repay to the Trustee the amount of any dividends or distributions received by
the Prohibited Owner (i) that are attributable to any Shares-in-Trust and (ii)
the record date of which was on or after the date that such shares became
Shares-in-Trust. The Prohibited Owner generally will receive from the Trustee
the lesser of (i) the price per share such Prohibited Owner paid for the
shares of Common Stock or Preferred Stock that were designated as Shares-in-
Trust (or, in the case of a gift or devise, the Market Price (as defined
below) per share on the date of such transfer) or (ii) the price per share
received by the Trustee from the sale of such Shares-in-Trust. Any amounts
received by the Trustee in excess of the amounts to be paid to the Prohibited
Owner will be distributed to the Beneficiary.
The Shares-in-Trust will be deemed to have been offered for sale to WREIT,
or its designee, at a price per share equal to the lesser of (i) the price per
share in the transaction that created such Shares-in-Trust (or, in the case of
a gift or devise, the Market Price per share on the date of such transfer) or
(ii) the Market Price per share on the date that WREIT, or its designee,
accepts such offer. WREIT will have the right to accept such offer for a
period of ninety days after the later of (i) the date of the purported
transfer which resulted in such Shares-in-Trust or (ii) the date WREIT
determines in good faith that a transfer resulting in such Shares-in-Trust
occurred.
"Market Price" on any date shall mean the average of the Closing Price (as
defined below) for the five consecutive Trading Days (as defined below) ending
on such date. The "Closing Price" on any date shall mean the average of the
high bid and low asked prices in the over-the-counter market, as reported by
The Nasdaq Stock Market. "Trading Day" shall mean any day other than a
Saturday, a Sunday or a day on which banking institutions in the State of New
York are authorized or obligated by law or executive order to close.
Any person who acquires or attempts to acquire shares of Common Stock or
Preferred Stock in violation of the foregoing restrictions, or any person who
owned shares of Common Stock or Preferred Stock that were transferred to a
Trust, will be required (i) to give immediately written notice to WREIT of
such event and (ii) to provide to WREIT such other information as it may
request in order to determine the effect, if any, of such transfer on WREIT's
status as a REIT.
All persons who own, directly or indirectly, more than 5% (or such lower
percentages as required pursuant to regulations under the Code) of the
outstanding shares of Common Stock and Preferred Stock must, within 30 days
after January 1 of each year, provide to WREIT a written statement or
affidavit stating the name and address of such direct or indirect owner, the
number of shares of Common Stock and Preferred Stock owned
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directly or indirectly, and a description of how such shares are held. In
addition, each direct or indirect stockholder shall provide to WREIT such
additional information as WREIT may request in order to determine the effect,
if any, of such ownership on WREIT's status as a REIT and to ensure compliance
with the Ownership Limitation.
The Ownership Limitation generally will not apply to the acquisition of
shares of Common Stock or Preferred Stock by an underwriter that participates
in a public offering of such shares. In addition, the Board of Directors, upon
receipt of a ruling from the Service or an opinion of counsel and upon such
other conditions as the Board of Directors may direct, may exempt a person
from the Ownership Limitation under certain circumstances. The foregoing
restrictions will not be removed until (A)(i) such restrictions are no longer
required in order to qualify as a REIT, and (ii) the Board of Directors
determines that it is no longer in the best interest of the Company to retain
such restrictions; or (B)(i) the Board of Directors determines that it is no
longer in the best interests of WREIT to attempt to qualify, or to continue to
qualify, as a REIT and (ii) there is an affirmative vote of two-thirds of the
number of shares of Common Stock and Preferred Stock entitled to vote on such
matter at a regular or special meeting of the stockholders of WREIT.
All certificates representing shares of Common Stock or Preferred Stock will
bear a legend referring to the restrictions described above.
The Ownership Limitation could have the effect of discouraging a takeover or
other transaction in which holders of some, or a majority, of shares of Common
Stock might receive a premium for their shares of Common Stock over the then
prevailing market price or which such holders might believe to be otherwise in
their best interest.
DIVIDEND REINVESTMENT PLAN
WREIT may implement a dividend reinvestment plan whereby stockholders may
automatically reinvest their dividends in WREIT's Common Stock. Details about
any such plan would be sent to WREIT's stockholders following adoption thereof
by the Board of Directors.
REPORTS TO STOCKHOLDERS
WREIT will furnish its stockholders with annual reports containing audited
financial statements certified by independent public accountants and
distribute quarterly reports containing unaudited financial information for
each of the first three quarters of the year.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The Bank of New
York.
LISTING OF THE COMMON STOCK
An application has been submitted for approval for quotation of the Common
Stock on the Nasdaq National Market under the symbol "WREI."
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CERTAIN PROVISIONS OF MARYLAND LAW AND OF WREIT'S CHARTER AND BYLAWS
The following summary of certain provisions of Maryland law and of the
Charter and Bylaws of WREIT does not purport to be complete and is subject to
and qualified in its entirety by reference to Maryland law and the Charter and
Bylaws of WREIT Certain provisions of Maryland law and the Charter and Bylaws
are described elsewhere in this Prospectus.
BOARD OF DIRECTORS
The Charter and Bylaws provide that the number of Directors of WREIT may be
increased or decreased by the Board of Directors but may not be fewer than the
minimum number required by Maryland law nor without certain approvals more
than nine. Any vacancy on the Board of Directors may be filled, at any regular
meeting or at any special meeting called for that purpose, by a majority of
the remaining Directors, except that a vacancy resulting from an increase in
the number of Directors which vacancy may be filled by a majority of the
entire Board of Directors.
WREIT's Charter provides that a Director may be removed from office at any
time, but only for cause and then only by the affirmative vote of at least
two-thirds of all of the votes ordinarily entitled to be cast in the election
of Directors voting together as a single class. In addition, the Charter
provides that at all times a majority of the Board of Directors must be
Independent Directors.
AMENDMENT
WREIT reserves the right from time to time to make any amendment to its
Charter now or hereafter authorized by law, including any amendments which
alter the contract rights as expressly set forth in the Charter of any shares
of outstanding stock. The Charter may be amended only by the affirmative vote
of a majority of the outstanding shares entitled to vote thereon, provided,
however, that provisions relating to WREIT's election to be taxed as a REIT,
the Board of Directors, dissolution of the Corporation and certain
restrictions on the transferability of Common Stock or Preferred Stock cannot
be amended without the affirmative vote of at least two-thirds of all of the
votes ordinarily entitled to be cast in the election of Directors voting
together as a single class. WREIT's Bylaws may be amended by the Board of
Directors or by the affirmative vote of at least two-thirds of all of the
votes ordinarily entitled to be cast in the election of Directors voting
together as a single class. The Charter provides that any amendment of the
provisions of the Charter relating to indemnification of officers and
directors shall not retroactively affect any act or failure to act that
occurred prior to the amendment.
BUSINESS COMBINATIONS
Under MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person (i) who beneficially owns, directly or indirectly,
10% or more of the voting power of the corporation's shares or (ii) who is an
affiliate of the corporation and, at any time within the two-year period prior
to the date in question, was the beneficial owner of 10% or more of the voting
power of the then outstanding voting stock of the corporation (an "Interested
Stockholder") or an affiliate of such an Interested Stockholder are prohibited
for five years after the most recent date on which the Interested Stockholder
becomes an Interested Stockholder. Any such business combination not
prohibited above must be recommended by the board of directors of such
corporation and approved by the affirmative vote of at least (a) 80% of the
votes entitled to be cast by holders of outstanding shares of voting stock of
the corporation and (b) two-thirds of the votes entitled to be cast by holders
of voting stock of the corporation other than shares held by the Interested
Stockholder with whom (or with whose affiliate) the business combination is to
be effected, unless, among other conditions, the corporation's common
stockholders receive a minimum price (as defined in the MGCL) for their shares
and the consideration is received in cash or in the same form as previously
paid by the Interested Stockholder for its shares. These provisions of
Maryland law do not apply, however, to business combinations that are approved
or exempted by the board of directors of the corporation prior to the time
that the Interested Stockholder becomes an Interested Stockholder.
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CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares of stock owned by the acquirer, by officers or by
directors who are employees of the corporation. "Control shares" are voting
shares of stock which, if aggregated with all other such shares of stock
previously acquired by the acquirer or in respect of which the acquirer is
able to exercise or direct the exercise of voting power (except solely by
virtue of a revocable proxy), would entitle the acquirer to exercise voting
power in electing directors within one of the following ranges of voting
power: (1) one-fifth or more but less than one-third, (2) one-third or more
but less than a majority, or (3) a majority or more of all voting power.
Control shares do not include shares the acquiring person is then entitled to
vote as a result of having previously obtained stockholder approval. A
"control share acquisition" means the acquisition of or ownership of, or the
power to direct the exercise of voting power with respect to, control shares,
subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders' meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then, subject to certain conditions and limitations, the corporation may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to
the absence of voting rights for the control shares, as of the date of the
last control share acquisition by the acquirer or of any meeting of
stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a stockholders
meeting and the acquirer becomes entitled to vote a majority of the shares
entitled to vote, all other stockholders may exercise appraisal rights. The
fair value of the shares as determined for purposes of such appraisal rights
may not be less than the highest price per share paid by the acquirer in the
control share acquisition. Also, certain restrictions and limitations
otherwise applicable to the exercise of dissenter's rights do not apply in the
context of a "control share acquisition."
The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange effected under the MGCL if the
corporation is a party to the transaction or (b) to acquisitions approved or
exempted by the charter or bylaws of the corporation. WREIT's Bylaws currently
contain a provision exempting WREIT's capital stock from this statute, but the
provision may be amended or eliminated by the Board of Directors.
OPERATIONS
The Company is generally prohibited from engaging in certain activities and
acquiring or holding property or engaging in any activity that would cause the
Company to fail to qualify as a REIT.
DISSOLUTION OF THE COMPANY
Under the MGCL, the Company may be dissolved by (i) the affirmative vote of
a majority of the entire Board of Directors declaring such dissolution to be
advisable and directing that the proposed dissolution be submitted for
consideration at any annual or special meeting of stockholders, and (ii) upon
proper notice, stockholder approval by the affirmative vote of the holders of
two-thirds of the total number of shares of capital stock outstanding and
entitled to vote thereon voting as a single class.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws of WREIT provide (a) with respect to an annual meeting of
stockholders, nominations of persons for election to the Board of Directors
and the proposal of business to be considered by such stockholders may be made
only (i) pursuant to WREIT's notice of the meeting, (ii) by the Board of
Directors or (iii) by a
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stockholder who is entitled to vote at the meeting and has complied with the
advance notice procedures set forth in the Bylaws and (b) with respect to
special meetings of stockholders, only the business specified in WREIT's
notice of meeting may be brought before the meeting of stockholders, and
nominations of persons for election to the Board of Directors may be made only
(i) pursuant to WREIT's notice of meeting, (ii) by the Board of Directors or
(iii) provided that the Board of Directors has determined that directors shall
be elected at such meeting, by a stockholder who is entitled to vote at the
meeting and has complied with the advance notice provisions set forth in the
Bylaws.
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
CHARTER AND BYLAWS
The business combination of provisions and the control share acquisition
provisions of the MGCL, the provisions of the Charter on removal of directors
and the advance notice provisions of the Bylaws could delay, defer or prevent
a change in control of WREIT or other transaction that might involve a premium
price for holders of Common Stock or otherwise be in their best interest.
COMMON STOCK AVAILABLE FOR FUTURE SALE
Upon the closing of the Offering, WREIT will have outstanding (or reserved
for issuance upon exercise of options) 26,000,000 shares of Common Stock. The
Common Stock issued in the Offering will be freely tradeable by persons other
than "Affiliates" of the Company without restriction under the Securities Act
of 1933, as amended (the "Securities Act"), subject to certain limitations on
ownership set forth in the Charter. See "Description of Capital Stock--
Restrictions on Transfer."
Shares of Common Stock issued to holders of Units upon exercise of the
Redemption Rights will be "restricted" securities under the meaning of Rule
144 promulgated under the Securities Act ("Rule 144") and may not be sold in
the absence of registration under the Securities Act unless an exemption from
registration is available, including exemptions contained in Rule 144. See
"Operating Partnership--Redemption Rights." As described below, WREIT has
granted certain holders registration rights with respect to their Common
Stock.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of restricted shares from the
Company or any "Affiliate" of the Company, as that term is defined under the
Securities Act, the acquiror or subsequent holder thereof is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of 1% of the then outstanding Common Stock or the average weekly
trading volume of the Common Stock during the four calendar weeks preceding
the date on which notice of the sale is filed with the Commission. Sales under
Rule 144 also are subject to certain manner of sale provisions, notice
requirements and the availability of current public information about the
Company. If two years have elapsed since the date of acquisition of restricted
shares from the Company or from any Affiliate of the Company, and the acquiror
or subsequent holder thereof is deemed not to have been an Affiliate of the
Company at any time during the three months preceding a sale, such person
would be entitled to sell such shares in the public market under Rule 144(k)
without regard to the volume limitations, manner of sale provisions, public
information requirements or notice requirements.
The Company and Messrs. Wiederhorn and Mendelsohn have agreed not to offer,
sell or contract to sell or otherwise dispose of any Common Stock without the
prior consent of the Representatives (as defined herein) for a period of 180
days from the date of this Prospectus.
WFSG has agreed not to offer, sell or contract to sell or otherwise dispose
of the Common Stock acquired on the Closing Date without the prior consent of
the Representatives, for a period of two years from the date of this
Prospectus, provided that WRSC continues to serve as the Manager during such
period.
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price prevailing from time to time. Sales of substantial amounts of Common
Stock, or the perception that such sales could occur, may adversely affect
prevailing market prices of the Common Stock.
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OPERATING PARTNERSHIP AGREEMENT
The Operating Partnership has been organized as a Delaware limited
partnership, the general partner of which is Wilshire Realty General Inc., a
wholly-owned subsidiary of WREIT (the "General Partner"). The Company
organized the Operating Partnership in order to provide future sellers of
assets with the opportunity to transfer those assets to the Company in a tax-
deferred exchange. At Closing, WREIT will purchase 20,000,000 (23,000,000 if
the Underwriters exercise their over-allotment option in full) Units with the
net proceeds of the Offering. In addition, approximately 376,874 Units will be
issued to Wilshire Properties 1 and Wilshire Properties 2 in exchange for
certain commercial property. See "Initial Investments." Upon issuance of these
Units, WREIT will assign to the General Partner its right to receive 203,769
Units (233,769 Units if the Underwriters exercise their over-allotment option
in full), representing the General Partner's 1% interest in the Operating
Partnership. WREIT, Wilshire Properties 1 and Wilshire Properties 2 will
become limited partners of the Operating Partnership. WREIT, Wilshire
Properties 1 and Wilshire Properties 2 and future holders of additional Units
are hereafter referred to as the "Limited Partners." The following is a
summary of the Operating Partnership Agreement entered into between the
General Partner and the Limited Partners. The following summary of the
Operating Partnership Agreement, and the descriptions of certain provisions
thereof set forth elsewhere in this Prospectus, describe certain provisions
which appear in the Operating Partnership Agreement.
GENERAL
Pursuant to the Operating Partnership Agreement, the General Partner, as the
sole general partner of the Operating Partnership, has the full, exclusive and
complete responsibility and discretion in the management and control of the
Operating Partnership. The Limited Partners have no authority in their
capacity as Limited Partners to transact business for, or participate in the
management activities or decisions of, the Operating Partnership except as
required by applicable law. Consequently, WREIT, by virtue of its ownership of
the General Partner, controls the assets and business of the Operating
Partnership. However, it is anticipated that any amendment to the Operating
Partnership Agreement would (i) affect the Redemption Rights (as defined
below), (ii) adversely affect the Limited Partners' rights to receive cash
distributions, (iii) alter the Operating Partnership's allocations of income
or loss, or (iv) impose on the Limited Partners any obligations to make
additional contributions to the capital of the Operating Partnership, requires
the consent of Limited Partner.
GENERAL PARTNER NOT TO WITHDRAW
The General Partner can not voluntarily withdraw from the Operating
Partnership or transfer or assign its interest in the Operating Partnership
unless the transaction in which such withdrawal or transfer occurs results in
the Limited Partners receiving property in an amount equal to the amount it
would have received had they exercised the Redemption Rights immediately prior
to such transaction, or unless the successor to the General Partner
contributes substantially all of its assets to the Operating Partnership in
return for an interest in the Operating Partnership.
CAPITAL CONTRIBUTION
WREIT will contribute, on behalf of the General Partner and as a Limited
Partner, all of the net proceeds of the Offering to the Operating Partnership.
The Operating Partnership will issue 203,769 Units (233,769 Units if the
Underwriters exercise their over-allotment option in full) to the General
Partner and 19,796,231 Units (22,766,231 Units if the Underwriters exercise
their over-allotment option in full) to WREIT for the contribution of such net
proceeds. Wilshire Properties 1 and Wilshire Properties 2 will receive
approximately 376,874 Units for the sale of certain commercial properties. See
"Initial Investments." As a result of the foregoing the General Partner will
hold a 1% general partnership interest in the Operating Partnership, and
WREIT, Wilshire Properties 1 and Wilshire Property 2 collectively will hold a
99% limited partnership interest in the Operating Partnership.
Upon completion of the Offering, WREIT will issue a total of 20,000,000
shares of Common Stock and own, through the General Partner and as a Limited
Partner, 98.2% of the partnership interests (98.4% if the Underwriters
exercise their over-allotment option in full) in the Operating Partnership.
Although the Operating Partnership will receive the net proceeds of the
Offering, WREIT will be deemed to have made a capital
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contribution to the Operating Partnership in the aggregate amount of the gross
proceeds of the Offering and the Operating Partnership will be deemed
simultaneously to have paid the underwriter's discount and other expenses paid
or incurred in connection with the Offering.
The Operating Partnership Agreement provides that if the Operating
Partnership requires additional funds at any time or from time to time in
excess of funds available to the Operating Partnership from borrowing or
capital contributions, the General Partner may borrow such funds from a
financial institution or other lender and lend such funds to the Operating
Partnership on the same terms and conditions as are applicable to the General
Partner's borrowing of such funds. Moreover, the General Partner is authorized
to cause the Operating Partnership to issue partnership interests for less
than fair market value if the Company (i) has concluded in good faith that
such issuance is in the best interest of the Company and the Operating
Partnership and (ii) the General Partner makes a capital contribution in an
amount equal to the proceeds of such issuance. Under the Operating Partnership
Agreement, each of the General Partner and the Limited Partners is obligated
to contribute the net proceeds of any future share offering by WREIT as
additional capital to the Operating Partnership in exchange for an additional
partnership interest. Upon such contribution, the General Partner's and the
Limited Partner's percentage interests in the Operating Partnership would be
increased on a proportionate basis based upon the amount of such additional
capital contributions. The percentage interests of the Limited Partners (other
than the Limited Partner) would be decreased on a proportionate basis in the
event of additional capital contributions by the General Partner and the
Limited Partners. In addition, if the General Partner and the Limited Partners
were to contribute additional capital to the Operating Partnership, the
General Partner would revalue the property of the Operating Partnership to its
fair market value (as determined by the General Partner) and the capital
accounts of the partners would be adjusted to reflect the manner in which the
unrealized gain or loss inherent in such property (that has not been reflected
in the capital accounts previously) would be allocated among the partners
under the terms of the Operating Partnership Agreement as if there were a
taxable disposition of such property for such fair market value on the date of
the revaluation.
REDEMPTION RIGHTS
The Operating Partnership Agreement, provides that the Limited Partners will
have the right (the "Redemption Rights") to cause the Operating Partnership to
redeem its Units for cash or, at the election of the General Partner, shares
of Common Stock on a one-for-one basis. The redemption price will be paid in
cash in the discretion of the Company or in the event that the issuance of
shares of Common Stock to the redeeming Limited Partner would (i) result in
any person owning, directly or indirectly, shares of Common Stock in excess of
the Ownership Limitation, (ii) result in shares of capital stock of the
Company being owned by fewer than 100 persons (determined without reference to
any rules of attribution), (iii) result in the Company being "closely held"
within the meaning of section 856(h) of the Code, (iv) cause the Company to
own, actually or constructively, 10% or more of the ownership interests in a
tenant of the Company's or the Operating Partnership's real property, within
the meaning of section 856(d)(2)(B) of the Code, or (v) cause the acquisition
of shares of Common Stock by such redeeming Limited Partner to be "integrated"
with any other distribution of shares of Common Stock for purposes of
complying with the Securities Act. WRSC holds options to acquire shares of
Common Stock (or, at the option of the Company, Units), none of which is
exercisable until the first anniversary of the Closing Date. Upon an
acquisition of Units, WRSC may immediately exercise its Redemption Rights.
If the Company decides to securitize some or all of its mortgage loans (or
to resecuritize some or all of its Mortgage-Backed Securities) through the
issuance of non-REMIC collaterized mortgage obligations with multiple
maturities ("CMOs"), it is anticipated that the Mortgage Loans will be
distributed, through the General Partner and the Initial Limited Partner, to
WREIT in order to prevent the Mortgage Loans from being treated as a taxable
mortgage pool for federal income tax purposes upon the issuance of the CMOs.
Accordingly, it is anticipated that the General Partner and the Initial
Limited Partner will have the right to redeem a portion of their partnership
interests in the Operating Partnership in exchange for Mortgage Loans to the
extent necessary to facilitate such a securitization transaction. The portion
of the General Partner's or Limited Partners' partnership interest that is
redeemed will be based on the fair market value of the Mortgage Loans
distributed, as determined by the General Partner, but subject to review by
the Independent Directors to ensure compliance with the Guidelines.
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OPERATIONS
The Operating Partnership Agreement requires that the Operating Partnership
be operated in a manner that will enable WREIT to satisfy the requirements for
being classified as a REIT for federal tax purposes, to avoid any federal
income or excise tax liability imposed by the Code, and to ensure that the
Operating Partnership will not be classified as a "publicly traded
partnership" for purposes of section 7704 of the Code.
In addition to the administrative and operating costs and expenses incurred
by the Operating Partnership, the Operating Partnership will pay all
administrative costs and expenses of the Company and the General Partner
(collectively, the "Company Expenses") and the Company Expenses will be
treated as expenses of the Operating Partnership. The Company Expenses
generally include (i) all expenses relating to the formation and continuity of
existence of the Company and the General Partner, (ii) all expenses relating
to the public offering and registration of securities by the Company, (iii)
all expenses associated with the preparation and filing of any periodic
reports by the Company under federal, state or local laws or regulations, (iv)
all expenses associated with compliance by the Company and the General Partner
with laws, rules and regulations promulgated by any regulatory body and (v)
all other operating or administrative costs of the General Partner incurred in
the ordinary course of its business on behalf of the Operating Partnership.
DISTRIBUTIONS
The Operating Partnership Agreement provides that the Operating Partnership
distribute cash from operations (including net sale or refinancing proceeds,
but excluding net proceeds from the sale of the Operating Partnership's
property in connection with the liquidation of the Operating Partnership) on a
quarterly (or, at the election of the General Partner, more frequent) basis,
in amounts determined by the General Partner in its sole discretion, to the
partners in accordance with their respective percentage interests in the
Operating Partnership. Upon liquidation of the Operating Partnership, after
payment of, or adequate provision for, debts and obligations of the Operating
Partnership, including any partner loans, it is anticipated that any remaining
assets of the Operating Partnership will be distributed to all partners with
positive capital accounts in accordance with their respective positive capital
account balances. If the General Partner has a negative balance in its capital
account following a liquidation of the Operating Partnership, it will be
obligated to contribute cash to the Operating Partnership equal to the
negative balance in its capital account.
ALLOCATIONS
The income, gain and loss of the Operating Partnership for each fiscal year
generally will be allocated among the partners in accordance with their
respective interests in the Operating Partnership, subject to compliance with
the provisions of Code sections 704(b) and 704(c) and Treasury regulations
("Treasury Regulations") promulgated thereunder.
TERM
The Operating Partnership shall continue until December 31, 2050, or until
sooner terminated as provided in the Operating Partnership Agreement or by
operation of law.
TAX MATTERS
Pursuant to the Operating Partnership Agreement, the General Partner is the
tax matters partner of the Operating Partnership and, as such, has authority
to handle tax audits and to make tax elections under the Code on behalf of the
Operating Partnership.
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FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax considerations
that may be relevant to a prospective holder of Common Stock in WREIT.
Proskauer Rose LLP has acted as counsel to WREIT and has reviewed this summary
and has rendered an opinion that the descriptions of the law and the legal
conclusions contained herein are correct in all material respects, and the
discussions hereunder fairly summarize the federal income tax considerations
that are likely to be material to WREIT and a holder of the Common Stock. The
discussion contained herein does not address all aspects of taxation that may
be relevant to particular stockholders in light of their personal investment
or tax circumstances, or to certain types of stockholders (including insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
foreign corporations, and persons who are not citizens or residents of the
United States) subject to special treatment under the federal income tax laws.
The statements in this discussion and the opinion of Proskauer Rose LLP are
based on current provisions of the Code, existing, temporary, and currently
proposed Treasury Regulations promulgated under the Code, the legislative
history of the Code, existing administrative rulings and practices of the
Service, and judicial decisions. No assurance can be given that future
legislative, judicial, or administrative actions or decisions, which may be
retroactive in effect, will not affect the accuracy of any statements in this
Prospectus with respect to the transactions entered into or contemplated prior
to the effective date of such changes.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS OWN TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND SALE OF THE
COMMON STOCK AND OF WREIT'S ELECTION TO BE TAXED AS A REIT, INCLUDING THE
FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE,
OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX
LAWS.
TAXATION OF THE COMPANY
WREIT plans to make an election to be taxed as a REIT under sections 856
through 860 of the Code, commencing with its short taxable year ending on
December 31, 1997.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its stockholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retroactively.
Proskauer Rose LLP has acted as counsel to WREIT in connection with the
Offering and WREIT's election to be taxed as a REIT. In the opinion of
Proskauer Rose LLP, assuming that the elections and other procedural steps
described in this discussion of "Federal Income Tax Considerations" are
completed by WREIT in a timely fashion, commencing with WREIT's short taxable
year ending December 31, 1997, WREIT will qualify to be taxed as a REIT
pursuant to sections 856 through 860 of the Code, and WREIT's organization and
proposed method of operation will enable it to continue to meet the
requirements for qualification and taxation as a REIT under the Code.
Investors should be aware, however, that opinions of counsel are not binding
upon the Service or any court. It must be emphasized that Proskauer Rose LLP's
opinion is based on various assumptions and is conditioned upon certain
representations made by WREIT as to factual matters, including representations
regarding the nature of WREIT's properties and the future conduct of its
business. Such factual assumptions and representations are described below in
this discussion of "Federal Income Tax Considerations" and are set out in the
federal income tax opinion that will be delivered by Proskauer Rose LLP at the
closing of the Offering. Moreover, such qualification and taxation as a REIT
depends upon WREIT's ability to meet on a continuing basis, through actual
annual operating results, distribution levels, and stock ownership, the
various qualification tests imposed under the Code discussed below. Proskauer
Rose LLP will not review WREIT's compliance with
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those tests on a continuing basis. Accordingly, no assurance can be given that
the actual results of WREIT's operations for any particular taxable year will
satisfy such requirements. For a discussion of the tax consequences of failure
to qualify as a REIT, see "Federal Income Tax Considerations--Failure to
Qualify."
If WREIT qualifies for taxation as a REIT, it generally will not be subject
to federal corporate income tax on its net income that is distributed
currently to its stockholders. That treatment substantially eliminates the
"double taxation" (i.e., taxation at both the corporate and stockholder
levels) that generally results from an investment in a corporation. However,
WREIT will be subject to federal income tax in the following circumstances.
First, WREIT will be taxed at regular corporate rates on any undistributed
REIT taxable income, including undistributed net capital gains. However, with
respect to any tax paid on undistributed net capital gains, the stockholders
of WREIT will receive a credit for their share of the tax paid by WREIT.
Second, under certain circumstances, WREIT may be subject to the "alternative
minimum tax" on its undistributed items of tax preference, if any. Third, if
WREIT has (i) net income from the sale or other disposition of "foreclosure
property" that is held primarily for sale to customers in the ordinary course
of business or (ii) other nonqualifying income from foreclosure property, it
will be subject to tax at the highest corporate rate on such income. Fourth,
if WREIT has net income from prohibited transactions (which are, in general,
certain sales or other dispositions of property (other than foreclosure
property) held primarily for sale to customers in the ordinary course of
business), such income will be subject to a 100% tax. Fifth, if WREIT should
fail to satisfy the 75% gross income test or the 95% gross income test (as
discussed below), and nonetheless has maintained its qualification as a REIT
because certain other requirements have been met, it will be subject to a 100%
tax on the net income attributable to the greater of the amount by which WREIT
fails the 75% or 95% gross income test multiplied by a fraction intended to
reflect the average profitability of WREIT. Sixth, if WREIT should fail to
distribute during each calendar year at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain net income
for such year, and (iii) any undistributed taxable income from prior periods,
WREIT would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. Seventh, if WREIT acquires
any asset from a C corporation (i.e., a corporation generally subject to full
corporate-level tax) in a merger or other transaction in which the basis of
the asset in WREIT's hands is determined by reference to the basis of the
asset (or any other asset) in the hands of the C corporation and WREIT
recognizes gain on the disposition of such asset during the 10-year period
beginning on the date on which it acquired such asset, then to the extent of
such asset's "built-in-gain" (i.e., the excess of the fair market value of
such asset at the time of acquisition by WREIT over the adjusted basis in such
asset at such time), WREIT will be subject to tax at the highest regular
corporate rate applicable (as provided in Treasury Regulations that have not
yet been promulgated). The results described above with respect to the tax on
"built-in-gain" assume that WREIT will elect pursuant to IRS Notice 88-19 to
be subject to the rules described in the preceding sentence if it were to make
any such acquisition. Finally, WREIT will be subject to tax at the highest
marginal corporate rate on the portion of any Excess Inclusion derived by
WREIT from REMIC Residual Interests equal to the percentage of the stock of
WREIT held by the United States, any state or political subdivision thereof,
any foreign government, any international organization, any agency or
instrumentality of any of the foregoing, any other tax-exempt organization
(other than a farmer's cooperative described in section 521 of the Code) that
is exempt from taxation under the unrelated business taxable income provisions
of the Code, or any rural electrical or telephone cooperative (each, a
"Disqualified Organization"). Any such tax on the portion of any Excess
Inclusion allocable to stock of WREIT held by a Disqualified Organization will
reduce the cash available for distribution from WREIT to all stockholders.
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust, or association (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation,
but for sections 856 through 859 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the
Code; (v) the beneficial ownership of which is held by 100 or more persons;
(vi) not more than 50% in value of the outstanding shares of which is owned,
directly or indirectly, by five or fewer individuals (as
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defined in the Code to include certain entities) during the last half of each
taxable year (the "5/50 Rule"); (vii) that makes an election to be a REIT (or
has made such election for a previous taxable year) and satisfies all relevant
filing and other administrative requirements established by the Service that
must be met in order to elect and maintain REIT status; (viii) that uses a
calendar year for federal income tax purposes and complies with the
recordkeeping requirements of the Code and Treasury Regulations promulgated
thereunder; and (ix) that meets certain other tests, described below,
regarding the nature of its income and assets. The Code provides that
conditions (i) to (iv), inclusive, must be met during the entire taxable year
and that condition (v) must be met 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. Conditions (v) and (vi) will not apply until after the first taxable
year for which an election is made by WREIT to be taxed as a REIT. For
purposes of determining stock ownership under the 5/50 Rule, a supplemental
unemployment compensation benefits plan, a private foundation, or a portion of
a trust permanently set aside or used exclusively for charitable purposes
generally is considered an individual. A trust that is a qualified trust under
Code section 401(a), however, generally is not considered an individual and
beneficiaries of such trust are treated as holding shares of a REIT in
proportion to their actuarial interests in such trust for purposes of the 5/50
Rule. WREIT will be treated as satisfying the 5/50 Rule if it complies with
the demand letter and recordkeeping requirements described below, and if it
does not know, and by exercising reasonable diligence would not have known,
whether it failed to satisfy the 5/50 Rule.
To monitor WREIT's compliance with the share ownership requirements, WREIT
is required to maintain records regarding the actual ownership of its shares
of stock. To do so, WREIT must demand written statements each year from the
record holders of certain percentages of its shares of stock 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 REIT with
2,000 or more record shareholders must demand statements from record holders
of 5% or more of its shares, one with less than 2,000, but more than 200
record shareholders must demand statements from record holders of 1% or more
of the shares, while a REIT with 200 or fewer record shareholders must demand
statements from record holders of 0.5% or more of the shares.) A list of those
persons failing or refusing to comply with this demand must be maintained as
part of WREIT's records. A shareholder who fails or refuses to comply with the
demand must submit a statement with his tax return disclosing the actual
ownership of the shares of stock and certain other information.
Prior to the consummation of the Offering, WREIT did not satisfy conditions
(v) and (vi) in the preceding paragraph. WREIT anticipates issuing sufficient
Common Stock with sufficient diversity of ownership pursuant to the Offering
to allow it to satisfy requirements (v) and (vi). In addition, WREIT's Charter
provides for restrictions regarding the transfer of Common Stock that are
intended to assist WREIT in continuing to satisfy the share ownership
requirements described in clauses (v) and (vi) above. Such transfer
restrictions are described in "Description of Common Stock--Restrictions on
Transfer."
WREIT currently has one subsidiary, the General Partner, and may have
additional subsidiaries in the future. Code section 856(i) provides that a
corporation that is a "qualified REIT subsidiary" shall not be treated as a
separate corporation, and all assets, liabilities, and items of income,
deduction, and credit of a "qualified REIT subsidiary" shall be treated as
assets, liabilities, and items of income, deduction, and credit of the REIT. A
"qualified REIT subsidiary" is a corporation, all of the capital stock of
which is held by the REIT. Thus, in applying the requirements described
herein, any "qualified REIT subsidiaries" of WREIT will be ignored, and all
assets, liabilities, and items of income, deduction, and credit of such
subsidiaries will be treated as assets, liabilities, and items of income,
deduction, and credit of WREIT. The General Partner is a "qualified REIT
subsidiary." Accordingly, the General Partner will not be subject to federal
corporate income taxation, provided WREIT maintains its status as a REIT,
although it may be subject to state and local taxation.
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In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate
share (based on its capital interest) of the assets of the partnership and
will be deemed to be entitled to the gross income of the partnership
attributable to such share. In addition, the assets and gross income of the
partnership will retain the same character in the hands of the REIT for
purposes of section 856 of the Code, including satisfying the gross income and
asset tests described below.
Income Tests. In order for WREIT to qualify and to maintain its
qualification as a REIT, two requirements relating to WREIT's gross income
must be satisfied annually. First, at least 75% of WREIT's gross income
(excluding gross income from prohibited transactions) for each taxable year
must consist of defined types of income derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property" and interest on obligations secured by mortgages on
real property or on interests in real property) or from certain types of
temporary investments of new capital. Second, at least 95% of WREIT's gross
income (excluding gross income from prohibited transactions) for each taxable
year must be derived from such real property or mortgages on real property and
from dividends, other types of interest, and gain from the sale or disposition
of stock or securities, or from any combination of the foregoing. The specific
application of these tests to WREIT is discussed below.
The term "interest," as defined for purposes of the 75% and 95% gross income
tests, generally does not include any amount received or accrued (directly or
indirectly) if the determination of such amount depends in whole or in part on
the income or profits of any person. However, an amount received or accrued
generally will not be excluded from the term "interest" solely by reason of
being based on a fixed percentage or percentages of receipts or sales. In
addition, an amount received or accrued generally will not be excluded from
the term "interest" solely by reason of being based on the income or profits
of a debtor if the debtor derives substantially all of its gross income from
the related property through the leasing of substantially all of its interests
in the property, to the extent the amounts received by the debtor would be
characterized as rents from real property if received by a REIT. Furthermore,
to the extent that interest from a loan that is based on the cash proceeds
from the sale of the property securing the loan constitutes a "shared
appreciation provision" (as defined in the Code), income attributable to such
participation feature will be treated as gain from the sale of the secured
property, which generally is qualifying income for purposes of the 75% and 95%
gross income tests.
Interest on obligations secured by mortgages on real property or on
interests in real property is qualifying income for purposes of the 75% gross
income test. Any amount includible in gross income with respect to a regular
or residual interest in a REMIC generally is treated as interest on an
obligation secured by a mortgage on real property. If, however, less than 95%
of the assets of a REMIC consists of real estate assets (determined as if
WREIT held such assets), WREIT will be treated as receiving directly its
proportionate share of the income of the REMIC. In addition, if WREIT receives
interest income with respect to a mortgage loan that is secured by both real
property and other property and the highest principal amount of the loan
outstanding during a taxable year exceeds the fair market value of the real
property on the date WREIT became committed to the mortgage loan, a portion of
the interest income, equal to (i) such highest principal amount minus such
value, divided by (ii) such highest principal amount, generally will not be
qualifying income for purposes of the 75% gross income test.
Proskauer Rose LLP is of the opinion that the interest, original issue
discount, and market discount income that WREIT derives from its investments
in Mortgage-Backed Securities, IOs, and Inverse IOs generally will be
qualifying interest income for purposes of both the 75% and the 95% gross
income tests, except to the extent that less than 95% of the assets of a REMIC
in which WREIT holds an interest consists of real estate assets (determined as
if WREIT held such assets), and WREIT's proportionate share of the income of
the REMIC includes income that is not qualifying income for purposes of the
75% and 95% gross income tests. Most of the income that WREIT recognizes with
respect to its investments in U.S. Commercial Loans will be qualifying income
for purposes of both gross income tests. In some cases, however, the loan
amount may exceed the value of the real property securing the loan, which will
result in a portion of the income from the loan being classified as qualifying
income for purposes of the 95% gross income test, but not for purposes of the
75% gross income test. WREIT has represented that the amount of such
recharacterized interest, together with the amount of its
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other income that is not included for purposes of determining compliance with
the 75% gross income test, will not result in a violation of that test. It is
also possible that, in some instances, the interest income may be based in
part on the borrower's profits or net income, which generally will disqualify
the income from the loan for purposes of both the 75% and the 95% gross income
tests.
WREIT may originate or acquire Construction or Mezzanine Loans that have
shared appreciation provisions. WREIT may be required to recognize income from
a shared appreciation provision over the term of the related loan using the
constant yield method pursuant to certain Treasury Regulations.
WREIT may originate or acquire loans and securitize such loans through the
issuance of non-REMIC CMOs. As a result of such transactions, WREIT will
retain an equity ownership interest in the Performing Mortgage Loans that has
economic characteristics similar to those of a Subordinated Interest. In
addition, WREIT may resecuritize Mortgage-Backed Securities (or non-REMIC
CMOs) through the issuance of non-REMIC CMOs, retaining an equity interest in
the Mortgage-Backed Securities used as collateral in the resecuritization
transaction. In the event the Company seeks to issue non-REMIC CMOs that (i)
are secured by real estate mortgages, (ii) are treated as debt instruments for
federal income tax purposes, and (iii) provide for payments that bear a
relationship to the underlying mortgages, such mortgages generally will have
to be transferred out of the Operating Partnership to WREIT, in redemption of
units in the Operating Partnership held by WREIT, in order to prevent the
transaction from being treated as a "taxable mortgage pool," which would
result in WREIT failing to qualify as a REIT. See "Operating Partnership
Agreement--Redemption Rights."
WREIT may receive income not described above that is not qualifying income
for purposes of the 75% and 95% gross income tests. For example, certain fees
for services rendered by the Operating Partnership will not be qualifying
income for purposes of the gross income tests. It is not anticipated that the
Operating Partnership will receive a significant amount of such fees. WREIT
will monitor the amount of nonqualifying income produced by its assets and has
represented that it will manage its portfolio in order to comply at all times
with the two gross income tests.
The rent received by WREIT (directly or indirectly) from the tenants of its
Real Property ("Rent") will qualify as "rents from real property" in
satisfying the gross income tests for a REIT described above only if several
conditions are met. First, the amount of Rent must not be based, in whole or
in part, on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, the Code provides that the Rent received from a
tenant will not qualify as "rents from real property" in satisfying the gross
income tests if WREIT, or a direct or indirect owner of 10% or more of WREIT,
owns 10% or more of such tenant, taking into account both direct and
constructive ownership (a "Related Party Tenant"). Third, if Rent attributable
to personal property, leased in connection with a lease of Real Property, is
greater than 15% of the total Rent received under the lease, then the portion
of Rent attributable to such personal property will not qualify as "rents from
real property." Finally, for the Rent to qualify as "rents from real
property," WREIT generally must not operate or manage the Real Property or
furnish or render services to the tenants of such Real Property, other than
through an "independent contractor" who is adequately compensated and from
whom WREIT derives no revenue. However, WREIT may provide certain services to
tenants without having to engage an independent contractor if the services in
question are "usually or customarily rendered" in connection with the rental
of space for occupancy only and are not otherwise considered services
furnished or rendered to the tenants of such property (any such non-permitted
services "Disqualified Services"). The performance of Disqualified Services
with respect to any property will not cause rents from the property to fail to
be treated as "rents from real property," however, if the amount received or
accrued for such Disqualified Services is less than or equal to, one percent
of all amounts received or accrued, directly or indirectly, by the Company
with respect to such property. For purposes of the preceding sentence, the
amount treated as received for any Disqualified Services shall not be less
than 150% of the direct cost of the Company in furnishing or rendering the
Disqualified Services.
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WREIT and the Operating Partnership anticipate they will not charge Rent for
any portion of any Real Property that is based, in whole or in part, on the
income or profits of any person (except by reason of being based on a fixed
percentage or percentages of receipts of sales, as described above) to the
extent that the receipt of such Rent would jeopardize WREIT's status as a
REIT. In addition, WREIT and the Operating Partnership anticipate that, to the
extent that WREIT receives Rent from a Related Party Tenant, such Rent will
not cause WREIT to fail to satisfy either the 75% or 95% gross income test.
WREIT and the Operating Partnership also anticipate that they will not allow
the Rent attributable to personal property leased in connection with any lease
of Real Property to exceed 15% of the total Rent received under the lease, if
the receipt of such Rent would cause WREIT to fail to satisfy either the 75%
or 95% gross income test. Finally, WREIT and the Operating Partnership
anticipate that they will not provide Disqualified Services other than through
an "independent contractor," to the extent such Disqualified Services would
jeopardize WREIT's status as a REIT.
REITs generally are subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualifying
income for purposes of the 75% gross income test), less expenses directly
connected with the production of such income. "Foreclosure property" is
defined as any real property (including interests in real property) and any
personal property incident to such real property (i) that is acquired by a
REIT as the result of such REIT having bid in such property at foreclosure, or
having otherwise reduced such property to ownership or possession by agreement
or process of law, after there was a default (or default was imminent) on a
lease of such property or on an indebtedness owed to the REIT that such
property secured, (ii) for which the related loan was acquired by the REIT at
a time when default was not imminent or anticipated, and (iii) for which such
REIT makes a proper election to treat such property as foreclosure property.
In general, property ceases to be foreclosure property three years after the
day the REIT acquired such property, subject to certain exceptions. WREIT does
not anticipate that it will receive any income from foreclosure property that
is not qualifying income for purposes of the 75% gross income test, but, if
WREIT does receive any such income, WREIT will, when permitted, make an
election to treat the related property as foreclosure property. (As noted
below, income from the sale of foreclosure property will not be subject to the
100% tax on prohibited transactions.)
If property is not eligible for the election to be treated as foreclosure
property ("Ineligible Property") because the related loan was acquired by the
WREIT at a time when default was imminent or anticipated, income received with
respect to such Ineligible Property may not be qualifying income for purposes
of the 75% or 95% gross income test, and a sale of such property could be
treated as giving rise to a "prohibited transaction," which would result in a
100% tax on any gain from the sale of such property. As a result, the Company
may be required to hold such property for investment in lieu of selling such
property or, alternatively, the Company may transfer such property to a
taxable corporation, owned in part by the Company, that could sell the
property and pay a corporate-level tax on the gain. It is possible that some
of the assets to be acquired by WREIT may be treated as Ineligible Property.
The net income derived from a prohibited transaction is subject to a 100%
tax. The term "prohibited transaction" generally includes a sale or other
disposition of property (other than foreclosure property) that is held
primarily for sale to customers in the ordinary course of a trade or business.
The Company believes that no asset owned by WREIT or the Operating Partnership
will be held for sale to customers and that a sale of any such asset will not
be in the ordinary course of WREIT's or the Operating Partnership's business.
Whether property is held "primarily for sale to customers in the ordinary
course of a trade or business" depends, however, on the facts and
circumstances in effect from time to time, including those related to a
particular property. The Code also provides a limited safe harbor pursuant to
which certain sales by a REIT of real estate assets will not constitute
prohibited transactions. This safe harbor applies when (i) the Company has
held the
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property for at least four years, (ii) the aggregate capital expenditures made
by the Company (or any partner of the Company) during the four-year period
preceding the date of the sale do not exceed 30% of the net selling price of
the property, (iii) either (A) during the taxable year the Company does not
make more than seven sales of property (other than foreclosure property, and
treating all sales to one buyer in one transaction as one sale), or (B) the
aggregate adjusted bases (with certain adjustments) of property other than
foreclosure property sold by the Company during the taxable year does not
exceed 10% of the aggregate bases of all assets of the Company as of the
beginning of the year, (iv) in the case of property not acquired through
foreclosure or deed in lieu of foreclosure, the Company has held the property
for at least four years for the production of rental income and (v) where the
seven-sale requirement described above is not satisfied, substantially all the
marketing and development expenditures with respect to the property were made
through an independent contractor from whom the Company does not derive or
receive any income. WREIT will attempt to comply with the terms of safe-harbor
provisions in the Code prescribing when asset sales will not be characterized
as prohibited transactions. Complete assurance cannot be given, however, that
WREIT can comply with the safe-harbor provisions of the Code or avoid owning
property that may be characterized as property held "primarily for sale to
customers in the ordinary course of a trade or business."
It is possible that, from time to time, WREIT will enter into hedging
transactions with respect to one or more of its assets or liabilities. Any
such hedging transactions could take a variety of forms, including interest
rate swaps or interest rate cap agreements, options, futures contracts,
forward rate agreements or any similar financial interest entered into by the
Company to reduce the interest rate risks with respect to any indebtedness
incurred to acquire or carry real estate assets (collectively, "Hedging
Transactions"). To the extent that WREIT enters into a Hedging Transaction,
any periodic income or gain from the disposition of such contract will be
treated as qualifying income for purposes of the 95% gross income test, but
not the 75% gross income test. To the extent that WREIT hedges with other
types of financial instruments or in other situations, it may not be entirely
clear how the income from those transactions will be treated for purposes of
the various income tests that apply to REITs under the Code. WREIT intends to
structure any hedging transactions in a manner that does not jeopardize its
status as a REIT. Accordingly, WREIT may conduct some or all of its hedging
activities that would not qualify as a Hedging Transaction through a corporate
subsidiary that is fully subject to federal corporate income tax.
If WREIT fails to satisfy one or both of the 75% and 95% gross income tests
for any taxable year, it nevertheless may qualify as a REIT for such year if
it is entitled to relief under certain provisions of the Code. Those relief
provisions generally will be available if WREIT's failure to meet such tests
is due to reasonable cause and not due to willful neglect, WREIT attaches a
schedule of the sources of its income to its return, and any incorrect
information on the schedule was not due to fraud with intent to evade tax. It
is not possible, however, to state whether in all circumstances WREIT would be
entitled to the benefit of those relief provisions. As discussed above in
"Federal Income Tax Considerations--Taxation of the Company," even if those
relief provisions apply, a 100% tax would be imposed on the net income
attributable to the greater of the amount by which WREIT fails the 75% or 95%
gross income test.
Asset Tests. WREIT, at the close of each quarter of each taxable year, also
must satisfy two tests relating to the nature of its assets. First, at least 75%
of the value of WREIT's total assets must be represented by cash or cash items
(including certain receivables), government securities, "real estate assets,"
or, in cases where WREIT raises new capital through stock or long-term (at least
five-year) debt offerings, temporary investments in stock or debt instruments
during the one-year period following WREIT's receipt of such capital. The term
"real estate assets" includes interests in real property, interests in mortgages
on real property to the extent the principal balance of a mortgage does not
exceed the fair market value of the associated real property, regular or
residual interests in a REMIC (except that, if less than 95% of the assets of a
REMIC consists of "real estate assets" (determined as if WREIT held such
assets), WREIT will be treated as holding directly its proportionate share of
the assets of such REMIC), and shares of other REITs. For purposes of the 75%
asset test, the term "interest in real property" includes an interest in
mortgage loans or land and improvements thereon, such as buildings or other
inherently permanent structures (including items that are structural components
of such buildings or
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structures), a leasehold of real property, and an option to acquire real
property (or a leasehold of real property). An "interest" in real property
also generally includes an interest in mortgage loans secured by controlling
equity interests in entities treated as partnerships for federal income tax
purposes that own real property, to the extent that the principal balance of
the mortgage does not exceed the fair market value of the real property that
is allocable to the equity interest. Second, of the investments not included
in the 75% asset class, the value of any one issuer's securities owned by
WREIT may not exceed 5% of the value of WREIT's total assets, and WREIT may
not own more than 10% of any one issuer's outstanding voting securities
(except for its interests in entities treated as partnerships and any
qualified REIT subsidiary).
WREIT expects that any International Investments, U.S. Commercial
Investments, Mortgage-Backed Securities, IOs, Inverse IOs, and temporary
investments that it acquires generally will be qualifying assets for purposes
of the 75% asset test, except to the extent that less than 95% of the assets
of a REMIC in which WREIT owns an interest consists of "real estate assets"
and WREIT's proportionate share of those assets includes assets that are
nonqualifying assets for purposes of the 75% asset test. Non-Performing Loans,
Performing Mortgage Loans, Construction Loans and Mezzanine Loans also will be
qualifying assets for purposes of the 75% asset test to the extent that the
principal balance of each mortgage loan does not exceed the value of the
associated real property. WREIT will monitor the status of the assets that it
acquires for purposes of the various asset tests and has represented that it
will manage its portfolio in order to comply at all times with such tests.
If WREIT should fail to satisfy the asset tests at the end of a calendar
quarter, such a failure would not cause it to lose its REIT status if (i) it
satisfied the asset tests at the close of the preceding calendar quarter and
(ii) the discrepancy between the value of WREIT's assets and the asset test
requirements arose from changes in the market values of its assets and was not
wholly or partly caused by the acquisition of one or more non-qualifying
assets. If the condition described in clause (ii) of the preceding sentence
were not satisfied, WREIT still could avoid disqualification by eliminating
any discrepancy within 30 days after the close of the calendar quarter in
which it arose.
Distribution Requirements. WREIT, in order to avoid corporate income
taxation of the earnings that it distributes, is required to distribute with
respect to each taxable year dividends (other than capital gain dividends) to
its stockholders in an aggregate amount at least equal to (i) the sum of (A)
95% of its "REIT taxable income" (computed without regard to the dividends
paid deduction and its net capital gain) and (B) 95% of the net income (after
tax), if any, from foreclosure property, minus (ii) the sum of certain items
of noncash income. Such distributions must be paid in the taxable year to
which they relate, or in the following taxable year if declared before WREIT
timely files its federal income tax return for such year and if paid on or
before the first regular dividend payment date after such declaration. To the
extent that WREIT does not distribute all of its net capital gain or
distributes at least 95%, but less than 100%, of its "REIT taxable income," as
adjusted, it will be subject to tax thereon at regular ordinary and capital
gains corporate tax rates. With respect to capital gains, the stockholders
include their proportionate share of the undistributed capital gains in income
and receive a credit for their share of income tax paid by WREIT and a basis
adjustment to their interest in WREIT. See "Taxation of Taxable U.S.
Stockholders." Furthermore, if WREIT should fail to distribute during each
calendar year (or, in the case of distributions with declaration and record
dates falling in the last three months of the calendar year, by the end of the
January immediately following such year) at least the sum of (i) 85% of its
REIT ordinary income for such year, (ii) 95% of its REIT capital gain income
for such year, and (iii) any undistributed taxable income from prior periods,
WREIT would be subject to a 4% nondeductible excise tax on the excess of such
required distribution over the amounts actually distributed. WREIT intends to
make timely distributions sufficient to satisfy the annual distribution
requirements.
It is possible that, from time to time, WREIT may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of
such expenses in arriving at its REIT taxable income. For example, WREIT may
recognize taxable market discount income upon the receipt of proceeds from the
disposition of, or principal payments on, Mortgage-Backed Securities,
Distressed U.S. Commercial Loans and International Mortgage Loans, that are
"market discount bonds" (i.e., obligations with a stated redemption price at
maturity that is greater than WREIT's tax
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basis in such obligations), although such proceeds often will be used to make
non-deductible principal payments on related borrowings. Accordingly, WREIT
may have less cash than is necessary to meet its annual 95% distribution
requirement or to avoid corporate income tax or the excise tax imposed on
certain undistributed income. In such a situation, WREIT may find it necessary
to arrange for short-term (or possibly long-term) borrowings or to raise funds
through the issuance of Preferred Stock or additional Common Stock.
Under certain circumstances, WREIT may be able to rectify a failure to meet
the distribution requirements for a year by paying "deficiency dividends" to
its stockholders in a later year, which may be included in WREIT's deduction
for dividends paid for the earlier year. Although WREIT may be able to avoid
being taxed on amounts distributed as deficiency dividends, it will be
required to pay to the Service interest based upon the amount of any deduction
taken for deficiency dividends.
FAILURE TO QUALIFY
If WREIT fails to qualify for taxation as a REIT in any taxable year, and
the relief provisions do not apply, WREIT will be subject to tax (including
any applicable alternative minimum tax) on its taxable income at regular
corporate rates. Distributions to WREIT's stockholders in any year in which
WREIT fails to qualify will not be deductible by WREIT nor will they be
required to be made. In such event, to the extent of WREIT's current and
accumulated earnings and profits, all distributions to stockholders will be
taxable as ordinary income and, subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, WREIT also will
be disqualified from taxation as a REIT for the four taxable years following
the year during which WREIT ceased to qualify as a REIT. It is not possible to
state whether in all circumstances WREIT would be entitled to such statutory
relief.
TAXATION OF TAXABLE U.S. STOCKHOLDERS
As long as WREIT qualifies as a REIT, distributions made to WREIT's taxable
U.S. stockholders out of current or accumulated earnings and profits (and not
designated as capital gain dividends) will be taken into account by such U.S.
stockholders as ordinary income and will not be eligible for the dividends
received deduction generally available to corporations. As used herein, the
term "U.S. stockholder" means a holder of Common Stock that for U.S. federal
income tax purposes is (i) a citizen or resident of the U.S., (ii) a
corporation, partnership, or other entity created or organized in or under the
laws of the U.S. or of any political subdivision thereof, (iii) an estate
whose income from sources without the United States is includible in gross
income for U.S. federal income tax purposes regardless of its connection with
the conduct of a trade or business within the United States, or (iv) any trust
with respect to which (A) a U.S. court is able to exercise primary supervision
over the administration of such trust and (B) one or more U.S. persons have
the authority to control all substantial decisions of the trust. Distributions
that are designated as capital gain dividends will be taxed as long-term
capital gains (to the extent they do not exceed WREIT's actual net capital
gain for the taxable year) without regard to the period for which the
stockholder has held his Common Stock. However, corporate stockholders may be
required to treat up to 20% of certain capital gain dividends as ordinary
income. Distributions in excess of 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 Common Stock, but rather will
reduce the adjusted basis of such stock. To the extent that such distributions
in excess of current and accumulated earnings and profits exceed the adjusted
basis of a stockholder's Common Stock, such distributions will be included in
income as long-term capital gain (or short-term capital gain if the Common
Stock had been held for one year or less), assuming the Common Stock is a
capital asset in the hands of the stockholder. In addition, any distribution
declared by WREIT in October, November, or December of any year and payable to
a stockholder of record on a specified date in any such month shall be treated
as both paid by WREIT and received by the stockholder on December 31 of such
year, provided that the distribution is actually paid by WREIT during January
of the following calendar year.
Pursuant to the Taxpayer Relief Act of 1997 enacted in August 1997, if WREIT
elects to retain and pay tax on its capital gains, and WREIT makes a written
designation to its stockholders prior to the expiration of 60 days
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after the close of the taxable year, the stockholder's portion of
undistributed capital gains will be included in the stockholder's long-term
capital gain for the taxable year. The stockholder's proportionate share of
tax imposed on WREIT with respect to the undistributed capital gains will be
deemed to have been paid by the stockholder and will be allowed as a credit or
refund, as the case may be, for the taxes deemed to have been paid by the
stockholder. In addition, the stockholder will receive an increase in basis in
the stockholder's interest in WREIT.
Stockholders may not include in their individual income tax returns any net
operating losses or capital losses of WREIT. Instead, such losses would be
carried over by WREIT for potential offset against its future income (subject
to certain limitations). Taxable distributions from WREIT and gain from the
disposition of the Common Stock will not be treated as passive activity income
and, therefore, stockholders generally will not be able to apply any "passive
activity losses" (such as losses from certain types of limited partnerships in
which a stockholder is a limited partner) against such income. In addition,
taxable distributions from WREIT generally will be treated as investment
income for purposes of the investment interest limitations. Capital gains from
the disposition of Common Stock (or distributions treated as such), however,
will be treated as investment income only if the stockholder so elects, in
which case such capital gains will be taxed at ordinary income rates. WREIT
will notify stockholders after the close of WREIT's taxable year as to the
portions of the distributions attributable to that year that constitute
ordinary income or capital gain dividends.
WREIT's investment in Subordinated Interests and certain types of Mortgage-
Backed Securities may cause it under certain circumstances to recognize
taxable income in excess of its economic income ("phantom income") and to
experience an offsetting excess of economic income over its taxable income in
later years. As a result, stockholders may from time to time be required to
pay federal income tax on distributions that economically represent a return
of capital, rather than a dividend. Such distributions would be offset in
later years by distributions representing economic income that would be
treated as returns of capital for federal income tax purposes. Accordingly, if
WREIT receives phantom income, its stockholders may be required to pay federal
income tax with respect to such income on an accelerated basis, i.e., before
such income is realized by the stockholders in an economic sense. Taking into
account the time value of money, such an acceleration of federal income tax
liabilities would cause stockholders to receive an after-tax rate of return on
an investment in WREIT that would be less than the after-tax rate of return on
an investment with an identical before-tax rate of return that did not
generate phantom income. For example, if an investor subject to an effective
income tax rate of 30% purchased a bond (other than a tax-exempt bond) with an
annual interest rate of 10% for its face value, his before-tax return on his
investment would be 10%, and his after-tax return would be 7%. However, if the
same investor purchased stock of WREIT at a time when the before-tax rate of
return was 10%, his after-tax rate of return on his stock might be somewhat
less than 7% as a result of WREIT's phantom income. In general, as the ratio
of WREIT's phantom income to its total income increases, the after-tax rate of
return received by a taxable stockholder of WREIT will decrease. WREIT will
consider the potential effects of phantom income on its taxable stockholders
in managing its investments.
Because WREIT expects to own at least some REMIC Residual Interests, it is
likely that stockholders (other than certain thrift institutions) will not be
permitted to offset certain portions of the dividend income they derive from
WREIT with their current deductions or net operating loss carryovers or
carrybacks. The portion of a stockholder's dividends that will be subject to
this limitation will equal his allocable share of any Excess Inclusion income
derived by WREIT with respect to the REMIC Residual Interests. WREIT's Excess
Inclusion income for any calendar quarter will equal the excess of its income
from REMIC Residual Interests over its "daily accruals" with respect to such
REMIC Residual Interests for the calendar quarter. Daily accruals for a
calendar quarter are computed by allocating to each day on which a REMIC
Residual Interest is owned a ratable portion of the product of (i) the
"adjusted issue price" of the REMIC Residual Interest at the beginning of the
quarter and (ii) 120% of the long-term federal interest rate (adjusted for
quarterly compounding) on the date of issuance of the REMIC Residual Interest.
The adjusted issue price of a REMIC Residual Interest at the beginning of a
calendar quarter equals the original issue price of the REMIC Residual
Interest, increased by the amount of daily accruals for prior quarters and
decreased by all prior distributions to WREIT with respect to the REMIC
Residual Interest. To the extent provided in future Treasury regulations, the
Excess Inclusion income with respect
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to any REMIC Residual Interests owned by WREIT that do not have significant
value will equal the entire amount of the income derived from such REMIC
Residual Interests. Furthermore, to the extent that WREIT (or a qualified REIT
subsidiary) acquires or originates mortgage loans and uses those loans to
collateralize one or more multiple-class offerings of Mortgage-Backed
Securities for which no REMIC election is made ("Non-REMIC Transactions"), it
is possible that, to the extent provided in future Treasury regulations,
stockholders (other than certain thrift institutions) will not be permitted to
offset certain portions of the dividend income that they derive from WREIT
that are attributable to Non-REMIC Transactions with current deductions or net
operating loss carryovers or carrybacks. Although no applicable Treasury
regulations have yet been issued, no assurance can be provided that such
regulations will not be issued in the future or that, if issued, such
regulations will not prevent WREIT's stockholders from offsetting some portion
of their dividend income with deductions or losses from other sources.
TAXATION OF STOCKHOLDERS ON THE DISPOSITION OF THE COMMON STOCK
In general, any gain or loss realized upon a taxable disposition of the
Common Stock by a stockholder who is not a dealer in securities will be
treated as long-term capital gain or loss if the Common Stock has been held
for more than one year and otherwise as short-term capital gain or loss.
However, any loss upon a sale or exchange of Common Stock by a stockholder who
has held such shares for six months or less (after applying certain holding
period rules) will be treated as a long-term capital loss to the extent of
distributions from WREIT required to be treated by such stockholder as long-
term capital gain. All or a portion of any loss realized upon a taxable
disposition of the Common Stock may be disallowed if other shares of Common
Stock are purchased within 30 days before or after the disposition.
CAPITAL GAINS AND LOSSES
A capital asset generally must be held for more than one year in order for
gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The highest marginal individual income tax rate is
39.6%, and the tax rate on long-term capital gains attributable to the sale of
a capital asset held for more than 12 months and 18 months or less applicable
to individuals is 28% while the rate attributable to the sale of a capital
asset held for more than 18 months is 20%. Thus, the differential between the
capital gain tax rates and the ordinary income tax rate for individuals may be
significant. In addition, the characterization of income as capital gain or
ordinary income may affect the deductibility of capital losses. Capital losses
not offset by capital gains may be deducted against an individual's ordinary
income only up to a maximum annual amount of $3,000. Unused capital losses may
be carried forward indefinitely by individuals. All net capital gain of a
corporate taxpayer is subject to tax at ordinary corporate rates. A corporate
taxpayer can deduct capital losses only to the extent of capital gains, with
unused losses being carried back three years and forward five years.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
WREIT will report to its U.S. stockholders and to the Service the amount of
distributions paid during each calendar year, and the amount of tax withheld,
if any. Under the backup withholding rules, a stockholder may be subject to
backup withholding at the rate of 31% with respect to distributions paid
unless such holder (i) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact or (ii) provides a
taxpayer identification number, certifies as to no loss of exemption from
backup withholding, and otherwise complies with the applicable requirements of
the backup withholding rules. A stockholder who does not provide WREIT with
his correct taxpayer identification number also may be subject to penalties
imposed by the Service. Any amount paid as backup withholding will be
creditable against the stockholder's income tax liability. In addition, WREIT
may be required to withhold a portion of capital gain distributions to any
stockholders who fail to certify their nonforeign status to WREIT. See "--
Taxation of Non-U.S. Stockholders."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts ("Exempt Organizations"), generally
are exempt from federal income taxation. However, they are
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subject to taxation on their unrelated business taxable income ("UBTI"). While
many investments in real estate generate UBTI, the Service has issued a
published ruling that dividend distributions from a REIT to an exempt employee
pension trust do not constitute UBTI, provided that the shares of the REIT are
not otherwise used in an unrelated trade or business of the exempt employee
pension trust. Based on that ruling, amounts distributed by WREIT to Exempt
Organizations generally should not constitute UBTI. However, if an Exempt
Organization finances its acquisition of the Common Stock with debt, a portion
of its income from WREIT will constitute UBTI pursuant to the "debt-financed
property" rules. Furthermore, social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts, and qualified group
legal services plans that are exempt from taxation under paragraphs (7), (9),
(17), and (20), respectively, of section 501(c) of the Code are subject to
different UBTI rules, which generally will require them to characterize
distributions from WREIT as UBTI. In addition, in certain circumstances, a
pension trust that owns more than 10% of WREIT's stock is required to treat a
percentage of the dividends from WREIT as UBTI (the "UBTI Percentage"). The
UBTI Percentage is the gross income derived by WREIT from an unrelated trade
or business (determined as if WREIT were a pension trust) divided by the gross
income of WREIT for the year in which the dividends are paid. The UBTI rule
applies to a pension trust holding more than 10% of WREIT's stock only if (i)
the UBTI Percentage is at least 5%, (ii) WREIT qualifies as a REIT by reason
of the modification of the 5/50 Rule that allows the beneficiaries of the
pension trust to be treated as holding shares of WREIT in proportion to their
actuarial interests in the pension trust, and (iii) either (A) one pension
trust owns more than 25% of the value of WREIT's stock or (B) a group of
pension trusts individually holding more than 10% of the value of WREIT's
stock collectively owns more than 50% of the value of WREIT's stock. However,
the Charter generally prohibits direct or indirect ownership of more than 9.8%
of the number of outstanding shares of Common Stock. See "Description of
Common Stock--Restrictions on Transfer."
Any dividends received by an Exempt Organization that are allocable to
Excess Inclusion will be treated as UBTI. In addition, WREIT will be subject
to tax at the highest marginal corporate rate on the portion of any Excess
Inclusion income derived by WREIT from REMIC Residual Interests that is
allocable to stock of WREIT held by Disqualified Organizations. Any such tax
would be deductible by WREIT against its income that is not Excess Inclusion
income.
If WREIT derives Excess Inclusion income from REMIC Residual Interests, a
tax similar to the tax on WREIT described in the preceding paragraph may be
imposed on stockholders who are (i) pass-through entities (i.e., partnerships,
estates, trusts, regulated investment companies, REITs, common trust funds,
and certain types of cooperatives (including farmers' cooperatives described
in section 521 of the Code)) in which a Disqualified Organization is a record
holder of shares or interests and (ii) nominees who hold Common Stock on
behalf of Disqualified Organizations. Consequently, a brokerage firm that
holds shares of Common Stock in a "street name" account for a Disqualified
Organization may be subject to federal income tax on the Excess Inclusion
income derived from those shares.
The Treasury Department has been authorized to issue regulations regarding
issuances by a REIT of multiple-class mortgage-backed securities for which no
REMIC election is made. If such Treasury regulations are issued in the future
preventing taxable stockholders from offsetting some percentage of the
dividends paid by WREIT with deductions or losses from other sources, that
same percentage of WREIT's dividends would be treated as UBTI for stockholders
that are Exempt Organizations. See "Federal Income Tax Considerations--
Taxation of Taxable U.S. Stockholders."
TAXATION OF NON-U.S. STOCKHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
stockholders (collectively, "Non-U.S. Stockholders") are complex and no
attempt will be made herein to provide more than a summary of such rules.
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 THE COMMON STOCK, INCLUDING ANY REPORTING
REQUIREMENTS.
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Distributions to Non-U.S. Stockholders that are not attributable to gain
from sales or exchanges by WREIT of U.S. real property interests and are not
designated by WREIT as capital gains dividends will be treated as dividends of
ordinary income to the extent that they are made out of current or accumulated
earnings and profits of WREIT. Such distributions ordinarily will be subject
to a withholding tax equal to 30% of the gross amount of the distribution
unless an applicable tax treaty reduces or eliminates that tax. However, if
income from the investment in the Common Stock is treated as effectively
connected with the Non-U.S. Stockholder's conduct of a U.S. trade or business,
the Non-U.S. Stockholder generally will be subject to federal income tax at
graduated rates, in the same manner as U.S. stockholders are taxed with
respect to such distributions (and also may be subject to the 30% branch
profits tax in the case of a Non-U.S. Stockholder that is a non-U.S.
corporation). WREIT expects to withhold U.S. income tax at the rate of 30% on
the gross amount of any such distributions made to a Non-U.S. Stockholder
unless (i) a lower treaty rate applies and any required form evidencing
eligibility for that reduced rate is filed with WREIT or (ii) the Non-U.S.
Stockholder files an IRS Form 4224 with WREIT claiming that the distribution
is effectively connected income. Under new Treasury Regulations that are not
effective until January 1, 1999, the gross amount of any distribution by WREIT
to a Non-U.S. Stockholder will generally be subject to witholding tax at a 30%
or lower treaty rate, unless the distribution is designated as a capital gain
dividend or a return of basis or is effectively connected with the Non-U.S.
Stockholder's conduct of a U.S. trade or business. Any tax withheld in excess
of the Non-U.S. Stockholder's U.S. federal income tax liability may be
refundable. These Treasury Regulations will also require, beginning in 1999,
that a Non-U.S. Stockholder satisfy certain certification and other
requirements when claiming the benefit of an applicable treaty with respect to
withholding on the distributions. (Under current law, distributions paid to an
address in a foreign country are generally presumed to paid to a resident of
such country for purposes of determining withholding and the applicability of
a treaty tax rate.)
If WRIC derives Excess Inclusion income from REMIC Residual Interests, the
portion of the dividends paid to Non-U.S. Stockholders that is treated as
Excess Inclusion income will not be eligible for exemption from the 30%
withholding tax or a reduced treaty rate. In addition, if Treasury regulations
are issued in the future preventing taxable stockholders from offsetting some
percentage of the dividends paid by WRIC with deductions or losses from other
sources, that same percentage of WRIC's dividends would not be eligible for a
reduced withholding tax rate under an otherwise applicable tax treaty. See "--
Taxation of Taxable U.S. Stockholders."
Distributions in excess of current and accumulated earnings and profits of
WRIC will not be taxable to a stockholder to the extent that such
distributions do not exceed the adjusted basis of the stockholder's Common
Stock, but rather will reduce the adjusted basis of such shares. To the extent
that distributions in excess of current and accumulated earnings and profits
exceed the adjusted basis of a Non-U.S. Stockholder's Common Stock, such
distributions will give rise to tax liability if the Non-U.S. Stockholder
would otherwise be subject to tax on any gain from the sale or disposition of
his Common Stock, as described below. Because it generally cannot be
determined at the time a distribution is made whether or not such distribution
will be in excess of current and accumulated earnings and profits, the entire
amount of any distribution normally will be subject to withholding at the same
rate as a dividend. However, amounts so withheld are refundable to the extent
it is determined subsequently that such distribution was, in fact, in excess
of current and accumulated earnings and profits of WREIT. The Small Business
Job Protection Act of 1996, enacted in August 1996, requires WREIT to withhold
10% of any distribution in excess of WREIT's current and accumulated earnings
and profits. Consequently, although WREIT intends to withhold at a rate of 30%
on the entire amount of any distribution, to the extent that WREIT does not do
so, any portion of a distribution not subject to withholding at a rate of 30%
will be subject to withholding at a rate of 10%.
For any year in which WREIT qualifies as a REIT, distributions that are
attributable to gain from sales or exchanges by WREIT of U.S. 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 ("FIRPTA"). Under FIRPTA,
distributions attributable to gain from sales of U.S. real property interests
are taxed to a Non-U.S. Stockholder as if such gain were effectively connected
with a U.S. business. Non-U.S. Stockholders thus would be taxed at the normal
capital gain rates applicable to U.S. stockholders (subject to applicable
alternative minimum tax and a
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special alternative minimum tax in the case of nonresident alien individuals).
Distributions subject to FIRPTA also may be subject to the 30% branch profits
tax in the hands of a non-U.S. corporate stockholder not entitled to treaty
relief or exemption. WREIT is required to withhold 35% of any distribution
that is designated by WREIT as a capital gains dividend. The amount withheld
is creditable against the Non-U.S. Stockholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of his Common Stock
generally will not be taxed under FIRPTA if WREIT is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the common stock was held
directly or indirectly by non-U.S. persons. It is currently anticipated that
WREIT will be a "domestically controlled REIT" and, therefore, the sale of the
Common Stock will not be subject to taxation under FIRPTA. However, because
the Common Stock will be publicly traded, no assurance can be given that WREIT
will be a "domestically controlled REIT." Furthermore, gain not subject to
FIRPTA will be taxable to a Non-U.S. Stockholder if (i) investment in the
Common Stock is effectively connected with the Non-U.S. Stockholder's U.S.
trade or business, in which case the Non-U.S. Stockholder will be subject to
the same treatment as U.S. stockholders with respect to such gain, or (ii) the
Non-U.S. Stockholder is a nonresident alien individual who was present in the
U.S. for 183 days or more during the taxable year and certain other conditions
apply, in which case the nonresident alien individual will be subject to a 30%
tax on the individual's capital gains. If the gain on the sale of the Common
Stock were to be subject to taxation under FIRPTA, the Non-U.S. Stockholder
would be subject to the same treatment as U.S. stockholders with respect to
such gain (subject to applicable alternative minimum tax, a special
alternative minimum tax in the case of nonresident alien individuals, and the
possible application of the 30% branch profits tax in the case of non-U.S.
corporations).
STATE AND LOCAL TAXES
WREIT, the General Partner, the Operating Partnership or WREIT's
stockholders may be subject to state and local tax in various states and
localities, including those states and localities in which it or they transact
business, own property, or reside. The state and local tax treatment of the
Company and its stockholders in such jurisdictions may differ from the federal
income tax treatment described above. Consequently, prospective stockholders
should consult their own tax advisors regarding the effect of state and local
tax laws upon an investment in the Common Stock.
FOREIGN TAXES
WREIT, the General Partner or the Operating Partnership may be subject to
foreign taxes on certain activities conducted in foreign countries. To the
extent that WREIT pays any foreign tax, the stockholders of WREIT will not
obtain a foreign tax credit.
SALE OF THE COMPANY'S PROPERTY
Any gain realized by WREIT on the sale of any property held as inventory or
other property held primarily for sale to customers in the ordinary course of
its trade or business will be treated as income from a prohibited transaction
that is subject to a 100% penalty tax. Such prohibited transaction income also
may have an adverse effect upon WREIT's ability to satisfy the income tests
for REIT status. See "Federal Income Tax Considerations--Requirements For
Qualification--Income Tests" above. WREIT, however, does not presently intend
to acquire or hold a material amount of property that represents inventory or
other property held primarily for sale to customers in the ordinary course of
WREIT's trade or business.
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ERISA CONSIDERATIONS
The following is a summary of material considerations arising under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the
prohibited transaction provisions of section 4975 of the Code that may be
relevant to a prospective purchaser (including, with respect to the discussion
contained in "--Status of the Company and the Operating Partnership under
ERISA," to a prospective purchaser that is not an employee benefit plan,
another tax-qualified retirement plan, or an individual retirement account
("IRA")). The discussion does not purport to deal with all aspects of ERISA or
section 4975 of the Code that may be relevant to particular stockholders
(including plans subject to Title I of ERISA, other retirement plans and IRAs
subject to the prohibited transaction provisions of section 4975 of the Code,
and governmental plans or church plans that are exempt from ERISA and section
4975 of the Code but that may be subject to state law requirements) in light
of their particular circumstances.
The discussion is based on current provisions of ERISA and the Code,
existing and currently proposed regulations under ERISA and the Code, the
legislative history of ERISA and the Code, existing administrative rulings of
the Department of Labor ("DOL") and reported judicial decisions. No assurance
can be given that legislative, judicial, or administrative changes will not
affect the accuracy of any statements herein with respect to transactions
entered into or contemplated prior to the effective date of such changes.
A FIDUCIARY MAKING THE DECISION TO INVEST IN THE COMMON STOCK ON BEHALF OF A
PROSPECTIVE PURCHASER THAT IS AN EMPLOYEE BENEFIT PLAN, A TAX-QUALIFIED
RETIREMENT PLAN, OR AN IRA SHOULD CONSULT ITS OWN LEGAL ADVISOR REGARDING THE
SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE CODE, AND
STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, OR SALE OF THE COMMON STOCK
BY SUCH PLAN OR IRA.
EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS, AND IRAS
Each fiduciary of a pension, profit-sharing, or other employee benefit plan
(a "Plan") subject to Title I of ERISA should consider carefully whether an
investment in the Common Stock is consistent with his fiduciary
responsibilities under ERISA. In particular, the fiduciary requirements of
Part 4 of Title I of ERISA require a Plan's investment to be (i) prudent and
in the best interests of the Plan, its participants, and its beneficiaries,
(ii) diversified in order to minimize the risk of large losses, unless it is
clearly prudent not to do so, and (iii) authorized under the terms of the
Plan's governing documents (provided the documents are consistent with ERISA).
In determining whether an investment in the Common Stock is prudent for
purposes of ERISA, the appropriate fiduciary of a Plan should consider all of
the facts and circumstances, including whether the investment is reasonably
designed, as a part of the Plan's portfolio for which the fiduciary has
investment responsibility, to meet the objectives of the Plan, taking into
consideration the risk of loss and opportunity for gain (or other return) from
the investment, the diversification, cash flow, and funding requirements of
the Plan's portfolio. A fiduciary also should take into account the nature of
the Company's business, the management of the Company, the length of the
Company's operating history, the fact that certain investment assets may not
have been identified yet, and the possibility of the recognition of UBTI.
The fiduciary of an IRA or of a qualified retirement plan not subject to
Title I of ERISA because it is a governmental or church plan or because it
does not cover common law employees (a "Non-ERISA Plan") should consider that
such an IRA or Non-ERISA Plan may only make investments that are authorized by
the appropriate governing documents and under applicable state law.
Fiduciaries of Plans and persons making the investment decision for an IRA
or other Non-ERISA Plan should consider the application of the prohibited
transaction provisions of ERISA and the Code in making their investment
decision. A "party in interest" or "disqualified person" with respect to a
Plan or with respect to a Plan or IRA subject to Code section 4975 other than
a fiduciary acting as such is subject to (i) an initial 15% excise tax on the
amount involved in any prohibited transaction involving the assets of the plan
or IRA and (ii) an excise tax equal to 100% of the amount involved if any
prohibited transaction is not timely corrected. If the
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disqualified person who engages in the transaction is the individual on behalf
of whom an IRA is maintained (or his beneficiary), the IRA will lose its tax-
exempt status and its assets will be deemed to have been distributed to such
individual in a taxable distribution (and no excise tax will be imposed) on
account of the prohibited transaction. In addition, a fiduciary who permits a
Plan to engage in a transaction that the fiduciary knows or should know is a
prohibited transaction may be liable to the Plan for any loss the Plan incurs
as a result of the transaction or for any profits earned by the fiduciary in
the transaction.
STATUS OF WREIT UNDER ERISA
The following section discusses certain principles that apply in determining
whether the fiduciary requirements of ERISA and the prohibited transaction
provisions of ERISA and the Code apply to an entity because one or more
investors in the equity interests in the entity is a Plan or is a Non-ERISA
Plan or IRA subject to section 4975 of the Code. A Plan fiduciary also should
consider the relevance of those principles to ERISA's prohibition on improper
delegation of control over or responsibility for "plan assets" and ERISA's
imposition of co-fiduciary liability on a fiduciary who participates in,
permits (by action or inaction) the occurrence of, or fails to remedy a known
breach by another fiduciary.
If the assets of the Company are deemed to be "plan assets" under ERISA, (i)
the prudence standards and other provisions of Part 4 of Title I of ERISA
would be applicable to any transactions involving the Company's assets, (ii)
persons who exercise any authority over the Company's assets, or who provide
investment advice to the Company, would (for purposes of the fiduciary
responsibility provisions of ERISA) be fiduciaries of each Plan that acquires
Common Stock, and transactions involving the Company's assets undertaken at
their direction or pursuant to their advice might violate their fiduciary
responsibilities under ERISA, especially with regard to conflicts of interest,
(iii) a fiduciary exercising his investment discretion over the assets of a
Plan to cause it to acquire or hold the Common Stock could be liable under
Part 4 of Title I of ERISA for transactions entered into by the Company that
do not conform to ERISA standards of prudence and fiduciary responsibility,
and (iv) certain transactions that the Company might enter into in the
ordinary course of its business and operations might constitute "prohibited
transactions" under ERISA and the Code.
Regulations of the DOL defining "plan assets" (the "Plan Asset Regulations")
generally provide that when a Plan or Non-ERISA Plan or IRA acquires a
security that is an equity interest in an entity and the security is neither a
"publicly-offered security" nor a security issued by an investment company
registered under the Investment Company Act of 1940, the Plan's or Non-ERISA
Plan's or IRA's assets include both the equity interest and an undivided
interest in each of the underlying assets of the issuer of such equity
interest, unless one or more exceptions specified in the Plan Asset
Regulations are satisfied.
The Plan Asset Regulations define a publicly-offered security as a security
that is "widely-held," "freely transferable," and either part of a class of
securities registered under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), or sold pursuant to an effective registration statement
under the Securities Act (provided the securities are registered under the
Exchange Act within 120 days after the end of the fiscal year of the issuer
during which the offering occurred). The Common Stock is being sold in an
offering registered under the Securities Act and will be registered under the
Exchange Act. The Plan Asset Regulations provide that a security is "widely
held" only if it is part of a class of securities that is owned by 100 or more
investors independent of the issuer and of one another. A security will not
fail to be widely held because the number of independent investors falls below
100 subsequent to the initial public offering as a result of events beyond the
issuer's control. The Company anticipates that upon completion of this
offering, the Common Stock will be "widely held."
The Plan Asset Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The Plan Asset Regulations further provide
that where a security is part of an offering in which the minimum investment
is $10,000 or less (as is the case with this offering), certain restrictions
ordinarily will not, alone or in combination, affect a finding that such
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securities are freely transferable. The restrictions on transfer enumerated in
the Plan Asset Regulations as not affecting that finding include: (i) any
restriction on or prohibition against any transfer or assignment that would
result in the termination or reclassification of an entity for federal or
state tax purposes, or that otherwise would violate any federal or state law
or court order, (ii) any requirement that advance notice of a transfer or
assignment be given to the issuer, (iii) any administrative procedure that
establishes an effective date, or an event (such as completion of an
offering), prior to which a transfer or assignment will not be effective, and
(iv) any limitation or restriction on transfer or assignment that is not
imposed by the issuer or a person acting on behalf of the issuer. The Company
believes that the restrictions imposed under the Charter on the transfer of
the Company's stock will not result in the failure of the Common Stock to be
"freely transferable." The Company also is not aware of any other facts or
circumstances limiting the transferability of the Common Stock other than
those enumerated in the Plan Asset Regulations as those not affecting free
transferability. However no assurance can be given that the DOL or the
Treasury Department will not reach a contrary conclusion.
Assuming that the Common Stock will be "widely held" and that no other facts
and circumstances other than those referred to in the preceding paragraph
exist that restrict transferability of the Common Stock, the shares of Common
Stock should be publicly offered securities and the assets of the Company
should not be deemed to be "plan assets" of any Plan, IRA, or Non-ERISA Plan
that invests in the Common Stock.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND REAL PROPERTY INVESTMENTS
The Company intends primarily to acquire U.S. Commercial Investments,
Mortgage-Backed Securities and International Investments but also may acquire
Other Real Estate Related Assets. The Company's return on any mortgage loans
it acquires will depend on, among other things, the ability of the servicer of
such mortgage loans to foreclose upon to mortgage loans in default and, if it
is the successful bidder at the foreclosure sale, thereafter to sell the
underlying real properties. Moreover, the Company's return on Mortgage-Backed
Securities depends upon the ability of the servicer of the underlying mortgage
loans to foreclose upon those loans.
There are a number of legal considerations involved in the acquisition of
mortgage loans, Mortgage-Backed Securities and real property, and the
foreclosure and sale of defaulted mortgage loans (whether individually or as
part of a series of Mortgage-Backed Securities or real property). The
following discussion provides general summaries of certain legal aspects of
mortgage loans and real property. Because such legal aspects are governed by
applicable state or international law (which laws vary from state to state and
country to country), the summaries do not purport to be complete, to reflect
the laws of any particular state or country, or to encompass the laws of all
states and countries. Accordingly, the summaries are qualified in their
entirety by reference to the applicable laws of the states or countries where
the property is located.
GENERAL
Each mortgage loan will be evidenced by a note or bond and secured by an
instrument granting a security interest in real property, which may be a
mortgage, deed of trust or a deed to secure debt, depending upon the
prevailing practice and law in the state in which the related Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages." A mortgage creates a lien
upon, or grants a title interest in, the real property covered thereby, and
represents the security for the repayment of the indebtedness customarily
evidenced by a promissory note. The priority of the lien created or interest
granted will depend on the terms of the mortgage and, in some cases, on the
terms of separate subordination agreements or intercreditor agreements with
others that hold interests in the real property, the knowledge of the parties
to the mortgage and, generally, the order of recordation of the mortgage in
the appropriate public recording office. However, the lien of a recorded
mortgage will generally be subordinate to later-arising liens for real estate
taxes and assessments and other charges imposed under governmental police
powers.
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TYPES OF MORTGAGE INSTRUMENTS
There are two parties to a mortgage: a mortgagor (the borrower and usually
the owner of the subject property) and a mortgagee (the lender). In contrast,
a deed of trust is a three-party instrument, among a trustor (the equivalent
of a borrower), a trustee to whom the real property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, in trust and generally with a power of sale, to the trustee to secure
repayment of the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties. The grantor (the borrower) conveys title to
the real property to the grantee (the lender), generally with a power of sale,
until such time as the debt is repaid. The mortgagee's authority under a
mortgage, the trustee's authority under a deed of trust and the grantee's
authority under a deed to secure debt are governed by the express provisions
of the related instrument, the law of the state in which the real property is
located, certain federal laws and, in some deed of trust transactions, the
directions of the beneficiary.
INTERESTS IN REAL PROPERTY
The interests in real property typically covered by a mortgage, deed of
trust or deed to secure debt is most often the fee simple estate in land and
improvements. However, such instruments may encumber other interests in real
property such as a tenant's interest in the lease of land or improvements, or
both, and the leasehold estate created by such lease. An instrument covering
an interest in real property other than the fee estate requires special
provisions in the instrument creating such interest or in the mortgage, deed
of trust or deed to secure debt, to protect the mortgagee against termination
of such interest before the mortgage, deed of trust or deed to secure debt is
paid.
LEASES AND RENTS
Mortgages that encumber income-producing property often contain an
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease
and the income derived therefrom, while (unless rents are to be paid directly
to the lender) retaining a revocable license to collect the rents for so long
as there is no default. If the borrower defaults, the license terminates and
the lender is entitled to collect the rents. Local law may require that the
lender take possession of the property and/or obtain a court-appointed
receiver before becoming entitled to collect the rents.
The potential payments from a property may be less than the periodic
payments due under the mortgage. For example, the net income that would
otherwise be generated from the property may be less than the amount that
would be needed to service the debt if the leases on the property are at
below-market rents, the market rents have fallen since the original financing,
vacancies have increased, or as a result of excessive or increased
maintenance, repair or other obligations to which a lender succeeds as
landlord.
CONDEMNATION AND INSURANCE
The form of the mortgage or deed of trust used by many lenders confers on
the mortgagee or beneficiary the right both to receive all proceeds collected
under any hazard insurance policy and all awards made in connection with any
condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the mortgage or deed of trust, in such order as the
mortgage or beneficiary may determine. Thus, in the event improvements on the
property are damaged or destroyed by fire or other casualty, or in the event
the property is taken by condemnation, the mortgagee or beneficiary under the
senior mortgage or deed of trust will have the prior right to collect any
insurance proceeds payable under a hazard insurance policy and any award of
damages in connection with the condemnation and to apply the same to the
indebtedness secured by the senior mortgage or deed of trust. Proceeds in
excess of the amount of senior mortgage indebtedness will, in most cases, be
applied to the indebtedness of a junior mortgage or trust deed to the extent
the junior mortgage or deed of trust so provides. The laws of certain states
may limit the ability of mortgagees or beneficiaries to apply the proceeds of
hazard insurance and partial condemnation awards to the secured indebtedness.
In such states, the mortgagor or trustor must be allowed to use the proceeds
of hazard insurance to repair the damage unless the
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security of the mortgagee or beneficiary has been impaired. Similarly, in
certain states, the mortgagee or beneficiary is entitled to the award for a
partial condemnation of the real property security only to the extent that its
security is impaired.
FORECLOSURE
General. Foreclosure is a legal procedure that allows the lender to recover
its mortgage debt by enforcing its rights and available legal remedies under
the mortgage. If the borrower defaults in payment or performance of its
obligations under the note or mortgage, the lender has the right to institute
foreclosure proceedings to sell the real property at public auction to satisfy
the indebtedness.
Foreclosure procedures vary from state to state. Two primary methods of
foreclosing a mortgage are judicial foreclosure, involving court proceedings,
and non-judicial foreclosure pursuant to a power of sale granted in the
mortgage instrument. Other foreclosure procedures are available in some
states, such as strict foreclosure, but they are either infrequently used or
available only in limited circumstances.
Judicial Foreclosure. A judicial foreclosure proceeding is conducted in a
court having jurisdiction over the mortgaged property. Generally, the action
is initiated by the service of legal pleadings upon all parties having a
subordinate interest of record in the real property and all parties in
possession of the property, under leases or otherwise, whose interests are
subordinate to the mortgage. A foreclosure action is subject to most of the
delays and expenses of other lawsuits if defenses are raised or counterclaims
are interposed, and sometimes requires several years to complete. When the
lender's right to foreclose is contested, the legal proceedings can be time-
consuming. Upon successful completion of a judicial foreclosure proceeding,
the court generally issues a judgment of foreclosure and appoints a referee or
other officer to conduct a public sale of the mortgaged property, the proceeds
of which are used to satisfy the judgment. Such sales are made in accordance
with procedures that vary from state to state.
Public Sale. A third party may be unwilling to purchase a mortgaged property
at a public sale following judicial foreclosure because of the difficulty in
determining the value of such property at the time of sale, due to, among
other things, redemption rights which may exist and the possibility of
physical deterioration of the property during the foreclosure proceedings. For
these reasons, it is common for the lender to purchase the mortgaged property
for an amount equal to or less than the underlying debt and accrued and unpaid
interest plus the expenses of foreclosure. Generally, state law controls the
amount of foreclosure costs and expenses which may be recovered by a lender.
Thereafter, subject to the mortgagor's right in some states to remain in
possession during a redemption period, if applicable, the lender will become
the owner of the property and have both benefits and burdens of ownership of
the mortgaged property. For example, the lender will have the obligation to
pay debt service on any senior mortgages, to pay taxes, obtain casualty
insurance and make such repairs at its own expense as are necessary to render
the property suitable for sale. The costs of operating and maintaining a
commercial or multifamily residential property may be significant and may be
greater than the income derived from that property.
Non-Judicial Foreclosure/Power of Sale. Foreclosure of a deed of trust is
generally accomplished by a non-judicial trustee's sale pursuant to a power of
sale typically granted in the deed of trust. A power of sale may also be
contained in any other type of mortgage instrument if applicable law so
permits. A power of sale under a deed of trust allows a non-judicial public
sale to be conducted generally following a request from the beneficiary/lender
to the trustee to sell the property upon default by the borrower and after
notice of sale is given in accordance with the terms of the mortgage and
applicable state law. The borrower or junior lienholder may then have the
right, during a reinstatement period required in some states, to cure the
default by paying the entire actual amount in arrears (without regard to the
acceleration of the indebtedness), plus the lender's expenses incurred in
enforcing the obligation. In other states, the borrower or the junior
lienholder is not provided a period to reinstate the loan, but has only the
right to pay off the entire debt to prevent the foreclosure sale. Generally,
state law governs the procedure for public sale, the parties entitled to
notice, the method of giving notice and the applicable time periods.
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Equitable Limitations on Enforceability of Certain Provisions. United States
courts have traditionally imposed general equitable principles to limit the
remedies available to lenders in foreclosure actions. These principles are
generally designed to relieve borrowers from the effects of mortgage defaults
perceived as harsh or unfair. Relying on such principles, a court may alter
the specific terms of a loan to the extent it considers necessary to prevent
or remedy an injustice, undue oppression or overreaching, or may require the
lender to undertake affirmative actions to determine the cause of the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's and have required that lenders reinstate loans or recast payment
schedules in order to accommodate borrowers who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose in the case of a non-monetary default, such as a failure
to adequately maintain the mortgaged property or an impermissible further
encumbrance of the mortgaged property.
Even if the lender is successful in the foreclosure action and is able to
take possession of the property, the costs of operating and maintaining a
commercial or multi-family property may be significant and may be greater than
the income derived from that property. The costs of management and operation
of those mortgaged properties which are hotels, motels, restaurants, nursing
homes, convalescent homes or hospitals may be particularly significant because
of the expertise, knowledge and with respect to nursing or convalescent homes,
regulatory compliance, required to run such operations and the effect which
foreclosure and a change in ownership may have with respect to consent
requirements and on the public's and the industry's (including franchisors')
perception of the quality of such operations. The lender also will commonly
obtain the services of a real estate broker and pay the broker's commission in
connection with the sale or lease of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal
the lender's investment in the property. Moreover, because of the expenses
associated with acquiring, owning and selling a mortgaged property, a lender
could realize an overall loss on a mortgage loan even if the mortgaged
property is sold at foreclosure, or resold after it is acquired through
foreclosure, for an amount equal to the full outstanding principal amount of
the loan plus accrued interest.
The holder of a junior mortgage that forecloses on a mortgaged property does
so subject to senior mortgages and any other prior liens, and may be obliged
to keep senior mortgage loans current in order to avoid foreclosure of its
interest in the property. In addition, if the foreclosure of a junior mortgage
triggers the enforcement of a "due-on-sale" clause contained in a senior
mortgage, the junior mortgagee could be required to pay the full amount of the
senior mortgage indebtedness or face foreclosure.
Post-sale Redemption. In a majority of states, after sale pursuant to a deed
of trust or foreclosure of a mortgage, the borrower and foreclosed junior
lienors are given a statutory period in which to redeem the property. In some
states, statutory redemption may occur only upon payment of the foreclosure
sale price. In other states, redemption may be permitted if the former
borrower pays only a portion of the sums due. In some states, the borrower
retains possession of the property during the statutory redemption period. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property because the exercise of a right of
redemption would defeat the title of any purchaser through a foreclosure.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has expired. In some states, a post-sale statutory right of
redemption may exist following a judicial foreclosure, but not following a
trustee's sale under a deed of trust.
Anti-Deficiency Legislation. Any commercial or multi-family residential
mortgage loans acquired by the Company are likely to be nonrecourse loans, as
to which recourse in the case of default will be limited to the property and
such other assets, if any, that were pledged to secure the mortgage loan.
However, even if a mortgage loan by its terms provides for recourse to the
borrower's other assets, a lender's ability to realize upon those assets may
be limited by state law. For example, in some states a lender cannot obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust or by non-judicial means. Other statutes may require the lender
to exhaust the security afforded under a mortgage before bringing a personal
action against the borrower. In certain other states, the lender has the
option of bringing a personal action against the borrower on the debt without
first exhausting such security; however, in some of those states, the lender,
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following judgment on such personal action, may be deemed to have elected a
remedy and thus may be precluded from foreclosing upon the security.
Consequently, lenders in those states where such an election of remedy
provision exists may choose to proceed first against the security. Finally,
other statutory provisions, designed to protect borrowers from exposure to
large deficiency judgments that might result from bidding at below-market
values at the foreclosure sale, limit any deficiency judgment to the excess of
the outstanding debt over the fair market value of the property at the time of
the sale.
Cooperatives. Mortgage loans may be secured by a security interest on the
borrower's ownership interest in shares, and the proprietary leases
appurtenant thereto (or cooperative contract rights), allocable to cooperative
dwelling units that may be vacant or occupied by non-owner tenants. Such loans
are subject to certain risks not associated with mortgage loans secured by a
lien on the fee estate of a borrower in real property. Such a loan typically
is subordinate to the mortgage, if any, on the cooperative's building which,
if foreclosed, could extinguish the equity in the building and the proprietary
leases of the dwelling units derived from ownership of the shares of the
cooperative. Further, transfer of shares in a cooperative are subject to
various regulations as well as to restrictions (including transfer
restrictions) under the governing documents of the cooperative, and the shares
may be canceled in the event that associated maintenance charges due under the
related proprietary leases are not paid. Typically, a recognition agreement
between the lender and the cooperative provides, among other things, the
lender with an opportunity to cure a default under a proprietary lease but
such recognition agreements may not have been obtained in the case of all the
mortgage loans secured by cooperative shares (or contract rights).
Under the laws applicable in many states, "foreclosure" on cooperative
shares is accomplished by a sale in accordance with the provisions of Article
9 of the UCC and the security agreement relating to the shares. Article 9 of
the UCC requires that a sale be conducted in a "commercially reasonable"
manner, which may be dependent upon, among other things, the notice given to
the debtor and the method, manner, time, place and terms of the sale. Article
9 of the UCC provides that the proceeds of the sale will be applied first to
pay the costs and expenses of the sale and then to satisfy the indebtedness
secured by the lender's security interest. A recognition agreement, however,
generally provides that the lender's right to reimbursement is subject to the
right of the cooperative to receive sums due under the proprietary leases.
BANKRUPTCY LAWS
Operation of the Bankruptcy Code and related state laws may interfere with
or affect the ability of a lender to realize upon collateral and/or to enforce
a deficiency judgment. For example, under the Bankruptcy Code, virtually all
actions (including foreclosure actions and deficiency judgment proceedings) to
collect a debt are automatically stayed upon the filing of the bankruptcy
petition and, often, no interest or principal payments are made during the
course of the bankruptcy case. The delay and the consequences thereof caused
by such automatic stay can be significant. Also, under the Bankruptcy Code,
the filing of a petition in bankruptcy by or on behalf of a junior lien or may
stay the senior lender from taking action to foreclose out such junior lien.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards protective of the lender are met, the amount and terms of a
mortgage loan secured by a lien on property of the debtor may be modified
under certain circumstances. For example, the outstanding amount of the loan
may be reduced to the then-current value of the property (with a corresponding
partial reduction of the amount of lender's security interest) pursuant to a
confirmed plan or lien avoidance proceeding, thus leaving the lender a general
unsecured creditor for the difference between such value and the outstanding
balance of the loan. Other modifications may include the reduction in the
amount of each scheduled payment, by means of a reduction in the rate of
interest and/or an alteration of the repayment schedule (with or without
affecting the unpaid principal balance of the loan), and/or by an extension
(or shortening) of the term to maturity.
Federal bankruptcy law may also have the effect of interfering with or
affecting the ability of the secured lender to enforce the borrower's
assignment of rents and leases related to the mortgaged property. Under
section 362 of the Bankruptcy Code, the lender will be stayed from enforcing
the assignment, and the legal proceedings
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necessary to resolve the issue could be time-consuming, with resulting delays
in the lender's receipt of the rents. In addition, the Bankruptcy Code has
been amended to provide that a lender's perfected pre-petition security
interest in leases, rents and hotel revenues continues in the post-petition
leases, rents and hotel revenues, unless a bankruptcy court orders to the
contrary "based on the equities of the case."
In a bankruptcy or similar proceeding, action may be taken seeking the
recovery as a preferential transfer of any payments made by the mortgagor
under the related mortgage loan to the owner of such mortgage loan. Payments
on long-term debt may be protected from recovery as preferences if they are
payments in the ordinary course of business made on debts incurred in the
ordinary course of business. Whether any particular payment would be protected
depends upon the facts specific to a particular transaction.
A trustee in bankruptcy, in some cases, may be entitled to collect its costs
and expenses in preserving or selling the mortgaged property ahead of payment
to the lender. In certain circumstances, a debtor in bankruptcy may have the
power to grant liens senior to the lien of a mortgage, and analogous state
statutes and general principles of equity may also provide a mortgagor with
means to halt a foreclosure proceeding or sale and to force a restructuring of
a mortgage loan on terms a lender would not otherwise accept. Moreover, the
laws of certain states also give priority to certain tax liens over the lien
of a mortgage or deed of trust. Under the Bankruptcy Code, if the court finds
that actions of the mortgagee have been unreasonable, the lien of the related
mortgage may be subordinated to the claims of unsecured creditors.
The Company's acquisition of real property, particularly REO Property, may
be affected by many of the considerations applicable to mortgage loan lending.
For example, the Company's acquisition of certain property at foreclosure sale
could be affected by a borrower's post-sale right of redemption. In addition,
the Company's ability to derive income from real property will generally be
dependent on its receipt of rent payments under leases of the related
property. The ability to collect rents may be impaired by the commencement of
a bankruptcy proceeding relating to a lessee under such lease. Under the
Bankruptcy Code, the filing of a petition in bankruptcy by or on behalf of a
lessee results in a stay in bankruptcy against the commencement or
continuation of any state court proceeding for past due rent, for accelerated
rent, for damages or for a summary eviction order with respect to a default
under the lease that occurred prior to the filing of the lessee's petition. In
addition, the Bankruptcy Code generally provides that a trustee or debtor-in-
possession may, subject to approval of the court, (i) assume the lease and
retain it or assign it to a third party or (ii) reject the lease. If the lease
is assumed, the trustee or debtor-in-possession (or assignee, if applicable)
must cure any defaults under the lease, compensate the lessor for its losses
and provide the lessor with "adequate assurance" of future performance. Such
remedies may be insufficient, and any assurances provided to the lessor may,
in fact, be inadequate. If the lease is rejected, the lessor will be treated
as an unsecured creditor with respect to its claim for damages for termination
of the lease. The Bankruptcy Code also limits a lessor's damages for lease
rejection to the rent reserved by the lease (without regard to acceleration)
for the greater of one year, or 15%, not to exceed three years, of the
remaining term of the lease.
DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS
Notes and mortgages may contain provisions that obligate the borrower to pay
a late charge or additional interest if payments are not timely made, and in
some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges that a lender may collect from a borrower
for delinquent payments. Certain states also limit the amounts that a lender
may collect from a borrower as an additional charge if the loan is prepaid. In
addition, the enforceability of provisions that provide for prepayment fees or
penalties upon an involuntary prepayment is unclear under the laws of many
states.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of drug-
related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures
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contained in the Comprehensive Crime Control Act of 1984 (the "Crime Control
Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give
notice to all parties "known to have an alleged interest in the property,"
including the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at
the time of execution of the mortgage, "reasonably without cause to believe"
that the property was used in, or purchased with the proceeds of, illegal drug
or RICO activities.
ENVIRONMENTAL RISKS
General. The Company will be subject to environmental risks when taking a
security interest in real property, as well as when it acquires any real
property. Of particular concern may be properties that are or have been used
for industrial, manufacturing, military or disposal activity. Such
environmental risks include the risk of the diminution of the value of a
contaminated property or, as discussed below, liability for the costs of
compliance with environmental regulatory requirements or the costs of clean-up
or other remedial actions. These compliance or clean-up costs could exceed the
value of the property or the amount of the lender's loan. In certain
circumstances, a lender could determine to abandon a contaminated mortgaged
property as collateral for its loan rather than foreclose and risk liability
for compliance or clean-up costs.
CERCLA. The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on
present and past "owners" and "operators" of contaminated real property for
the costs of clean-up. A secured lender may be liable as an "owner" or
"operator" of a contaminated mortgaged property if agents or employees of the
lender have become sufficiently involved in the management of such mortgaged
property or the operations of the borrower. Such liability may exist even if
the lender did not cause or contribute to the contamination and regardless of
whether the lender has actually taken possession of a mortgaged property
through foreclosure, deed in lieu of foreclosure or otherwise. The magnitude
of the CERCLA liability at any given contaminated site is a function of the
actions required to address adequately the risks to human health and the
environment posed by the particular conditions at the site. As a result, such
liability is not constrained by the value of the property or the amount of the
original or unamortized principal balance of any loans secured by the
property. Moreover, under certain circumstances, liability under CERCLA may be
joint and several--i.e., any liable party may be obligated to pay the entire
cleanup costs regardless of its relative contribution to the contamination.
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
(the "1996 Lender Liability Act") provides for a safe harbor for secured
lenders from CERCLA liability even though the lender forecloses and sells the
real estate securing the loan, provided the secured lender sells "at the
earliest practicable, commercially reasonable time, at commercially reasonable
terms, taking into account market conditions and legal and regulatory
requirements." Although the 1996 Lender Liability Act provides significant
protection to secured lenders, it has not been construed by the courts and
there are circumstances in which actions taken could expose a secured lender
to CERCLA liability. And, the transferee from the secured lender is not
entitled to the protections enjoyed by a secured lender. Hence, the
marketability of any contaminated real estate continues to be suspect.
Certain Other Federal and State Laws. Many states have environmental clean-
up statutes similar to CERCLA, and not all those statutes provide for a
secured creditor exemption. In addition, underground storage tanks are
commonly found on a wide variety of commercial and industrial properties.
Federal and state laws impose liability on the owners and operators of
underground storage tanks for any cleanup that may be required as a result of
releases from such tanks. These laws also impose certain compliance
obligations on the tank owners and operators, such as regular monitoring for
leaks and upgrading of older tanks. The Company may become a tank owner or
operator and subject to compliance obligations and potential cleanup
liabilities, either as a result of becoming involved in the management of a
site at which a tank is located or, more commonly, by taking title
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to such a property. Federal and state laws also obligate property owners and
operators to maintain and, under some circumstances, to remove asbestos-
containing building materials and lead-based paint. As a result, the presence
of these materials can increase the cost of operating a property and thus
diminish its value. In a few states, transfers of some types of properties are
conditioned upon cleanup of contamination prior to transfer. In these cases, a
lender that becomes the owner of a property through foreclosure, deed in lieu
of foreclosure or otherwise, may be required to clean up the contamination
before selling or otherwise transferring the property.
Beyond statute-based environmental liability, there exist common law causes
of action (for example, actions based on nuisance or on toxic tort resulting
in death, personal injury or damage to property) related to hazardous
environmental conditions on a property.
Superlien Laws. Under the laws of many states, contamination of a property
may give rise to a lien on the property for clean-up costs. In several states,
such a lien has priority over all existing liens, including those of existing
mortgages. In these states, the lien of a mortgage may lose its priority to
such a "superlien."
Additional Considerations. The cost of remediating environmental
contamination at a property can be substantial. To reduce the likelihood of
exposure to such losses, the Company will not acquire title to a Mortgaged
Property or take over its operation unless, based on an environmental site
assessment prepared by a qualified environmental consultant, it has made the
determination that it is appropriate to do so. The Company expects that it
will organize a special purpose subsidiary to acquire any environmentally
contaminated real property.
Environmental Site Assessments. In addition to possibly allowing a lender to
qualify for the innocent landowner defense (see discussion under "--
Environmental Risks--CERCLA" above), environmental site assessments can be a
valuable tool in anticipating, managing and minimizing environmental risk.
They are commonly performed in many commercial real estate transactions.
Environmental site assessments vary considerably in their content and
quality. Even when adhering to good professional practices, environmental
consultants will sometimes not detect significant environmental problems
because an exhaustive environmental assessment would be far too costly and
time-consuming to be practical. Nevertheless, it is generally helpful in
assessing and addressing environmental risks in connection with commercial
real estate (including multi-family properties) to have an environmental site
assessment of a property because it enables anticipation of environmental
problems and, if agreements are structured appropriately, can allow a party to
decline to go forward with a transaction.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980 ("Title V") provides that state usury limitations shall not apply to
certain types of residential (including multi-family) first mortgage loans
originated by certain lenders after March 31, 1980. Title V authorized any
state to reimpose interest rate limits by adopting, before April 1, 1983, a
law or constitutional provision that expressly rejects application of the
federal law. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V. Certain states have taken action
to reimpose interest rate limits and/or to limit discount points or other
charges.
AMERICANS WITH DISABILITIES ACT
Under Title III of the Americans with Disabilities Act of 1990 and rules
promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, public accommodations (such as hotels,
restaurants, shopping centers, hospitals, schools and social service center
establishments) must remove architectural and communication barriers that are
structural in nature from existing places of public accommodation to the
extent "readily achievable." In addition, under the ADA, alterations to a
place of public accommodation or a commercial facility are to be made so that,
to the maximum extent feasible, such altered
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portions are readily accessible to and usable by disabled individuals. The
"readily achievable" standard takes into account, among other factors, the
financial resources of the affected site, owner, landlord or other applicable
person. In addition to imposing a possible financial burden on the borrower in
its capacity as owner or landlord, the ADA may also impose such requirements
on a foreclosing lender who succeeds to the interest of the borrower as owner
or landlord. Furthermore, since the "readily achievable" standard may vary
depending on the financial condition of the owner or landlord, a foreclosing
lender who is financially more capable than the borrower of complying with the
requirements of the ADA may be subject to more stringent requirements than
those to which the borrower is subject.
GROUND LEASE RISKS
Mortgage Loans may be secured by a mortgage on a ground lease. Leasehold
mortgages are subject to certain risks not associated with mortgage loans
secured by a fee estate. The most significant of these risks is that the
ground lease creating the leasehold estate could terminate, leaving the
leasehold mortgagee without its security. The ground lease may terminate if,
among other reasons, the ground lessee breaches or defaults in its obligations
under the ground lease or there is a bankruptcy of the ground lessee or ground
lessor. This risk may be minimized if the ground lease contains certain
provisions protective of the mortgagee, but the ground leases that secure
mortgage loans may not contain some of these protective provisions.
DUE ON SALE AND DUE ON ENCUMBRANCE
Certain of the mortgage loans may contain due on sale and due on encumbrance
clauses. These clauses generally provide that the lender may accelerate the
maturity of the loan if the mortgagor sells or otherwise transfers or
encumbers the mortgaged property. The enforceability of due on sale clauses
has been subject of legislation or litigation in many states and, in some
cases, the enforceability of these clauses has been limited or denied.
However, with respect to certain loans, the Garn-St. Germain Depository
Institutions Act of 1982 preempts state constitutional, statutory and case law
that prohibits the enforcement of due on sale clauses and permits lenders to
enforce these clauses in accordance with their terms subject to certain
limited exceptions.
SUBORDINATE FINANCING
When a mortgagor encumbers mortgaged property with one or more junior liens,
the senior lender is subjected to additional risk. First, the mortgagor may
have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and
the senior loan does not, a mortgagor may be more likely to repay sums due on
the junior loan than those on the senior loan. Second, acts of the senior
lender that prejudice the junior lender can cause the senior lender to lose
its priority. For example, if the mortgagor and the senior lender agree to
increase the principal amount of or the interest rate payable on the senior
loan, the senior lender may lose its priority to the extent any existing
junior is harmed or the mortgagor is additionally burdened. Third, if the
mortgagor defaults on the senior loan and/or any junior loan or loans, the
existence of junior loans and the action taken by junior lenders can impair
the security available to the senior lender and can interfere with or delay
the taking of action by the senior lender.
ACCELERATION ON DEFAULT
Some of the mortgage loans may include "Debt--Acceleration" clauses, which
permit the lender to accelerate the full debt upon a monetary or nonmonetary
default of the mortgagor. The courts of all states will enforce clauses
providing for acceleration in the event of a material payment default after
giving effect to any appropriate notices. Such courts, however, may refuse to
foreclose on a mortgage or deed of trust when an acceleration of the
indebtedness would be inequitable or unjust under the circumstances or would
render the acceleration unconscionable. Furthermore, in some states, the
mortgagor may avoid foreclosure and reinstate an accelerated loan by paying
only the defaulted amounts and the costs and attorneys' fees incurred by the
lender in collecting such defaulted payments.
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CERTAIN LAWS AND REGULATIONS; TYPES OF MORTGAGED PROPERTY
The real property securing the mortgage loans will be subject to compliance
with various federal, state and local statutes and regulations. Failure to
comply (together with an inability to remedy any such failure) could result in
material diminution in the value of the mortgaged properties which could,
together with the possibility of limited alternative uses for a particular
property (e.g., a nursing home or convalescent home or hospital), result in
the failure to realize the full principal amount of the related mortgage loan.
Mortgages on properties which are owned by a mortgagor under a condominium
form of ownership are subject to declarations, bylaws and other regulations of
the condominium association. Mortgaged properties which are hotels or motels
may present additional risks in that hotels and motels are typically operated
pursuant to franchise, management and operating agreements which may be
terminated by the operator, and the transferability of the hotel's operating
liquor and other licenses to the entity acquiring the hotel either through
purchases or foreclosure is subject to the peculiarities of local law
requirements. In addition, mortgaged properties which are multifamily
residential properties may be subject to rent control laws, which could impact
the future cash flows of such properties.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a mortgagor who enters military service after the
origination of such mortgagor's mortgage loan (including a mortgagor who is in
reserve status and is called to active duty after origination of the mortgage
loan), may not be charged interest (including fees and charges) above an
annual rate of 6% during the period of such mortgagor's active duty status,
unless a court orders otherwise upon application of the lender. Because the
Relief Act applies to mortgagors who enter military service after origination
of the related mortgage loan, no information can be provided as to the number
of mortgage loans that may be affected by the Relief Act. Application of the
Relief Act would adversely affect, for an indeterminate period of time, the
ability of any servicer to collect full amounts of interest on certain
mortgage loans. In addition, the Relief Act imposes limitations that would
impair the ability of a servicer to foreclosure on an affected mortgage loan
during the mortgagor's period of active duty status, and, under certain
circumstances, during an additional three month period thereafter.
USE OF PROCEEDS
All of the expected net proceeds of this Offering will be used to purchase
Units in the Operating Partnership and the payment of the existing
indebtedness of Wilshire Properties 1 and Wilshire Properties 2. Thereupon,
the Operating Partnership will use approximately $145.3 million plus accrued
interest to purchase the Initial Investments. The purchase price for the
Initial Investments was based on certain assumptions made with respect to the
potential net cash flows to be generated by the Initial Investments. See
"Initial Investments," "Yield Considerations Regarding the Initial
Investments" and "Risk Factor--Other Risks--Conflicts of Interest in the
Business of the Company." Pending investment, the balance of the net proceeds
(approximately $131.7 million) will be invested in investment-grade, interest-
bearing securities and held by the Operating Partnership until used to
originate or acquire International Investments, Commercial Real Property
including U.S. Commercial Properties, Distressed U.S. Commercial Loans and
Other Real Estate Related Assets as provided herein. See "Operating Policies
and Strategies."
The Company intends to leverage its portfolio through borrowings, generally
through the use of loans, repurchase agreements, warehouse lines of credit,
mortgage loans, issuance of Mortgage-Backed Securities and other borrowing
arrangements.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company has agreed to sell to each of the underwriters named below (the
"Underwriters") and each of the Underwriters, for whom Friedman, Billings,
Ramsey & Co., Inc., Prudential Securities Incorporated, and Black & Company,
Inc. are acting as representatives (the "Representatives"), has severally
agreed to purchase from the Company the number of shares of Common Stock
offered hereby set forth below opposite its name.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc. ...............................
Prudential Securities Incorporated....................................
Black & Company, Inc. ................................................
----
Total...............................................................
====
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to purchase all the shares of Common Stock offered
hereby if any are purchased.
The Underwriters propose initially to offer the shares of Common Stock
directly to the public at the public offering price set forth on the cover
page of this Prospectus and to certain dealers at such offering price less a
concession not to exceed $ per share of Common Stock. The Underwriters may
allow and such dealers may reallow a concession not to exceed $ per share
of Common Stock to certain other dealers. After the shares of Common Stock are
released for sale to the public, the offering price and other selling terms
may be changed by the Underwriters.
At the request of the Company, the Underwriters have reserved up to
shares of Common Stock ( shares if the Underwriters' over-allotment option
is exercised) for sale to directors, officers and employees of WFSG and its
subsidiaries at the initial public offering price set forth on the cover page
of this Prospectus net of any underwriting discounts or commissions, and up to
shares of Common Stock ( shares if the Underwriters' over-allotment
option is exercised) for sale to certain other persons at the initial public
offering price. The number of shares of Common Stock available for sale to the
general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares which are not so purchased will be
offered by the Underwriters to the general public on the same basis as the
other shares offered hereby.
The Company has granted to the Underwriters an option exercisable during a
30-day period after the date hereof to purchase, at the initial offering price
less underwriting discounts and commissions, up to an additional 3,000,000
shares of Common Stock for the sole purpose of covering over-allotments, if
any. To the extent that the Underwriters exercise such option, each
Underwriter will be committed, subject to certain conditions, to purchase a
number of the additional shares of Common Stock proportionate to such
Underwriter's initial commitment.
The Company and WFSG have agreed to indemnify the several Underwriters
against certain civil liabilities under the Securities Act, or to contribute
to payments the Underwriters may be required to make in respect thereof.
Prior to this Offering, there has been no public market for the shares of
Common Stock. The initial public offering price has been determined by
negotiation between the Company and the Representatives. Among the factors
considered in making such determination were the history of, and the prospects
for, the industry in which the Company will compete, an assessment of the
skills of WRSC, the Company's prospects for future earnings, the general
conditions of the economy and the securities market and the prices of
offerings by similar issuers. There can, however, be no assurance that the
price at which the shares of Common Stock will sell in the public market after
this offering will not be lower than the price at which they are sold by the
Underwriters.
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The Representatives have informed the Company that the Underwriters do not
intend to confirm sales of the shares offered hereby to any accounts over
which they exercise discretionary authority.
Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for or purchase the Common Stock. As an exception to these
rules, the representatives are permitted to engage in certain transactions
that stabilize the price of the Common Stock. Such transactions consist of
bids or purchases for the purpose of pegging, fixing or maintaining the price
of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the representatives
may reduce that short position by purchasing Common Stock in the open market.
The representatives may also elect to reduce any short position by exercising
all or part of the over-allotment option described above.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the representatives purchase
Common Stock in the open market to reduce the Underwriters' short position or
to stabilize the price of the Common Stock, they may reclaim the amount of the
selling concession from the Underwriters and selling group members who sold
those Common Stock as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
The Company, Messrs. Wiederhorn and Mendelsohn have agreed not to offer,
sell or contract to sell or otherwise dispose of any Common Stock without the
prior consent of the Representatives for a period of 180 days from the date of
this Prospectus.
WFSG has agreed not to offer, sell or contract to sell or otherwise dispose
of the Common Stock acquired at the Closing without the prior consent of the
Representatives, for a period of two years from the date of this Prospectus
provided that WRSC continues to serve as the Manager during such period.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Proskauer Rose
LLP, New York, New York and for the Underwriters by Gibson, Dunn & Crutcher
LLP, Los Angeles, California. Proskauer Rose LLP and Gibson, Dunn & Crutcher
LLP will be relying as to matters of Maryland law on the opinion of Piper &
Marbury LLP, Baltimore, Maryland.
EXPERTS
The financial statement of Wilshire Real Estate Investment Trust Inc. as of
October 28, 1997 included in this Prospectus has been audited by Arthur
Andersen LLP, independent certified public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in auditing and accounting in giving said
reports.
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ADDITIONAL INFORMATION
THE COMPANY
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus forms a part)
under the Securities Act of 1933, as amended, with respect to the Common Stock
offered pursuant to the Prospectus. This Prospectus contains summaries of the
material terms of the documents referred to herein and therein, but does not
contain all of the information set forth in the Registration Statement
pursuant to the rules and regulations of the Commission. For further
information, reference is made to such Registration Statement and the exhibits
thereto. Such Registration Statement and exhibits as well as reports and other
information filed by WRIC can be inspected without charge and copied at
prescribed rates at the public reference facilities maintained by the
Commission at the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at its Regional Offices located as
follows: Chicago Regional Office, Citicorp Center, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661-2511; and New York Regional Office,
Seven World Trade Center, Suite 1300, New York, New York 10048. The Commission
maintains a Web site that contains reports, proxy, and information statements
and other information regarding registrants that file electronically with the
Commission. The Web site is located at http://www.sec.gov.
Statements contained in this Prospectus as to the contents of any contract
or other document that is filed as an exhibit to the Registration Statement
are not necessarily complete, and each such statement is qualified in its
entirety by reference to the full text of such contract or document.
The Company will be required to file reports and other information with the
Commission pursuant to the Securities Exchange Act of 1934. In addition to
applicable legal requirements, if any, holders of Common Stock will receive
annual reports containing audited financial statements with a report thereon
by the Company's independent certified public accounts, and quarterly reports
containing unaudited financial information for each of the first three
quarters of each fiscal year.
WILSHIRE FINANCIAL SERVICES GROUP INC.
WFSG files reports and other information with the Commission pursuant to the
Securities Exchange Act of 1934. Additional information about WFSG, therefore,
may be inspected or copied at the public reference facilities maintained by
the Commission at the locations mentioned above.
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GLOSSARY OF TERMS
Except as otherwise specified or as the context may otherwise require, the
following terms used herein shall have the meanings assigned to them below.
All terms in the singular shall have the same meanings when used in the plural
and vice-versa.
"1996 Lender Liability Act" shall mean the Asset Conservation, Lender
Liability and Deposit Insurance Act of 1996.
"ADA" shall mean the Americans with Disabilities Act of 1990, as amended.
"Affiliate" shall mean (i) any person directly or indirectly owning,
controlling, or holding, with power to vote ten percent or more of the
outstanding voting securities of such other person, (ii) any person ten
percent or more of whose outstanding voting securities are directly or
indirectly owned, controlled, or held, with power to vote, by such other
person, (iii) any person directly or indirectly controlling, controlled by, or
under common control with such other person, (iv) any executive officer,
director, trustee or general partner of such other person, and (v) any legal
entity for which such person acts as an executive officer, director, trustee
or general partner. The term "person" means and includes any natural person,
corporation, partnership, association, limited liability company or any other
legal entity. An indirect relationship shall include circumstances in which a
person's spouse, children, parents, siblings or mothers-, fathers-, sisters-
or brothers-in-law is or has been associated with a person.
"Affiliated Transaction" shall mean any material acquisition transaction
between the Company and any Interested Stockholder.
"Average Invested Assets" shall mean the average of the aggregate book value
of the assets of the Company (including all of WRIC's direct and indirect
subsidiaries), before reserves for depreciation or bad debts or other similar
noncash reserves, computed by taking the daily average of such values during
such period.
"Bankruptcy Code" shall mean Title 11 of the United States Code, as amended.
"Beneficiary" shall mean the beneficiary of the Trust.
"Board of Directors" shall mean the Board of Directors of the Company.
"BPO" shall mean a broker's price opinion obtained by WRSC or one of its
affiliates from one of its approved brokers with respect to a loan.
"Bylaws" shall mean the Bylaws of the Company.
"CERCLA" shall mean the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended.
"Charter" shall mean the Charter of the Company.
"Closing" shall mean the closing of the Offering.
"Commercial Mortgage-Backed Securities" shall mean commercial or multi-
family Mortgage-Backed Securities.
"CMO or CMO Bonds" shall mean collateralized mortgage obligations.
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"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Commission" shall mean the Securities and Exchange Commission.
"Common Stock" shall mean the Common Stock, par value $.0001 per share, of
WRIC.
"Company" shall mean Wilshire Real Estate Investment Trust Inc., a Maryland
corporation, together with its subsidiaries, unless the context indicates
otherwise.
"Company Expenses" shall mean all administrative costs and expenses of the
Company and the General Partner.
"Crime Control Act" shall mean the Comprehensive Crime Control Act of 1984.
"Directors" means the members of the Company's Board of Directors.
"DOL" shall mean the Department of Labor.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Excess Inclusion" shall have the meaning specified in section 860E(c) of
the Code.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Exempt Organizations" shall mean tax-exempt entities, including, but not
limited to, charitable organizations, qualified employee pension and profit
sharing trusts and individual retirement accounts.
"FHLB" shall mean the Federal Home Loan Bank.
"FIRPTA" shall mean the Foreign Investment in Real Property Tax Act of 1980.
"FLHMC" shall mean the Federal Loan Home Mortgage Corporation, a corporate
instrumentality of the United States created and existing under Title III of
the Emergency Home Finance Act of 1970, as amended, or any successor thereto.
"FNMA" shall mean the Federal National Mortgage Association, a federally
chartered and privately owned corporation organized and existing under the
Federal National Mortgage Association Charter Act, or any successor thereto.
"Funds From Operations" shall mean net income (computed in accordance with
GAAP), excluding gains (or losses) from debt restructuring or sales of
property, plus depreciation, and after adjustments for unconsolidated
partnerships and joint ventures.
"GAAP" shall mean generally accepted accounting principles.
"Garn Act" shall mean the Garn-St. Germain Depository Institutions Act of
1982.
"General Partner" shall mean Wilshire Realty General Inc., as the sole
general partner of the Operating Partnership.
"Guidelines" shall mean guidelines that set forth general parameters for the
Company's investments, borrowings and operations.
"HUD" shall mean the Department of Housing and Urban Development.
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<PAGE>
"Independent Director" shall mean a director who within the last two years,
has not (i) been employed by WSFG or any of its Affiliates, (ii) been an
officer or director of WRSC or any of its Affiliates, (iii) performed services
for WRSC or any of its Affiliates, or (iv) had any material business or
professional relationship with WRSC or any of its Affiliates.
"Initial Investments" shall mean the U.S. Commercial Investments, Mortgage-
Backed Securities, and International Investments described under "Initial
Investments," which are to be acquired on or soon after the Closing.
"Interested Stockholder" shall mean any holder of more than 10% of any class
of outstanding voting shares of the Company.
"Inverse IO" shall mean a class of Mortgage-Backed Securities that is
entitled to no (or only nominal) distributions of principal, but is entitled
to interest at a floating rate that varies inversely with a specified index.
"IO" shall mean a class of Mortgage-Backed Securities that is entitled to no
(or only nominal) distributions of principal.
"IRA" shall mean an individual retirement account.
"Lease" shall mean, with respect to each Mortgaged Property or Real
Property, the agreement pursuant to which the Borrower rents and leases to the
Lessee and the Lessee rents and leases from the Borrower, such Mortgaged
Property or Real Property.
"LIBOR" shall mean the London Interbank Offering Rate for one-month U.S.
Dollar deposits.
"Limited Partners" shall mean initially, the Company, Wilshire 1 and
Wilshire 2 and any other holder of Units in the future.
"Management Agreement" shall mean an agreement or agreements among the
Company, WRSC and WFSG pursuant to which WRSC performs various services for
the Company.
"Manager" shall mean Wilshire Realty Services Corporation.
"Market Price" shall mean the average of the Closing Price for the five
consecutive Trading Days ending on such date.
"Mortgage-Backed Securities" shall mean classes of mortgage-backed
securities that are subordinated in right of payments of principal and
interest to more senior classes.
"Mortgage Collateral" shall mean mortgage pass-through securities or pools
of whole loans securing or backing a series of Mortgage-Backed Securities.
"Mortgage Loan" shall mean a mortgage loan underlying a series of Mortgage-
Backed Securities or a Mortgage Loan held by the Company, as the context
indicates.
"Mortgaged Property" shall mean the real property securing a mortgage loan.
"NAREIT" shall mean the National Association of Real Estate Investment
Trusts, Inc.
"Net Income" shall mean the income of the Company as reported for federal
income tax purposes before WRSC's incentive compensation, net operating loss
deductions arising from losses in prior periods and the deduction for
dividends paid, plus the effects of adjustments, if any, necessary to record
hedging and interest transactions in accordance with generally accepted
accounting principles.
102
<PAGE>
"Non-ERISA Plan" shall mean a plan that does not cover common law employees.
"Nonperforming Mortgage Loans" shall mean commercial and residential
mortgage loans for which the payment of principal and interest is more than 90
days delinquent.
"Offering" shall mean the offering of Common Stock hereby.
"Offering Price" shall mean the offering price of $15.00 per Common Share
offered hereby.
"OID" shall mean original issue discount.
"Operating Partnership" shall mean Wilshire Real Estate Partnership L.P.
"Operating Partnership Agreement" shall mean the partnership agreement of
the Operating Partnership, as amended from time to time.
"Option Plan" shall mean a plan which provides for options to purchase
Units.
"Other Real Estate Related Assets" shall mean real estate related assets
other than subordinated interests and U.S. Commercial Property, including,
without limitation, Mortgage Loans, other classes of Mortgage-Backed
Securities and other interests in real estate.
"OTS" shall mean the Office of Thrift Supervision.
"Ownership Limitation" shall mean the restriction on ownership (or deemed
ownership by virtue of the attribution provisions of the Code) of (a) more
than 9.8% of the outstanding shares of Common Stock or Preferred Stock by any
stockholder other than WFSG or (b) more than 20% of the outstanding shares of
Common Stock by WFSG.
"Pass-Through Certificates" shall mean interests in trusts, the assets of
which are primarily mortgage loans.
"Plan" shall mean certain pension, profit-sharing, employee benefit, or
retirement plans or individual retirement accounts.
"Plan Asset Regulations" shall mean regulations of the Department of Labor
that define "plan assets."
"Preferred Stock" shall mean the preferred stock of the Company.
"Prohibited Owner" shall mean the record holder of the shares of Common
Stock or Preferred Stock that are designated as Shares-in-Trust.
"Qualifying Interests" shall mean mortgages and other liens on and interests
in real estate.
"Real Property" shall mean real property owned by the Company.
"Realized Losses" shall mean, generally, the aggregate amount of losses
realized on loans that are liquidated and losses on loans due to fraud,
mortgagor bankruptcy or special hazards.
"Redemption Rights" shall mean the rights that it is anticipated the Limited
Partners will have pursuant to the Operating Partnership Agreement to redeem
all or a portion of their interests in the Operating Partnership for Common
Stock on a one-for-one basis or, at the option of the Company, an equivalent
amount of cash.
"REIT" shall mean real estate investment trust, as defined in section 856 of
the Code.
"Related Party Tenant" shall mean a tenant of WREIT or the Operating
Partnership in which WREIT owns 10% or more of the ownership interests, taking
into account both direct ownership and constructive ownership.
103
<PAGE>
"REMIC" shall mean real estate mortgage investment conduit, as defined in
section 860D of the Code.
"REMIC Residual Interest" shall mean a class of Mortgage-Backed Securities
that is designated as the residual interest in one or more REMICs.
"Rent" shall mean rent received by the Company from tenants of Real Property
owned by the Company.
"REO Property" shall mean real property acquired by a mortgage lender at
foreclosure (or by deed in lieu of foreclosure).
"Representatives" shall mean Friedman, Billings, Ramsey & Co., Inc.,
Prudential Securities Incorporated and Black & Company, Inc.
"RICO" shall mean the Racketeer Influenced and Corrupt Organizations laws,
18 U.S.C.A. Section 1961, et seq.
"Residential Mortgage-Backed Securities" shall mean a series of one- to
four-family residential Mortgage-Backed Securities.
"Rule 144" shall mean the rule promulgated under the Securities Act that
permits holders of restricted securities as well as affiliates of an issuer of
the securities, pursuant to certain conditions and subject to certain
restrictions, to sell their securities publicly without registration under the
Securities Act.
"SAIF" shall mean the Savings Association Insurance Fund.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Service" shall mean the Internal Revenue Service.
"Shares-in-Trust" shall mean shares of Common Stock or Preferred Stock the
purported transfer of which would result in a violation of the Ownership
Limitation, result in the stock of WREIT being held by fewer than 100 persons,
result in WREIT being "closely held," or cause WREIT to own 10% or more of the
ownership interests in a tenant of the Company's Real Property.
"Special Servicing" shall mean servicing of defaulted mortgage loans,
including oversight and management of the resolution of such mortgage loans by
modification, foreclosure, deed in lieu of foreclosure or otherwise.
"Sub IO" shall mean an IO with characteristics of a Subordinated Interest.
"Subordinated Interests" shall mean classes of Mortgage-Backed Securities
that are subordinated in right of payments of principal and interest to more
senior classes.
"Sub-Performing Mortgage Loans" shall mean loans for which default is likely
or imminent.
"Ten-Year U.S. Treasury Rate" shall mean the arithmetic average of the
weekly average yield to maturity for actively traded current coupon U.S.
Treasury fixed interest rate securities (adjusted to constant maturities of
ten years) published by the Federal Reserve Board during a quarter, or, if
such rate is not published by the Federal Reserve Board, any Federal Reserve
Bank or agency or department of the federal government selected by the
Company.
"Title V" shall mean Title V of the Depository Institutions Deregulation and
Monetary Control Act of 1980.
"Trading Day" shall mean any day other than a Saturday, a Sunday or a day on
which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
104
<PAGE>
"Treasury Regulations" shall mean the income tax regulations promulgated
under the Code.
"Trust" shall mean a trust created in the event of an impermissible transfer
of shares of Common Stock.
"Trustee" shall mean a trustee of the Trust.
"UBTI" shall mean unrelated business taxable income.
"UBTI Percentage" shall mean the gross income derived by the Company from an
unrelated trade or business divided by the gross income of the Company for the
year in which the dividends are paid.
"UCC" shall mean the Uniform Commercial Code.
"Underwriters" shall mean Friedman, Billings, Ramsey & Co., Inc., Prudential
Securities Incorporated and Black & Company and each of the underwriters for
whom Friedman, Billings, Ramsey & Co., Inc., Prudential Securities
Incorporated and Black & Company, Inc. are acting as representatives.
"Underwriting Agreement" shall mean the agreement pursuant to which the
Underwriters will underwrite the Common Stock.
"Units" shall mean units of limited partnership interest in the Operating
Partnership.
"WCC" shall mean Wilshire Credit Corporation.
"WREIT" shall mean Wilshire Real Estate Investment Trust Inc.
"WFSG" shall mean Wilshire Financial Services Group Inc.
105
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Wilshire Real Estate Investment Trust Inc.
We have audited the accompanying balance sheet of Wilshire Real Estate
Investment Trust Inc. (the "Company") as of October 28, 1997. This financial
statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Wilshire Real Estate Investment
Trust Inc. as of October 28, 1997, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
October 28, 1997
F-1
<PAGE>
WILSHIRE REAL ESTATE INVESTMENT TRUST INC.
BALANCE SHEET
AS OF OCTOBER 28, 1997
ASSETS
<TABLE>
<S> <C>
Cash.................................................................... $2,000
======
LIABILITIES AND STOCKHOLDER'S EQUITY
Stockholder's Equity
Common Stock, par value $0.01 per share; 1,000 shares authorized; 100
shares issued and outstanding........................................ $ 1
Additional paid-in-capital............................................ 1,999
------
Total Stockholder's Equity.......................................... $2,000
======
</TABLE>
See accompanying notes to this balance sheet.
F-2
<PAGE>
WILSHIRE REAL ESTATE INVESTMENT TRUST INC.
NOTES TO BALANCE SHEET
OCTOBER 28, 1997
1. THE COMPANY
Wilshire Real Estate Investment Trust Inc. (the "Company" or "WREIT") is a
newly organized Maryland corporation that will elect to be taxed as a Real
Estate Investment Trust ("REIT") under the Internal Revenue Code of 1986, as
amended. The Company will be managed by Wilshire Realty Services Corporation
("WRSC"), a wholly-owned subsidiary of Wilshire Financial Services Group Inc.
("WFSG"). The Company intends to invest primarily in the following: (i)
distressed commercial and multi-family mortgage loans and commercial and
multi-family real properties in the United States ("U.S. Commercial
Investments"); (ii) subordinated interests in mortgage-backed securities
("Mortgage-Backed Securities"), primarily residential Mortgage-Backed
Securities (other than Mortgage-Backed Securities backed by mortgage loans
and/or real properties previously owned by WFSG or its affiliates); and (iii)
international performing and distressed mortgage loans and real properties
("International Investments," and together with U.S. Commercial Investments
and Mortgage-Backed Securities, the "Primary Investments").
The Company's sole activity through October 28, 1997, consisted of the
organization and start-up of the Company. Accordingly, no statement of
operation is presented.
2. ORGANIZATION
The Company will file a Registration Statement on Form S-11 with the
Securities and Exchange Commission with respect to a proposed public offering
(the "Offering") of 23,000,000 shares of Common Stock, which includes
3,000,000 shares that are issuable upon exercise of the Underwriters' over
allotment option.
In connection with the proposed public offering, the Company will engage in
the following transactions:
(1) WREIT, a Maryland corporation taxable as a REIT, will issue
approximately 10% of its common stock to WFSG and approximately 90% of its
common stock to public investors.
(2) WREIT will incorporate and capitalize a qualified REIT subsidiary,
the General Partner.
(3) The General Partner WREIT, Wilshire Properties 1 Inc. ("Wilshire
Properties 1"), Wilshire Properties 2 Inc. ("Wilshire Properties 2") will
hold all of the outstanding Units in the Operating Partnership, with the
General Partner holding Units constituting a 1% general partnership
interest. In the future, the Company may seek to acquire additional assets
and issue Units in payment of some or all of the purchase price thereafter.
(4) The Operating Partnership will assign to Wilshire Credit Corporation
("WCC") any special servicing rights and obligations (other than the right
to direct foreclosure) received in connection with Mortgage-Backed
Securities acquisitions. WCC is currently owned by the principal
shareholders of WFSG. WCC and the European Servicers will service the loans
and real property investments of the Company.
(5) WFSG will incorporate and capitalize WRSC.
(6) WRSC will enter into an agreement with WREIT and the Operating
Partnership (the "Management Agreement"), pursuant to which WRSC will
formulate operating strategies and provide certain managerial and
administrative functions for the Company's Board of Directors.
3. MANAGEMENT AGREEMENT
Pursuant to the Management Agreement WRSC, subject to the supervision of
WREIT's Board of Directors, will formulate operating strategies for the
Company, arrange for the acquisition of assets by the Company, arrange for
various types of financing for the Company, including repurchase agreements,
secured term loans, warehouse lines of credit, mortgage loans and the issuance
of Mortgage-Backed Securities, monitor the performance of the Company's assets
and provide certain administrative and managerial services in
F-3
<PAGE>
WILSHIRE REAL ESTATE INVESTMENT TRUST INC.
NOTES TO BALANCE SHEET--(CONTINUED)
connection with the operation of the Company. For performing these services,
WRSC will receive the following compensation, fees and other benefits
(including reimbursement of out-of-pocket expenses):
<TABLE>
<CAPTION>
FEE AMOUNT
--- ------
<C> <S>
Base Management Fee......... Equal to 1% per annum of the first $1.0 billion of
such Average Invested Assets, 0.75% of the next
$500.0 million of Average Invested Assets and
0.50% of Average Invested Assets above $1.5
billion.
Incentive Fee............... Based on the amount, if any, by which the
Company's Funds from Operations plus certain gains
(minus certain losses) exceed a hurdle rate.
Expense Reimbursement Fee... Reimbursement of due diligence costs and out-of-
pocket expenses.
</TABLE>
The Board of Directors of the Company will adjust the base management fee
after the first two years to align the fee more closely with the actual costs
of such services.
4. INITIAL INVESTMENTS
At the Closing of this Offering (the "Closing"), the Company will acquire
from WFSG or its affiliates (i) U.S. Commercial Investments for approximately
$52.8 million; (ii) Mortgage-Backed Securities for approximately $98.4
million; and (iii) International Investments in the United Kingdom for
approximately $5.4 million. The balance of the net proceeds of the Offering,
constituting up to approximately 47.5 percent of the total net proceeds, will
be invested by the Company as opportunities arise. Certain of the U.S.
Commercial Investments will be acquired from Wilshire Properties 1 and
Wilshire Properties 2. Wilshire Properties 1 and Wilshire Properties 2, all of
the outstanding of which are owned by the principal shareholders of WFSG, will
acquire approximately 376,874 units of partnership interest of the Operating
Partnership (the "Units") (which will comprise 1.8% of Units of the Operating
Partnership or 1.6% if the Underwriters' over-allotment option is exercised in
full) on the Closing Date in exchange for the contribution of certain assets
to the Operating Partnership. These properties will be purchased subject to
mortgage indebtedness of $5.6 million. WFSG has granted the Company an option
to purchase for up to approximately $110.0 million all or a portion of up to
50% of WFSG's interest in two portfolios of International Investments in
France. The Company is currently evaluating the suitability of such
investments under U.S. tax and French law.
5. FEDERAL INCOME TAXES
After the Offering, the Company intends to make an election to be taxed as a
REIT under Section 586 through 860 of the Internal Revenue Code. As a REIT,
the Company generally will not be subject to federal income tax if it
distributes at least 95% of its taxable income for each tax year to its
stockholders. REITs are subject to a number of organizational and operational
requirements. If the Company fails to qualify as a REIT in any taxable year,
the Company will be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate tax rates.
Even if the Company qualifies for taxation as a REIT, the Company may be
subject to state and local income taxes and to federal income tax and excise
tax on its undistributed income.
6. OFFERING COSTS
In connection with the Offering, affiliates have or will incur legal,
accounting and related costs which will be reimbursed by the Company only upon
the consummation of the Offering. These costs would then be deducted from the
gross proceeds of the Offering.
F-4
<PAGE>
WILSHIRE REAL ESTATE INVESTMENT TRUST INC.
NOTES TO BALANCE SHEET--(CONTINUED)
7. CONFLICT OF INTEREST
The Company will be managed by WRSC, a wholly-owned subsidiary of WFSG. WCC,
the European Servicers, wholly owned by WFSG and WCC will provide servicing
and asset management services for the Company. WCC is currently owned by the
principal shareholders of WFSG. WFSG and WCC are currently structuring a
transaction in which WCC would become a subsidiary of WFSG, which is likely to
be completed shortly after the Closing of this Offering. In addition, certain
other subsidiaries of WFSG will provide further servicing and asset management
services for the Company. WFSG will own 9.9% of the outstanding shares of
Common Stock in WREIT immediately after the Closing. In addition Wilshire
Properties 1 and Wilshire Properties 2 will acquire approximately 376,874
Units (which comprise 1.8% of Units of the Operating Partnership or 1.6% if
the Underwriters' over-allotment option is exercised in full) on the Closing
Date in exchange for the contribution of certain assets to the Operating
Partnership. Because of the Company's relationship with WRSC, WCC and WFSG,
the Company will be subject to various potential conflicts of interest. In
addition, two of the members of the Board of Directors of and all of its
Officers are employed by WRSC or its affiliates.
A majority of the Company's Board of Directors will be unaffiliated with
WRSC (the "Independent Directors"). The Independent Directors are expected to
approve the execution of the Management Agreement and general guidelines for
the Company's investments, borrowings and operations (the "Guidelines"), as
well as transactions or agreements between the Company and WFSC or its
affiliates. Although WRSC will perform the day-to-day operations of the
Company, the Independent Directors will review all transactions on a quarterly
basis to measure compliance with the Guidelines. In such a review, the
Independent Directors will generally rely primarily on information provided by
WRSC. A majority of the Independent Directors are required pursuant to the
Management Agreement to approve in advance any purchase of assets from WFSG or
its affiliates or any other significant transaction not contemplated under the
Management Agreement or Servicing Agreement, relying, however, primarily on
information provided by WRSC.
The Management Agreement does not limit the right of WRSC or WFSG to engage
in business or to render services to others that compete with the Company.
While the Management Agreement is in effect, however, WFSG will not invest in
any particular Primary Investment unless the Company has declined to make the
investment at the direction of the Independent Directors. Additionally, WFSG
has agreed to not sponsor another REIT that would invest in the Primary
Investments.
The Company will acquire the Initial Investments from WFSG or its affiliates
soon after the Closing. The Company may also acquire other Primary Investments
and Other Real Estate Related Assets from WFSG or its affiliates in the
future. In addition, the Company may, but has no current plans to invest as a
co-participant with WFSG or its affiliates in loans originated or acquired by
such affiliates.
8. STOCK OPTIONS
The Company intends to adopt a non-qualified stock option plan (the "Option
Plan"), which provides for options to purchase shares of Common Stock (or, at
the election of the Company, Units in the Operating Partnership that may be
redeemed for cash, or, at the election of the General Partner, shares of
Common Stock on a one-for-one basis). The maximum aggregate number of shares
of Common Stock that may be issued pursuant to options granted under the
Option Plan is 6,000,000 shares.
Before Closing, the Company will grant to WRSC and the Independent Director
options under the Option Plan, representing the right to acquire 2,000,000
shares of Common Stock (2,300,000 shares assuming the Underwriters exercise
their over-allotment option in full), at an exercise price per share equal to
the initial offering price of the Common Stock. If the options could be
exercised immediately, they would represent 11.0% of the number of shares of
Common Stock outstanding after completion of this Offering. However, the
options cannot be exercised immediately. One quarter of WRSC's options become
exercisable on each of the first four anniversaries of the Closing. The
options terminate on the tenth anniversary of the Closing.
F-5
<PAGE>
WILSHIRE REALTY INVESTMENT CORPORATION
NOTES TO BALANCE SHEET--(CONTINUED)
Upon the Closing, the Company will grant each Independent Director an option
to purchase 5,000 shares of Common Stock at an exercise price equal to the
initial offering price. In the future, newly elected Independent Directors
will receive options to purchase 5,000 shares of Common Stock at the closing
price on the day that they join the Board. These options shall vest
immediately with the recipient. In addition, on the last trading day of each
calendar quarter, the Company will automatically grant each Independent
Director a non-statutory stock option to purchase 1,500 of shares of Common
Stock at 110% of the fair market value on that day. Each of these director
options will vest and be exercisable as follows: one-third on each of the
first, second and third anniversaries of the grant date and will terminate
(unless sooner terminated under the terms of the Option Plan) ten years after
the date of grant. If such a director ceases to be a member of the board for
any reason other than death or disability, the currently vested options will
terminate on the first anniversary of the date the director ceases to be a
board member. If such a director dies or becomes disabled while a member of
the board, these options will terminate on the second anniversary of the date
the director dies or becomes disabled. Under the Option Plan, the Company
could grant restricted stock and stock appreciation rights to Independent
Directors in addition to these "automatic" quarterly option grants.
The Board of Directors may amend the Option Plan any time, except that
approval by WREIT's stockholders is required for any amendment that increases
the aggregate number of shares of Common Stock that may be issued pursuant to
the Option Plan, increases the maximum number of shares of Common Stock that
may be issued to any person, changes the class of persons eligible to receive
such options, modifies the period within which the options may be granted,
modifies the period within which the options may be exercised or the terms
upon which options may be exercised, or increases the material benefits
accruing to the participants under the Option Plan.
F-6
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SE-
CURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE
SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SO-
LICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SO-
LICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
----------------
SUMMARY TABLE OF CONTENTS
----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 1
Organization and Relationships............................................ 8
Risk Factors.............................................................. 9
Operating Policies and Objectives......................................... 19
Management of Operations.................................................. 31
Servicing Agreements...................................................... 39
The Company............................................................... 40
Distribution Policy....................................................... 42
Yield Considerations Related to the Company's Investments................. 42
Initial Investments....................................................... 45
Yield Considerations Related to the Initial
Mortgage-Backed Securities.............................................. 58
Capitalization............................................................ 61
Management's Discussion and Analysis of Liquidity and Capital Resources... 61
Description of Capital Stock.............................................. 62
Certain Provisions of Maryland Law and of WREIT's Charter and Bylaws...... 65
Common Stock Available for Future Sale.................................... 67
Operating Partnership Agreement........................................... 68
Federal Income Tax Considerations......................................... 71
ERISA Considerations...................................................... 85
Certain Legal Aspects of Mortgage Loans and Real Property Investments..... 87
Use of Proceeds........................................................... 96
Underwriting.............................................................. 97
Legal Matters............................................................. 98
Experts................................................................... 98
Additional Information.................................................... 99
Glossary of Terms......................................................... 100
Financial Statements...................................................... F-1
</TABLE>
UNTIL , 1997 ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECU-
RITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DE-
LIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
20,000,000 SHARES
[LOGO OF WILSHIRE REAL ESTATE INVESTMENT TRUST]
COMMON STOCK
----------------
PROSPECTUS
----------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
PRUDENTIAL SECURITIES INCORPORATED
BLACK & COMPANY, INC.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the approximate amount of the fees and
expenses (other than sales commissions) payable by the Registrant in
connection with the issuance and distribution of the Common Stock.
<TABLE>
<S> <C>
SEC Registration Fee.......................................... $ 111,515
Blue Sky Fees and Expenses.................................... 7,500
NASD Filing Fee............................................... 30,500
The NASDAQ Stock Market Filing Fee............................ 50,000
Printing and Mailing Fees..................................... 400,000
Counsel Fees and Expenses..................................... 750,000
Accounting Fees and Expenses.................................. 150,000
Miscellaneous................................................. 100,485
----------
Total....................................................... $1,600,000
==========
</TABLE>
ITEM 32. SALES TO SPECIAL PARTIES
Not Applicable.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
Not Applicable.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS
WREIT Charter limits the liability of its directors and officers to WRIC and
its stockholders to the fullest extent permitted from time to time by Maryland
law. Maryland law presently permits the liability of directors and officers to
a corporation or its stockholders for money damages to be limited, except (i)
to the extent that it is proved that the director or officer actually received
an improper benefit or profit in money property or services for the amount of
the benefit or profit in money, property or services actually received, or
(ii) if a judgment or other final adjudication is entered in a proceeding
based on a finding that the director's or officer's action, or failure to act,
was the result of active and deliberate dishonesty and was material to the
cause of action adjudicated in the proceeding. This provision does not limit
the ability of WREIT or its stockholders to obtain other relief, such as an
injunction or rescission.
The Charter and Bylaws require WREIT to indemnify and hold harmless and,
without requiring a determination of the ultimate entitlement to
indemnification, pay reasonable expenses in advance of the final disposition
of any proceeding to its present and former directors and officers and certain
other parties to the fullest extent permitted from time to time by Maryland
law. The Maryland General Corporation Law ("MGCL") permits a corporation to
indemnify its directors, officers and certain other parties against judgments,
penalties, fines, settlements and reasonable expenses incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service to or at the request of the corporation, unless it is
established that (i) the act or omission of the indemnified party was material
to the matter giving rise to the proceeding and (x) was committed in bad faith
or (y) was the result of active and deliberate dishonesty, (ii) the
indemnified party actually received an improper personal benefit in money,
property or services or (iii) in the case of any criminal proceeding, the
indemnified party had reasonable cause to believe that the act or omission was
unlawful. Indemnification may be made against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by the director or
officer in connection with the proceeding. Indemnification is limited to court
ordered reimbursement for expenses; however, if the proceeding is one by or in
the right of the corporation, and the director or officer was adjudged to be
liable to the corporation or if the proceeding is one charging improper
personal benefit to the director or officer and the director or officer was
adjudged to be liable on the basis that
II-1
<PAGE>
personal benefit was improperly received. The termination of any proceeding by
conviction, or upon a plea of nolo contendere or its equivalent, or an entry
of any order of probation prior to judgment, creates a rebuttal presumption
that the director or officer did not meet the requisite standard of conduct
required for indemnification to be permitted. Maryland law requires a
corporation (unless its charter provides otherwise, which WRIC's Charter does
not) to indemnify a director or officer who has been successful, on the merits
or otherwise, in the defense of any proceeding to which he is made a party by
reason of his service in that capacity. It is the position of the Securities
and Exchange Commission that indemnification of directors and officers for
liabilities arising under the Securities Act is against public policy and is
unenforceable pursuant to Section 14 of the Securities Act.
The Registrant will carry an insurance policy providing directors' and
officers' liability insurance for any liability its directors or officers or
the directors or officers of any of its subsidiaries may incur in their
capacities as such.
The Registrant will indemnify Wilshire Realty Services Corporation, a
Delaware corporation (the "Manager" or "WRSC"), and its officers and directors
from any action or claim brought or asserted by any party by reason of any
allegation that WRSC or one or more of its officers or directors otherwise is
accountable or liable for the debts or obligations of the Registrant or its
affiliates. In addition, WRSC and its officers and directors will not be
liable to the Registrant, and the Registrant will indemnify WRSC and its
officers and directors for acts performed pursuant to the Management
Agreement, filed as Exhibit hereto, except for claims arising from acts
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of their duties under the Management Agreement.
The form of Underwriting Agreement filed as an exhibit to this registration
statement provides for the reciprocal indemnifications by the Underwriters of
Registrant, and its directors, officers and controlling persons, and by the
Registrant of the Underwriters, and their respective directors, officers and
controlling persons, against certain liabilities under the Securities Act.
ITEM 35. TREATMENT OF PROCEEDS FROM SHARES BEING REGISTERED
Not Applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS
(a) Index to Financial Statements.
<TABLE>
<S> <C>
Report of Independent Public Accountants................................. F-1
Balance Sheet as of October 28, 1997..................................... F-2
Notes to Balance Sheet................................................... F-3
</TABLE>
(b) Exhibits.
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Amended & Restated Charter of the Registrant.
3.2* Bylaws of the Registrant.
4.1* Form of Common Stock Certificate.
5.1* Opinion of Proskauer Rose LLP
8.1* Opinion of Proskauer Rose LLP as to Tax Matters.
10.1* Form of Management Agreement.
10.2* Partnership Agreement of Wilshire Real Estate Partnership, L.P.
10.3* Form of Stock Option Plan.
10.4* Form of Servicing Agreements.
21.1* List of Subsidiaries of Registrant.
23.1* Consent of Proskauer Rose LLP (included in Exhibits 5.1 and 8.1).
23.2 Consent of Arthur Andersen LLP
24.1 Powers of Attorney (included on Signature Page).
27 Financial Data Schedule
</TABLE>
- --------
* to be filed by amendment
II-2
<PAGE>
ITEM 37. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issues.
The undersigned Registrant hereby undertakes to provide to the Underwriters
as the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-11 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED IN THE CITY OF PORTLAND, OREGON, ON THE 29TH DAY OF OCTOBER, 1997.
Wilshire Real Estate Investment
Trust Inc.,a Maryland
corporation(Registrant)
By /s/ Lawrence A. Mendelsohn
----------------------------------
LAWRENCE A. MENDELSOHN
PRESIDENT
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Andrew A. Wiederhorn and/or Lawrence A. Mendelsohn his true and lawful
attorney-in-fact and agent, with full powers of substitution, for him and in
his name, place and stead, in any and all capacities, to sign and to file any
and all amendments, including post-effective amendments and any registration
statements filed pursuant to Rule 462(b), to this Registration Statement with
the Securities and Exchange Commission, granting to said attorney-in-fact
power and authority to perform any other act on behalf of the undersigned
required to be done in connection therewith.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON THE 29TH
DAY OF OCTOBER, 1997, IN THE CAPACITIES INDICATED.
SIGNATURE TITLE
/s/ Andrew A. Wiederhorn Chairman of the Board of
- ------------------------------------- Directors, Chief Executive
ANDREW A. WIEDERHORN Officer, Secretary, Treasurer
and Director
/s/ Lawrence A. Mendelsohn Director and President
- -------------------------------------
LAWRENCE A. MENDELSOHN
/s/ Chris Tassos Executive Vice President and
- ------------------------------------- Chief Financial Officer
CHRIS TASSOS (Principal Accounting Officer)
/s/ John C. Cordas Director
- -------------------------------------
JOHN C. CORDAS
/s/ David C. Egelhoff Director
- -------------------------------------
DAVID C. EGELHOFF
/s/ Steven Kapiloff Director
- -------------------------------------
STEVEN KAPILOFF
II-4
<PAGE>
EXHIBIT 23.2
Consent of Independent Public Accountants
-----------------------------------------
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement (No. 333-00000) filed on Form S-11 by Wilshire Real
Estate Investment Trust Inc. with the Securities and Exchange Commission.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
October 29, 1997
Los Angeles, California
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCE SHEET AS OF OCTOBER 28, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 10-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> OCT-28-1997
<CASH> 2,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 0
<ALLOWANCE> 0
<TOTAL-ASSETS> 0
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
0
<COMMON> 2,000
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 0
<INTEREST-LOAN> 0
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 0
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 0
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 0
<INCOME-PRETAX> 0
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
