<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 26, 1997,
REGISTRATION NO. 333-
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
CAPITAL AUTOMOTIVE REIT
(EXACT NAME OF REGISTRANT AS SPECIFIED IN GOVERNING INSTRUMENT)
MARYLAND 54-1870224
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1925 NORTH LYNN STREET, SUITE 306
ARLINGTON, VIRGINIA 22209
[ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES]
THOMAS D. ECKERT
PRESIDENT AND CHIEF EXECUTIVE OFFICER
1925 NORTH LYNN STREET, SUITE 306
ARLINGTON, VIRGINIA 22209
[NAME, ADDRESS, INCLUDING ZIP CODE, TELEPHONE NUMBER, AND FACSIMILE NUMBER
INCLUDING AREA CODE OF AGENT FOR SERVICE]
----------------
COPIES TO:
GEORGE P. STAMAS, ESQ. GEORGE C. HOWELL, III, ESQ.
JOHN B. WATKINS, ESQ. JACK A. MOLENKAMP, ESQ.
WILMER, CUTLER & PICKERING HUNTON & WILLIAMS
2445 M STREET, N.W. RIVERFRONT PLAZA, EAST TOWER
WASHINGTON, D.C. 20037-1420 951 EAST BYRD STREET
TELEPHONE NO. (202) 663-6000 RICHMOND, VA 23219-4074
FACSIMILE NO. (202) 663-6363 TELEPHONE NO. (804) 788-8200
FACSIMILE NO. (804) 788-8218
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF SECURITIES BEING OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares of
Beneficial Interest
(par value $.01 per
share)............... 18,345,957 $16.00 $293,535,312 $88,950
=================================================================================
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
==============================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 NOVEMBER 26, 1997
PROSPECTUS
15,000,000 COMMON SHARES
CAPITAL AUTOMOTIVE REIT
[LOGO APPEARS HERE]
COMMON SHARES OF BENEFICIAL INTEREST
----------
Capital Automotive REIT (the "Company") is a newly organized self-
administered and self-managed Maryland real estate investment trust formed to
invest in the real property and improvements used by operators (the "Dealers")
of multi-site, multi-franchised motor vehicle dealerships ("Dealerships") and
motor vehicle related businesses ("Related Businesses") located in major
metropolitan areas throughout the United States. The Company is the first
publicly-offered real estate investment trust ("REIT") formed primarily to
acquire, lease back, and finance the development of, real property and
improvements for use by Dealers. The Company has entered into agreements to
acquire 21 Properties (the "Initial Properties" or together with any future
real property and improvements acquired by the Company, the "Properties"),
located in the Washington, D.C. Metropolitan Area and Philadelphia. All of the
Initial Properties are operated by four of the top 20 Dealers in the
Washington, D.C. Metropolitan Area, as measured by total new vehicles sold in
1996. The Company will lease back the Initial Properties to Dealers or their
affiliates under long-term, triple-net leases.
All of the Company's common shares of beneficial interest, par value $.01 per
share (the "Common Shares"), offered hereby are being sold by the Company. To
assist the Company in maintaining its qualification as a REIT, ownership of
Common Shares by any person is generally limited to 9.9% of the outstanding
Common Shares. Prior to the Offering, there has been no public market for the
Common Shares. It is currently estimated that the initial public offering price
will be between $14.00 and $16.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The Company has applied for listing of the Common Shares on The
Nasdaq Stock Market National Market under the symbol "CARS." See "Glossary"
beginning on page G-1 for the definition of certain terms used in this
Prospectus.
FBR Asset Investment Corporation, an affiliate of Friedman, Billings, Ramsey
& Co., Inc., the Representative of the Underwriters, has agreed to acquire a
number of Common Shares equal to 4.4% of the Common Shares to be outstanding on
the closing of the Offering up to a maximum investment of $10 million. FBR
Asset Investment Corporation will acquire the Common Shares at the initial
public offering price, (less underwriting discounts and commissions).
----------
SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR A DISCUSSION OF CERTAIN MATERIAL
RISKS TO BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON SHARES,
INCLUDING, AMONG OTHERS:
. Dependence on the ability of Lessees to pay rent to the Company, which
ability may be affected by risks inherent in operating Dealerships and
Related Businesses;
. The Company's lack of operating history;
. The Company has committed approximately 20% of the net proceeds of the
Offering (assuming the Underwriters do not exercise their over-allotment
option) to specific investments; the Company may face significant
competition in acquiring additional properties, which may inhibit the
Company's ability to achieve its investment objectives;
. Conflicts of interest between the Company and certain Trustees of the
Company, and the potential influence of such Trustees or their affiliates
with respect to the business of, and decisions affecting, the Company;
. The Company's limited control over the management of the Properties; and
. Adverse tax consequences of failing to qualify as a REIT and the decrease
in funds available to pay distributions to shareholders resulting from
taxation as a regular corporation.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECU-RITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REP-RESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Common Share........................... $ $ $
- --------------------------------------------------------------------------------
Total(3)(4)................................ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be
approximately $ including reimbursement of certain out of pocket
expenses of Friedman, Billings, Ramsey & Co., Inc., the Representative of
the Underwriters. The Company has granted to the Representative warrants to
purchase an aggregate number of Common Shares equal to 4% of the Common
Shares to be outstanding on the closing of the Offering (including exercise
of the Underwriters' over-allotment option) on a fully diluted basis. The
Common Shares issuable upon exercise of the Warrants have been registered
by the Company. See "Underwriting."
(3) The Company has granted the Underwriters a 30-day over-allotment option to
purchase up to 2,250,000 additional Common Shares on the same terms and
conditions as set forth above. If all such additional shares are purchased
by the Underwriters, the total Price to the Public, Underwriting Discounts
and Commissions and Proceeds to the Company will be $ , $ and $ ,
respectively. See "Underwriting."
(4) The Underwriters have agreed to reserve up to 2% of the Common Shares
offered hereby for sale to certain persons associated with the Company and
their families at the Price to the Public (less underwriting discounts). To
the extent such reserved shares are sold to such individuals, the total
Underwriting Discounts and Commissions will be reduced to the extent of
such discounts. See "Underwriting."
----------
The Common Shares are offered by the Underwriters subject to receipt and
acceptance by the Underwriters, 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 offers and to reject orders in whole
or in part. It is expected that delivery of the Common Shares will be made in
New York, New York on or about , 1998.
----------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is , 1998
<PAGE>
[Pictures of various Initial Properties highlighting the portfolio]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES,
INCLUDING PURCHASES OF THE COMMON SHARES TO STABILIZE THE MARKET PRICE,
PURCHASES OF THE COMMON SHARES TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMMON SHARES MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON SHARES
ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY......................................................... 1
THE COMPANY................................................................ 1
THE INITIAL PROPERTIES, LEASES AND DEALERSHIPS............................. 3
STRATEGY................................................................... 6
RISK FACTORS............................................................... 7
STRUCTURE OF THE COMPANY................................................... 10
FORMATION TRANSACTIONS..................................................... 12
BENEFITS TO RELATED PARTIES................................................ 12
SUMMARY SELECTED FINANCIAL INFORMATION..................................... 14
DISTRIBUTIONS.............................................................. 16
TAX STATUS OF THE COMPANY.................................................. 16
THE OFFERING............................................................... 16
RISK FACTORS............................................................... 17
The Company is Dependent upon Dealers Generating Sufficient Revenues from
Their Operations to Permit the Lessees to Pay Rent and Fulfill Their
Other Obligations Under the Initial Leases.............................. 17
Dependence on Lessees.................................................. 17
Dependence on Guarantors............................................... 17
The Company Has No Rights Under, or Control Over, Franchise
Agreements............................................................ 17
Effect of Bankruptcy of Lessees........................................ 18
Resale or Re-leasing of Properties..................................... 18
Uninsurable Losses..................................................... 19
General Risks Associated With Operating Dealerships and Related
Businesses.............................................................. 19
Dependence on Specific Industry........................................ 19
Dependence on Manufacturers............................................ 19
Franchise Agreements................................................... 20
Mature Industry and Cyclicality........................................ 20
Dealership Competition................................................. 20
Imported Vehicles...................................................... 20
Purchase Prices of Properties Have Not Been Based on Independent
Appraisals and As A Result The Market Capitalization of the Company May
Exceed the Fair Market Value of the Company's Properties if Determined
by Appraisal............................................................ 21
The Company's Lack of Operating History; No Assurance that the Company
Will Be Able to Generate Sufficient Revenue to Make or Sustain
Distributions to Shareholders........................................... 21
There Can Be No Assurance that the Company Will Complete Any Additional
Acquisitions of Properties or that the Company Will Not Be Treated As An
Investment Company...................................................... 22
Risk of Leverage......................................................... 22
The Company will not Exercise Control Over the Management or Maintenance
of the Initial Properties............................................... 22
Conflicts of Interest Among the Company and Certain Trustees............. 23
Ability of Certain Trustees to Influence the Company................... 23
Initial Sale........................................................... 23
Terms of Leases........................................................ 23
Ability of Certain Trustees and Their Affiliates to Influence the Sale
or Refinancing of the Initial Properties.............................. 23
Dependence on Key Personnel.............................................. 24
Geographic Concentration of the Initial Properties in Certain Markets
Renders the Company Vulnerable to Local Economic Conditions............. 24
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
General Real Estate Investment Risks..................................... 24
General Risks.......................................................... 24
Real Estate Related Taxes.............................................. 24
Operating Expenses..................................................... 24
Risks Associated with Illiquidity of Real Estate....................... 24
Governmental Regulations; Environmental Matters.......................... 25
Environmental Laws..................................................... 25
Americans with Disabilities Act of 1990................................ 26
Other Regulations...................................................... 26
Competition with Other Companies with Similar Business Objectives and
Strategies.............................................................. 26
Risks of Financing for Real Estate Development........................... 26
Adverse Consequences of Failure to Qualify as a REIT; Other Tax
Liabilities............................................................. 26
Tax Liabilities as a Consequence of Failure to Qualify as a REIT....... 26
Adverse Effects of REIT Minimum Distribution Requirements.............. 27
Consequences of Failure to Qualify as a Partnership.................... 28
Risks Regarding Characterization of Initial Leases..................... 28
Other Tax Liabilities.................................................. 28
The Ownership Limit...................................................... 28
Certain Anti-takeover Provisions May Inhibit a Change in Control of the
Company................................................................. 29
General................................................................ 29
Preferred Shares....................................................... 29
Maryland Business Combination Statute.................................. 29
Changes in Policies...................................................... 29
No Prior Market for Common Shares........................................ 29
Effect on Market Interest Rates on Share Prices.......................... 30
Dilution................................................................. 30
Possible Adverse Effects on Share Price Arising from Common Shares
Eligible for Future Sale................................................ 30
USE OF PROCEEDS............................................................ 31
CAPITALIZATION............................................................. 32
DILUTION................................................................... 33
SELECTED FINANCIAL INFORMATION............................................. 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................ 36
Overview................................................................. 36
Results of Operations.................................................... 36
Pro Forma Results of Operations.......................................... 36
Environmental Matters.................................................. 36
Liquidity and Capital Resources.......................................... 37
BUSINESS OF THE COMPANY AND PROPERTIES..................................... 38
Overview................................................................. 38
Strategy................................................................. 39
The Initial Properties, Leases and Dealerships........................... 40
General Initial Lease Terms.............................................. 43
Use of the Properties.................................................. 43
Amounts Payable under the Leases; Net Provisions....................... 43
Maintenance, Alterations, Additions or Improvements.................... 44
Insurance.............................................................. 44
Damage to, or Condemnation of, a Property.............................. 44
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Financial Covenants..................................................... 45
Assignment and Subletting............................................... 45
Indemnification......................................................... 46
Environmental Matters................................................... 46
Events of Default....................................................... 46
Right of First Offer and Option to Purchase Property.................... 48
Governing Law........................................................... 48
Governmental Regulations Affecting the Properties......................... 48
Environmental Laws...................................................... 48
Americans with Disabilities Act of 1990................................. 48
Franchise Agreements...................................................... 49
Competition............................................................... 49
Employees................................................................. 50
Legal Proceedings......................................................... 50
MANAGEMENT.................................................................. 51
Trustees, Executive Officers and Key Employees............................ 51
Committees of the Board of Trustees....................................... 52
Compensation of Trustees.................................................. 52
Executive Compensation.................................................... 53
Employment Agreements..................................................... 53
Incentive Plan............................................................ 54
Option Grants in Connection with the Formation Transactions............... 55
Indemnification of Trustees and Officers.................................. 55
STRUCTURE AND FORMATION OF THE COMPANY...................................... 56
Structure of the Company.................................................. 56
Formation Transactions.................................................... 56
Benefits to Related Parties............................................... 57
Lock-Out Provisions....................................................... 58
Benefits of the UPREIT Structure.......................................... 58
Acquisition of the Initial Properties from the Initial Sellers............ 58
RELATED TRANSACTIONS........................................................ 59
Transactions with Trustees................................................ 59
Dealer Warrants.......................................................... 59
Acquisitions of Initial Properties....................................... 59
Initial Leases........................................................... 59
Guaranty of Debt of Operating Partnership................................ 59
PARTNERSHIP AGREEMENT....................................................... 60
Management................................................................ 60
Indemnification........................................................... 60
Transferability of Interests.............................................. 60
Extraordinary Transactions................................................ 61
Issuance of Additional Units.............................................. 61
Capital Contributions and Additional Funds................................ 61
Awards Under Incentive Plan............................................... 61
Distributions............................................................. 62
Operations................................................................ 62
Limited Partner Redemption Rights......................................... 62
Tax Matters............................................................... 62
Term...................................................................... 62
PRINCIPAL SHAREHOLDERS OF THE COMPANY....................................... 63
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST............................... 64
Authorized Shares........................................................ 64
Common Shares............................................................ 64
Preferred Shares......................................................... 65
Restrictions on Ownership and Transfer................................... 66
Certain Provisions of Maryland Law and of the Declaration of Trust and
By-laws................................................................. 68
Business Combinations.................................................. 68
Control Share Acquisitions............................................. 69
Limitation of Liability and Indemnification............................ 69
Maryland Asset Requirements............................................ 70
Meetings of Shareholders............................................... 70
COMMON SHARES ELIGIBLE FOR FUTURE SALE..................................... 71
General................................................................ 71
Underwriting Warrants.................................................. 72
Dealer Warrants........................................................ 72
Registration of Common Shares Issued Upon Redemption of Units;
Registration Rights..................................................... 72
FEDERAL INCOME TAX CONSIDERATIONS.......................................... 72
Taxation of the Company as a REIT........................................ 72
General................................................................ 72
Requirements for Qualification......................................... 73
Income Tests........................................................... 74
Risk Regarding Characterization of Initial Leasdes..................... 75
Asset Tests............................................................ 78
Annual Distribution Requirements....................................... 78
Partnership Anti-Abuse Rule............................................ 79
Failure to Qualify..................................................... 79
Taxation of Holders of Common Shares..................................... 80
U.S. Shareholders...................................................... 80
Backup Withholding..................................................... 81
Taxation of Tax-Exempt Shareholders.................................... 81
Non-U.S. Shareholders.................................................. 82
Ordinary Dividends..................................................... 82
Return of Capital...................................................... 83
Capital Gain Dividends................................................. 83
Sale of Common Shares.................................................. 84
Backup Withholding..................................................... 84
Other Tax Consequences................................................... 84
Tax Aspects of the Operating Partnership................................. 85
Classification as a Partnership........................................ 85
Partnership Allocations................................................ 86
Tax Allocations with Respect to the Properties......................... 86
Basis in Operating Partnership Interest................................ 87
Sale of the Properties................................................. 88
UNDERWRITING............................................................... 89
LEGAL MATTERS.............................................................. 91
EXPERTS.................................................................... 91
ADDITIONAL INFORMATION..................................................... 91
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
GLOSSARY................................................................... G-1
</TABLE>
iv
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial information, including the historical and pro forma
financial statements and notes thereto, appearing elsewhere in this Prospectus.
This Prospectus contains forward looking statements that involve risks and
uncertainties. The Company's actual operations may differ significantly from
the results discussed in the forward-looking statements. Such statements can be
identified by the use of forward-looking terminology such as "may," "will,"
"could," "should," "expect," "anticipate," "estimate," or "continue" or the
negative thereof or other variations thereon or comparable terminology. The
cautionary statements set forth under the caption "Risk Factors" and elsewhere
in the Prospectus identify important factors with respect to such forward-
looking statements, including certain risks and uncertainties, that could cause
actual results to differ materially from those in such forward-looking
statements.
Unless otherwise indicated, the information contained in this Prospectus
assumes: (i) the consummation of the transactions described under "Structure
and Formation of the Company" (collectively, the "Formation Transactions")
contemporaneously with the closing of this Offering, (ii) an initial public
offering price of $15.00 per Common Share (representing the midpoint of the
price range), (iii) the purchase by FBR Asset Investment Corporation of a
number of Common Shares equal to 4.4% of the Common Shares to be outstanding on
the closing of the Offering up to a maximum investment of $10 million at the
assumed initial public offering price (less underwriting discounts and
commissions), and (iv) that the Underwriters' over-allotment option will not be
exercised.
This Prospectus includes statistical industry data regarding Dealerships and
Related Businesses. Unless otherwise indicated, such data is taken or derived
from information published by (i) the Industry Analysis Division of the
National Automobile Dealers Association ("NADA") in its NADA Data 1996 and NADA
Data 1997, and on the "NADANET" web-site located at
"www.nadanet.com/news/nadadata/econfyi.htm," (ii) Crain Communications Inc. in
its Automotive News 100-Year Almanac, 1996 Market Data Book and 1997 Market
Data Book, (iii) ADT Automotive, Inc. in its 1997 Used Car Market Report, (iv)
the Bureau of the Census in the U.S. Department of Commerce in its Statistical
Abstract of the United States 1996 from the National Data Book, or (v) the
Washington Business Journal, thirteenth annual The Book of Lists, 1997-1998.
Unless the context otherwise requires, all references to (i) the "Company" in
this Prospectus include Capital Automotive REIT and its sole subsidiary,
Capital Automotive L.P., a Delaware limited partnership (the "Operating
Partnership"), or either of them, and (ii) Dealers, Initial Sellers and Sellers
(as defined hereafter) and Initial Lessees and Lessees (as defined hereafter)
also refer to persons or entities who are their affiliates ("Affiliates") as
defined in Rule 405 of the Securities Act of 1933, as amended (the "Securities
Act"). See "Glossary" beginning on page G-1 for the definition of certain other
terms used in this Prospectus.
THE COMPANY
The Company is a newly organized self-administered and self-managed Maryland
REIT formed to invest in the real property and improvements used by Dealers
located in major metropolitan areas throughout the United States. The Company
is the first publicly-offered REIT formed primarily to acquire, lease back, and
finance the development of, Properties for use by Dealers.
Thomas D. Eckert, President and Chief Executive Officer, Scott M. Stahr,
Executive Vice President and Chief Operating Officer, Donald L. Keithley,
Executive Vice President of Business Development and David S. Kay, Vice
President and Chief Financial Officer, the Company's executive officers, have
over 75 years of combined experience in the real estate, financial and motor
vehicle industries. Following the Offering, the Company's executive officers
will own or have the right to acquire in the aggregate a number of Common
Shares and units of partnership interest of the Operating Partnership ("Units")
equal to 6.625% of the Common Shares to be outstanding on the closing of the
Offering (including exercise of the Underwriters' over-allotment) on a fully
diluted basis pursuant to options granted under the Company's Incentive Plan
(the "Plan"). See "Management."
1
<PAGE>
The Company has entered into agreements to acquire the Initial Properties,
which consist of 21 parcels of real property and related improvements. The
Initial Properties are primarily located in the Washington, D.C. Metropolitan
Area and Philadelphia. All of the Initial Properties are operated by four of
the top 20 Dealers in the Washington, D.C. Metropolitan Area, as measured by
total new vehicles sold in 1996. Dealers located on the Initial Properties sell
domestic and imported luxury, family, economy and sport utility vehicles, and
trucks and vans of more than 19 manufacturers, including Honda, Toyota, Lexus,
Chevrolet, Saturn, Ford, Infiniti, Jaguar, Acura, Lincoln-Mercury, Mitsubishi
and Nissan. The Initial Properties will be purchased from their owners, who are
Affiliates of the Dealers (the "Initial Sellers" or together with any future
sellers, the "Sellers") and will be leased back to the Dealers or their
Affiliates (the "Initial Lessees" or together with any future lessees, the
"Lessees"). The Initial Leases will be long-term triple-net leases that require
the Initial Lessees to pay all operating costs of the Initial Properties.
The Initial Sellers are Affiliates of John J. Pohanka, Robert M. Rosenthal,
Vincent A. Sheehy, and Jonathan K. Cherner and Andrew M. Cherner. Collectively,
they have over 145 years of experience in the automotive industry. In the
aggregate, they will own 5,048,259 Units in the Operating Partnership. Messrs.
Pohanka and Rosenthal will have the right to acquire an aggregate number of
Units equal to 4% of the Common Shares to be outstanding on the closing of the
Offering (including exercise of the Underwriters' over-allotment option) on a
fully diluted basis. Messrs. Pohanka and Rosenthal will serve on the Company's
Board of Trustees. Each of the Dealership groups has received numerous industry
awards. See "Business Overview."
The Pohanka Automotive Group, established in 1919, sold approximately 11,900
motor vehicles in 1996. The Pohanka Automotive Group operates a total of 16
franchises representing 14 motor vehicle manufacturers (or their authorized
distributors) (the "Manufacturers"), and the Company will acquire all nine
Properties upon which the Pohanka Automotive Group operates its Dealerships and
Related Businesses. The Rosenthal Automotive Organization, the 14th largest
automotive group in the United States, sold more than 31,500 motor vehicles in
1996. The Rosenthal Automotive Organization operates 19 franchises representing
ten Manufacturers, and the Company will acquire seven of the 13 Properties upon
which the Rosenthal Automotive Organization operates its Dealerships and
Related Businesses (which are substantially all of the Properties owned by the
Rosenthal Automotive Organization). Sheehy Auto Stores, which sold over 14,500
motor vehicles in 1996, operates 12 franchises representing seven
Manufacturers, and the Company will acquire four of the five Properties upon
which the Sheehy Auto Stores operate its Dealerships and Related Businesses.
The Cherner Automotive Group, which sold more than 4,200 motor vehicles in
1996, operates two franchises representing two Manufacturers, and the Company
will acquire one of those two Properties.
The Company's primary business strategy is to acquire a diversified portfolio
of Properties used by Dealers throughout the United States, including
Properties used by new motor vehicle retail dealerships, used motor vehicle
retail dealerships, motor vehicle auctioneers, and service, repair or parts
businesses. In addition, the Company intends to acquire undeveloped property or
property being used for other purposes and make capital available to finance
the development of Dealerships or Related Businesses. In each case, it is the
intention of the Company to lease back the Properties to the Dealers or their
Affiliates. The Company will seek to implement its strategy by acquiring, or
providing financing for the development of, Properties used by Dealers that (i)
have many years of uninterrupted ownership and operation, (ii) have generated
steady cash flow from the sale or lease of new or used motor vehicles, the
operation of service and repair facilities, parts businesses or body shops or
other motor vehicle related businesses or the arrangement of financing or
credit insurance, and (iii) are located in major metropolitan areas throughout
the United States. The Company believes that its acquisition and financing
strategy will provide Sellers with an opportunity (i) to acquire liquidity,
while maintaining ownership and control of the Dealerships or Related
Businesses, (ii) to diversify their investments, (iii) to obtain funds to
expand the operations of their Dealerships or Related Businesses, and (iv) to
facilitate their estate planning.
2
<PAGE>
New and used franchised motor vehicle retailing, including the sale of
trucks, minivans, and sport utility vehicles, parts and services, and other
ancillary businesses, is the largest consumer retail sector in the United
States, with approximately $500 billion in 1996 sales. Sales by franchised
motor vehicle retail dealerships are estimated to account for one-fifth of the
nation's total retail sales of all products and merchandise. In 1996, the 100
largest Dealership groups generated less than 10% of total sales revenue and
controlled approximately 5% of the over 22,000 existing Dealerships,
demonstrating the fragmentation of the industry.
The Company believes that the real property and improvements used by Dealers
is a major and discrete sector of the national retail real estate industry.
Dealerships are estimated to have over $40 billion currently invested in
Dealership-related real estate. The Company believes that those properties
present attractive acquisition and financing opportunities because they have
locations with frontage on, and visibility from, major thoroughfares and zoning
for a wide range of alternative uses. In the event that such properties can no
longer be leased to Dealers, the Company believes that they can be redeveloped
for other commercial or residential uses.
The Company believes that the size and the fragmentation of the industry and
the increasing capital needs of Dealers of Dealerships provide an attractive
environment in which the Company can seek to implement its primary business
strategy. The current trend is for Dealers of Dealerships to consolidate their
operations to increase efficiency and their competitive position. That trend
should facilitate the Company's strategy of acquiring Properties from Dealers
with multi-site, multi-franchised and diversified locations.
The Company was organized as a Maryland REIT in October 1997, and its
principal executive offices are located at 1925 North Lynn Street, Suite 306,
Arlington, Virginia 22209. Its telephone number is (703) 469-1287.
THE INITIAL PROPERTIES, LEASES AND DEALERSHIPS
The Company has entered into agreements to acquire 21 Initial Properties that
are primarily located in suburban communities of Washington, D.C. and
Philadelphia The Company's interest in each Initial Property includes the land,
buildings and improvements, related easements and rights and fixtures. The
Company will not own or lease any personal property, furniture or equipment at
any Initial Property, all of which will be owned or leased from third parties
or by the respective Initial Lessee. The Initial Properties are generally zoned
for a wide range of commercial uses and typically have frontage on major
transportation arteries with high traffic patterns, high visibility, bright
signage, and ease of entrance and exit. The improvements on the Initial
Properties generally consist of one or more retail showrooms, office space
(which may or may not be contained in separate buildings), adjacent full
service and repair facilities, parts and accessories departments, and in many
cases, acreage set aside for used car sales, body shops and parking for
inventory.
3
<PAGE>
Set forth below is certain information relating to the Initial Properties:
<TABLE>
<CAPTION>
AGGREGATE
GROSS
LAND LEASEABLE
PURCHASE AREA BUILDING
DEALERSHIPS LOCATION PRICE(1) IN ACRES AREA (SQ. FT.)
----------- -------------- ------------ -------- --------------
<S> <C> <C> <C> <C>
Rosenthal Infiniti, Mazda & Nissan Tysons Corner, VA $ 23,873,587 12.0 84,384
Rosenthal Nissan, Acura, Mazda & Isuzu Gaithersburg, MD 11,855,771 8.4 68,898
Rosenthal Honda & Jaguar Tysons Corner, VA 11,454,528 7.8 46,836
Rosenthal Chevrolet & Jeep/Eagle Arlington, VA 6,779,469 5.2 67,000
Rosenthal Mazda Arlington, VA 5,356,973 2.2 16,176
Rosenthal Storage Lot Arlington, VA 4,890,991 4.7 32,349
Rosenthal Body Shop Tysons Corner, VA 1,057,392 0.9 16,000
------------ ----- -------
65,268,711 41.2 331,643
------------ ----- -------
Pohanka Saturn & Isuzu Marlow Heights, MD 4,326,150 5.9 38,377
Pohanka Acura & Chevrolet/GEO Chantilly, VA 4,234,418 5.1 48,571
Pohanka Saturn Bowie, MD 4,064,550 5.3 22,679
Pohanka Honda Marlow Heights, MD 3,700,387 2.3 40,769
Pohanka Lexus Chantilly, VA 3,438,343 2.3 15,111
Pohanka Cadillac, Hyundai, Nissan & Kia Fredricksburg, VA 3,432,650 6.2 42,473
Pohanka Hyundai & Subaru Marlow Heights, MD 1,556,465 2.6 15,372
Pohanka Body Shop Marlow Heights, MD 694,575 2.7 2,550
Pohanka Undeveloped Dealership Lot Chantilly, VA 5,876,437 7.1 --
------------ ----- -------
31,323,975 39.5 225,902
------------ ----- -------
Sheehy Ford & Kia Springfield, VA 6,308,000 6.6 51,512
Chapman Ford Sales Philadelphia, PA 3,000,000 7.9 43,800
Sheehy Lincoln-Mercury & Mitsubishi Woodbridge, VA 2,565,925 3.1 24,597
Sheehy Ford Marlow Heights, MD 2,132,000 4.6 26,400
------------ ----- -------
14,005,925 22.2 146,309
------------ ----- -------
Cherner Lincoln Mercury Annandale, VA 6,322,909 5.3 38,585
------------ ----- -------
6,322,909 5.3 38,585
------------ ----- -------
Total........................................... $116,921,520 108.2 742,439
============ ===== =======
</TABLE>
- --------
(1) Includes an aggregate of approximately $1.3 million attributable to
estimated acquisition fees and expenses (including transfer taxes,
recordation taxes and title insurance but excluding the Company's attorney
and accounting fees).
Concurrently with the Company's acquisition of the Initial Properties, the
Company will lease them back to the Initial Lessees pursuant to the Initial
Leases. The Company expects that the Initial Leases will generally have initial
terms ranging from ten to 12 years (the "Fixed Term") and may be extended for
two additional ten year terms (the "Extended Term") at the option of the
respective Initial Lessees. The Initial Leases will be triple-net leases that
require the Initial Lessees to pay substantially all expenses associated with
the operation of the Initial Properties, such as taxes and other governmental
charges, insurance, utilities, service and maintenance. Each Initial Lease will
require the Initial Lessee to operate the Initial Property only for the same
purpose for which it was used on the Company's purchase date, unless the
Company consents to a different use.
The annual rent for the first year (the "Initial Annual Base Rent") under
each Initial Lease has been negotiated by the Company to produce an appropriate
yield on that Initial Property's purchase price (including acquisition fees and
expenses). The Initial Annual Base Rent and the adjusted annual base rent for
each year thereafter (the "Annual Base Rent") will be adjusted upward
periodically based on a factor of the CPI ranging from one-half of CPI adjusted
every other year to full CPI adjusted every year, which may be subject to
periodic minimum or maximum adjustment rates ranging from zero to 2%,
respectively. The Company will have general recourse to the Initial Lessees,
but the Initial Lessees' payment obligations under the Initial Leases will be
unsecured.
4
<PAGE>
Set forth below is certain information relating to the Initial Lessees:
<TABLE>
<CAPTION>
INITIAL
ANNUAL BASE LEASE FIXED
LESSEE (DEALERSHIPS)(1) LOCATION RENT EXPIRATION TERM EXTENDED TERM(2)
----------------------- ------------------ ----------- ---------- -------- -----------------
<S> <C> <C> <C> <C> <C>
Geneva Enterprises, Inc.
d/b/a Rosenthal Nissan-
Mazda.................. Tysons Corner, VA $ 2,506,727 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc.
d/b/a Rosenthal Mazda.. Arlington, VA 621,408 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc.
d/b/a Rosenthal
Chevrolet/Jeep Eagle
(Storage Lot).......... Arlington, VA 562,464 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc.
d/b/a Rosenthal Honda.. Tysons Corner, VA 511,866 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc.
d/b/a Rosenthal
Jaguar................. Tysons Corner, VA 511,854 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc.
d/b/a Geneva Management
(Related Business)..... Arlington, VA 453,600 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc.
d/b/a Rosenthal Isuzu.. Gaithersburg, MD 451,418 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc.
d/b/a Nissan
Gaithersburg........... Gaithersburg, MD 350,214 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc.
d/b/a Rosenthal Acura.. Gaithersburg, MD 330,111 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc.
d/b/a Rosenthal
Chevrolet/Jeep/ Eagle.. Arlington, VA 312,476 Feb. 2008 10 years 2-10 year options
Maryland Imported Cars,
Inc. d/b/a Gaithersburg
Mazda(3)............... Gaithersburg, MD 261,308 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc.
d/b/a Rosenthal Honda
(2-acre lot)........... Tysons Corner, VA 176,981 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc.
d/b/a Rosenthal Honda
(Body Shop)............ Tysons Corner, VA 126,887 Feb. 2008 10 years 2-10 year options
-----------
7,177,314
-----------
Pohanka Auto Center,
Inc. & Pohanka
Oldsmobile-GMC Truck,
Inc. (Saturn,
Isuzu)(4) ............. Marlow Heights, MD 497,507 Feb. 2008 10 years 2-10 year options
Pohanka Auto West, Inc.
& Pohanka Chevrolet-
GEO, Inc.
(Chevrolet/GEO and
Acura)(4) ............. Chantilly, VA 453,082 Feb. 2009 11 years 2-10 year options
Pohanka Virginia
Properties Partnership
(Saturn)(4)............ Bowie, MD 447,101 Feb. 2009 11 years 2-10 year options
Pohanka Imports, Inc.
(Honda)(4) ............ Marlow Heights, MD 407,043 Feb. 2009 11 years 2-10 year options
Pohanka Auto Center,
Inc. (Cadillac,
Hyundai, Nissan,
Oldsmobile & Kia)(4)... Fredricksburg, VA 386,173 Feb. 2008 10 years 2-10 year options
Pohanka of Chantilly
(Lexus)(4)............. Chantilly, VA 357,588 Feb. 2010 12 years 2-10 year options
Pohanka Hyundai, Inc.
(Hyundai & Subaru)(4).. Marlow Heights, MD 171,211 Feb. 2009 11 years 2-10 year options
Pohanka Oldsmobile-GMC
Truck, Inc. (Body
Shop)(4)............... Marlow Heights, MD 97,241 Feb. 2009 11 years 2-10 year options
Pohanka Virginia
Properties Partnership
(Undeveloped Dealership
Lot)(4)................ Chantilly, VA 628,779 Feb. 2009 11 years 2-10 year options
-----------
3,445,725
-----------
Sheehy Ford of
Springfield, Inc. (Ford
& Kia)................. Springfield, VA 672,340 Feb. 2008 10 years 2-10 year options
Chapman Ford Sales,
Inc.................... Philadelphia, PA 330,000 Feb. 2008 10 years 2-10 year options
Sheehy Lincoln-Mercury,
Inc. (Lincoln-Mercury &
Mitsubishi)............ Woodbridge, VA 282,252 Oct. 2007 10 years 2-10 year options
Sheehy Ford, Inc........ Marlow Heights, MD 255,840 April 2006 8 years 2-10 year options
-----------
1,540,432
-----------
Cherner Lincoln
Mercury................ Annandale, VA 695,520 Feb. 2008 10 years 2-10 year options
-----------
695,520
-----------
Total.................................. $12,858,991
===========
</TABLE>
- --------
(1) See the historical financial statements for Geneva Enterprises, Inc. and
Affiliated Company and Pohanka Automotive Group.
(2) If any Initial Lease is renewed for a second Extended Term, the Annual Base
Rent will be renegotiated by the parties to reflect the fair market rate at
the renewal date.
(3) Guaranteed by Geneva Enterprises, Inc.
(4) Each Initial Lease with an Affiliate of Pohanka Automotive Group will be
guaranteed by each other Initial Lessee affiliated with the Pohanka
Automotive Group.
5
<PAGE>
In addition to selling new vehicles, many Dealers lease new vehicles and
sell used vehicles. Lease arrangements typically provide Dealers with a source
of late-model, off-lease vehicles for its used vehicle inventory. Dealers also
provide service and parts primarily for the vehicle makes and models that they
sell or lease, and perform both warranty and non-warranty service work. In
general, parts departments support the sales and service divisions. Dealers may
also sell factory-approved parts at retail to their customers or at wholesale
to independent repair shops. Dealers arrange third party financing for their
customers, sell vehicle service contracts and arrange selected types of credit
insurance for which they receive financing fees, subject to a charge-back
against a portion of the finance fees if contracts are terminated prior to
their scheduled maturity.
STRATEGY
The Company's primary business strategy is to acquire a diversified portfolio
of Properties used by Dealers throughout the United States, including
Properties used by new motor vehicle retail dealerships, used motor vehicle
retail dealerships, motor vehicle auctioneers, and service, repair or parts
businesses. In addition, the Company intends to acquire undeveloped property or
property being used for other purposes and make capital available to finance
the development of Dealerships or Related Businesses. In each case, it is the
intention of the Company to lease back the Properties to the Lessees, who will
be the Dealers or their Affiliates. The Company will seek to implement its
strategy by acquiring, or providing financing for the development of,
Properties used by Dealers that (i) have many years of uninterrupted ownership
and operation, (ii) have generated steady cash flow from the sale or lease of
new or used motor vehicles, the operation of service and repair facilities,
parts businesses or body shops or other motor vehicle related businesses or the
arrangement of financing or credit insurance, and (iii) are located in major
metropolitan areas throughout the United States. The Company believes that its
acquisition and financing strategy will provide Sellers with an opportunity (i)
to acquire liquidity, while maintaining ownership and control of the
Dealerships or Related Businesses, (ii) to diversify their investments, (iii)
to obtain funds to expand the operations of their Dealerships or Related
Businesses, and (iv) to facilitate their estate planning.
The Company's primary objective is to become the leading owner and lessor of
Properties used by Dealers throughout the United States in order to provide the
Company with predictable streams of cash flow to maximize shareholder value. To
achieve these objectives, the Company plans to:
. Implement an aggressive, yet disciplined, acquisition program by
purchasing Properties used by Dealers of multi-site, multi-franchised
Dealerships or Related Businesses that have demonstrated historic growth,
are well managed, and have been maintained in good condition, and whose
location and characteristics will be suitable for alternative use by:
. Diversifying geographically by acquiring or providing financing for
the development of Properties located in major consolidated
metropolitan statistical areas ("CMSAs") in order to minimize the
potential adverse impact of economic downturns in certain markets;
. Leveraging the contacts and experience of the Company's management to
develop relationships with Dealers;
. Maintaining long-term working relationships with Dealers, by providing
capital for multiple acquisitions of Properties on a market-by-market
basis; and
. Taking advantage of opportunities created by the fragmented ownership
of Dealerships and Related Businesses, and the large number of
suitable locations with adequate roadway frontage, high visibility and
appropriate zoning.
6
<PAGE>
. Use the Company's UPREIT structure to acquire Properties in exchange for
cash or Units, or a combination of cash and Units, thereby deferring some
or all of a Seller's potential taxable gain, and enhancing the ability of
the Company to consummate transactions and to structure more competitive
acquisitions than other real estate companies in the market that may lack
the Company's access to capital and the ability to acquire Properties for
Units.
. Use several valuation mechanisms, including calculations of discounted
cash flow, evaluations of comparable sales and leases of properties,
analysis of the alternative uses of the Properties, and evaluation of the
Dealers' financial strength, to determine the purchase price and lease
terms for the Properties.
. Lease back the Properties to Lessees on a triple-net basis, thereby
eliminating brokerage, re-leasing and similar costs and the risk of high
Lessee turnover due to the generally historic long-term operation of
Dealerships or Related Businesses at Property locations.
. Negotiate Lease covenants designed to minimize the likelihood of loss to
the Company, by permitting the Company to establish the ability of
affiliated Lessees (together with any guarantors) to pay rent by
periodically monitoring compliance with a rent coverage ratio ("Rent
Coverage Ratio"), monitor compliance with other financial guidelines
established by the Manufacturer, or require the Lessee to provide
additional security in the form of a guarantee of an Affiliate.
. Utilize a variety of other financing sources, that may include the
issuance of Units or other equity securities or debt securities, or a
combination thereof, and enter into a bank credit facility, that will be
used to leverage Properties, acquire additional Properties and for
working capital purposes. Operate with a debt to total market
capitalization ratio of not more than 50% and obtain leverage as a means
to gain positive spread on investments.
. Acquire undeveloped Properties or Properties being used for other
purposes and provide financing to a Dealer for the development of
Dealerships or Related Businesses and lease it back to the Lessees.
RISK FACTORS
An investment in the Common Shares involves various risks. Prospective
shareholders should carefully consider the matters discussed under "Risk
Factors" prior to making an investment decision regarding the Common Shares
offered hereby. These risks include:
. Dependence on the ability of Lessees to pay rent and perform their
obligations under the Leases, which ability may be affected by risks
inherent in operating Dealerships or Related Businesses, including, but
not limited to, (i) the ability of Dealers to access financing, (ii)
competitive factors, including consolidation of ownership, (iii) the
expansion or contraction of the motor vehicle retail industry, (iv)
performance of Dealers under their Franchise Agreements with
Manufacturers, (v) general factors affecting Manufacturers, including
union and labor issues, product safety issues, health and safety
regulations, environmental regulations, consumer tastes and preferences,
recalls and litigation, (vi) governmental regulation, including health,
safety and environmental regulation, and (vii) general economic factors
that affect new and used motor vehicle sales and leases;
. The lack of operating history of the Company;
. The Company has committed only 20% of the net proceeds of the Offering
(assuming the Underwriters do not exercise their over-allotment option)
to specific investments; the Company may face significant competition in
acquiring additional Properties, which may inhibit the Company's ability
to achieve its investment objectives;
7
<PAGE>
. Conflicts of interest between the Company and certain Trustees and the
potential influence of the Trustees or their Affiliates over the business
of, and decisions affecting, the Company, including, but not limited to,
(i) operation of the Company's ongoing businesses, including conflicts
associated with the tax consequences to certain Initial Sellers, which,
together with certain provisions of the Partnership Agreement, may
influence the Company's decision or ability to sell or finance, or to
prepay debt secured by, certain Properties, (ii) potential election by
the Lessee to exercise its right of first offer or option to purchase the
Properties at the end of the Fixed Term or Extended Term and negotiation
of the terms of such acquisitions, and (iii) the enforcement of the
Initial Leases or other agreements;
. The Company's limited control over the management of the Properties;
. The taxation of the Company as a regular corporation if it fails to
qualify as a REIT and the resulting decrease in funds available to pay
distributions to shareholders;
. The possibility that the consideration paid by the Company for certain
Properties acquired by the Company may exceed fair market values
estimated by other methodologies, such as third party appraisals;
. Terms of certain Franchise Agreements impose certain restrictions
relating to the sale or transfer of certain assets or Property of certain
Dealerships without the consent or waiver of Manufacturers;
. The Company's dependence on key officers and Trustees of the Company,
including Thomas D. Eckert, President and Chief Executive Officer, Scott
M. Stahr, Executive Vice President and Chief Operating Officer, Donald L.
Keithley, Executive Vice President of Business Development and David S.
Kay, Vice President and Chief Financial Officer;
. The distribution requirements for a REIT under federal income tax laws,
which may limit the Company's ability to finance future acquisitions,
developments and improvements without additional debt or equity
financing;
. The geographic concentration of the Initial Properties primarily in
suburban communities of Washington, D.C. and Philadelphia, which could
render the Company vulnerable to local economic conditions and other
local factors;
. General risks relating to commercial real estate ownership and
investment, including, but not limited to (i) the effect of economic and
other conditions on real estate values, including, those associated with
cyclical weaknesses in the real estate markets, (ii) the general lack of
liquidity of investments in real estate, (iii) competition from other
real estate investors seeking properties of the types which the Company
intends to acquire or finance, (iv) the inability of Lessees to make rent
payments, (v) the possibility that the Company may not be able to replace
existing Lessees, if necessary, or reposition properties for alternative
uses, (vi) governmental regulation, including, changes in use, zoning,
health and safety and environmental requirements, (vii) potential for
unknown or future environmental or other liabilities, and (viii)
uninsurable losses;
. Limitations on the Company's ability to sell or refinance certain
Properties;
. The ability of the Board of Trustees to change the policies of the
Company, including investment, financing and distribution policies,
without a vote of the shareholders;
. Failure by the Company to invest a significant portion of the proceeds of
this Offering in Properties within one year of closing of the Offering,
which could result in the Company acquiring real estate used by
businesses other than Dealerships or Related Businesses or investing any
unused proceeds in certain government securities that could yield lower
returns than other investments, in order to avoid registering as an
investment company and becoming subject to the requirements of the
Investment Company Act of 1940, as amended (the "Investment Company
Act");
. The potential anti-takeover effects of provisions in the Company's
Declaration of Trust and By-laws, including, among other things,
provisions generally limiting the actual or constructive ownership of
Common Shares by any one person or entity to 9.9% of the outstanding
Common Shares, unless the Board of Trustees waives that restriction,
which could deter the acquisition of control by a third party, thus
making it more difficult to effect a change in management or limiting the
opportunity for shareholders to receive a premium over the market price
for their Common Shares;
8
<PAGE>
. The potential fluctuations in market interest rates or equity markets,
which may lead prospective shareholders to demand higher yields, may
adversely affect the market price of the Common Shares or may limit the
Company's ability to raise additional equity to finance future
acquisitions, developments and improvements;
. The possible reduction of the market price of the Common Shares or
dilution on a per share basis, due to the potential future sale of
additional Common Shares or the issuance of Units as consideration for
the acquisition of Properties; and
. The absence of a prior public market for the Common Shares and the
possibility that the trading volume of the Common Shares may be limited.
9
<PAGE>
STRUCTURE OF THE COMPANY
The Company will be the sole general partner of the Operating Partnership.
The Company will contribute the proceeds of the Offering to the Operating
Partnership in exchange for Units representing approximately 75.7% of the
partnership interests in the Operating Partnership. The Company will conduct
substantially all of its business, and will hold all of its interests in the
Properties, through the Operating Partnership. As the sole general partner of
the Operating Partnership, the Company will have the exclusive power to manage
and conduct the business of the Operating Partnership, subject to certain
exceptions set forth in the Amended and Restated Agreement of Limited
Partnership of the Operating Partnership (the "Partnership Agreement"). See
"Partnership Agreement."
The following diagram depicts the ownership structure of the Company and the
Operating Partnership upon completion of the Offering and the Formation
Transactions:
[FLOW CHART APPEARS HERE]
10
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
11
<PAGE>
FORMATION TRANSACTIONS
The following transactions will be completed prior to or concurrently with
the completion of the Offering:
. FBR Asset Investment Corporation, an Affiliate of the Representative, has
agreed to acquire a number of Common Shares equal to 4.4% of the Common
Shares to be outstanding on the closing of the Offering up to a maximum
investment of $10 million in a private placement at the initial public
offering price (less underwriting discounts and commissions) (the "FBR
Offering").
. The Company will contribute the net proceeds of the Offering and the FBR
Offering to the Operating Partnership in exchange for 15,690,377 Units.
. The Initial Sellers will contribute their ownership interests in the
Initial Properties to the Operating Partnership for Units. The aggregate
number of Units issuable to the Initial Sellers or to persons designated
by such Initial Sellers (the "Designees") will be 5,048,259 (based on the
assumed initial public offering price). The Operating Partnership will
acquire certain Initial Properties subject to existing mortgage debt of
$41.2 million (the "Mortgage Debt"), which will be paid in full from the
proceeds of the Offering.
. The Company will use the proceeds of the Offering and the FBR Offering to
repay the Mortgage Debt and indebtedness of up to approximately $2.3
million to Friedman, Billings, Ramsey Group, Inc., an Affiliate of the
Representative, incurred in connection with the organization of the
Company (the "FBR Loan"), to acquire additional Properties, to pay the
expenses of the Offering and for general working capital purposes. See
"Use of Proceeds."
. Operators or their Affiliates will enter into long-term triple-net Leases
with the Company with respect to the Initial Properties.
. Messrs. Pohanka and Rosenthal, Trustees of the Company and Affiliates of
certain Initial Lessees, will each receive warrants representing the
right to acquire a number of Units equal to 2% of the Common Shares to be
outstanding on the closing of the Offering (including exercise of the
Underwriters' over-allotment option) on a fully diluted basis, at an
exercise price equal to the initial public offering price of the Common
Shares, such warrants to be exercisable beginning on the closing of the
Offering and for a period of five years thereafter (the "Dealer
Warrants").
. The Company expects to enter into a bank credit facility and to borrow
approximately $5 million prior to or the closing of the Offering, of
which approximately $2.5 million will be guaranteed by Affiliates of Mr.
Rosenthal and approximately $2.5 million will be guaranteed by Affiliates
of Mr. Sheehy.
BENEFITS TO RELATED PARTIES
The consummation of the Formation Transactions will result in benefits to
certain officers and Trustees, which include the following:
. Messrs. Pohanka and Rosenthal have agreed to serve on the Board of
Trustees of the Company.
. Because Initial Sellers affiliated with Messrs. Pohanka and Rosenthal
will receive Units as consideration for the sale of certain Initial
Properties to the Company, they will defer taxes that would otherwise be
payable upon a taxable transfer of the Initial Properties. The Company
will be prevented in certain instances, due to adverse tax consequences
for certain Initial Sellers, from selling, financing or prepaying debt
secured by certain Initial Properties or guaranteed by certain Initial
Sellers. See "Structure and Formation of the Company--Lockout
Provisions."
12
<PAGE>
. Messrs. Pohanka and Rosenthal will each receive Dealer Warrants. See
"Related Transactions--Transactions with Trustees--Dealer Warrants."
. The Company has entered into employment agreements with Thomas D. Eckert,
Scott M. Stahr, Donald L. Keithley and David S. Kay providing for annual
salaries of $350,000, $225,000, $200,000 and $150,000, respectively. See
"Management--Executive Compensation."
. Thomas D. Eckert, Scott M. Stahr, Donald L. Keithley and David S. Kay
will be granted options pursuant to the Plan to acquire a number of
Common Shares and Units equal to 3%, 1.625%, .75% and 1.25%,
respectively, of the Common Shares to be outstanding on the closing of
the Offering (including exercise of the Underwriter's over-allotment
option) on a fully diluted basis at the initial public offering price
pursuant to the Company's Plan. See "Management--Incentive Plan."
. Beginning two years after issuance of Units, each Initial Seller will
have the right to redeem its Units for cash, or at the option of the
Company, Common Shares on a one-for-one basis (subject to certain
limitations). See "Partnership Agreement--Limited Partner Redemption
Rights."
. The Initial Properties owned by Affiliates of Messrs. Pohanka or
Rosenthal, will be leased back to Affiliates of Messrs. Pohanka or
Rosenthal who will continue to control the operations of the Dealership
or Related Business. See "Business of the Company and Properties-- The
Initial Properties, Leases and Dealerships."
13
<PAGE>
SUMMARY SELECTED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth summary selected historical and pro forma
financial information for the Company. The unaudited pro forma operating
information is presented as if the Formation Transactions had occurred as of
the beginning of the period indicated and therefore incorporates certain
assumptions that are included in the Company's Unaudited Pro Forma Financial
Statements. The unaudited pro forma balance sheet information is presented as
if the Formation Transactions had occurred on October 20, 1997. The unaudited
pro forma information does not purport to represent what the Company's
financial position or results of operations actually would have been had the
Formation Transactions, in fact, occurred on such date or at the beginning of
the period indicated, or to project the Company's financial position or results
of operations at any future date or for any future period. The historical and
unaudited pro forma financial information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
PRO FORMA FOR THE
PERIOD FROM PRO FORMA
JANUARY 1, 1997 YEAR ENDED
THROUGH DECEMBER 31,
OCTOBER 20, 1997 1996
----------------- ------------
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Rental income(1)............................... $ 11,243 $12,859
General and administrative expenses(2)......... 3,063 3,500
Depreciation(3)................................ 1,790 2,046
Minority interest(4)........................... 1,470 1,683
Interest expense, net.......................... 350 400
Net earnings................................... 4,570 5,230
Net earnings per share......................... $ 0.29 $ 0.33
Weighted average Common Shares outstanding(5).. 15,690 15,690
<CAPTION>
PRO FORMA
FOR THE
PERIOD FROM PRO FORMA
JANUARY 1, 1997 YEAR ENDED
THROUGH DECEMBER 31,
OCTOBER 20, 1997 1996
----------------- ------------
(UNAUDITED)
<S> <C> <C>
OTHER FINANCIAL DATA:
Net earnings of the Operating Partnership...... $ 6,040 $ 6,913
Add: Depreciation.............................. 1,790 2,046
Funds from Operations of the Operating
Partnership (6)............................... 7,830 8,959
Funds from Operations of the Company(6)........ 5,927 6,781
<CAPTION>
PRO FORMA HISTORICAL
OCTOBER 20, OCTOBER 20,
1997 1997
----------------- ------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Real estate owned, at cost..................... $116,922 $ --
Total assets................................... 299,176 --
Debt outstanding under line of credit.......... 5,000 --
Minority interest.............................. 71,348 --
Total shareholders' equity..................... 221,757 --
</TABLE>
14
<PAGE>
- --------
(1) Represents rental income from the Initial Lessees recorded in accordance
with the terms of the Initial Leases as if all Initial Properties had been
in operation for the entire period. The Company will lease the Initial
Properties to the Initial Lessees under the Initial Leases.
(2) Represents management's estimates of general and administrative expenses.
(3) Represents depreciation of the building and improvements allocation of the
Initial Properties over a 20-year period.
(4) Represents 24.3% of the Operating Partnership's net earnings.
(5) Weighted average Common Shares outstanding include Common Shares sold in
the Offering as if such Common Shares were outstanding for the entire
period.
(6) The Company believes Funds from Operations is helpful to shareholders as a
measure of the performance of an equity REIT because, along with cash flows
from operating activities, investing activities and financing activities,
it provides shareholders with an understanding of the ability of the
Company to incur and service debt and make capital expenditures. Funds from
Operations is calculated as net earnings (loss) (computed in accordance
with GAAP), excluding significant non-recurring items, gains (or losses)
from debt restructuring and sales of property, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. The Company computes Funds from Operations
in accordance with standards established by the White Paper on Funds from
Operations approved by the National Association of Real Estate Investment
Trusts ("NAREIT") Board of Governors in March 1995, which may differ from
the methodology for calculating Funds from Operations utilized by other
equity REITs, and, accordingly, the Company's Funds from Operations may not
be comparable to the Funds from Operations of such other REITs. Funds from
Operations should not be considered as an alternative to net earnings
(computed in accordance with GAAP) as an indication of the Company's
financial performance or to cash flows from operating activities (computed
in accordance with GAAP) as a measure of the Company's liquidity, nor is it
indicative of funds available to fund the Company's cash needs, including
its ability to make distributions.
15
<PAGE>
DISTRIBUTIONS
The Company plans to pay regular quarterly distributions to its shareholders
of at least 95% of its taxable income each year so as to qualify for the
benefits accorded to a REIT under the Code. See "Description of Shares of
Beneficial Interest" and "Partnership Agreement."
TAX STATUS OF THE COMPANY
The Company will elect to be taxed as a REIT under Sections 856-859 of the
Code, commencing with its taxable year ending December 31, 1998. A REIT is
subject to a number of organizational and operational requirements, including a
requirement that it currently distribute at least 95% of its REIT taxable
income each year, determined without regard to the deduction for dividends paid
and by excluding any net capital gains. If the Company qualifies for taxation
as a REIT, the Company generally will not be subject to federal income tax at
the corporate level on income it distributes currently to its shareholders. If
the Company fails to qualify as a REIT for federal income tax purposes in any
taxable year, the Company will be subject to federal income tax (including any
alternative minimum tax) on its taxable income at regular corporate rates and
distributions to the shareholders in any such year will not be deductible by
the Company. See "Risk Factors--Adverse Consequences of Failure to Qualify as a
REIT; Other Tax Liabilities" and "Certain Federal Income Tax Considerations--
Failure to Qualify" for a more detailed discussion of the consequences of the
failure of the Company to qualify as a REIT for federal income tax purposes.
The Company may be subject to certain federal, state and local taxes on its
income and property notwithstanding its qualification for federal income
taxation as a REIT.
THE OFFERING
Common Shares Offered
Hereby...................... 15,000,000
Common Shares to be
Outstanding after the
Offering................... 15,690,377(1)
Use of Proceeds............. For repayment of Mortgage Debt, the FBR Loan,
acquisition of Properties and general working
capital purposes. See "Use of Proceeds."
Proposed Nasdaq Symbol...... CARS
- --------
(1) Includes the Common Shares being offered hereby and the Common Shares to be
acquired by FBR Asset Investment Corporation. Excludes 5,048,259 Common
Shares reserved for issuance upon redemption of the Units, 2,191,915 Common
Shares and Units reserved for issuance pursuant to the Plan, of which
1,785,945 Common Shares and Units have been granted to executive officers
of the Company, 1,095,957 Common Shares issuable upon exercise of the
Underwriting Warrants, and 1,095,957 Common Shares issuable upon conversion
of Units issuable upon exercise of the Dealer Warrants (in each case
assuming exercise of the Underwriters' over-allotment option in full). See
"Structure and Formation Transactions," "Management--Incentive Plan,"
"Related Transactions" and "Partnership Agreement."
16
<PAGE>
RISK FACTORS
In addition to the other information presented in this Prospectus,
prospective shareholders should carefully consider the following matters
before purchasing Common Shares in the Offering. Each of these factors could
adversely affect the ability of the Company to make expected distributions to
shareholders.
This Prospectus contains "forward-looking statements" which represent the
Company's expectations or beliefs, including, but not limited to, statements
concerning industry performance, the acquisitions, financing or leasing of
Properties, the Company's operations, performance, financial condition, plans,
strategies, growth and prospects. Any statements contained in this Prospectus
that are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the generality of the foregoing, the use of
forward-looking terminology such as "may," "will," "could," "should,"
"expect," "anticipate," "estimate," or "continue" or the negative thereof or
other variations thereon or comparable terminology. The cautionary statements
set forth under the caption "Risk Factors" and elsewhere in the Prospectus
identify important factors with respect to such forward-looking statements,
including certain risks and uncertainties, that could cause actual results to
differ materially from those in such forward-looking statements. These
statements by their nature involve substantial risks and uncertainties,
certain of which are beyond the Company's control, and actual results may
differ materially depending on a variety of important factors, including those
described below in this "Risk Factors" section and elsewhere in this
Prospectus.
THE COMPANY IS DEPENDENT UPON DEALERS GENERATING SUFFICIENT REVENUES FROM
THEIR OPERATIONS TO PERMIT THE LESSEES TO PAY RENT AND FULFILL THEIR OTHER
OBLIGATIONS UNDER THE LEASES
Dependence on Lessees. The Lessees of the Properties will either be the
Dealers or Affiliates of those Dealers. None of the Initial Leases with
affiliated Dealers are cross-defaulted with each other. A Lessee may or may
not generate sufficient cash flow to be able to perform its obligations under
its Lease. Any Lessee may change or terminate its business, or engage other
management to operate a Property. The Company intends to minimize the adverse
impact of revenue fluctuations, by (i) when possible, entering into Leases
with multi-site Dealers selling the products of more than one Manufacturer,
(ii) negotiating lease provisions that permit the Company to establish the
ability of affiliated Lessees (together with any guarantors (the
"Guarantors")) to pay rent by periodically monitoring compliance with a Rent
Coverage Ratio and compliance with other financial guidelines established by
the Manufacturer, or (iii) requiring certain Lessees to provide additional
security in the form of guaranties of Affiliates (the "Guaranties"). There is
no assurance that the conditions imposed on the Lessees will minimize the risk
of default. Nonperformance by the Lessees or Guarantors could adversely affect
the ability of the Company to pay or maintain distributions or otherwise
operate its business. The failure of a Lessee to perform under a Lease could
require the Company to declare a default, repossess the Property, find another
tenant for the Property or resell the Property.
Dependence on Guarantors. The Company will enter into separate Initial
Leases with each Dealer using an Initial Property. Certain Initial Leases will
be guaranteed by Affiliates of the Initial Lessees. The Guaranties will be of
payment and not of collection. There is no assurance that upon a default any
or all of the Guarantors will perform under a Guaranty. In the event of a
default under a Guaranty, the Company's remedy will be limited to seeking
payment from such Guarantor. Failure of a Guarantor to perform under a
Guaranty will not constitute a default under the Initial Lease pursuant to
which a Guarantor is an Initial Lessee. Because Messrs. Pohanka and Rosenthal
are Trustees of the Company, the Company's decision whether or not to pursue
payment from certain Guarantors could be influenced by Mr. Pohanka or Mr.
Rosenthal in his capacity as a Trustee. See "Risk Factors--Conflicts of
Interest."
The Company Has No Rights Under, or Control Over, Franchise Agreements. In
general, a Manufacturer enters into a Franchise Agreement directly with the
Dealer, who may or may not be the Lessee of the Property. Upon expiration or
termination of a Lease, for default or otherwise, the Company will have no
rights under the relevant Franchise Agreements with the Manufacturer. Any
rights under the Franchise Agreements will accrue to the signatories to those
agreements. In addition, upon termination or non-renewal of any Franchise
Agreement,
17
<PAGE>
the Company will not have any rights to require the Manufacturer or the Lessee
to continue to operate a Dealership at a Property. Although a Lessee may be
obligated under a Lease to continue to pay rent and perform its other
obligations, there is no assurance that the Lessee will do so. If an Initial
Lessee moves a franchised Dealership or stops operating a franchised
Dealership from a Property, the Initial Leases provide that the Initial Lessee
has 24 months in which to replace or reopen the Dealership. The Company may
enter into similar Lease provisions with other Lessees.
Effect of Bankruptcy of Lessees. Any or all of the Lessees (or Guarantors)
may seek the protection of the federal Bankruptcy Code, which could result in
delays in rent payments or in the rejection and termination of a Lease and
thereby cause a reduction in the Company's cash flow and the amounts available
for distributions to its shareholders. No assurance can be given that any
Lessee (or Guarantor) will not seek protection under the Bankruptcy Code in
the future or, if any Lessee (or Guarantor) does seek such protection, that it
will assume its Lease (or Guaranty) and continue to make rent payments in a
timely manner. If any Lease (or Guaranty) is not assumed following bankruptcy
the Company's cash flow and the amounts available for distribution to its
shareholders may be adversely affected.
If a Lessee filed bankruptcy, it initially would have at least 60 days to
decide whether to assume the Lease. That period could be extended by order of
the Bankruptcy Court. During the period before the Lease was assumed or
rejected, the Lessee would not be required to pay amounts due under the Lease
for the period before the bankruptcy was filed. If the Lease was assumed, the
Lessee would be required to pay all amounts then due under the Lease, but
would not be required to pay interest on those amounts.
If a Lease was rejected by a bankrupt Lessee, the rejection would be treated
as a breach of the Lease and the Company would have a claim for damages
resulting from the breach. However, the claim would be limited to an amount
equal to the rent reserved under the lease, without acceleration, for the
greater of one year or 15% (but not more than three years) of the remaining
term of the Lease, plus rent already due but unpaid. In addition, the
Company's rejection claim ordinarily would be treated as a general unsecured
claim, and would be paid only to the extent that funds were available to pay
general unsecured claims against the Lessee. There can be no assurance that
any such payment would be sufficient to pay the amounts due under the lease.
Resale or Re-leasing of Properties. The failure of a Lessee to perform under
a Lease could require the Company to declare a default, repossess the
Property, find another tenant for the Property or resell the Property. There
is no assurance that the Company will be able to lease such Property to a
Dealer, or to successfully reposition the Property for other uses, or if a
replacement tenant or a different use would support the same or higher level
of lease payments. Moreover, there can be no assurance that any individual
Lessee will elect to extend a Lease upon expiration of its Fixed Term, which
would also force the Company to find a suitable replacement tenant.
The Company may or may not be able to sell a Property if or when the Company
decides to do so. The real estate market is affected by many factors, such as
general economic downturns, availability of financing, interest rates and
other factors, including supply and demand, that are beyond the control of the
Company. The Company cannot predict whether it would be able to sell any
Property for the price or on the terms set by the Company, or whether any
price or other terms offered by a prospective purchaser would be acceptable to
the Company. The Company cannot predict the length of time needed to find a
willing purchaser and to close the sale of a Property. The number of
competitive Properties operated as Dealerships or Related Businesses in a
particular area could have a material adverse effect on the Company's ability
to lease a Property in the event of loss of a Lessee.
The Company may not be able to sell a Property as is. The Company may be
required to expend funds to correct defects, such as defects related to the
environment, health or safety or maintenance or repair. The Company may also
be required to make improvements before a Property can be sold. There is no
assurance that the Company will have funds available to correct defects or
make improvements. Furthermore, the expenditure of funds to correct defects or
make improvements may adversely affect the funds available for investment by
the Company or Actual Cash Available for Distribution to shareholders.
18
<PAGE>
If the Property is not occupied or if rent is not being paid or is being
paid in an amount that is insufficient to cover operating expenses, the
Company could be required to expend funds with respect to that Property,
including expenses relating to taxes, insurance, utilities and maintenance of
the Property. In connection with the acquisition of a Property, the Company
may agree on restrictions that prohibit the sale of that Property for a period
of time or impose other restrictions, such as a limitation on the amount of
debt that can be placed or repaid on that Property. Such provisions would
restrict the ability of the Company to resell or re-lease a Property. See "--
The Tax Consequences of Company Acquisitions, Financings or Sales of
Properties May Impact Certain Initial Sellers More Adversely."
Although the Company may grant a Lessee a right of first offer or option to
purchase a Property there is no assurance that the Lessee will exercise that
right or that the price offered by the Lessee in the case of a right of first
offer will be adequate. Furthermore, if a Lessee affiliated with a Trustee
exercises its right of first offer or option to purchase a Property, such
Trustee can influence the Company's decision to sell the Property.
Uninsurable Losses. Each Lease requires the Lessee to maintain insurance on
the Properties and insure against customary risks, such as fire, vandalism and
malicious mischief, extended coverage perils, physical loss perils, commercial
general liability, flood (when the Property is located in whole or in material
part in a designated flood plain area) and workers' compensation insurance.
There are, however, certain types of losses (such as from environmental
events, pollution, hurricanes, floods, earthquakes or wars) that may be either
uninsurable or not economically insurable. In addition, there is no assurance
that material losses in excess of insurance proceeds will not occur. Although
the Lease requires the Lessee to restore the Properties substantially to the
condition it was in prior to the loss, should the Lessee fail to restore the
Property the Company could lose both its capital invested in, and anticipated
profits, from such Properties. See "Business of the Company and Properties--
The Initial Leases, Properties Leases and Dealerships Leases" and "Business of
the Company and Properties--Insurance Coverage."
GENERAL RISKS ASSOCIATED WITH OPERATING DEALERSHIPS AND RELATED BUSINESSES
Dependence on Specific Industry. The Company's strategy is to concentrate on
acquisitions and the financing of the development of Properties used in the
operation of Dealerships and Related Businesses. As a result, the Company will
be subject to risks inherent in investments in that industry. The effects on
Actual Cash Available for Distribution to shareholders resulting from a
downturn of businesses within the industry will be more pronounced than if the
Company had diversified its investments. The success of the operations of a
Dealership also depends on general economic and other factors. The factors
affecting motor vehicle sales include rates of employment, income growth,
interest rates, other national and local conditions, automotive innovations
and general consumer sentiment.
Dependence on Manufacturers. Dealers operate Dealerships pursuant to written
Franchise Agreements with Manufacturers. The ability of each Lessee to pay
rent and perform its other obligations under a Lease will be dependent to a
significant extent on its relationship with the Manufacturer on whom it is
dependent for its inventory of new motor vehicles and parts. A reduction in
the availability of motor vehicles or parts, and certain popular models in
particular, could have an adverse effect on sales. In addition, the financial
condition of the Manufacturer, marketing programs and expenditures, vehicle
design, production capabilities and management of the Manufacturer affect
sales. Events such as strikes and other labor actions by unions, or negative
publicity concerning a particular Manufacturer or vehicle model, product
recalls and litigation also affect sales. Many of these factors are beyond the
control of the Company and could, at one time or another, negatively impact a
Lessee and therefore the Company.
The Dealers affiliated with the Initial Lessees generally operate
Dealerships that sell the products of more than one Manufacturer. The sales
mix of makes and models of motor vehicles that account for a material portion
of the sales of such Dealers changes periodically, among other things, as a
result of changes in consumer taste,
19
<PAGE>
the aging of certain models, the redesign of certain models or the
introduction of new models. Therefore, sales of the makes or models of one
Manufacturer today may not reflect the level of future sales of that
Manufacturer's products. Although a Lessee's dependence on any one
Manufacturer may be lessened by its relationship with a number of different
domestic and import Manufacturers, adverse conditions affecting some or all of
the Manufacturers that account for a significant portion of sales could
materially adversely affect a Lessee's ability to pay rent (or if a lease is
guaranteed, an affiliated Guarantor's ability to honor its Guaranty) or such
Lessee's ability to otherwise continue as an occupant of an Initial Property.
Franchise Agreements. Manufacturers exercise a great degree of control over
Dealerships, and the Franchise Agreements provide for termination or non-
renewal for a variety of causes. The Company believes that each Initial Lessee
is in compliance in all material respects with all of their Franchise
Agreements. These Franchise Agreements generally expire at various times
between one and five years, although some Franchise Agreements have no
specific expiration date and continue in effect unless terminated under
certain limited circumstances. The Company is not aware of any refusal by a
Manufacturer to renew a Franchise Agreement with Affiliates of an Initial
Lessee, and has no reason to believe that each Initial Lessee will not be able
to renew all of its Franchise Agreements upon expiration thereof. There can be
no assurance, however, that any of the Franchise Agreements will be renewed or
that the terms and conditions of such renewals will be favorable to the
Dealer. If a Manufacturer terminates or declines to renew one or more
Franchise Agreements for Dealerships operated on any Property, such action
could have a material adverse effect on the ability of the Lessee to pay rent
and perform its other obligations and, therefore, on the ability of the
Company to pay distributions. Actions taken by Manufacturers to exploit their
bargaining position in negotiating the terms of such renewals or otherwise
could also have a material adverse effect on the Company by adversely
affecting the ability of such Lessee to pay rent, any Guarantor to honor its
Guaranty or the Lessee's ability to otherwise continue as an occupant of such
Property.
Certain Franchise Agreements also contain restrictions on the sale or
transfer of assets or real property necessary for operation of the
Dealerships, or may contain rights of first refusal in favor of certain
Manufacturers to purchase those assets or real property. There are no
assurances that certain Manufacturers will consent to the sale of, or waive
prior rights to purchase, certain Properties that the Company may negotiate to
acquire, when such consents or waivers are required. Failure to receive all or
some of the required consent or waiver could have a materially adverse effect
on the ability of the Company to acquire additional Properties. See "Business
of the Company and Properties--Franchise Agreements."
Mature Industry and Cyclicality. The United States motor vehicle industry
generally is considered a mature industry in which minimal growth is expected
in unit sales of new vehicles. The motor vehicle industry is cyclical and
historically has experienced periodic downturns, characterized by oversupply
and weak demand. Many factors affect the industry, including general economic
conditions and consumer confidence, the level of discretionary personal
income, interest rates and credit availability.
Dealership Competition. The operation of Dealerships and Related Businesses
is a highly competitive undertaking. Dealers' compete with other Dealerships
selling the same or similar makes of new and used vehicles, Dealers offering
other models, market buyers and sellers of used vehicles, service center
chains and independent service and repair shops, some or all of which may
offer motor vehicles, services or repairs at a lower price, provide faster
service or offer faster delivery than Dealerships or Related Businesses
operated by Affiliates of the Lessees. These competitors may be larger and
have greater financial and marketing resources than Affiliates of the Lessees.
In addition, certain Manufacturers have publicly announced that they may
directly enter the retail market in the future which could have a material
adverse effect on some or all of the Affiliates of Lessees. In addition, the
industry is undergoing consolidation, as Dealers who represent single or a
limited number of Manufacturers are acquired by Dealers that represent many
Manufacturers.
Imported Vehicles. Certain motor vehicles retailed by Dealers, as well as
certain major components of vehicles retailed by Dealers, are imported.
Accordingly, the revenues generated by those Dealerships could be
20
<PAGE>
adversely affected by import restrictions on certain jurisdictions, export
restrictions by certain jurisdictions, and could be dependent to some extent
upon general economic conditions in and political relations with foreign
countries, including Japan. Recently, Congress has been considering the United
States' trade relations with Japan, and actions by Congress could restrict the
importation of motor vehicles from Japan. Additionally, fluctuations in
currency exchange rates may adversely affect sales of motor vehicles produced
by Manufacturers of imports. Imports into the United States may also be
adversely affected by increased transportation costs.
PURCHASE PRICES OF PROPERTIES HAVE NOT BEEN BASED ON INDEPENDENT APPRAISALS
AND AS A RESULT THE MARKET CAPITALIZATION OF THE COMPANY MAY EXCEED THE FAIR
MARKET VALUE OF THE COMPANY'S PROPERTIES IF DETERMINED BY APPRAISAL
The valuations of the Company's Properties have not, and in the future may
not, be determined by independent third-party appraisals. Therefore, the
consideration being paid by the Company for certain Properties may exceed the
fair market value of such Properties if determined by third-party appraisals.
The Company considers several methods of valuation including the review and
analyses of comparable properties and leases, discounted cash flow
calculations, valuing alternative uses of the Property, and evaluating the
financial strength of prospective Lessees. To the extent that Properties may
be purchased from Sellers whose affiliates hold positions with the Company,
including certain Trustees, the use of such valuation methodologies, and the
basis of negotiation of the purchase price, for such Properties may be
susceptible to conflict of interests. In certain cases, the Operating
Partnership may assign a value to Units for the purpose of determining the
number of Units to be issued in an acquisition below the market price at which
the Common Shares have been trading.
Furthermore, management believes it is appropriate to value the Company as
an operating enterprise rather than at the values that could be obtained from
a liquidation of the Company or of individual Properties. Accordingly, the
valuation of the Company has been determined based on a capitalization of the
Company's estimated Actual Cash Available for Distribution, and the other
factors set forth in the section captioned "Underwriting." See "Structure and
Formation of the Company--Determination and Valuation of Ownership Interests"
and "Underwriting." Because the liquidation value of the Company may be less
than the value of the Company as a going concern, shareholders may suffer a
loss in the value of their Common Shares if the Company is required to sell
the Properties or any other assets.
THE COMPANY'S LACK OF OPERATING HISTORY; NO ASSURANCE THAT THE COMPANY WILL BE
ABLE TO GENERATE SUFFICIENT REVENUE TO MAKE OR SUSTAIN DISTRIBUTIONS TO
SHAREHOLDERS
The Company has been recently organized and has no operating history. There
can be no assurance that the Company will be able to generate sufficient
revenue from operations to pay operating expenses of the Company and make or
sustain distributions to shareholders. See "Distributions." The Company also
will be subject to the risks generally associated with the formation of any
new business. The Company's management has extensive experience in the real
estate industry but has limited experience operating a real estate investment
trust and working together.
The Company's ability to make and sustain cash distributions is based on
many factors, including the ability of the Company to make additional
acquisitions, investment of the proceeds of this Offering, ability to
negotiate favorable Lease terms, the Lessee's performance under Leases and
anticipated operating expense levels, which may not prove accurate and actual
results may vary substantially from estimates. Some of the factors are beyond
the control of the Company, and a change in any such factor could affect the
Company's ability to pay future distributions. No assurance can be given as to
the Company's ability to pay or maintain distributions. Neither is there an
assurance that the level of distributions will increase over time, contractual
increases in rent under the leases of the Properties or the receipt of rental
revenue in connection with future acquisitions of Properties will increase the
Company's Actual Cash Available for Distribution to shareholders. However, in
the event of a default or a lease termination, there could be a decrease or
cessation of rental payments and thereby a decrease in Actual Cash Available
for Distribution. See "Distributions."
21
<PAGE>
THERE CAN BE NO ASSURANCE THAT THE COMPANY WILL COMPLETE ANY ADDITIONAL
ACQUISITIONS OF PROPERTIES OR THAT THE COMPANY WILL NOT BE TREATED AS AN
INVESTMENT COMPANY
Apart from the Initial Properties, which the Company expects to acquire
contemporaneously with the closing of the Offering, the Company has not
completed any acquisitions, financings or dispositions of Properties. There
can be no assurances that additional acquisitions of Properties or
opportunities to finance the development of Properties on terms that meet the
Company's investment criteria will be available to the Company or that the
Company will be successful in capitalizing on such opportunities.
The Company has commitments to invest only 20% of the net proceeds of the
Offering (assuming the Underwriters do not exercise their over-allotment
option). The Company cannot predict whether it will make future acquisitions
for cash or Units or any combination thereof. In order to maintain the
Company's exemption from regulation under the Investment Company Act, the
Investment Company Act requires, among other things, that the Company be
primarily engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate, within one year of
the closing of the Offering. If the Company does not invest a significant
portion of the proceeds of this Offering in Properties within one year of the
closing date, the Company may decide to invest in real estate assets used by
businesses other than Dealerships or Related Businesses. Alternatively, the
Company may temporarily invest any unused proceeds in certain government
securities that could yield lower returns than other investments in order to
avoid registering as an investment company and becoming subject to the
requirements of the Investment Company Act.
RISK OF LEVERAGE
The Company intends to use leverage, generally with a ratio of debt-to-total
market capitalization of not more than 50%. This strategy is subject to
reevaluation and modification by the Board of Trustees. If the Company
modifies this strategy to permit a higher degree of leverage and incurs
additional indebtedness, debt service requirements would increase accordingly,
and such an increase could adversely affect the Company's financial condition
and results of operations. In addition, increased leverage could increase the
risk of default by the Company on its debt obligations, with the potential for
loss of the Properties secured thereby, cash available for distribution, and
asset values, of the Company.
In determining an appropriate level of leverage, the Company will utilize
its market capitalization rather than the aggregate book value of its assets.
The Company has chosen to use market capitalization because it believes that
the book value of its assets (which is primarily the historic cost of real
property less depreciation) may not always accurately reflect its ability to
borrow and to meet debt service requirements. The market capitalization of the
Company, however, is more variable than book value, and does not necessarily
reflect the fair market value of the underlying assets of the Company at all
times. Although the Company will consider factors other than market
capitalization in making decisions regarding the incurrence of debt (such as
the purchase price of Properties to be acquired with debt financing, the
estimated market value of the Properties to be financed, and the ability of
particular Properties and the Company as a whole to generate cash flow to
cover expected debt service and to make distributions), there can be no
assurance that management decisions based on the ratio of debt-to-total market
capitalization (or to any other measures of asset value) will not adversely
affect the expected level of distributions to shareholders.
THE COMPANY WILL NOT EXERCISE CONTROL OVER THE MANAGEMENT OR MAINTENANCE OF
THE PROPERTIES
The Lessees will control the management or maintenance of the Properties
under the Leases. The Leases will generally require that the Lessees operate
the Properties in an efficient and professional manner and maintain each
Property in good order, repair and appearance. During the terms of the Leases,
the Company will not have the authority to require any Lessees to operate the
Properties in a particular manner or to govern any particular aspect of their
operation except as set forth in the Leases. Thus, even if the Company
believes a Lessee is operating a Property in a manner adverse to the Company's
interests, the Company will not be able to require such Lessee to change its
method of operation. The Company is limited to seeking redress only if a
Lessee violates the terms of the Lease, in which case the Company's primary
remedy is to seek to enforce the Lease or terminate the Lease or, in certain
circumstances, proceed under a Guaranty, if any, and seek to recover damages
from such Lessee or to the extent applicable, any Guarantor of such Lease.
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CONFLICTS OF INTEREST AMONG THE COMPANY AND CERTAIN TRUSTEES
The following descriptions set forth the principal conflicts of interest,
including the relationships through which they arise, and the policies and
procedures implemented by the Company to address those conflicts.
Ability of Certain Trustees to Influence the Company. Messrs. Pohanka and
Rosenthal, each an Affiliate of an Initial Lessee, have agreed to join the
Board of Trustees immediately prior to the effective date of the Offering.
Upon completion of the Offering, Affiliates of Mr. Pohanka will own a 5.8%
interest in Units of the Operating Partnership and Affiliates of Mr. Rosenthal
will own a 16.5% interest in Units of the Operating Partnership, which may be
redeemed for ,Common Shares (subject to certain limitations). In addition,
Messrs. Pohanka and Rosenthal will be granted the Dealer Warrants exercisable
beginning on the closing of the Offering and continuing for a period of five
years. See "Related Transactions--Transactions with Trustees-- Dealer
Warrants." Messrs. Pohanka and Rosenthal, as Trustees, will be in a position
to exercise influence over the operations and affairs of the Company.
Initial Sale. The terms of the sale of certain Initial Properties and the
Initial Leases with Affiliates of Messrs. Pohanka and Rosenthal may be more
advantageous with respect to their Properties than the terms the Company will
attempt to negotiate with Sellers of future Properties.
Terms of Leases. To the extent that Initial Lessees affiliated with the
Trustees exercise their rights to extend the Initial Lease for a second
Extended Term, the Initial Lessees will be required to negotiate a new Base
Annual Rent based on fair market value at the time of exercise of the second
Extended Term. The Trustees, to the extent they continue to sit on the Board,
may influence those negotiations and the terms of any such agreement. In
addition, the Trustees can influence the decision whether or not to take
action against an Initial Lessee or Guarantor affiliated with a Trustee in the
event of a default. The terms of any related party agreement or the
declaration of any default will require the authorization of a majority of the
disinterested Trustees of the Company. See "The Company is Dependent Upon
Dealers Generating Sufficient Revenues From Their Operations to Permit the
Lessees to Pay Rent and Fulfill Their Other Obligations Under the Leases--
Dependence on Guarantors."
Ability of Certain Trustees and Their Affiliates to Influence the Sale or
Refinancing of the Initial Properties. The Initial Lessees who are Affiliates
of certain Trustees have entered into Initial Leases that grant certain rights
to the Initial Lessees to repurchase the Initial Properties at such time as
the Company shall determine to sell an Initial Property and upon expiration of
the Fixed Term or the Extended Term of the Initial Lease. Messrs. Pohanka or
Rosenthal could influence the Company's decision to sell, and the terms of
sale of, any Initial Property to an affiliated Initial Lessee. These Initial
Lessees could experience different and more adverse tax consequences compared
to those experienced by shareholders or other holders of Units upon the sale
of, or reduction of mortgage indebtedness on, certain Initial Properties.
While the Company, as the sole general partner of the Operating Partnership,
has the exclusive authority to determine whether and on what terms to sell or
finance certain Properties, such parties may have different objectives
regarding the appropriate pricing and timing of any sale of, or reduction of
mortgage indebtedness on, such Properties. Affiliated Trustees of the Company
could influence the Company not to sell particular Properties, or not to incur
additional, or conversely, not to pay off outstanding, indebtedness on
particular Initial Properties, even though such sales or financing might
otherwise be financially advantageous to the Company and its shareholders.
Pursuant to the lock-out provisions, the Company may not sell (except in
certain events, including certain transactions that would not result in the
recognition of any gain for tax purposes), or may be required to maintain
certain debt levels, for periods ranging from zero to seven years on certain
Initial Properties. Thus, the lock-out provisions materially restrict the
Company from selling or otherwise disposing of or refinancing such Initial
Properties. The lock-out provisions apply even if it would otherwise be in the
best interests of the shareholders for the Company to sell one or more of such
Initial Properties, reduce the outstanding indebtedness with, respect to any
of such Initial Properties or not refinance such indebtedness on a nonrecourse
basis at maturity, or increase the amount of indebtedness with respect to such
Initial Properties. Such possible future limitations, together with the lock-
out provisions, may restrict the ability of the Company to sell substantially
all of its assets, even if such a sale would be in the best interests of its
shareholders. See "Structure and Formation of the Company."
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The lock-out provisions could impair the ability of the Company to take
actions during the lock-out period that would otherwise be in the best
interests of the shareholders and, therefore, may have an adverse impact on
the value of the Common Shares (relative to the value that would result if the
lock-out provisions did not exist). In particular, the lock-out provisions
could preclude the Company from participating in certain major transactions
that could result in a disposition of the Company's or a change in control of
the Company even though that disposition or change in control might be in the
best interests of the shareholders.
DEPENDENCE ON KEY PERSONNEL
The loss of the services of Thomas D. Eckert, the Company's President and
Chief Executive Officer, Scott M. Stahr, the Company's Executive Vice
President and Chief Operating Officer, Donald L. Keithley, the Company's
Executive Vice-President of Business Development, or David S. Kay, the
Company's Vice President and Chief Financial Officer of the Company, could
have a material adverse effect on the Company, its operations and its business
prospects. See "Management--Employment Agreements." The Company's success also
depends upon its ability to attract and maintain qualified personnel.
GEOGRAPHIC CONCENTRATION OF THE INITIAL PROPERTIES IN CERTAIN MARKETS RENDERS
THE COMPANY VULNERABLE TO LOCAL ECONOMIC CONDITIONS
The Company's revenues and the value of the Initial Properties may be
affected by a number of factors, including the local economic climate (which
may be adversely impacted by business layoffs or downsizing, industry
slowdowns, changing demographics and other factors). In addition, local
competitive conditions will affect the performance of the Dealerships and
Related Businesses. There can be no assurance that the Company will be able to
expand geographically, or that any such expansion will adequately insulate it
from the adverse effects of local or regional economic conditions. See
"Business of the Company and Properties--Strategy."
GENERAL REAL ESTATE INVESTMENT RISKS
General Risks. Real property investments are subject to varying degrees of
risk. The yields available from equity investments in real estate depend in
large part on the amount of rental income earned and capital appreciation
generated, as well as property operating and other expenses incurred. If the
Company's Properties do not generate revenues sufficient to meet operating
expenses the Company may have to borrow amounts to cover fixed costs, and the
Company's Actual Cash Available for Distribution may be adversely affected.
The Leases require the Lessees to maintain the Properties and to return the
Properties to the Company at the end of the Lease term in good condition,
normal wear and tear excepted. The Company intends to collect one month's rent
as a security deposit from each Lessee. If the Lessee does not return the
Property to the Company in good condition, there is no assurance that the
security deposit will be sufficient to restore a Property, in which event the
Company would be required to expend its own funds to do so, which could be
significant.
Real Estate Related Taxes. Certain local real property tax assessors may
seek to reassess certain of the Properties as a result of the Formation
Transactions or future acquisitions of such Properties. The Leases permit the
Company to pass through such increases to the Lessees for payment but there is
no assurance that renewal Leases or future Leases will be negotiated on the
same basis.
Operating Expenses. The Properties will be subject to operating risks common
to commercial real estate in general, any or all of which may adversely affect
the Company. The Properties will be subject to increases in tax rates, utility
costs, operating expenses, insurance costs, repairs and maintenance and
administrative expenses. While the Initial Properties will be leased on a
triple net basis, renewals of Leases or future Leases may not be negotiated on
that basis, in which event the Company will have to pay those costs. If the
Company is unable to lease Properties on a triple-net basis or if the Lessees
fail to pay required tax, utility and other impositions, the Company could be
required to pay those costs which could adversely affect funds available for
future acquisitions or the Company's Actual Cash Available for Distribution.
Risks Associated With Illiquidity of Real Estate. Equity real estate
investments are relatively illiquid and therefore may tend to limit the
ability of the Company to react promptly to changes in economic or other
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conditions. In addition, certain significant expenditures associated with
equity real estate investments (such as interest payments, real estate taxes
and maintenance costs) are generally not reduced when circumstances cause a
reduction in income from the investments.
GOVERNMENTAL REGULATIONS; ENVIRONMENTAL MATTERS
The Dealers and their Affiliates and the Company are subject to a wide range
of federal, state and local laws and regulations, such as local licensing
requirements, consumer protection laws and regulations relating to gasoline
storage, waste treatment and other environmental matters, including:
Environmental Laws. All real property and the operations conducted on real
property are subject to federal, state and local laws and regulations relating
to environmental protection and human health and safety, including those
governing wastewater discharges, air emissions, the operation and removal of
underground and above-ground storage tanks, the use, storage, treatment,
transportation and disposal of solid and hazardous materials and the
remediation of contamination associated with such disposal. Certain of these
laws and regulations may impose joint and several liability on certain
statutory classes of persons including lessees, owners or operators, for the
costs of investigation or remediation of contaminated properties, regardless
of fault or the legality of the original disposal.
The past and present business operations of the Dealers that are subject to
such laws and regulations include the use, storage, handling and contracting
for recycling or disposal of hazardous or toxic substances or wastes,
including environmentally sensitive materials such as motor oil, waste motor
oil and filters, transmission fluid, antifreeze, freon, waste paint and
lacquer thinner, batteries, solvents, lubricants, degreasing agents, gasoline
and diesel fuels. The Company, Dealers, Lessees and Sellers may be subject to
other laws and regulations as a result of the past or present existence of
certain underground and/or above-ground storage tanks at the Properties. The
Dealers, Lessees or Sellers, like many of their competitors, have incurred,
and will continue to incur, capital and operating expenditures and other costs
in complying with such laws and regulations.
Certain laws and regulations, including those governing air emissions and
underground and above-ground storage tanks, have been amended so as to require
compliance with new or more stringent standards as of future dates. The
Company cannot predict what other environmental legislation or regulations
will be enacted in the future, how existing or future laws or regulations will
be administered or interpreted or what environmental conditions may be found
to exist in the future. Compliance with new or more stringent laws or
regulations, stricter interpretation of existing laws or the future discovery
of environmental contamination may require expenditures by the Company or
additional expenditures by the Dealers, Sellers or Lessees and their
Affiliates, some of which may be material. There can be no assurance that (i)
future laws, ordinances or regulations will not impose any material
environmental liability, or (ii) the current environmental condition of the
Properties will not be affected by the operations of the Dealerships or
Related Businesses or their Affiliates, by the condition of the land or
operations in vicinity of the Properties (such as the presence of underground
storage tanks) or by the activities of unrelated third parties. Under various
federal, state and local laws, ordinances and regulations, a current or
previous owner, developer or operator of real estate may be liable for the
costs of removal or remediation of certain hazardous or toxic substances at,
on, under or in its property. The costs of such removal or remediation could
be substantial. See "Business of the Company and Properties--Government
Regulations Affecting the Properties--Environmental Laws."
Limited environmental investigations have been conducted at the Initial
Properties, with the results set out in "Phase 1 reports" prepared by
consultants retained by the Dealers and their Affiliates. Certain Phase 1
reports have disclosed certain environmental conditions, including releases of
petroleum products from leaking underground storage tanks at three Properties
and asbestos-containing materials at two of the Initial Properties. Such
Initial Sellers are not obligated to correct those conditions. However, such
Initial Sellers are obligated to indemnify the Company for third party claims
based on environmental conditions until such time as any relevant statute of
limitations has run. The ability of the Company to sell or re-lease the
affected Initial Properties could be impaired in the absence of remediation of
the environmental conditions.
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The Company has negotiated for the Initial Lessees and their Affiliates to
comply with, indemnify and hold harmless the Company and its officers,
directors, employees, shareholders, agents and Affiliates from, and to assume
the cost of compliance with, all laws and regulations applicable to its
Dealerships and Related Businesses, including environmental laws, and
remediation requirements. However, if any Initial Lessee fails to comply with
such requirements, the Company could be forced to pay such costs, which could
be significant, and then seek reimbursement of those costs from the Initial
Lessee.
Americans With Disabilities Act of 1990. In addition, the Properties are
required to comply with Title III of the Americans with Disabilities Act of
1990 (the "ADA") to the extent that such properties are "public
accommodations" and/or "commercial facilities" as defined by the ADA. Although
the Company believes that each of the Initial Properties is in substantial
compliance with the ADA, no assurance can be given that any investigation of
the Initial Properties will not reveal non-compliance with the ADA or that the
requirements of the ADA will not be changed. Although the Lessee will have
primary responsibility for complying with the ADA, there is no assurance that
the Lessee will comply, or that the Company would be reimbursed by the Lessee
if the Company had to make expenditures to comply with the ADA. See "Business
of the Company and Properties--Governmental Regulations Affecting the
Properties--Americans With Disabilities Act of 1990."
Other Regulations. The Properties are and will be subject to state and local
fire, life-safety and similar requirements. The Leases will require that each
Lessee comply with all regulatory requirements. Failure to comply with those
requirements could result in the imposition of fines by governmental
authorities, awards of damages to private litigants, or restrictions on the
ability to conduct business on such properties.
COMPETITION FROM OTHER COMPANIES WITH SIMILAR BUSINESS OBJECTIVES AND
STRATEGIES
The Company believes that it is the first publicly-offered REIT to focus
primarily on consolidating the Properties used by Dealers or Related
Businesses under one ownership structure. However, the Company believes that
other REITs or entities could also target these types of Properties for
acquisition or development financing, and some of those companies may have
greater financial resources or general real estate experience than the
Company. Those entities will compete with the Company in seeking Properties
for acquisition and disposition or, land for development, and re-leasing of
Properties to Dealers as they become available.
RISKS OF FINANCING FOR REAL ESTATE DEVELOPMENT
The Company may purchase or acquire undeveloped land or land used for other
commercial purposes, and may provide a third party with financing to develop
such land as a Dealership or Related Business. If the Company does so, it may
be at risk of non-performance by the developer. Upon completion of the
development of such Property, the Company will also own the improvements. The
amount of the development financing could exceed the fair market value of the
property and improvements if the fair market value were to be determined by
some other methodology.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT; OTHER TAX LIABILITIES
Tax Liabilities as a Consequence of Failure to Qualify as a REIT. The
Company intends to operate its business so as to qualify as a REIT under the
Code commencing with its taxable year ending December 31, 1998. Although
management believes that the Company will be organized and will operate in
such a manner, no assurance can be given that the Company will be able to
operate in a manner so as to qualify as a REIT or remain so qualified.
Qualification as a REIT involves the satisfaction of numerous requirements
(some on an annual and others on a quarterly basis) established under highly
technical and complex Code provisions for which there are only limited
judicial and administrative interpretations and involves the determination of
various factual matters and circumstances not entirely within the Company's
control. The complexity of these provisions and of the applicable Treasury
Regulations that have been promulgated under the Code is greater in the case
of a REIT that holds its assets in partnership form. In addition, no assurance
can be given that new legislation,
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regulations, administrative interpretations or court decisions will not
significantly change the tax laws with respect to qualification as a REIT or
the federal income tax consequences of such qualification. The Company,
however, is not aware of any pending tax legislation that would adversely
affect the Company's ability to operate as a REIT.
Wilmer, Cutler & Pickering, counsel to the Company, will deliver its opinion
to the Company regarding the Company's ability to qualify as a REIT. See
"Certain Federal Income Tax Considerations--Taxation of the Company as a REIT"
and "Legal Matters." Such legal opinion will be based on various assumptions
and factual representations by the Company regarding the Company's ability to
meet the various requirements for qualification as a REIT, and no assurance
can be given that actual operating results will meet these requirements.
Wilmer, Cutler & Pickering has no obligation to advise the Company or its
shareholders of any subsequent change in the matters stated, represented or
assumed or of any subsequent change in applicable law. Such legal opinion is
not binding on the IRS or any court.
If the Company fails to qualify as a REIT in any taxable year, except as to
certain failures for which there may be statutory relief or imposition of
intermediate sanctions in the form of monetary penalties, the Company would be
subject to federal income tax (including any applicable alternative minimum
tax) on its taxable income at regular corporate rates and would not be allowed
a deduction in computing its taxable income for amounts distributed to its
shareholders. This treatment would reduce the net earnings of the Company
available for investment or distribution to shareholders because of the
additional tax liability to the Company for the years involved. In addition,
unless entitled to relief under certain statutory provisions, the Company also
would be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification is lost. See "Certain Federal
Income Tax Considerations--Taxation of the Company as a REIT--Failure to
Qualify." Although the Company currently intends to operate in a manner
designed to qualify as a REIT, it is possible that future economic, market,
legal, tax or other considerations may cause the Company to fail to qualify as
a REIT or may cause the Board of Trustees to revoke the Company's REIT
election.
Adverse Effects of REIT Minimum Distribution Requirements. To obtain the
favorable tax treatment accorded to REITs under the Code, the Company
generally will be required each year to distribute to its shareholders at
least 95% of its REIT taxable income. The Company will be subject to income
tax on any undistributed REIT taxable income and net capital gain, and to a 4%
non-deductible 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 the calendar year, (ii) 95% of its
capital gain net income for such year, and (iii) 100% of its undistributed
income from prior years.
The Company intends to make distributions to its shareholders to comply with
the distribution provisions of the Code and to avoid federal income taxes and
the non-deductible 4% excise tax. The Company's income consists primarily of
its share of the income of the Operating Partnership, and the Company's cash
flow consists primarily of its share of distributions from the Operating
Partnership. Differences in timing between the receipt of income and the
payment of expenses in arriving at taxable income (of the Company or the
Operating Partnership) and the effect of non-deductible capital expenditures,
the creation of reserves or required debt amortization payments could in the
future require the Company to borrow funds through the Operating Partnership
on a short-term or long-term basis to meet the distribution requirements that
are necessary to continue to qualify as a REIT. In such circumstances, the
Company might need to borrow funds to avoid adverse tax consequences even if
management believes that the then prevailing market conditions generally are
not favorable for such borrowings or that such borrowings are not advisable in
the absence of such tax considerations.
Distributions by the Operating Partnership are determined by the Company, as
general partner, and are dependent on a number of factors, including the
amount of Actual Cash Available For Distribution, the Operating Partnership's
financial condition, any decision by the Company's Board of Trustees to
reinvest funds rather than to distribute such funds, the Operating
Partnership's capital expenditure requirements, the annual distribution
requirements under the REIT provisions of the Code and such other factors as
the Board of Trustees deems relevant. There can be no assurance that the
Company will be able to continue to satisfy the annual distribution
requirement so as to avoid corporate income taxation of the earnings that it
distributes.
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Consequences of Failure to Qualify as a Partnership. Wilmer, Cutler &
Pickering will deliver an opinion to the Company stating that, assuming that
the Operating Partnership is being operated in accordance with its
organizational documents, the Operating Partnership has been and will continue
to be treated as a partnership, and not as a corporation, for federal income
tax purposes. Such opinion is not binding on the IRS. If the IRS were to
challenge successfully the status of the Operating Partnership as a
partnership for federal income tax purposes, the Operating Partnership would
be taxable as a corporation. In such event, the Company would cease to qualify
as a REIT for federal income tax purposes. The imposition of a corporate tax
on the Operating Partnership with a resulting loss of REIT status of the
Company, would reduce substantially the amount of cash available for
distribution to the Company's shareholders.
Risks Regarding Characterization of Initial Leases. Wilmer, Cutler &
Pickering will deliver to the Company its opinion that each Initial Lease will
be treated as a true lease for federal income tax purposes. Such opinion is
not binding on the IRS. If the IRS were to challenge successfully the
characterization of the Initial Leases as true leases, the Operating
Partnership would not be treated as the owner of the Property in question for
federal income tax purposes and the Operating Partnership would lose tax
depreciation and cost recovery deduction with respect to such Property, which
in turn could cause the Company to fail to qualify as a REIT.
Other Tax Liabilities. Even if the Company qualifies as and maintains its
status as a REIT, it may be subject to certain federal income taxes if it has
a certain amount of non-qualified income. For example, if the Company has net
income from a "prohibited transaction," such income will be subject to a 100%
tax. See "Certain Federal Income Tax Considerations--Taxation of the Company
as a REIT--Requirements for Qualification." In addition, the Company will be
subject to state and local taxes on its income and property.
THE OWNERSHIP LIMIT
For the Company to maintain its qualification as a REIT under the Code, not
more than 50% in value of the outstanding shares of beneficial interest of the
Company may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities) at any time during the last
half of the Company's taxable year (other than the first taxable year for
which the election to be treated as a REIT has been made).
To ensure that the Company will not fail to qualify as a REIT under this and
other tests under the Code, the Company's Declaration of Trust, subject to
certain exceptions, authorizes the trustees to take such actions as are
necessary and desirable to preserve its qualification as a REIT and to limit
any person to direct or indirect ownership of no more than (i) 9.9% of the
number of the outstanding Common Shares, or (ii) 9.9% of the number of
outstanding Preferred Shares of any series of Preferred Shares (the "Ownership
Limit"). The Company's Board of Trustees, upon receipt of a ruling from the
IRS, an opinion of counsel or other evidence satisfactory to the Board and
upon such other conditions as the Board may establish, may exempt a proposed
transferee from the Ownership Limit; provided that such exemption would not
result in the termination of the Company's status as a REIT. See "Description
of Shares of Beneficial Interest--Restrictions on Ownership and Transfer." The
foregoing restrictions on transferability and ownership will continue to apply
until (i) the Board of Trustees determines that it is no longer in the best
interests of the Company to attempt to qualify, or to continue to qualify, as
a REIT, and (ii) there is an affirmative vote of two-thirds of the votes
entitled to be cast on such matter at a regular or special meeting of the
shareholders of the Company.
The Ownership Limit may have the effect of delaying, deferring or preventing
a transaction or a change in control of the Company that might involve a
premium price for the Common Shares or otherwise be in the best interest of
the shareholders. See "Description of Shares of Beneficial Interest--
Restrictions on Ownership and Transfer."
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CERTAIN ANTI-TAKEOVER PROVISIONS MAY INHIBIT A CHANGE IN CONTROL OF THE
COMPANY
General. Certain provisions contained in the Declaration of Trust and By-
laws and the Maryland General Corporation Law (the "MGCL"), as applicable to
Maryland REITs, may have the effect of discouraging a third party from making
an acquisition proposal for the Company and may thereby delay, deter or
prevent a change in control of the Company or the removal of existing
management and, as a result, could prevent shareholders from being paid a
premium for their Common Shares over then-prevailing market prices. See
"Description of Shares of Beneficial Interest--Restrictions on Ownership and
Transfer" and "--Certain Provisions of Maryland Law and of the Company's
Declaration of Trust and By-laws."
Preferred Shares. The Declaration of Trust permits the Board of Trustees to
issue up to 20 million Preferred Shares, issuable in one or more classes or
series. The Board of Trustees may classify or reclassify any unissued
Preferred Shares and establish the preferences and rights (including the right
to vote, participate in earnings, and to convert into Common Shares) of any
such Preferred Shares. Thus, the Board of Trustees could authorize the
issuance of Preferred Shares with terms and conditions which could have the
effect of discouraging a takeover or other transaction in which holders of
some or a majority of the Common Shares might receive a premium for their
Common Shares over the then-prevailing market price of such Common Shares. See
"Description of Shares of Beneficial Interest--Preferred Shares."
Maryland Business Combination Statute. Under the MGCL, as applicable to
Maryland REITs, certain "Business Combinations" (including certain issuances
of equity securities) between a Maryland REIT such as the Company and any
person who owns 10% or more of the voting power of the Company's beneficial
interests or an Affiliate of the trust which, 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 shares of beneficial interest of then-outstanding voting shares
of beneficial interest of the Company (an "Interested Shareholder"), are
prohibited for five years after the most recent date on which the Interested
Shareholder became an Interested Shareholder. Thereafter, any such "Business
Combination" must be approved by a super-majority shareholder vote unless,
among other things, the holders of shares of beneficial interest 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
Shareholder for its shares. As permitted by the MGCL, the Declaration of Trust
exempts any "Business Combinations" involving the issuance of Common Shares to
any Initial Seller upon the exchange of Units acquired by any of them in
connection with the Formation Transactions or the acquisition by any of them
of any additional shares of beneficial interest in the Company. Accordingly,
the five-year prohibition and the super-majority vote requirement will not
apply to any "Business Combinations" between the Sellers and the Company. As a
result, the Sellers may be able to enter into "Business Combinations" with the
Company, which may or may not be in the best interests of the shareholders,
without the super-majority shareholder approval. See "Description of Shares of
Beneficial Interest--Certain Provisions of Maryland Law and of the Company's
Declaration of Trust and By-laws--Business Combinations."
CHANGES IN POLICIES
The major policies of the Company, including its policies with respect to
investments, financing, growth, debt capitalization, REIT qualification and
distributions, are determined by the Board of Trustees. Although it has no
present intention to do so, the Board of Trustees may amend or revise these
and other policies from time to time without a vote of the shareholders.
Accordingly, shareholders will have limited control over changes in policies
of the Company.
NO PRIOR MARKET FOR COMMON SHARES
Prior to this Offering, there has been no public market for the Common
Shares. Although the Company has applied for listing of the Common Shares on
the Nasdaq National Market, there can be no assurance that an active trading
market will develop. The initial public offering price will be determined
through negotiations between the Company and the Underwriters and may not be
indicative of the market price of the Common Shares after the Offering. See
"Underwriting."
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EFFECT OF MARKET INTEREST RATES ON SHARE PRICES
One of the factors that may influence the price of the Common Shares in
public markets will be the annual yield on the price paid for Common Shares
from distributions by the Company. Thus, an increase in market interest rates
may lead purchasers of Common Shares to demand a higher annual yield, which
could adversely affect the market price of the Common Shares.
DILUTION
The Company does not anticipate that the Offering will result in material
dilution to investors in the Common Shares. See "Dilution."
POSSIBLE ADVERSE EFFECTS ON SHARE PRICE ARISING FROM COMMON SHARES ELIGIBLE
FOR FUTURE SALE
No prediction can be made as to the effect, if any, of future sales of
Common Shares, or the availability of shares for future sales, on the market
price of the Common Shares. Sales of substantial amounts of Common Shares
(including up to 3,950,216 Common Shares issuable upon the exchange of Units,
exercise of options granted to executive officers under the Plan, exercise of
the Underwriting Warrants and exercise of the Dealer Warrants), or the
perception that such sales could occur, may adversely affect prevailing market
prices for the Common Shares. Such Common Shares and Units will be deemed to
be "restricted securities" within the meaning of Rule 144 under the Securities
Act and may not be transferred unless such Common Shares or Units have been
registered under the Securities Act or an exemption from registration is
available, including any exemption from registration provided under Rule 144.
In general, upon satisfaction of certain conditions, Rule 144 permits the sale
of certain amounts of restricted securities one year following the date of
acquisition of the restricted securities from the Company and, after two
years, permits unlimited sales by persons unaffiliated with the Company.
Upon the completion of the Offering and the consummation of the Formation
Transactions, the Company will have 15,690,377 Common Shares outstanding (or
17,966,846 Common Shares if the Underwriters' over-allotment option is
exercised in full), of which 15,000,000 will be freely tradeable in the public
market by persons other than "Affiliates" of the Company without restriction
or registration under the Securities Act. The Company's officers and Trustees
have agreed not to offer, sell, offer to sell, contract to sell, grant any
option to purchase or otherwise sell or dispose of (or announce any offer,
sale, offer of sale, contract of sale, grant of any option to purchase or
other sale or disposition of) any Common Shares or other shares of beneficial
interest of the Company, or any securities convertible or exercisable or
exchangeable for any Units or Common Shares or other shares of beneficial
interest of the Company (other than pursuant to the Plan), for a period of two
years from the date of this Prospectus without the prior written consent of
the Representative, subject to certain limited exceptions. The Representative,
at any time and without notice, may release all or any portion of the Common
Shares or Units subject to the foregoing lock-up agreements.
Under the Partnership Agreement, the Company will deliver registered Common
Shares upon redemption of Units for Common Shares. The Company has also
granted demand registration rights to register the Common Shares being
privately placed with FBR Asset Investment Corporation.
The Company may issue from time to time additional Common Shares or Units in
connection with the acquisition of Properties. See "Business of the Company
and Properties--Strategy." The Company anticipates that it will file a
registration statement with respect to the Common Shares issuable upon
exercise of options under the Plan following or concurrent with the completion
of this Offering. Such registration statement generally will allow Common
Shares covered thereby to be transferred or resold with fewer restrictions
under the Securities Act. See "Common Shares Eligible for Future Sale."
30
<PAGE>
USE OF PROCEEDS
The proceeds to the Company from the sale of the Common Shares offered
hereby, net of the estimated underwriting discounts and expenses of the
Offering, are expected to be approximately $207.8 million ($239.1 million if
the Underwriters' over-allotment option is exercised in full), assuming an
initial public offering price per share of $15.00. In addition, the Company
will receive an aggregate of $9.6 million from the proceeds of the FBR
Offering. Approximately $43.5 million of the net proceeds will be used by the
Company to repay indebtedness, including the (i) $41.2 million secured by
mortgages on certain Initial Properties and (ii) up to approximately $2.3
million drawn on the short-term revolving line of credit issued to the Company
by Friedman, Billings, Ramsey Group, Inc., an Affiliate of the Representative
of the Underwriters, on October 26, 1997. The FBR Loan accrued interest at a
rate of 10% at November 1, 1997. The Mortgage Debt accrued interest at the
weighted average rate of 8.08% at November 1, 1997. The Company expects to
enter into a bank line of credit and at closing to borrow $5 million under
that line of credit. The balance of the proceeds will be used to purchase
Properties consistent with the Company's investment policies and for general
business purposes. While the Company may engage from time to time in
discussions regarding potential acquisitions, it has not entered into any
agreement as of the date of this Prospectus to make any such acquisition.
Pending the described uses, any remaining net proceeds will be invested in
short-term readily marketable interest-bearing securities, interest-bearing
bank accounts, certificates of deposit, money market securities, U.S.
government securities or mortgage-backed securities.
31
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
October 20, 1997, and as adjusted to give effect to the completion of the
Offering (assuming no exercise of the Underwriters' over-allotment option) and
the completion of the concurrent FBR Offering. The table should be read in
conjunction with the historical and unaudited pro forma financial information
of the Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL OCTOBER 20,
OCTOBER 20, 1997
1997 (UNAUDITED)
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Debt outstanding under Line of Credit.................. $-- $ 5,000
Minority Interest...................................... -- 71,348
Shareholders' Equity:
Preferred Shares of Beneficial Interest, par value
$.01 per share; 20 million authorized; no shares
outstanding historical; no shares outstanding pro
forma -- --
Common Shares of Beneficial Interest
Common Shares, par value $.01 per share; 100
million authorized; 10 shares outstanding
historical; 15,000,000 shares outstanding pro
forma(1).......................................... -- 157
Additional Paid-in Capital........................... -- 221,600
---- --------
Total Shareholders' Equity......................... -- 221,757
---- --------
Total Capitalization............................... $-- $298,105
==== ========
</TABLE>
- --------
(1) Excludes 2,250,000 Common Shares reserved for the Underwriters' over-
allotment, 2,191,915 Common Shares and Units reserved for issuance
pursuant to the Company's Plan of which 1,785,945 have been granted,
1,095,957 Common Shares issuable upon exercise of the Underwriting
Warrants and an aggregate of 1,095,957 Common Shares issuable upon
conversion of Units issuable upon exercise of the Dealer Warrants (in each
case assuming exercise of the Underwriters' over-allotment option in
full). See "Structure and Formation of the Company," "Management--
Incentive Plan" and "Related Transactions."
32
<PAGE>
DILUTION
The Company expects there will be no substantial difference between the
initial public offering price per Common Share and effective cash cost per
Common Share paid in the Offering and or FBR Offering. Accordingly, the
Company expects there will be no material dilution to new investors purchasing
Common Shares in this Offering, except for the payment of Underwriters'
discounts and commissions and other expenses of this Offering. The Company
expects that the dilution per Common Share will be approximately $.87,
determined by subtracting pro forma net tangible book value, after giving
effect to the Offering and the Formation Transactions, from the initial public
offering price paid by a new investor for a Common Share.
33
<PAGE>
SELECTED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth summary selected historical and pro forma
financial information for the Company. The unaudited pro forma operating
information is presented as if the Formation Transactions had occurred as of
the beginning of the period indicated and therefore incorporates certain
assumptions that are included in the Company's Unaudited Pro Forma Financial
Statements. The unaudited pro forma balance sheet information is presented as
if the Formation Transactions had occurred on October 20, 1997. The unaudited
pro forma information does not purport to represent what the Company's
financial position or results of operations actually would have been had the
Formation Transactions, in fact, occurred on such date or at the beginning of
the period indicated, or to project the Company's financial position or
results of operations at any future date or for any future period. The
historical and unaudited pro forma financial information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
PRO FORMA FOR THE
PERIOD FROM PRO FORMA
JANUARY 1, 1997 YEAR ENDED
THROUGH DECEMBER 31,
OCTOBER 20, 1997 1996
----------------- ------------
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Rental income(1)........................... $ 11,243 $12,859
General and administrative expenses(2)..... 3,063 3,500
Depreciation(3)............................ 1,790 2,046
Minority interest(4)....................... 1,470 1,683
Interest expense, net...................... 350 400
Net earnings............................... 4,570 5,230
Net earnings per share..................... $ 0.29 $ 0.33
Weighted average Common Shares
outstanding(5)............................ 15,690 15,690
<CAPTION>
PRO FORMA
FOR THE
PERIOD FROM PRO FORMA
JANUARY 1, 1997 YEAR ENDED
THROUGH DECEMBER 31,
OCTOBER 20, 1997 1996
----------------- ------------
(UNAUDITED)
<S> <C> <C>
OTHER FINANCIAL DATA:
Net earnings of the Operating Partnership.. $ 6,040 $ 6,913
Add: Depreciation.......................... 1,790 2,046
Funds from Operations of the Operating
Partnership(6)............................ 7,830 8,959
Funds from Operations of the Company(6).... 5,927 6,781
<CAPTION>
PRO FORMA HISTORICAL
OCTOBER 20, OCTOBER 20,
1997 1997
----------------- ------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Real estate owned, at cost................. $116,922 $ --
Total assets............................... 299,176 --
Debt outstanding under line of credit...... 5,000 --
Minority interest.......................... 71,348 --
Total shareholders' equity................. 221,757 --
</TABLE>
34
<PAGE>
- --------
(1) Represents rental income from the Initial Lessees recorded in accordance
with the terms of the Initial Leases as if all Initial Properties had been
in operation for the entire period. The Company will lease the Initial
Properties to the Initial Lessees under the Initial Leases.
(2) Represents management's estimates of general and administrative expenses.
(3) Represents depreciation of the building and improvements allocation of the
Initial Properties over a 20-year period.
(4) Represents 24.3% of the Operating Partnership's net earnings.
(5) Weighted average Common Shares outstanding include Common Shares sold in
the Offering as if such Common Shares were outstanding for the entire
period.
(6) The Company believes Funds from Operations is helpful to shareholders as a
measure of the performance of an equity REIT because, along with cash
flows from operating activities, investing activities and financing
activities, it provides shareholders with an understanding of the ability
of the Company to incur and service debt and make capital expenditures.
Funds from Operations is calculated as net earnings (loss) (computed in
accordance with GAAP), excluding significant non-recurring items, gains
(or losses) from debt restructuring and sales of property, plus real
estate related depreciation and amortization and after adjustments for
unconsolidated partnerships and joint ventures. The Company computes Funds
from Operations in accordance with standards established by the White
Paper on Funds from Operations approved by the NAREIT Board of Governors
in March 1995, which may differ from the methodology for calculating Funds
from Operations utilized by other equity REITs, and, accordingly, the
Company's Funds from Operations may not be comparable to the Funds from
Operations of such other REITs. Funds from Operations should not be
considered as an alternative to net earnings (computed in accordance with
GAAP) as an indication of the Company's financial performance or to cash
flows from operating activities (computed in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds
available to fund the Company's cash needs, including its ability to make
distributions.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was organized as a Maryland REIT on October 20, 1997, and
intends to make an election to qualify under the Code as a REIT commencing
with its taxable year ending December 31, 1998. Substantially all of the
Company's initial revenues are expected to be derived from: (i) rents received
under long-term triple-net Leases of Properties operated as Dealerships and
Related Businesses, including 21 Initial Properties the Company anticipates
acquiring upon the completion of this Offering and which the Company
thereafter will lease back to the Initial Lessees pursuant to the Initial
Leases (which are in some cases guaranteed by affiliated Guarantors) and (ii)
interest earned from the temporary investment of funds in short-term
investments. The Initial Base Annual Rent for each Initial Property under the
Initial Leases is initially set at a fixed amount and the Base Annual Rent
will be adjusted upward periodically based on a factor of the CPI, ranging
from one-half of CPI adjusted every other year to full CPI adjusted every
year, which may be subject to periodic minimum or maximum adjustment rates,
ranging from zero to 2%, respectively.
The Company will incur operating and administrative expenses including,
principally, compensation expense for its executive officers and other
employees, professional fees and various expenses incurred in the process of
acquiring additional Properties. The Company will be self-administered and
managed by its executive officers and staff, and will not engage a separate
advisor or pay an advisory fee for services, although the Company will engage
legal, accounting, tax and financial advisors from time to time.
The primary non-cash expense of the Company will be the depreciation of its
Properties. The Company expects to depreciate buildings and improvements on
the Initial Properties over a 39.5-year and 20-year period for tax and
financial reporting purposes, respectively. The Company will not own or lease
any personal property, furniture or equipment at any Initial Property.
The Company also expects to employ leverage, using a combination of debt or
other equity securities and a bank credit facility, to fund additional
investments, and will incur long and short-term indebtedness, and related
interest expense, from time to time. See "Risk Factors--There Can be No
Assurance That the Company Will Complete Any Additional Acquisitions of
Properties or that the Company Will Not be Treated as an Investment Company."
The Company intends to make distributions to its shareholders in amounts not
less than the amounts required to maintain REIT status under the Code and, in
general, in amounts exceeding taxable income. The Company's ability to make
distributions will depend upon its Actual Cash Available for Distribution.
RESULTS OF OPERATIONS
The Company has had no operations prior to October 20, 1997 (the date of
organization), or through the date of this Prospectus. The Company's future
results of operations will depend upon the Company's receipt of payments under
the Initial Leases, the acquisition of the additional Properties, and the
terms of any other investments the Company may make.
PRO FORMA RESULTS OF OPERATIONS
The Company estimates that after giving effect to the Offering and the
acquisition of the Initial Properties, rental income would have been $12.9
million for the year ended December 31, 1996 and $11.2 million for the period
ended October 20, 1997. Net earnings would have been $5.2 million or $0.33 per
Common Share for the year ended December 31, 1996, and $4.6 million or $0.29
per Common Share for the period ended October 20, 1997. Pro forma rental
income is recorded in accordance with the terms of the Initial Leases as if
all of the Initial Leases had been in effect for the entire period. See "The
Company's Selected Financial Information."
Environmental Matters. Each Initial Lease and Contribution Agreement
provides for various representations and warranties by the Initial Lessee and
Initial Seller, respectively, relating to environmental matters with respect
to each Initial Property. The Phase 1 reports indicate that petroleum products
have been released from leaking underground storage tanks removed from three
of the Initial Properties and asbestos is present at two of the Initial
Properties. Each Initial Lease and Contribution Agreement requires
36
<PAGE>
the Initial Lessee to indemnify and hold harmless the Company from and against
third party liabilities, costs and expenses imposed upon or asserted against
the Company or the Initial Property on account of, among other things, any
federal, state or local law, ordinance, regulation, order or decree relating
to the protection of human health or the environment in respect of the Initial
Property. Each Initial Lessee is obligated to comply with all environmental
laws. Notwithstanding the environmental laws impose liabilities on the owner
of property. The Company, therefore, could incur liabilities regardless of the
Initial Lease provisions, especially if the Initial Lessee defaults on its
obligations to the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that the proceeds of the Offering and the FBR
Offering, together with its cash from operations, and any bank credit facility
anticipated to be available to the Company, will provide adequate liquidity to
acquire additional Properties, conduct its operations, fund administrative and
operating costs, interest payments and acquisitions, and allow distributions
to shareholders in accordance with the Code's requirements for qualification
as a REIT and to avoid any corporate level federal income or excise tax.
In order to qualify as a REIT for federal income tax purposes, the Company
will be required to make substantial distributions to its shareholders. The
following factors, among others, will affect Funds from Operations and will
influence the decisions of the Board of Trustees regarding distributions: (i)
increases in Annual Base Rent under the Leases; and (ii) returns from short-
term investments pending application of the net proceeds of the Offering.
Although the Company will receive most of its rental payments on a monthly
basis, it intends to make distributions quarterly. Amounts accumulated for
distribution will be invested by the Company in short-term investments.
Under the terms of the Initial Leases, each Initial Lessee is responsible
for substantially all expenses associated with the operation of the related
Initial Property, such as taxes and other governmental charges, insurance,
utilities, service, maintenance and any ground lease payments. See "Business
of the Company and Properties--The Initial Properties, Leases and
Dealerships." As a result of these arrangements, the Company does not believe
it will be responsible for any major expenses in connection with the Initial
Properties during the terms of the respective Initial Leases. The Company
anticipates entering into similar Leases with respect to additional
Properties. After the terms of any respective Lease expires, or in the event a
Lessee is unable to meet its obligations, the Company anticipates that any
expenditures it might become responsible for in maintaining the related
Property will be funded by cash from operations and, in the case of major
expenditures, possibly by borrowings. To the extent that unanticipated
expenditures or significant borrowings are required, the Company's Funds from
Operations and liquidity may be adversely affected.
Other than the repayment of the FBR Loan and certain assumed mortgage
indebtedness with the net proceeds from the Offering, the Company has no
commitments to make other capital expenditures at the date of this Prospectus.
The Company may raise additional long-term capital by issuing, in public or
private transactions, debt or other equity securities, but the availability
and terms of any such issuance will depend upon the market and other
conditions. The Company anticipates that as a result of its initially low
ratio of debt to total market capitalization and its intention to maintain
such ratio at no more than 50%, it will be able to obtain financing for its
long-term capital needs. However, there can be no assurance that additional
financing or capital will be available on terms acceptable to the Company. The
Company intends to enter into a bank credit facility to acquire Properties and
may, under certain circumstances, borrow additional amounts in connection with
the acquisition of additional Properties, the renovation or expansion of
Properties, or, as necessary, to meet certain distribution requirements
imposed on a REIT under the Code.
Acquisitions will be made subject to the investment objectives and policies
to maximize both current income and long-term growth in income described
elsewhere in this Prospectus. The Company's liquidity requirements with
respect to future acquisitions may be reduced to the extent the Company uses
Common Shares or Units as consideration for such purchases.
37
<PAGE>
BUSINESS OF THE COMPANY AND PROPERTIES
OVERVIEW
The Company is a newly organized self-administered and self-managed Maryland
REIT formed to invest in the real property and improvements used by Dealers
located in major metropolitan areas throughout the United States. The Company
is the first publicly-offered REIT formed primarily to acquire, lease back,
and finance the development of, Properties for use by Dealers.
Thomas D. Eckert, President and Chief Executive Officer, Scott M. Stahr,
Executive Vice President and Chief Operating Officer, Donald L. Keithley,
Executive Vice President of Business Development and David S. Kay, Vice
President and Chief Financial Officer, the Company's executive officers, have
over 75 years of combined experience in the real estate, financial and motor
vehicle industries. Following the Offering, the Company's executive officers
will own or have the right to acquire in the aggregate a number of Common
Shares and Units equal to 6.625% of the Common Shares to be outstanding on the
closing of the Offering (including exercise of the Underwriters' over-
allotment option) on a fully diluted basis. See "Management."
The Company has entered into agreements to acquire the Initial Properties,
which consist of 21 parcels of real property and related improvements. The
Initial Properties are primarily located in the Washington, D.C. Metropolitan
Area and Philadelphia. All of the Initial Properties are operated by four of
the top 20 Dealers in the Washington, D.C. Metropolitan Area, as measured by
total new vehicles sold in 1996. Dealers located on the Initial Properties
sell domestic and imported luxury, family, economy, and sport utility
vehicles, trucks and vans of more than 19 manufacturers, including Honda,
Toyota, Lexus, Chevrolet, Saturn, Ford, Infiniti, Jaguar, Acura, Lincoln-
Mercury, Mitsubishi and Nissan. The Initial Properties have been purchased
from the Initial Sellers each of whom is an Affiliate of a Dealer and will be
leased back to the Initial Lessees. The Initial Leases will be long-term
triple-net leases that require the Initial Lessees to pay all operating costs
of the Initial Properties.
The Initial Sellers are Affiliates of John J. Pohanka, Robert M. Rosenthal,
Vincent A. Sheehy, Jonathan K. Cherner and Andrew M. Cherner. Collectively,
they have over 145 years of combined experience in the automotive industry.
They will own an aggregate of 5,048,259 Units. Messrs. Pohanka and Rosenthal
will have the right to acquire additional Units equal to 4% of the Common
Shares to be outstanding on the closing of the Offering (including exercise of
the Underwriters' over-allotment option) on a fully diluted basis. Messrs.
Pohanka and Rosenthal will serve on the Company's Board of Trustees.
The Pohanka Automotive Group, led by its Chairman, John J. Pohanka, has been
in business for almost 80 years. The Pohanka family began operating
dealerships in 1919, and the business' current leader, Mr. Pohanka has been
involved in the automotive industry for almost 50 years. Today the second and
third generation of the Pohanka family lead the business' operations. In 1996,
the Pohanka Automotive Group Dealerships sold 11,900 new and used motor
vehicles. The Pohanka Automotive Group is currently comprised of nine
Dealerships, each of which is located in the Washington, D.C. Metropolitan
Area. Under Mr. Pohanka's leadership, the Pohanka Automotive Group's
Dealerships have received numerous awards, including the Time Magazine Quality
Dealer Award. The Company has entered into agreements to purchase all of the
Properties used by the Pohanka Automotive Group.
The Rosenthal Automotive Organization, led by its Chairman, Robert M.
Rosenthal, has been in business for over 40 years. With 19 franchises, the
Rosenthal Automotive Organization is the 14th largest automotive group in the
United States in terms of total new vehicles sold in 1996. In 1996, the
Rosenthal Automotive Organization Dealerships sold more than 31,500 new and
used motor vehicles. Under Mr. Rosenthal's leadership, the Rosenthal
Automotive Organization's Dealerships have received numerous national and
local awards, including the Time Magazine Quality Dealer Award, the
International American Automobile Dealers/Sports Illustrated Dealer of
Distinction, the Acura Precision Team Award, the Jaguar Pride of Jaguar Award,
and the Mazda President's Award. The Company has entered into agreements to
purchase seven of the 13 Properties used by the Rosenthal Automotive
Organization or its Affiliates (which are substantially all of the Properties
owned by the Rosenthal Automotive Organization).
38
<PAGE>
The Sheehy Auto Stores, led by its Chairman, Vincent A. Sheehy, were
established in 1965. Mr. Sheehy entered the automotive business in 1945. Mr.
Sheehy is a past chairman of the Ford Dealer Advertising Fund and a past
director of the National Automobile Dealers Association. Mr. Sheehy's
Dealerships have won numerous awards including the North American Customer
Excellence Awards in 1995, 1996 and 1997 and the President's Circle Award in
1996. The Sheehy Auto Stores sold approximately 14,500 motor vehicles in 1996.
The Cherner Automotive Group first began operating in the mid-1920's in
Washington, D.C. Jonathan and Andrew Cherner took over management of the
Dealerships in 1993. Jonathan Cherner is a board member of the Washington
Lincoln Mercury Dealers Association, the Washington Area Isuzu Dealer
Advertising Association and the Isuzu National Dealer Council. Andrew Cherner
is an active member of Kia's National Dealer Council and the Lincoln Mercury
Regional Marketing Committee. The Cherner Automotive Group sold approximately
4,200 motor vehicles in 1996.
New and used franchised motor vehicle retailing, including the sale of
trucks, minivans, and sport utility vehicles, parts and services, and other
ancillary businesses, is the largest consumer retail sector in the United
States, with approximately $500 billion in 1996 sales. Sales by franchised
motor vehicle retail dealerships are estimated to account for one-fifth of the
nation's total retail sales of all products and merchandise. In 1996, the 100
largest Dealership groups generated less than 10% of total sales revenue and
controlled approximately 5% of the over 22,000 existing franchised
Dealerships, demonstrating the fragmentation of the industry.
The Company believes that the real property and improvements used by Dealers
is a major and discrete sector of the national retail real estate industry.
Industry sources estimate that Dealerships have over $40 billion currently
invested in Dealership-related real estate. The Company believes that those
properties present attractive acquisition and financing opportunities because
they have locations with frontage on, and visibility from, major thoroughfares
and zoning for a wide range of alternative uses. In the event that such
properties can no longer be leased to Dealers, the Company believes that they
can be redeveloped for other commercial or residential uses.
The Company believes that the size and the fragmentation of the industry and
the increasing capital needs of Dealers, provide an attractive environment in
which the Company can seek to implement its primary business strategy. The
current trend is for Dealers to consolidate their operations to increase
efficiency and their competitive position. That trend should facilitate the
Company's strategy of acquiring Properties from Dealers with multi-site,
multi-franchised and diversified locations.
STRATEGY
The Company's primary business strategy is to acquire a diversified
portfolio of Properties used by Dealers throughout the United States,
including Properties used by new motor vehicle retail dealerships, used motor
vehicle retail dealerships, motor vehicle auctioneers, and service, repair or
parts businesses. In addition, the Company intends to acquire undeveloped
property or property being used for other purposes and make capital available
to finance the development of Dealerships or Related Businesses. In each case,
it is the intention of the Company to lease back the Properties to Dealers or
their Affiliate. The Company will seek to implement its strategy by acquiring,
or providing financing for the development of, Properties used by Dealers that
(i) have many years of uninterrupted ownership and operation, (ii) have
generated steady long-term cash flow from the sale or lease of new or used
motor vehicles, the operation of service and repair facilities, parts
businesses or body shops or other motor vehicle related businesses or the
arrangement of financing or credit insurance, and (iii) are located in major
metropolitan areas throughout the United States. The Company believes that its
acquisition and financing strategy will provide Sellers with an opportunity
(i) to acquire liquidity, while maintaining ownership and control of the
Dealerships or Related Businesses, (ii) to diversify their investments, (iii)
to obtain funds to expand the operations of their Dealerships or Related
Businesses, and (iv) to facilitate their estate planning.
The Company's primary objective is to become the leading owner and lessor of
Properties used by Dealers throughout the United States in order to provide
the Company with predictable streams of cash flow to maximize shareholder
value. To achieve these objectives, the Company plans to:
39
<PAGE>
. Implement an aggressive, yet disciplined, acquisition program by purchasing
Properties used by Dealers of multi-site, multi-franchised Dealerships or
Related Businesses that have demonstrated historic growth, are well
managed, and have been maintained in good condition, and whose location and
characteristics will be suitable for alternative use by:
. Diversifying geographically by acquiring or providing financing for
the development of Properties located in major CMSAs in order to
minimize the potential adverse impact of economic downturns in
certain markets;
. Leveraging the contacts and experience of the Company's management
to build and maintain long-term relationships with Dealers;
. Maintaining long-term working relationships with Dealers, by
providing capital for multiple acquisitions of Properties on a
market-by-market basis, thereby enhancing efficiency and value; and
. Taking advantage of opportunities created by the fragmented
ownership of Dealerships and Related Businesses, and the large
number of suitable locations with adequate roadway frontage, high
visibility and appropriate zoning.
. Use the Company's UPREIT structure to acquire Properties in exchange for
cash or Units, or a combination of cash and Units, thereby deferring some
or all of a Seller's potential taxable gain, and enhancing the ability of
the Company to consummate transactions and to structure more competitive
acquisitions than other real estate companies in the market that lack the
Company's access to capital and the ability to acquire Properties with
Units.
. Use several valuation mechanisms, including calculations of discounted cash
flow, evaluations of comparable sales and leases of properties, analysis of
the alternative uses of the Properties and evaluation of the Dealers'
financial strength, to determine the purchase price and lease terms for the
Properties.
. Lease back the Properties to Lessees on a triple-net basis, thereby
eliminating brokerage, re-leasing and similar costs and the risk of high
Lessee turnover due to the general historic long-term operation of
Dealerships or Related Businesses at Property locations.
. Negotiate Lease covenants designed to minimize the likelihood of loss to
the Company, by permitting the Company to establish the ability of the
Lessees (together with any Guarantors) to pay rent by periodically
monitoring compliance with a Rent Coverage Ratio, monitor compliance with
other financial guidelines established by the Manufacturer, or require the
Lessee to provide additional security in the form of a Guarantee of an
Affiliate.
. Utilize a variety of other financing sources, that may include the issuance
of Units, or other equity securities or debt securities, or a combination
thereof; and enter into a bank credit facility that will be used to
leverage Properties, acquire additional Properties and for working capital
purposes; and operate with a debt to total market capitalization ratio of
not more than 50% and obtain leverage as a means to gain positive spread on
investments.
. Acquire undeveloped Properties or Properties being used for other purposes
and provide financing to a Dealer development of Dealerships or Related
Businesses and lease it back to the Lessees.
THE INITIAL LEASES, PROPERTIES AND DEALERSHIPS
The Company has entered into agreements to acquire 21 Initial Properties
that are primarily located in suburban communities of the Washington, D.C.
Metropolitan Area and Philadelphia. The Company's interest in each Initial
Property includes the land, buildings and improvements, related easements and
rights and fixtures. The Company will not own or lease any personal property,
furniture or equipment at any Initial Property, all of which will be owned, or
leased from third parties or by the respective Initial Lessee. The Initial
Properties are generally zoned for a wide range of commercial uses and
typically have frontage on major transportation arteries with high traffic
patterns, high visibility, bright signage, and ease of entrance and exit. The
improvements on the
40
<PAGE>
Initial Properties generally consist of one or more retail showrooms, office
space (which may or may not be contained in separate buildings), adjacent full
service and repair facilities, parts and accessories departments, and in many
cases, acreage set aside for used car sales, body shops and parking for
inventory.
The Company will own fee simple title to the Initial Properties, with the
exception of Rosenthal Chevrolet, a portion of which is subject to a ground
lease. The sites of the Initial Properties are generally subject to standard
and customary utility and other easements, certain covenants and restrictions
and certain reciprocal easements regarding access. Fifteen of the Initial
Properties are secured by Mortgage Debt that will be paid in full from the
proceeds of this Offering. See "Use of Proceeds."
Set forth below is certain information relating to the Initial Properties:
<TABLE>
<CAPTION>
AGGREGATE
GROSS
LAND LEASEABLE
PURCHASE AREA BUILDING
DEALERSHIPS LOCATION PRICE(1) IN ACRES AREA (SQ. FT.)
----------- -------------- ------------ -------- --------------
<C> <S> <C> <C> <C>
Tysons Corner,
Rosenthal Infiniti, Mazda & Nissan VA $ 23,873,587 12.0 84,384
Gaithersburg,
Rosenthal Nissan, Acura, Mazda & Isuzu MD 11,855,771 8.4 68,898
Tysons Corner,
Rosenthal Honda & Jaguar VA 11,454,528 7.8 46,836
Rosenthal Chevrolet & Jeep/Eagle Arlington, VA 6,779,469 5.2 67,000
Rosenthal Mazda Arlington, VA 5,356,973 2.2 16,176
Rosenthal Storage Lot Arlington, VA 4,890,991 4.7 32,349
Tysons Corner,
Rosenthal Body Shop VA 1,057,392 0.9 16,000
------------ ----- -------
65,268,711 41.2 331,643
------------ ----- -------
Marlow
Pohanka Saturn & Isuzu Heights, MD 4,326,150 5.9 38,377
Pohanka Acura & Chevrolet/GEO Chantilly, VA 4,234,418 5.1 48,571
Pohanka Saturn Bowie, MD 4,064,550 5.3 22,679
Marlow
Pohanka Honda Heights, MD 3,700,387 2.3 40,769
Pohanka Lexus Chantilly, VA 3,438,343 2.3 15,111
Fredricksburg,
Pohanka Cadillac, Hyundai, Nissan & Kia VA 3,432,650 6.2 42,473
Marlow
Pohanka Hyundai & Subaru Heights, MD 1,556,465 2.6 15,372
Marlow
Pohanka Body Shop Heights, MD 694,575 2.7 2,550
Pohanka Undeveloped Dealership Lot Chantilly, VA 5,876,437 7.1 --
------------ ----- -------
31,323,975 39.5 225,902
------------ ----- -------
Springfield,
Sheehy Ford & Kia VA 6,308,000 6.6 51,512
Philadelphia,
Chapman Ford Sales PA 3,000,000 7.9 43,800
Sheehy Lincoln-Mercury & Mitsubishi Woodbridge, VA 2,565,925 3.1 24,597
Marlow
Sheehy Ford Heights, MD 2,132,000 4.6 26,400
------------ ----- -------
14,005,925 22.2 146,309
------------ ----- -------
Cherner Lincoln Mercury Annandale, VA 6,322,909 5.3 38,585
------------ ----- -------
Total........................................... $116,921,520 108.2 742,439
============ ===== =======
</TABLE>
- --------
(1) Includes an aggregate of approximately $1.3 million attributable to
estimated acquisition fees and expenses (including transfer taxes,
recordation taxes and title insurance but excluding the Company's attorney
and accounting fees).
Concurrently with the Company's acquisition of the Initial Properties, the
Company will lease them back to the Initial Lessees pursuant to the Initial
Leases. The Company expects that the Initial Leases will be for the Fixed
Terms ranging from ten to 12 years and may be extended for one or two Extended
Terms of ten years at the option of the respective Initial Lessee. The Initial
Leases will be triple-net leases that require the Initial Lessees to pay
substantially all expenses associated with the operation of the Initial
Properties, such as taxes and other governmental charges, insurance,
utilities, service, maintenance. Each Initial Lease will require the Initial
Lessee to operate the Initial Property only for the same purpose for which it
was used on the Company's purchase date, unless the Company consents to a
different use.
The Initial Annual Base Rent under each Initial Lease has been negotiated by
the Company to produce an appropriate yield on that Initial Property's
purchase price (including acquisition fees and expenses). The Initial Annual
Base Rent and the Annual Base Rent will be adjusted upward periodically based
on a factor of the CPI, ranging from one half of CPI adjusted every other year
to full CPI adjusted every year, which may be subject to
41
<PAGE>
periodic minimum or maximum adjustment rates ranging from zero to 2%,
respectively, which may be subject to periodic minimum or maximum adjustment
rates. The Company will have general recourse to the Initial Lessees, but the
Initial Lessees' payment obligations under the Initial Leases will be
unsecured.
Set forth below is certain information relating to the Initial Lessees:
<TABLE>
<CAPTION>
INITIAL
ANNUAL BASE LEASE FIXED
LESSEE (DEALERSHIPS)(1) LOCATION RENT EXPIRATION TERM EXTENDED TERM(2)
----------------------- ------------------ ----------- ---------- -------- -----------------
<S> <C> <C> <C> <C> <C>
Geneva Enterprises, Inc.
d/b/a Rosenthal Nissan-
Mazda.................. Tysons Corner, VA $ 2,506,727 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc.
d/b/a Rosenthal Mazda.. Arlington, VA 621,408 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc.
d/b/a Rosenthal
Chevrolet/Jeep Eagle
(Storage Lot).......... Arlington, VA 562,464 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc.
d/b/a Rosenthal Honda.. Tysons Corner, VA 511,866 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc.
d/b/a Rosenthal
Jaguar................. Tysons Corner, VA 511,854 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc.
d/b/a Geneva Management
(Related Business)..... Arlington, VA 453,600 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc.
d/b/a Rosenthal Isuzu.. Gaithersburg, MD 451,418 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc.
d/b/a Nissan
Gaithersburg........... Gaithersburg, MD 350,214 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc.
d/b/a Rosenthal Acura.. Gaithersburg, MD 330,111 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc.
d/b/a Rosenthal
Chevrolet/Jeep/ Eagle.. Arlington, VA 312,476 Feb. 2008 10 years 2-10 year options
Maryland Imported Cars,
Inc. d/b/a Gaithersburg
Mazda(3)............... Gaithersburg, MD 261,308 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc.
d/b/a Rosenthal Honda
(2-acre lot)........... Tysons Corner, VA 176,981 Feb. 2008 10 years 2-10 year options
Geneva Enterprises, Inc.
d/b/a Rosenthal Honda
(Body Shop)............ Tysons Corner, VA 126,887 Feb. 2008 10 years 2-10 year options
-----------
7,177,314
-----------
Pohanka Auto Center,
Inc. & Pohanka
Oldsmobile-GMC Truck,
Inc. (Saturn,
Isuzu)(4) ............. Marlow Heights, MD 497,507 Feb. 2008 10 years 2-10 year options
Pohanka Auto West, Inc.
& Pohanka Chevrolet-
GEO, Inc.
(Chevrolet/GEO and
Acura)(4) ............. Chantilly, VA 453,082 Feb. 2009 11 years 2-10 year options
Pohanka Virginia
Properties Partnership
(Saturn)(4)............ Bowie, MD 447,101 Feb. 2009 11 years 2-10 year options
Pohanka Imports, Inc.
(Honda)(4) ............ Marlow Heights, MD 407,043 Feb. 2009 11 years 2-10 year options
Pohanka Auto Center,
Inc. (Cadillac,
Hyundai, Nissan,
Oldsmobile & Kia)(4)... Fredricksburg, VA 386,173 Feb. 2008 10 years 2-10 year options
Pohanka of Chantilly
(Lexus)(4)............. Chantilly, VA 357,588 Feb. 2010 12 years 2-10 year options
Pohanka Hyundai, Inc.
(Hyundai & Subaru)(4).. Marlow Heights, MD 171,211 Feb. 2009 11 years 2-10 year options
Pohanka Oldsmobile-GMC
Truck, Inc. (Body
Shop)(4)............... Marlow Heights, MD 97,241 Feb. 2009 11 years 2-10 year options
Pohanka Virginia
Properties Partnership
(Undeveloped Dealership
Lot)(4)................ Chantilly, VA 628,779 Feb. 2009 11 years 2-10 year options
-----------
3,445,725
-----------
Sheehy Ford of
Springfield, Inc. (Ford
& Kia)................. Springfield, VA 672,340 Feb. 2008 10 years 2-10 year options
Chapman Ford Sales,
Inc.................... Philadelphia, PA 330,000 Feb. 2008 10 years 2-10 year options
Sheehy Lincoln-Mercury,
Inc. (Lincoln-Mercury &
Mitsubishi)............ Woodbridge, VA 282,252 Oct. 2007 10 years 2-10 year options
Sheehy Ford, Inc........ Marlow Heights, MD 255,840 April 2006 8 years 2-10 year options
-----------
1,540,432
-----------
Cherner Lincoln
Mercury................ Annandale, VA 695,520 Feb. 2008 10 years 2-10 year options
-----------
695,520
-----------
Total.................................. $12,858,991
===========
</TABLE>
- --------
(/1/)See the historical financial statements for Geneva Enterprises, Inc. and
Affiliated Company and Pohanka Automotive Group.
(/2/)If any Initial Lease is renewed for a second Extended Term, the Annual Base
Rent will be renegotiated by the parties to reflect the fair market rate at
the renewal date.
(/3/)Guaranteed by Geneva Enterprises, Inc.
(/4/)Each Initial Lease with an Affiliate of Pohanka Automotive Group will be
guaranteed by each other Initial Lessee affiliated with the Pohanka
Automotive Group.
The Dealerships are operated pursuant to written Franchise Agreements with
Manufacturers that, among other things, (i) generally designate the location or
geographic area in which the Dealerships have the right to
42
<PAGE>
sell and service motor vehicles, (ii) impose requirements on the size, design,
layout and maintenance of showrooms and other structures, and (iii) provide
guidelines relating to matters such as advertising, inventory maintenance,
personnel training, and the use and display of the Manufacturers' trademarks,
service marks and designs. In addition, Dealers have entered into related
agreements with certain Manufacturers that establish financial covenants, and
that, in certain cases, restrict changes in control of the Dealerships without
the consent of such Manufacturers. Certain of the Franchise Agreements contain
certain restrictions relating to the sale or transfer of assets or Properties
necessary for the operation of the Dealership, or grant the Manufacturer a
right of first refusal to purchase such assets or Properties. The Franchise
Agreements generally have terms of one to five years, and have historically
been renewed by the Manufacturers in the ordinary course of business. Such
Dealers have never had their Franchise Agreements involuntarily terminated by
a Manufacturer nor has a Manufacturer failed to renew a Franchise Agreement
upon request for renewal by such Dealer. See "Business of the Company and
Properties--Franchise Agreements."
Dealers affiliated with the Initial Lessees sell domestic and imported
luxury, family, economy and sport utility vehicles, trucks and vans of more
than 19 Manufacturers, including, Honda, Toyota, Lexus, Chevrolet, Saturn,
Ford, Infiniti, Jaguar, Acura, Lincoln-Mercury, Mitsubishi and Nissan. The
diversification of Manufacturers decreases the risks associated with changes
in consumer preferences and dependence on any single brand, Manufacturer or
market.
In addition to selling new vehicles, many of those Dealers lease new
vehicles and sell used vehicles. Lease arrangements could provide Dealers with
a steady source of late-model, off-lease vehicles for its used vehicle
inventory. Dealers also provide service and parts primarily for the vehicle
makes and models that they sell or lease, and perform both warranty and non-
warranty service work. In general, parts departments support the sales and
service divisions. Dealers may also sell factory-approved parts at retail to
their customers or at wholesale to independent repair shops. Dealers arrange
third party financing for their customers, sell vehicle service contracts and
arrange selected types of credit insurance for which they receive financing
fees, subject to a charge-back against a portion of the finance fees if
contracts are terminated prior to their scheduled maturity.
GENERAL INITIAL LEASE TERMS
The Company's Initial Leases will include the following general lease terms.
The Company expects to negotiate substantially the same terms with Lessees of
additional Properties.
Use of the Properties. Each Initial Lease generally will require the Initial
Property to be continuously operated for the same purposes as they were used
on the Company's purchase date unless the Company consents otherwise. The
Initial Leases will generally require that the Initial Lessee or any permitted
assignee operate the Initial Properties in an efficient and professional
manner.
Amounts Payable Under the Leases; Net Provisions. During the Fixed Term and
any Extended Terms, each Initial Lessee or its assigns will pay the Initial
Annual Base Rent and Annual Base Rent, which will be payable in monthly
installments. The Initial Annual Base Rent and Annual Base Rent will be
adjusted upward periodically based on a factor of the CPI, ranging from one-
half of CPI adjusted every other year to full CPI adjusted every year, which
may be subject to periodic minimum or maximum adjustments ranging from zero to
2%, respectively.
Each Initial Lease is what is commonly referred to as a "triple net" lease,
under which each Initial Lessee is required to pay thereunder rent and
substantially all expenses associated with operation of a particular Initial
Property. Such expenses include all taxes, assessments and levies, excises,
fees, and all other governmental charges with respect to such Initial
Property, and all charges for insurance, utilities, service and maintenance,
including, without limitation, electricity, telephone, trash disposal, gas,
oil, water, sewer, communication and all other utilities used in each Initial
Property, and any ground lease payments. Each Initial Lessee will generally be
obligated to comply with all laws, contracts, covenants and restrictions
affecting an Initial Property and to perform all obligations under any ground
lease affecting an Initial Property.
43
<PAGE>
Maintenance, Alterations, Capital Additions or Improvements. Each Initial
Lessee or its assigns is obligated, at its sole cost and expense, to maintain
its Initial Property in good order, repair and appearance and to make
structural and non-structural, interior and exterior, foreseen and unforeseen,
and ordinary and extraordinary repairs and replacements, which may be
necessary and appropriate to keep such Initial Property in good order, repair
and appearance (excluding ordinary wear and tear) or which may be required by
any governmental authority, including those required to continue to satisfy
any licensure requirements related to the operation of the Dealership or
Related Business. The Company will not be required to build or rebuild any
improvements to any Initial Property, or to make any repairs, replacements,
alterations, restorations or renewals to any Initial Property.
Each Initial Lessee or its assigns, at its sole cost and expense, may make
alterations, additions, changes and/or improvements to each Initial Property
with the prior written consent of the Company, provided that the value and
primary intended use of such Initial Property (determined in the Company's
reasonable judgment) is not impaired. The Company may, but is under no
obligation to, provide or arrange construction, permanent or other financing
for any addition, alteration or improvement, the terms of which will be
separately negotiated. All improvements constructed upon each Initial Property
by Initial Lease during the Fixed Term or an Extended Term of an Initial
Lease, including all additions, alterations and replacements, for so long as
the lease is in effect (including following any sublease or assignment of the
Initial Lease) will be the sole property of the Initial Lessee during the
Fixed Term and the Extended Terms. Upon the expiration or early termination of
such Initial Lease, all improvements, additions, alterations and replacements
will become the Property of the Company. All machinery, equipment, furniture,
furnishings and other personal property installed at the expense of an Initial
Lessee on any Initial Property will remain the property of such Initial Lessee
and may be removed by such Initial Lessee at the expiration or earlier
termination of the Initial Lease.
Insurance. Each Initial Lease provides that the Initial Lessee will maintain
insurance on the related Initial Property under the Initial Lessee's insurance
policies providing for the following coverages in such amounts as are or shall
customarily be insured against with respect to properties similar to the
Initial Properties, including: (i) fire, vandalism and malicious mischief,
extended coverage perils and all physical loss perils, (ii) commercial general
public liability (including personal injury and property damage), (iii) flood
(when the Initial Property is located in whole or in material part in a
designated flood plain area), earthquake and other similar hazards as may be
customary for comparable properties in the area, (iv) worker's compensation
and (v) such other insurance as the Manufacturer under the relevant Franchise
Agreement or any holder of a mortgage, deed of trust or other security
agreement on such Initial Property (a "Company Mortgagee") may reasonably
require, which at the time is usual and commonly obtained on commercially
reasonable terms in connection with properties similar in type of building
size and use to the Initial Property and located in the geographic area where
the Initial Property is located. The foregoing insurance policies will name
the Company and any company mortgagee as additional insureds or loss payees,
as applicable. Each Initial Lease specifies the deductibles for insurance
covering each class of risk. Notwithstanding, there will be risks for which
insurance will not be obtainable or will be prohibitively expensive. In such
event, an Initial Lessee's ability to restore the Initial Property may be
dependent on its internally generated funds or borrowing capacity.
Damage to, or Condemnation of, a Property. In the event of any insurable
damage or destruction to any Initial Property, the Initial Lessee thereof will
submit complete and detailed plans and specifications to the Company, and upon
authorization of the Company (which will not be unreasonably withheld or
delayed), will have the obligation to promptly fully to repair or restore the
same, at the Initial Lessee's expense so as to make such Leased Property at
least equal in value to such Initial Property immediately prior to such
occurrence and as nearly similar to it in character as is practicable and
reasonable. The Annual Base Rent, real estate taxes and other impositions on
the particular Initial Property will be proportionately abated during the time
of restoration, but only to the extent of any rental interruption insurance
proceeds actually received by the Company. If any Initial Property is damaged
by an insurable event to such an extent that the Initial Property is
"completely destroyed" (which will be sufficient damage to such Leased
Property such that the Company and the Initial Lessee agree to that
classification) or "partially destroyed" (which will be damage to such Initial
Property such
44
<PAGE>
that the Initial Property will not be suitable for use by a Dealership or
Related Business (as determined by a reasonable Dealer in light of standard
trade practices) within 180 days of the occurrence of such damages), the
Initial Lessee may elect to terminate the relevant Initial Lease upon 30 days
notice to the Company. In the event of the termination of the Initial Lease
upon an Initial Property being "completely destroyed" or "partially
destroyed," the Initial Lessee will have no obligation to repair, rebuild or
replace such Initial Property, and the entire insurance proceeds will belong
to Landlord.
If at any time during the Term or any Extended Term, any Initial Property is
totally and permanently taken by right of eminent domain or by conveyance made
in response to the threat of the exercise of such right ("Condemnation"), the
Initial Lease will terminate as to Initial Property so taken as of the date
the condemning authority has the right to possession of the Initial Property
being condemned. The Initial Lessee will be required to pay all outstanding
applicable rent and other charges through the date of termination. The Initial
Lease will not terminate if the condemnation occurred due to the failure of
the Initial Lessee to maintain such Initial Property, whether or not such
failure constituted an event of default at the time of the Condemnation.
If a portion of an Initial Property is taken by condemnation, the Initial
Lease will remain in effect as to such Initial Property if such Initial
Property is not thereby rendered unsuitable for use as a Dealership or Related
Business. In such event, the Company will retain the amount of any award
received by the Company, is obligated to apply such award to restore the
Initial Property, and any excess after such application will be retained by
the Company. Any award made by the condemning authority to the Intial Lessee
will belong to the Initial Lessee.
Financial Covenants. All affiliated Initial Lessees and Guarantors, if any,
as a group will be required to maintain a Rent Coverage Ratio of at least one
and one-half-to-one as of the date of the Initial Lease and at 24 month
intervals thereafter, computed as the aggregate of net income before taxes
plus mortgage interest, rent expense, depreciation, compensation of principals
of the Initial Lessees, management fees plus the annual LIFO adjustment and
other non-cash expenses, less recurring capital expenditures and gain (loss)
on sale of real estate, dividends and/or profits taken out of the Initial
Lessees and Guarantors if any, divided by the aggregate of the Initial
Lessees' and Guarantors', if any, obligations under the Initial Leases. In
addition, the Initial Lessee will be required to comply with all financial
covenants imposed by Manufacturers with whom the Initial Lessee has a
Franchise Agreement. These covenants have been designed to minimize the
likelihood of loss to the Company, by permitting the Company to establish the
ability of affiliated Initial Lessee's (and any Guarantors) to pay rent by
periodically monitoring compliance with the Rent Coverage Ratio, monitor
compliance with other financial guidelines established by the Manufacturer, or
require an Initial Lessee to provide additional security in the form of a
Guaranty of an Affiliate.
Assignment and Subletting. The Initial Leases provide that each Initial
Lessee may not, without the prior written consent of the Company (which will
not be unreasonably withheld) or upon compliance with conditions established
by the Company, assign, mortgage, pledge, hypothetate, encumber or otherwise
transfer any Initial Lease or sublease any Initial Property, in whole or in
part, except to an Affiliate. An assignment of the Initial Lease includes any
change of control of the Initial Lessee. In the event that (i) the Company
withholds any consent to any assignment or transfer of such Initial Lease or
any interest herein, and (ii) such assignee or transferee is approved by the
relevant Manufacturer for continuation as a franchisee, there will be a
presumption that such assignment or transfer was reasonable and the Initial
Lessee will have the burden of rebutting such presumption and of proving that
such consent was in fact reasonably withheld (or that such conditions were
reasonable). The Company will also receive an assignment of all management,
operating or service agreements relating to the maintenance, management,
possession or use of an Initial Property.
If the Company withholds its consent to any assignment or if the Company
establishes conditions to approval of any assignment but such conditions have
not been complied with to the satisfaction of the Company, the Initial Lessee
will continue to be primarily liability under the Initial Lease. Any
assignment or other transfer of all or any portion of the Initial Lessee's
interest in an Initial Lease in violation of the restrictions on assignment or
subletting will be voidable at the Company's option.
45
<PAGE>
If the Initial Lessee requests the assignment of an Initial Lease with
respect to less than the entire Initial Property, and such Inital Property is
not a separate subdivided lot, the Company may condition its approval of an
assignment upon a showing that the Initial Lessee has taken the actions
necessary to sever and spin-off one or more of such parcels of such Initial
Property from such Initial Lease.
The Initial Lessee will need the Company's prior approval before entering
into any sublease, license agreement or other arrangement which would have the
effect of causing all or a portion of the amount received or accrued by the
Company under the Initial Leases to be treated as other than "rents from real
property" within the meaning of Section 856(d) of the Code.
Indemnification. Under each Initial Lease, an Initial Lessee indemnifies,
and is obligated to save harmless, the Company generally from and against
liabilities, costs and expenses (including reasonable attorneys' fees and
expenses) and actual or consequential damages imposed upon or asserted against
the Company, its officers, directors, employees, shareholders, agents or
Affiliates on account of, among other things, (a) the use, condition,
operation or occupancy of the Initial Properties; (b) any activity, work, or
thing done, or permitted or suffered by the Initial Lessee in, on or about the
Initial Properties; (c) any acts, omissions, or negligence of Initial Lessee
or any person claiming under the Initial Lessee, or the contractors, agents,
employees, invitees, or visitors of the Initial Lessee or any such person; (d)
any breach, violation, or nonperformance by the Initial Lessee or any person
claiming under the Initial Lessee or the employees, agents, contractors,
invitees, or visitors of the Initial Lessee or of any such person, of any
term, representation, warranty, covenant, or provision of this Initial Lease
or any law, ordinance, or governmental requirement of any kind; (e) any injury
or damage to the person, property or business of Lessee, its employees,
agents, contractors, invitees, visitors, or any other person entering upon any
Initial Property under the express or implied invitation of the Initial
Lessee; (f) any accident, injury to or death of persons or loss or damage to
any item of property occurring at any Initial Property; (g) any environmental
law or any pollution or other threat to human health or the environment at,
arising out of or relating to any Initial Property, and (h) any brokers' or
agents' fees and commissions. If any action or proceeding is brought against
the Company or any of its employees, or agents by reason of any such demand,
claim, or cause of action, the Initial Lessee, upon notice from the Company,
will defend the same at the Initial Lessee's expense with counsel reasonably
satisfactory to the Company. In the event the Company reasonably determines
that its interests and the interests of the Initial Lessee in any such action
or proceeding are not substantially the same and that Initial Lessee's counsel
cannot adequately represent the interests of the Company, the Company shall
have the right to hire separate counsel in any such action or proceeding and
the reasonable costs thereof shall be paid for by the Initial Lessee. The
Initial Lessees' obligations to indemnify the Company will continue after the
expiration or earlier termination of the Initial Lease until the later of (i)
two years following the date of the Initial Lease, (ii) the expiration of the
period 90 days after the date the Company has actual knowledge of the
existence of a claim covered by indemnification, or (iii) 90 days after the
expiration of the applicable statute of limitations for claims arising from,
or relating to, any environmental law or any pollution or other threat to
human health or the environment.
Environmental Matters. Each Initial Lease provides for various
representations and warranties by the Lessee relating to environmental matters
with respect to each Initial Property. Each Initial Lease also requires the
Initial Lessee to indemnify and hold harmless the Company from and against all
liabilities, costs and expenses imposed upon or asserted against the Company,
the Initial Lessee or the Initial Property on account of, among other things,
any federal, state or local law, ordinance, regulation, order or decree
relating to the protection of human health or the environment in respect of
the Initial Property (irrespective of whether there has occured any violation
of any environmental law). Each Initial Lessee is required to comply with all
environmental laws. Notwithstanding the Initial Lease provisions, the
environmental laws impose liabilities on the owner of property, therefore, the
Company could incur liabilities regardless of the Initial Lease provisions,
especially if the Initial Lessee defaults on its obligations to the Company.
Events of Default. The following events, among others, constitute "Events of
Default" under the Initial Leases: (a) the Initial Lessee fails to pay in full
any installment of rent, or any other monetary obligation payable by the
Initial Lessee to the Company hereunder, within ten days after notice is given
by the Company to the
46
<PAGE>
Initial Lessee (except that after two defaults within any 12 month period, any
further default during such 12 month period will constitute an immediate event
of default); (b) the Initial Lessee fails to observe and perform any covenant
(other than the covenant in respect of insurance, and certain conditions or
agreements required to be performed by the Initial Lessee and such failure
continues for a period of 20 days after written notice thereof is given to
Lessee by the Company; or if, by reason of the nature of such default, the
same cannot with due diligence be remedied within said 20 days, such failure
will not be deemed to continue if the Initial Lessee proceeds promptly and
with due diligence to remedy the failure and diligently completes the remedy
thereof; provided, however, said cure period will not extend beyond 40 days if
the facts or circumstances giving rise to the default are creating a further
harm to the Company or the subject Initial Property and the Company makes a
good faith determination that the Initial Lessee is not undertaking remedial
steps that the Company would cause to be taken if the Initial Lease were then
to terminate; (c) if the Initial Lessee (i) admits in writing its inability to
pay its debts generally as they become due, (ii) files a petition in
bankruptcy or a petition to take advantage of any insolvency act, (iii) makes
an assignment for the benefit of its creditors, (iv) is unable to pay its
debts as they mature, (v) consents to the appointment of a receiver of itself
or of the whole or any substantial part of its property, or (vi) files a
petition or answer seeking reorganization or arrangement under the federal
bankruptcy laws or any other applicable law or statute of the United States of
America or any state thereof; (d) if the Initial Lessee, on insolvency
proceedings or on a petition in bankruptcy filed against it, is adjudicated as
bankrupt or a court of competent jurisdiction enters an order or decree
appointing, without the consent of the Initial Lessee, a receiver of Lessee of
the whole or substantially all of its property, or approving a petition filed
against it seeking reorganization or arrangement of the Initial Lessee under
the federal bankruptcy laws or any other applicable law or statute of the
United States or any state thereof, and such judgment, order or decree is not
vacated, dismissed or set aside within 60 days from the date of the entry
thereof; (e) if the estate or interest of the Initial Lessee in an Initial
Property or any part thereof is levied upon or attached in any proceeding and
the same is not vacated or discharged within 15 days after commencement
thereof (unless the Initial Lessee is contesting such lien or attachment in
accordance with the Initial Lease); (f) any representation, warranty or
covenant made by the Initial Lessee on behalf of itself or an Affiliate in the
Initial Lease or in any certificate, demand or request made pursuant hereto
proves to be incorrect, in any material respect, as of the date of issuance or
making thereof; (g) conviction of Lessee of a crime or offense constituting a
felony in the jurisdiction in which committed or under federal law; (h)
termination or relinquishment of the franchise or license pursuant to which an
Initial Lessee conducts business on or from the Initial Property, provided
that such event shall not constitute an Event of Default if (i) no other Event
of Default shall have occurred and be continuing, and (ii) at a date no later
than 24 months following such date of termination or relinquishment, the
Initial Lessee has entered into written new or amended franchises or licenses
for operation of the Dealership or Related Business at the Initial Property
satisfactory to the Company in its discretion applying commercially reasonable
standards; (i) default under any franchise or license pursuant to which Lessee
conducts business at a Property, if in the Company's judgment such default in
light of commercially reasonable standards and industry practice would have a
material adverse effect on the Initial Lessee or the Initial Property; (j) a
final, non-appealable judgment or judgments for the payment of money not fully
covered (excluding deductibles) by insurance is rendered against the Initial
Lessee and the same remains undischarged, unvacated, unbonded, unappealed or
unstayed for a period of 15 consecutive days; (k) the Initial Lessee shall
fail to observe the covenant in respect to insurance; or (l) except after the
effective date of a permitted assignment, if the Initial Lessee is liquidated
or dissolved or proceedings for that purpose or for the purpose of selling or
divesting the Initial Lessee of all or substantially all of its assets have
been brought.
Subject to the Initial Lease, the Company may exercise any one or more of
the following remedies upon the occurrence of an event of default: (i) the
Company may terminate the Initial Lease, (ii) exclude the Initial Lessee from
possession of the Initial Property, and (iii) use reasonable efforts to lease
such Initial Property to others. If an Initial Lease is terminated with
respect to a portion of the Initial Property is terminated, the Initial Lessee
will remain liable to the Company for damages in an amount equal to the rent
and other sums which would have been owing by the Initial Lessee as to the
Initial Property for the balance of the Fixed Term or Extended Term as if the
Lease had not been so terminated, less the net proceeds, if any, of any re-
letting of the Initial Property by the Company subsequent to such termination,
after deducting all the Company's expenses in connection with
47
<PAGE>
such re-letting. In the event of any event of default, the Company may cause
the Initial Lessee to vacate the Initial Property. In addition, the Company
may exercise any other rights that it may have under law or under the leases.
However, except in certain circumstances or for certain Initial Lessees, there
will be no cross defaults between or among any Initial Property to any other
Initial Property leased to affiliated Initial Lessees.
Right of First Offer and Option to Purchase Property. The Initial Lessees
under the Initial Leases may have a right of first offer to purchase the
Initial Property if the Company decides to sell the Initial Property. The
Company will notify the Initial Lessee of its intention to sell the Initial
Property and the Initial Lessee will have 30 days to extend an offer,
including specifying the purchase price for the Initial Property. The Company
may reject the offer, at its discretion based on its reasonable judgment. If
the Company rejects the Initial Lessee's offer, it may sell the Initial
Property to a third party on other terms if the purchase price is higher or
the Company reasonably believes such terms are more advantageous than the
terms proposed by the Initial Lessee. In addition, upon expiration of the
Fixed Term, or if the term is renewed, the Extended Term, provided that there
is no event of default, the Initial Lessee has an option to purchase the
Initial Property at a purchase price equal to the mean of the closest two
appraised values of the Initial Property by three independent appraisals.
Governing Law. Each Initial Lease will be governed by and construed in
accordance with the law of the state of Virginia (but not including such
state's conflict of laws rules) except when the law of the state in which the
Property is located is required to control.
GOVERNMENTAL REGULATIONS AFFECTING THE PROPERTIES
Environmental Laws. Under various federal, state and local laws, ordinances
and regulations, a current or previous owner, developer or operator of real
estate may be liable for the costs of removal or remediation of certain
hazardous or toxic substances at, on, under or in its property. The costs of
such removal or remediation could be substantial. Such laws often impose such
liability without regard to whether the owner or operator knew of, or was
responsible for, the release or presence of such hazardous or toxic
substances. The presence of such substances may adversely affect the owner's
ability to sell or rent such real estate or to borrow using such real estate
as collateral. Persons who arrange for the disposal or treatment of hazardous
or toxic substances also may be liable for the costs of removal or remediation
of such substances at the disposal or treatment facility, whether or not such
facility is owned or operated by such person.
The Company is not aware of any environmental liability that the Company
believes would have a material adverse effect on the Company's business,
financial condition or results of operations. No assurance can be given,
however, that all potential environmental liabilities have been identified,
that no prior owner or operator or other person created any material
environmental condition not known to the Company or that future uses,
conditions or legal requirements (including, without limitation, those that
may result from future acts or omissions or changes in applicable
environmental laws and regulations) will not result in the imposition of
environmental liabilities. The Initial Lessees and the Initial Sellers have
made certain representations in the Initial Leases and Contribution
Agreements, respectively, regarding the environmental matters and will
indemnify the Company for third party claims arising from breach of such
representations. There can be no assurance that such indemnification will be
available or uncontested.
Americans With Disabilities Act of 1990. The Initial Properties and any
subsequently acquired Properties must comply with Title III of the ADA to the
extent that such properties are "public accommodations" and/or "commercial
facilities" as defined by the ADA. Compliance with the ADA requires that
public accommodations "reasonably accommodate" individuals with disabilities
and that new construction or alterations made to "commercial facilities"
conform to accessibility guidelines unless "structurally impracticable" for
new construction, or technically infeasible for alterations. The Company
believes that the Properties substantially comply with all present
requirements under the ADA and applicable state laws. Under the Leases, the
Lessee is responsible for all costs associated with compliance with the ADA.
However, noncompliance with the ADA could result in the imposition of
injunctive relief, fines, an award of damages to private litigants or
additional capital expenditures to remedy such noncompliance.
48
<PAGE>
FRANCHISE AGREEMENTS
Each Dealer operates its Dealership pursuant to a written Franchise
Agreement with the applicable Manufacturer. The typical automotive Franchise
Agreement specifies the locations at which the Dealer has the right and the
obligation to sell motor vehicles and related parts and products and to
perform certain approved services in order to serve a specified market area.
The designation of such areas and the allocation of new vehicles among
Dealerships are subject to the discretion of the Manufacturer, which generally
does not guarantee exclusivity within a specified territory. A Franchise
Agreement may impose requirements on the Dealer concerning such matters as the
showrooms, the facilities and equipment for servicing vehicles, the
maintenance of inventories of vehicles and parts, the maintenance of minimum
net working capital and the training of personnel. Compliance with these
requirements is closely monitored by the Manufacturer. In addition,
Manufacturers require the Dealers to submit a financial statement of
operations on a monthly basis. The Franchise Agreement also grants the Dealers
the non-exclusive right to use and display the Manufacturer's trademarks,
service marks and designs in the form and manner approved by the Manufacturer.
Each Franchise Agreement sets forth the name of the person approved by the
Manufacturer to exercise full managerial authority over the operations of a
Dealership and the names and ownership percentages of the approved owners of
the Dealership and contains provisions requiring the Manufacturer's prior
approval of changes in management or transfers of ownership of the Dealership.
Each Initial Lessee's Dealerships are owned, directly or indirectly, by such
Initial Lessee. Several Manufacturers include provisions in their Franchise
Agreements that prohibit transfers of assets or real property considered
necessary for the conduct of the Dealership or similar restrictions that could
prohibit or require the prior consent of a Manufacturer before a Seller can
sell and the Company can purchase a Property.
Most Franchise Agreements expire after a specified period of time, ranging
from one to five years, and the Company believes that each Initial Lessee
expects to renew any expiring agreements in the ordinary course of business.
The typical Franchise Agreement provides for early termination or non-renewal
by the Manufacturer under certain circumstances such as change of management
or ownership without Manufacturer approval, insolvency or bankruptcy of the
Dealership, death or incapacity of the dealer manager, conviction of a dealer
manager or owner of certain crimes, misrepresentation of certain information
by the Dealer or owner to the Manufacturer, failure to adequately operate the
Dealership, failure to maintain any license, permit or authorization required
for the conduct of business, or material breach of other provisions of the
Franchise Agreement. The Dealership is typically entitled to terminate the
Franchise Agreement at any time without cause.
The motor vehicle franchise relationship is also governed by various federal
and state laws established to protect Dealers from the general unequal
bargaining power between the parties. The following discussion of state court
and administrative holdings and various state laws is based on management's
beliefs and may not be an accurate description of the state court and
administrative holdings and various state laws. Under the laws of Maryland,
Pennsylvania and Virginia (the "Initial Property States"), despite the terms
of contracts between the Manufacturers and the Dealers, Manufacturers may not
unreasonably withhold approval of a transfer of a Dealership. It is
unreasonable under laws of the Initial Property States for a Manufacturer to
reject a prospective transferee of a Dealership who is of good moral character
and who otherwise meets the Manufacturer's written, reasonable and uniformly
applied standards or qualifications relating to the prospective transferee's
business experience and financial qualifications. In addition, under the laws
of the Initial Property States and the laws of other states, franchised
Dealerships may challenge Manufacturers' attempts to establish new franchises
in the franchised dealers' markets, and state regulators may deny applications
to establish new Dealerships for a number of reasons, including a
determination that the Manufacturer is adequately represented in the market.
The laws of the Initial Property States limit the ability of Manufacturers to
terminate or fail to renew franchises.
COMPETITION
The Company believes that it is the first publicly-offered REIT to primarily
focus on consolidating the Properties utilized by Dealerships or Related
Businesses under one ownership structure. However, the Company
49
<PAGE>
believes that other REITs or entities could also target these types of
properties for acquisition or development, some of which REITs may have
greater financial resources or general real estate experience than the
Company. Those entities will compete with the Company in seeking Properties
for acquisition and disposition or, land for development. Lessees or their
Affiliates may own other Properties that will not be acquired by the Company
and which may instead be sold to competitors. See "Risk Factors--Competition
from Other Companies with Similar Business Objectives and Strategies."
EMPLOYEES
As of November 15, 1997, the Company had six employees. None of the
employees are represented by collective bargaining units. The Company believes
that its relationship with its employees is good.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings. Pursuant to the Leases,
the Lessees will indemnify the Company from and against all liabilities, costs
and expenses imposed upon or asserted against the Company as owner of the
Properties on account of certain matters relating to the operation of the
Properties by Lessee and, where appropriate, the ownership of the Properties
prior to their acquisition by the Company. See "--General Initial Lease
Terms--Indemnification."
50
<PAGE>
MANAGEMENT
TRUSTEES, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information concerning each of the
Company's trustees, executive officers and key employees:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John J. Pohanka(1)...... 69 Chairman of the Board
Thomas D. Eckert........ 50 President and Chief Executive Officer, Trustee
Scott M. Stahr.......... 41 Executive Vice-President and Chief Operating Officer
Donald L. Keithley...... 58 Executive Vice-President of Business Development
David S. Kay............ 31 Vice President and Chief Financial Officer
Robert M. Rosenthal(1).. 69 Trustee
</TABLE>
- --------
(1) The Company anticipates that Messrs. Pohanka and Rosenthal will become
members of the Board of Trustees prior to the effective date of this
Offering.
JOHN J. POHANKA will be the Chairman of the Board of Trustees. Mr. Pohanka
is the Chairman of the Pohanka Automotive Group. Mr. Pohanka has been involved
in the automotive industry for almost 50 years, and is a member of the second-
generation of the Pohanka family to be involved in the automotive industry,
with the first Pohanka dealership having been founded in 1919. The Pohanka
Automotive Group is currently comprised of eight Dealerships, each of which is
located in the Washington, D.C. Metropolitan Area. In 1996, the Pohanka
Automotive Group's Dealerships sold more than 11,900 new and used motor
vehicles. The Pohanka Automotive Group's Dealerships have received numerous
awards, including the Time Magazine Quality Dealer Award. Mr. Pohanka has been
active in a number of national and local industry and business groups during
his career, having served as past President of the National Automobile Dealers
Association, a past President of the National Capital Area Automotive Trade
Association, and a past Chairman of the National Institute for Automotive
Service Excellence, a group which he co-founded. Mr. Pohanka also is a co-
founder of the National Automobile Technicians Educational Foundation. Mr.
Pohanka is a graduate of Princeton University.
THOMAS D. ECKERT is the Company's President and Chief Executive Officer and
is a member of the Board of Trustees. From 1983 to 1997, Mr. Eckert was
employed by Pulte Home Corporation ("Pulte"), the largest homebuilding firm in
the U.S. Most recently, Mr. Eckert served as President of Pulte's Mid-Atlantic
Region, which included oversight of the company's land acquisition,
development and homebuilding operations from Virginia to New Jersey. Mr.
Eckert is a former director of PHM Mortgage Company and is currently a
director of the Munder Funds, a $6.2 billion mutual fund group, and the
Celotex Corporation, a building products manufacturing entity with $700
million in annual revenues. Prior to working at Pulte, Mr. Eckert was employed
with the public accounting firm of Arthur Andersen LLP for over seven years.
Mr. Eckert is a graduate of the University of Michigan.
SCOTT M. STAHR is the Company's Executive Vice-President and Chief Operating
Officer. From 1985 to 1997, Mr. Stahr was a Principal at LaSalle Partners, a
Chicago-based real estate investment firm. In that role, Mr. Stahr was
responsible for sourcing, underwriting and negotiating acquisitions of office,
retail, parking and industrial properties. Mr. Stahr has also advised and
provided consulting services to corporate and institutional clients on the
acquisition, disposition and value enhancement of their real estate-related
holdings. Prior to joining LaSalle Partners, Mr. Stahr was a practicing
attorney with a broad commercial litigation and real estate practice. Mr.
Stahr is a graduate of the University of Virginia and holds a J.D. from the
University of Texas.
DONALD L. KEITHLEY is the Company's Executive Vice-President of Business
Development. Mr. Keithley was the J.D. Power and Associates Partner in charge
of Dealer Relations from 1984 to 1997. In 1996, Mr. Keithley authored "The
Revolution in Automotive Retailing: A Perspective of the New Millennia," a
book which addresses the rapidly evolving changes in the dealership franchise
system. He has given numerous presentations on this subject to executives
within the industry. Before his tenure at J.D. Power and Associates,
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<PAGE>
Mr. Keithley was employed by the Toyota Motor Company and the Ford Motor
Company for numerous years. Mr. Keithley received a Masters in Business
Administration from the University of California at Los Angeles, and currently
serves on the Business Advisory Council for Loyola Marymount University.
DAVID S. KAY is the Company's Vice-President and Chief Financial Officer.
Prior to joining the Company, Mr. Kay was employed by the public accounting
firm of Arthur Andersen LLP in Washington, D.C. for approximately ten years.
His areas of expertise included emerging companies in the automotive, retail,
and distribution industries. While at Arthur Andersen LLP, Mr. Kay provided
clients with consultation regarding mergers and acquisitions, business
planning and strategy and equity financing. He also has several years of
experience in capital formation projects, roll-up transactions, and initial
public offerings for motor vehicle dealerships across the nation. Mr. Kay has
participated on an NADA task force and has given presentations at NADA
conventions and at other industry seminars. Mr. Kay is a graduate of James
Madison University.
ROBERT M. ROSENTHAL will be a member of the Board of Trustees. Mr. Rosenthal
is the Chairman of the Rosenthal Automotive Organization. He has been involved
in the automotive industry for over 40 years, and during that time has founded
more than 35 Dealerships. With 19 current Dealerships, the Rosenthal
Automotive Organization was the nation's 14th largest automotive group in
terms of total new and used vehicle retail sales. In 1996, the Rosenthal
Automotive Group Dealerships sold more than 31,500 new and used motor
vehicles. Under Mr. Rosenthal's leadership, the Rosenthal Automotive
Organization's Dealerships have received numerous national and local awards,
including the Time Magazine Quality Dealer Award, the International American
Automobile Dealers/Sports Illustrated Dealer of Distinction, the Acura
Precision Team Award, the Jaguar Pride of Jaguar Award, and the Mazda
President's Award. Mr. Rosenthal has been active in a number of national and
local industry and business groups during his career, including, the
Washington New Automobile Dealers Association, of which he has served as a
past Director and President, the National Automobile Dealers Association, the
Chief Executives Organization and the World Business Council. He also serves
on the Board of Directors of First Virginia Bank and is an officer and trustee
of the Phillips Collection. Mr. Rosenthal is a graduate of Temple University.
COMMITTEES OF THE BOARD OF TRUSTEES
Audit Committee. Promptly following the closing of the Offering, the Board
of Trustees of the Company will establish an Audit Committee. The Audit
Committee will be established to make recommendations concerning the
engagement of independent public accountants, to review with the independent
accountants the plans and results of the audit engagement, to approve
professional service provided by the independent public accountants, to review
the independence of the independent public accountants, to consider the range
of audit and non-audit fees and to review the adequacy of the Company's
internal accounting controls.
Executive Committee. Promptly following the closing of the Offering, the
Board of Trustees of the Company will establish an Executive Committee.
Subject to the Company's conflicts of interest policies, the Executive
Committee may be granted certain authority to acquire and dispose of real
property and the power to authorize, on behalf of the full Board of Trustees,
the execution of certain contracts and agreements, including those related to
the borrowing of money by the Company, and, consistent with the Partnership
Agreement, to cause the Operating Partnership to take such actions.
Executive Compensation Committee. Promptly following the closing of the
Offering, the Board of Trustees of the Company will establish an Executive
Compensation Committee to determine compensation for the Company's executive
officers and to implement and administer the Company's Share Incentive Plan.
COMPENSATION OF TRUSTEES
The Company intends to pay its Trustees who are not employees of the Company
or affiliated with a Seller $ for their services as Trustees. Each non-
employee trustee (other than Messrs. Pohanka and Rosenthal) also will receive
a grant of options to purchase Units under the Company's Plan. See "--
Incentive Plan."
52
<PAGE>
EXECUTIVE COMPENSATION
The Company was organized in October 1997, did not conduct any prior
operations and, accordingly, did not pay any compensation to its executive
officers for the year ended December 31, 1996. The following table below sets
forth the annual base salary rates and other compensation expected to be paid
in 1998 to the Company's Chief Executive Officer and each of the Company's
other executive officers.
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------ ------------
NAME AND SECURITIES
PRINCIPAL UNDERLYING
POSITION SALARY($)(1) BONUS($)(2) OPTIONS
--------- ------------ ----------- ------------
<S> <C> <C> <C>
Thomas D. Eckert......................... 350,000 740,666
President and Chief Executive Officer
Scott M. Stahr........................... 225,000 401,194
Executive Vice President and
Chief Operating Officer(3)
Donald L. Keithley....................... 200,000 185,166
Executive Vice President of
Business Development
David S. Kay............................. 150,000 308,611
Vice President and
Chief Financial Officer
</TABLE>
- --------
(1) This reflects the initial annual base salaries payable for the 12-month
period beginning on the date of commencement of each officer's employment
agreement. See "--Employment Agreements."
(2) Each executive officer named above will be eligible for a bonus of up to
100% of their initial base salary. In addition, Mr. Keithley is also
eligible for an additional incentive bonus of $200,000.
(3) Mr. Stahr received a signing bonus of $250,000 to compensate him for
terminating his employment with his prior employer.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of the
executive officers named in the table above. These agreements are for a four
year term and provide that the executive officers agree to devote their full
business time to the operation of the Company (except as the Company otherwise
agrees, including on behalf of the Operating Partnership). The term is
shortened to June 30, 1998 if the Company has not completed its initial public
offering by such date. The employment agreements permit the Company to
terminate the executives' employment with appropriate notice for or without
cause. In addition, executives may resign for good reason (generally defined
in the agreements to include the Company's failure to comply with the
agreements' material terms, the reduction of responsibilities and duties or,
for Mr. Eckert, his voluntary departure from the Board of Trustees) ,
relocation, or a change of control. In general terms, a change of control
occurs (i) if a person, entity, or group (with certain exceptions) acquires
more than 40% of the Company's then-outstanding voting securities, (ii) if the
Company merges into another entity unless prior Company shareholders have at
least 60% of the combined voting power of the securities in the merged entity,
or (iii) the liquidation, dissolution, or sale or disposition of substantially
all of the Company's assets.
If the executives' employment ends for any reason, the Company will pay
accrued salary, bonuses already determined, and other existing obligations. In
addition, if the Company terminates the employment of any of Messrs. Eckert,
Stahr, or Kay without cause or any of them resigns for good reason, the
Company will be obligated to pay (i) a lump sum payment of severance equal to
24 months' salary, (ii) payment of premiums for the period of group health
coverage, if any, to which he is entitled by law, and (iii) a pro rata annual
bonus for the year of termination. Notwithstanding the foregoing, the Company
has not agreed to pay severance and provide the foregoing benefits if the
executives' employment ends because of expiration or non-extension of their
agreements, although Messrs. Eckert and Kay have separate arrangements for
certain benefits as described in "Underwriting."
53
<PAGE>
While employed and for a one year period after employment, the executives
have agreed not to compete with the Company by working with or investing in
any enterprise engaged in forming or operating Dealerships or that invest
primarily in Dealerships or Related Businesses or properties used by
Dealerships or Related Businesses or that provide real estate financing to
Dealerships or Related Businesses.
INCENTIVE PLAN
The Company has established the Plan for the purpose of attracting and
retaining trustees, executive officers and other key employees. Each option
granted pursuant to the Plan shall be designated at the time of grant as
either an "incentive option" or as a "non-qualified option." If the grant is
for an "incentive option," the Company will issue options for Common Shares.
If the grant is for "non-qualified options" the Company will issue options for
Units.
The Plan provides for the grants of options ("Options") to purchase a
specified number of Common Shares or Units. Under the Plan, Common Shares and
Units in an aggregate number equal to 8% of the Common Shares to be
outstanding on the closing of the Offering (including exercise of the
Underwriters' over-allotment) on a fully diluted basis will be available for
grants. Contemporaneously with the completion of the Offering, the Company
will grant Options for an aggregate number of Common Shares and Units equal to
6.625% of the Common Shares to be outstanding on the closing of the Offering
(including exercise of the Underwriters' over-allotment option) on a fully
diluted basis (the "Initial Grants") to the following key officers and
employees of the Company: Thomas D. Eckert, Scott M. Stahr, Donald L. Keithley
and David S. Kay. Participants in the Plan, who may be trustees, officers or
employees of the Company, or its subsidiaries or Company-owned partnerships,
will be selected by the Executive Compensation Committee. See also "--
Compensation of Trustees."
The Plan authorizes the Executive Compensation Committee to grant incentive
options at an exercise price to be determined by it, provided that such price
cannot be less than 100% of the fair market value of Common Shares on the date
on which the Option is granted. The exercise price of non-qualified options
may be any price at least 100% of the fair market value of Common Shares as
determined by the Executive Compensation Committee.
The Initial Grants will become exercisable, subject to certain conditions
being met, at a rate of 25% per year over four years commencing on the first
anniversary of their date of grant and will have a term of ten years. The
exercise price of the Options issued under the Initial Grants will be the
initial public offering price of the Common Shares. The exercise price for any
Option is generally payable in cash or, in certain circumstances, by the
surrender, at the fair market value on the date on which the Option is
exercised, of Common Shares.
All unexercisable Options held by an optionee will automatically be
forfeited if the optionee leaves employment for any reason other than death or
permanent disability. Upon a "change in control" (as defined in the Plan), all
unexercisable Options will become exercisable. The rights of any optionees to
exercise a Option may not be transferred in any way other than by will or
applicable laws of descent and distribution.
The Company also anticipates that it will grant Options to its non-employee
Trustees (other than Messrs. Pohanka and Rosenthal). The exercise price for
any of these Options will generally be payable in cash or, in certain
circumstances, by the surrender, at the fair market value on the date on which
the Option is exercised, of Common Shares.
The Executive Compensation Committee may grant options under the Plan in
substitution for outstanding options with higher exercise prices. In addition,
in the event of certain extraordinary events, the Executive Compensation
Committee may make adjustments in the aggregate number and kind of shares of
beneficial interest reserved for issuance, the number and kind of shares of
beneficial interest covered by outstanding awards and the exercise prices
specified therein as may be determined to be appropriate.
54
<PAGE>
The following table contains information concerning the grant of Share
Options under the Company's Plan expected to be made for the year ended
December 31, 1998. The table also lists potential realizable values of such
options on the basis of assumed annual compounded share appreciation rates of
5% and 10% over the life of the Options.
OPTION GRANTS IN CONNECTION WITH THE FORMATION TRANSACTIONS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
NUMBER OF % OF TOTAL PRICE APPRECIATION FOR
SECURITIES OPTIONS OPTION TERM
NAME AND UNDERLYING GRANTED TO EXERCISE OR (IN THOUSANDS)
PRINCIPAL OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
POSITION GRANTED(1) FISCAL YEAR ($/SH) DATE(2) 5%(3) 10%(3)
--------- ---------- ------------ ----------- ---------- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
Thomas D. Eckert........ 740,666 37.1% 15 $6,987 $17,706
President and Chief
Executive Officer
Scott M. Stahr.......... 401,194 20.1 15 3,785 9,591
Executive Vice
President and
Chief Operating Officer
Donald L. Keithley...... 185,166 9.3 15 1,747 4,427
Executive Vice
President of Business
Development
David S. Kay............ 308,611 15.4 15 2,911 7,378
Vice President and
Chief Financial Officer
</TABLE>
- --------
(1) The Options granted will become exercisable at a rate of 25% per year over
four years commencing on the first anniversary of their date of grant.
(2) The expiration date of the Options will be ten years after the date of the
grant.
(3) The potential realizable value is reported net of the option price, but
before the income taxes associated with exercise. These amounts represent
assumed annual compounded rates of appreciation at 5% and 10% from the
date of grant to the expiration date of the Options.
INDEMNIFICATION OF TRUSTEES AND OFFICERS
The Declaration of Trust contains a provision permitted under Maryland law
eliminating (with limited exceptions) each Trustee's personal liability for
monetary damages for breach of any duty as a Trustee. In addition, the
Declaration of Trust and By-laws authorize the Company to indemnify its
present and former Trustees and officers and to pay or reimburse expenses for
such individuals in advance of the final disposition of a proceeding to the
maximum extent permitted from time to time under Maryland law. Maryland law
provides that indemnification of a person who is a party, or threatened to be
made a party, to legal proceedings by reason of the fact that such a person is
a trustee, officer, employee or agent of a corporation or was a trustee or
officer of the corporation or is or was serving as a trustee or officer of a
corporation or other firm at the request of a corporation, against expenses,
judgments, fines and amounts paid in settlement, is mandatory in certain
circumstances and permissive in others, subject to authorization by the Board
of Trustees.
The Company intends to enter into separate indemnification agreements with
each of the Company's Trustees and certain of its executive officers. The
indemnification agreements will require, among other things, that the Company
indemnify its Trustees and officers to the fullest extent permitted by law,
and advance to the Trustees and officers all related expenses, subject to
reimbursement if it is subsequently determined that indemnification is not
permitted. The Company also must indemnify and advance all expenses incurred
by Trustees and officers seeking to enforce their rights under the
indemnification agreements and cover trustees and officers under the Company's
Trustees' and officers' liability insurance. Although the form of
indemnification agreement offers substantially the same scope of coverage
afforded by provisions in the Declaration of Trust and By-laws, it provides
greater assurance to Trustees and officers that indemnification will be
available, because as a contract, it cannot be unilaterally modified by the
Board of Trustees or by the shareholders to eliminate the rights it provides.
55
<PAGE>
STRUCTURE AND FORMATION OF THE COMPANY
The Company was formed on October 20, 1997. The Operating Partnership was
formed on November 13, 1997.
STRUCTURE OF THE COMPANY
The Company will be the sole general partner of the Operating Partnership.
The Company will contribute the proceeds of the Offering to the Operating
Partnership in exchange for Units representing approximately 75.7% of the
partnership interests in the Operating Partnership. The Company will conduct
substantially all of its business, and will hold all of its interests in the
Properties, through the Operating Partnership. As the sole general partner of
the Operating Partnership, the Company will have the exclusive power to manage
and conduct the business of the Operating Partnership, subject to certain
exceptions set forth in the Partnership Agreement. See "Partnership
Agreement."
The following diagram depicts the ownership structure of the Company and the
Operating Partnership upon completion of the Offering and the Formation
Transactions (as defined below):
[OPERATING PARTNERSHIP CHART APPEARS HERE]
FORMATION TRANSACTIONS
The following transactions will be completed prior to or concurrently
with the completion of the Offering:
. Pursuant to the FBR Offering, FBR Asset Investment Corporation, an
Affiliate of the Representative, has agreed to acquire a number of
Common Shares equal to 4.4% of the Common Shares to be outstanding
on the closing of the Offering up to a maximum investment of
$10 million in a private placement at the initial public offering
price (less underwriting discounts and commissions).
56
<PAGE>
. The Company will contribute the net proceeds of the Offering and the FBR
Offering to the Operating Partnership in exchange for 15,690,377 Units.
. The Initial Sellers will contribute their ownership interests in the
Initial Properties to the Operating Partnership for Units. The aggregate
number of Units issuable to the Initial Sellers or to their Designees
will be 5,048,259 (based on the assumed initial public offering price).
The Operating Partnership will acquire certain Initial Properties
subject to the Mortgage Debt. In addition, the Company will pay transfer
taxes and other expenses relating to the acquisition of the Initial
Properties.
. The Company will use the proceeds of the Offering and the FBR Offering
to repay Mortgage Debt and up to approximately $2.3 million of
indebtedness under the FBR Loan, to acquire additional Properties, to
pay the expenses of the Offering, to pay the expenses of the Offering
and for general working capital purposes. See "Use of Proceeds."
. Operators or their Affiliates will enter into long-term triple-net
Leases with the Company and may enter into other agreements with the
Company with respect to the Initial Properties.
. Messrs. Pohanka and Rosenthal, Trustees and Affiliates of certain
Initial Sellers and Initial Lessees, will each receive Dealer Warrants.
. The Company expects to enter into a bank credit facility and to borrow
approximately $5 million prior to or on the closing of the Offering, of
which approximately $2.5 million will be guaranteed by Affiliates of Mr.
Rosenthal and approximately $2.5 million will be guaranteed by Mr.
Sheehy.
BENEFITS TO RELATED PARTIES
The consummation of the Formation Transactions will result in benefits to
certain officers and Trustees, which include the following:
. Messrs. Pohanka and Rosenthal have agreed to serve on the Board of
Trustees of the Company.
. Because Initial Sellers affiliated with Messrs. Pohanka and Rosenthal
will receive Units as consideration for the sale of certain Initial
Properties to the Company, they will defer taxes that would otherwise be
payable upon a taxable transfer of the Initial Properties. The Company
will be prevented in certain instances, due to adverse tax consequences
for certain Initial Sellers, from selling, financing or prepaying debt
secured by certain Initial Properties or guaranteed by certain Initial
Sellers. See "--Lock-out Provisions."
. Messrs. Pohanka and Rosenthal will each receive the Dealer Warrants. See
"Related Transactions--Transactions with Trustees--Dealer Warrants."
. The Company has entered into employment agreements with Thomas D.
Eckert, Scott M. Stahr, Donald L. Keithley and David S. Kay providing
for annual salaries of $350,000, $225,000, $200,000 and $150,000,
respectively. See "Management--Compensation."
. Thomas D. Eckert, Scott M. Stahr, Donald L. Keithley and David S. Kay
will be granted options to acquire a number of Common Shares and Units
equal to 3%, 1.625%, .75% and 1.25%, respectively, of the Common Shares
to be outstanding on the closing of the Offering (including exercise of
the Underwriters' over-allotment option) on a fully diluted basis at the
initial public offering price pursuant to the Company's Plan. See
"Management--Incentive Plan".
. Beginning two years after issuance of Units, each Initial Seller will
have the right to redeem its Units for cash, or at the option of the
Company, Common Shares (subject to certain limitations). See
"Partnership Agreement--Limited Partner Redemption Rights.
. Each Initial Property will be leased back to an Affiliate of the Initial
Seller, who will continue to control the operations of the Dealership or
Related Business. See "Business of the Company and Properties--The
Initial Properties, Leases and Dealerships."
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<PAGE>
LOCK-OUT PROVISIONS
The Contribution Agreements contain "Lock-out Provisions" that restrict the
Company's ability to sell, or will be required to maintain indebtedness on,
certain Initial Properties for periods ranging from zero to seven years
following the completion of the Offering, which could enable certain
participants in the Formation Transactions to defer certain tax consequences
associated with the Formation Transactions. See "Risk Factors--Conflicts of
Interests Among the Company and Certain Trustees--Ability of Certain Trustees
and Their Affiliates to Influence the Sale or Refinancing of Properties--,"
"Business of the Company and Properties," "Management" and "Certain
Relationships and Transactions."
BENEFITS OF THE UPREIT STRUCTURE
The benefits of the Company's UPREIT status and structure include the
following:
. Access to Capital. The Company's structure will, in the Company's judgment,
provide it with greater access to capital for refinancing and growth.
Sources of capital include the Common Shares sold in the Offering and
possible future issuances of debt or equity through public offerings or
private placements. The financial strength of the Company should enable it
to obtain financing at advantageous better rates and on acceptable terms.
. Growth of the Company. The Company's structure will allow shareholders,
through the ownership of Common Shares, and Sellers, through their
ownership of Units, to participate in the growth of the real estate market
through an ongoing business enterprise. In addition to the existing
portfolio of Initial Properties, the Company gives shareholders and Sellers
an interest in all future investment in those Properties.
. Liquidity. The Company's structure allows shareholders and Sellers the
opportunity to liquidate their capital investment through the disposition
of Common Shares or the conversion of Units into Common Shares. Pursuant to
the Partnership Agreement and subject to certain conditions, each Unit held
by the Company or any Seller may be redeemed for cash or, at the option of
the Company, exchanged for one Common Share (subject to adjustment).
. Tax Deferral. The Formation Transactions provide to the Sellers the
opportunity to defer the tax consequences that would arise from a sale or
contribution of their interests in the Properties and other assets to the
Company or to a third party.
ACQUISITION OF THE INITIAL PROPERTIES FROM THE INITIAL SELLERS
The Operating Partnership will acquire the Initial Sellers' interests in the
Initial Properties pursuant to Contribution Agreements with each Initial
Seller negotiated on an arm's length basis. The obligations of the Initial
Sellers to transfer such Initial Properties pursuant to the Contribution
Agreements is or will be conditioned upon the completion of the Offering, the
closing of the transactions contemplated by the Initial Leases and the
Contribution Agreements, and normal and customary conditions to the closing of
real estate transactions, including the consents of various lenders. In
addition, in certain circumstances, the Initial Sellers' will be required to
deliver the consent of certain Manufacturers under the applicable Franchise
Agreements to the sale of certain Initial Properties. The Initial Sellers are
in the process of obtaining such lender or Manufacturer consents, if
applicable, and expect to obtain all necessary consents prior to the
completion of the Offering. The Contribution Agreements also contain
representations and warranties to the Operating Partnership concerning the
ownership and operation of the Initial Properties and environmental matters
and certain other covenants, representations and warranties customarily found
in real estate purchase agreements. Claims for indemnification for any breach
under the Contribution Agreements could be made by the Operating Partnership
for approximately two years from the completion of the Offering, subject to
longer periods for breaches relating to tax and environmental matters.
Although each Initial Seller is obligated during the Indemnification period to
maintain a net worth equal to the purchase price for the relevant Initial
Property, there is no assurance that an Initial Seller will be able to satisfy
its indemnification obligation.
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<PAGE>
RELATED TRANSACTIONS
TRANSACTIONS WITH TRUSTEES
Dealer Warrants. Messrs. Pohanka and Rosenthal are Trustees of the Company
and principals of certain Initial Sellers. They will each be granted the
Dealer Warrants.
Acquisition of Initial Properties. Mr. John J. Pohanka is Chairman of
Pohanka Automotive Group. Upon consummation of this Offering, the Company will
purchase nine of the Initial Properties from Affiliates of Pohanka Automotive
Group for aggregate consideration of approximately $31.3 million. through the
issuance of 1,199,675 Units and the assumption of $13.3 million of mortgage
debt. The Company has agreed not to sell, and to maintain specified levels of
debt on, the Initial Properties acquired from Mr. Pohanka for periods ranging
from four years to seven years, with most being subject to a four year lock-
out period.
Mr. Robert M. Rosenthal is Chairman of Rosenthal Automotive Organization.
Upon consummation of this Offering, the Company will purchase seven of the
Initial Properties from Affiliates of Rosenthal Automotive Organization for
aggregate consideration of approximately $65.3 million to be paid through the
issuance of 3,429,486 Units and the assumption of $13.8 million of mortgage
debt. The Company has agreed not to sell, and to maintain specified levels of
debt on, the Initial Properties acquired from Mr. Rosenthal for periods
ranging from five to seven years, with most being subject to a seven year
lock-out period.
Initial Leases. The Company will enter into Leases with Affiliates of
Pohanka Automotive Group for nine Initial Properties for aggregate Initial
Annual Base Rent of approximately $3.5 million. See "Business of the Company
and Properties--The Initial Properties, Leases and Dealerships."
The Company will enter into Initial Leases with Affiliates of Rosenthal
Automotive Organization for seven Initial Properties for aggregate Initial
Annual Base Rent of approximately $7.2 million. See "Business of the Company
and Properties--The Initial Properties, Leases and Dealerships."
Guaranty of Debt of Operating Partnership. The Company expects to enter into
a bank credit facility and prior to or on the closing of the Offering the
Company will borrow $5 million, of which Affiliates of Mr. Rosenthal will
guarantee approximately $2.5 million.
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<PAGE>
PARTNERSHIP AGREEMENT
The following summary of the Partnership Agreement, and the descriptions of
certain provisions set forth elsewhere in this Prospectus, are qualified in
their entirety by reference to the Partnership Agreement, which is filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
MANAGEMENT
The Operating Partnership is organized as a Delaware limited partnership
pursuant to the terms of the Partnership Agreement. The Company will initially
hold approximately 75.7% of the Units, of the Operating Partnership and at all
times will hold at least 20% of outstanding Units, including its interest held
as a limited partner of the Operating Partnership (a "Limited Partner"). The
Company will conduct substantially all of its business through the Operating
Partnership. Pursuant to the Partnership Agreement, the Company, as the sole
general partner of the Operating Partnership, will generally have full,
exclusive and complete responsibility and discretion in the management and
control of the Operating Partnership, including the ability to cause the
Operating Partnership to enter into certain major transactions, including
acquisitions, dispositions and refinancings and to cause changes in the
Operating Partnership's line of business and distribution policies.
Limited Partners of the Operating Partnership will have no authority to
transact business for, or participate in the management or decisions of, the
Operating Partnership, except as provided in the Partnership Agreement and as
required by applicable law. The Company, as general partner, without the
consent of the Limited Partners may amend the Operating Partnership Agreement;
provided however, that any amendment (i) affecting the conversion factor or
redemption right in a manner adverse to the Limited Partners, (ii) adversely
affecting the rights of the Limited Partners to receive distributions or
allocations of profit or loss (other than in connection with the issuance of
additional Units), (iii) imposing on the Limited Partners any obligation to
make additional capital contributions, or (iv) affecting the Limited Partners'
registration rights, requires the consent of two-thirds of the Limited
Partners (excluding any Units held by the Company in its capacity as a Limited
Partner). Further, the Company, with the consent of the Limited Partners
(including the Company in its capacity as a Limited Partner) holding at least
two-thirds of the Units, may not sell, transfer or convey all or substantially
all of the assets of the Operating Partnership, including without limitation a
sale, assignment, transfer to another public or private company or approve a
merger or consolidation of the Operating Partnership. The Limited Partners
have no right to remove the Company as general partner of the Operating
Partnership.
INDEMNIFICATION
To the extent permitted by law, the Partnership Agreement provides for
indemnification of the Company, as general partner, its officers and trustees
and such other persons as the Company may designate to the same extent
indemnification is provided to officers and trustees of the Company in the
Declaration of Trust, and limits the liability of the Company and its officers
and trustees to the Operating Partnership to the same extent liability of
officers and trustees of the Company is limited under the Declaration of
Trust.
TRANSFERABILITY OF INTERESTS
Except for a transaction described in the following paragraph, the
Partnership Agreement provides that the Company may not voluntarily withdraw
from the Operating Partnership, or transfer or assign its interest in the
Operating Partnership. A Limited Partner may transfer its interests in the
Operating Partnership to a transferee subject to certain conditions,
including, the written consent of the Company, provided further that such
transfer does not cause the Operating Partnership to be treated as an
association taxable as a corporation for federal or state income tax purposes
and does not cause the Company to cease to comply with requirements under the
Code for qualification as a REIT. Such transferee will be admitted as a
substitute Limited Partner only upon assumption of all obligations of the
transferor Limited Partner, and the consent of the Company, as general
partner.
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<PAGE>
EXTRAORDINARY TRANSACTIONS
The Partnership Agreement provides that the Company may not generally engage
in any merger, consolidation or other combination with or into another person
or sale of all or substantially all of its assets, or any reclassification,
recapitalization or change of outstanding Common Shares (a "Business
Combination"), unless the holders of Units will receive, or have the
opportunity to receive, the same consideration per Unit as shareholders
receive per Common Share in the transaction and no more than 75% of the equity
securities of the acquiring entity shall be owned by the Company or its
Affiliates. If, in connection with a Business Combination, a purchase, tender
or exchange offer (the "Offer") shall have been made to and accepted by the
holders of more than 50% of the outstanding Common Shares, each holder of
Units shall be given the option to exchange its Units for the greatest amount
of cash, securities or other property which a Limited Partner would have
received had it (i) exercised its right to cause its Units to be redeemed by
the Operating Partnership (the "Redemption Right") and pursuant to the
Company's option to issue Common Shares in exchange for Units, received Common
Shares immediately prior to the expiration of the Offer, and (ii) sold,
tendered or exchanged pursuant to the Offer the Common Shares received upon
the exercise of the Redemption Right. In addition, the Company may merge into
or consolidate with another entity if immediately after such merger or
consolidation (i) substantially all of the assets of the successor or
surviving entity (the "Surviving Entity"), other than Units held by the
Operating Partnership's general partner, are contributed to the Operating
Partnership as a Capital Contribution in exchange for Units with a fair market
value equal to the value of the assets so contributed as determined by the
Surviving Entity in good faith, and (ii) the Surviving Entity expressly agrees
to assume, or acknowledge and ratify, all obligations of the General Partner
under the Partnership Agreement.
ISSUANCE OF ADDITIONAL UNITS
As sole general partner of the Operating Partnership, the Company has the
ability to cause the Operating Partnership to issue additional Units
representing general or limited partnership interests, including Preferred
Units in the Operating Partnership.
CAPITAL CONTRIBUTIONS AND ADDITIONAL FUNDS
The 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 borrowings or prior capital
contributions, the Company may borrow such funds from a financial institution
or other lender or through public or private debt offerings and lend such
funds to the Operating Partnership on the same terms and conditions as are
applicable to the Company's borrowing of such funds. The Partnership Agreement
and the Incentive Plan also provide that in the event the Company issues
additional shares of beneficial interest (including any issuance of Common
Shares pursuant thereto), the Company is required to contribute to the
Operating Partnership as an additional capital contribution any net proceeds
from such issuance in exchange for additional partnership interests with
preferences and rights corresponding to the beneficial interests so issued. As
an alternative to borrowing funds required by the Operating Partnership, the
Company may contribute the amount of such required funds as an additional
capital contribution to the Operating Partnership. If the Company so
contributes additional capital to the Operating Partnership, the Company's
partnership interest in the Operating Partnership will be increased on a
proportionate basis. Conversely, the partnership interests of the Limited
Partners will be decreased on a proportionate basis in the event of additional
capital contributions by the Company. See "Policies With Respect to Certain
Activities--Financing Policies."
AWARDS UNDER INCENTIVE PLAN
If Options granted in connection with the Incentive Plan are exercised at
any time or from time to time, the Partnership Agreement requires the Company
to contribute to the Operating Partnership as an additional contribution the
exercise price received by the Company in connection with the issuance of
Common Shares to such exercising participant. Upon such contribution the
Company will be issued a number of Units in the Operating Partnership equal to
the number of Common Shares so issued.
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DISTRIBUTIONS
The Partnership Agreement provides that the Operating Partnership shall
distribute cash on a quarterly basis (or more frequently at the election of
the Company, as general partner), pro rata in accordance with the partner's
respective percentage interests.
OPERATIONS
The Partnership Agreement requires that the Operating Partnership be
operated in a manner that will enable the Company to satisfy the requirements
for being classified as a REIT, unless the Company otherwise ceases to qualify
as a REIT and to ensure that the Partnership will not be classified as a
publicly traded partnership under the Code. Pursuant to the Partnership
Agreement, the Operating Partnership will assume and pay when due, or
reimburse the Company for payment of, all expenses it incurs relating to the
ownership and operation of, or for the benefit of, the Operating Partnership
and all costs and expenses relating to the operations of the Company.
LIMITED PARTNER REDEMPTION RIGHTS
Beginning two years after the issuance of the Units, the Limited Partners
will have the right to redeem their Units for cash based on the average market
price of the Company's Common Shares for the twenty days immediately preceding
the five trading days prior to the exercise of the right to have Units
redeemed by the Operating Partnership. The Company, in its sole discretion,
may assume the obligations of the Operating Partnership to redeem such Units,
in which case the Company will have the option, in its sole discretion, to
exchange the Units for cash or the issuance of a like number of Common Shares.
The Company may not exchange any Common Shares for Units if actual or
constructive ownership of such Common Shares would (i) violate the Ownership
Limit, (ii) result in the Company's shares being owned by fewer than 100
persons, (iii) result in the Company being "closely held" within the meaning
of Section 856(h) of the Code, (iv) cause the Company to own, directly 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 Common
Shares by such Limited Partner to be "integrated" with any other distribution
of Common Shares for purposes of complying with the registration provisions of
the Securities Act. See "Description of Common Shares of Beneficial Interest--
Restrictions on Ownership and Transfer." Following the expiration of the
foregoing restrictions, any Common Shares issued to the Company or any of the
Limited Partners upon redemption of their Units may be sold in the public
market pursuant to the registration statements which the Company will be
obligated to file under the Partnership Agreement. See "Common Shares
Available for Future Sale."
TAX MATTERS
Pursuant to the Partnership Agreement, the Company will be the "tax matters
partner" of the Operating Partnership and, as such, will have authority to
make certain tax decisions under the Code on behalf of the Operating
Partnership.
TERM
The Operating Partnership will continue in full force and effect until
December 31, 2073 or until sooner dissolved and terminated upon (i) the
dissolution, bankruptcy, insolvency or termination of the Company (unless the
Limited Partners elect to continue the Operating Partnership), (ii) the
passage of 90 days after the sale or other disposition of all, or
substantially all the assets of the Operating Partnership, or (iii) the
election by the Company, as general partner, that the Operating Partnership
should be dissolved, or (iv) by operation of law.
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PRINCIPAL SHAREHOLDERS OF THE COMPANY
The following table sets forth certain information regarding the expected
beneficial ownership of the Common Shares and Units immediately following the
consummation of the Offering and the Formation Transactions, by (a) each
person known by the Company to be the beneficial owner of more than 5% of the
Common Shares, (b) each Trustee of the Company, (c) each executive officer of
the Company and (d) all Trustees and executive officers of the Company as a
group. Unless otherwise indicated in the footnotes, all of such interests are
owned directly, and the indicated person or entity has sole voting and
investment power. The number of shares represents the number of Common Shares
the person holds or the number of Common Shares into which Units held by the
person are exchangeable (if the Company elects to issue shares or Units rather
than pay cash upon such exchange). The officers and Trustees of the Company
have agreed not to sell or exchange any Units, without the consent of the
Representative, for a period of two years following completion of the
Offering. See "Partnership Agreement--Limited Partner Redemption Rights."
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
COMMON COMMON SHARES/
SHARES/UNITS PERCENTAGE OF UNITS PERCENTAGE OF
BENEFICIALLY COMMON SHARES/UNITS BENEFICIALLY COMMON SHARES/UNITS
OWNED OWNED PRIOR TO OWNED AFTER OWNED FOLLOWING
NAME PRIOR TO OFFERING OFFERING(1)(2) OFFERING(2) OFFERING(3)
---- ----------------- ------------------- -------------- -------------------
<S> <C> <C> <C> <C>
Thomas D. Eckert(3)(4).. 10 100% -- --
Scott M. Stahr(3)(4).... -- -- -- --
Donald L.
Keithley(3)(4)......... -- -- -- --
David S. Kay(3)(4)...... -- -- -- --
John J.
Pohanka(1)(4)(5)....... -- -- 1,693,452 9.7%
Robert M.
Rosenthal(1)(4)(5)..... -- -- 3,923,263 20.0
FBR Asset Investment
Corporation(6)......... -- -- 1,677,931 10.1
Trustees and Executive
Officers as a group
(four persons)......... -- -- -- --
</TABLE>
- --------
(1) Assumes exchange of all outstanding Units for Common Shares.
(2) Assumes that all Units held by the person are redeemed for Common Shares.
The total number of Common Shares outstanding used in calculating the
percentage assumes that none of the Units held by other persons are
redeemed for Common Shares.
(3) Mr. Eckert owns 10 Common Shares prior to the Offering, which the Company
intends to repurchase immediately prior to the effective date of the
Offering. Excludes Options held by Messrs. Eckert, Stahr, Keithley and Kay
to acquire 740,666, 401,194, 185,166 and 308,611 Common Shares or Units,
respectively, which are not exercisable within 60 days from the date of
the Prospectus.
(4) The address for the executive officers and Trustees of the Company is c/o
1925 North Lynn Street, Suite 306, Arlington, Virginia 22209. Messers.
Pohanka and Rosenthal will join the Board of Trustees of the Company
immediately prior to the effective date of the Offering.
(5) Assumes exercise of Dealer Warrants for Units and exchange of the Units
for Common Shares.
(6) Includes Common Shares to be issued on exercise of the Underwriting
Warrants issued to the Representative, an Affiliate of FBR Asset
Investment Corporation.
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DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
The Company was formed as a REIT under the laws of the State of Maryland.
Rights of shareholders are governed by Title 8 of the Corporations and
Associations Articles, Annotated Code of Maryland (the "Maryland REIT Law")
and by the Declaration of Trust and By-laws. The following summary of the
terms of shares of beneficial interest of the Company does not purport to be
complete and is subject to and qualified in its entirety by reference to the
Declaration of Trust and By-laws, copies of which are filed as exhibits to the
Registration Statement of which this Prospectus is a part.
AUTHORIZED SHARES
The Declaration of Trust provides that the Company may issue up to 100
million Common Shares, par value $.01 per share, and 20 million Preferred
Shares, par value $.01 per share. Upon completion of the Offering and the
consummation of the Formation Transactions, there will be 15,590,377 Common
Shares issued and outstanding and no Preferred Shares issued and outstanding.
As permitted by the Maryland REIT Law, the Declaration of Trust contains a
provision permitting the Board of Trustees, without any action by the
shareholders of the Trust, to classify or reclassify any unissued Common
Shares or Preferred Shares into one or more classes or series of shares of
beneficial interest by setting or changing the preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or
distributions, qualifications or terms or conditions of redemption of such new
class or series of shares of beneficial interest, amend the Declaration of
Trust to increase or decrease the aggregate number of shares of beneficial
interest or the number of shares of any class of shares of beneficial interest
that the Trust has authority to issue. The Company believes that the power of
the Board of Trustees to issue additional shares of beneficial interest will
provide the Company with increased flexibility in structuring possible future
financings and acquisitions and in meeting other needs that might arise. The
additional shares of beneficial interest, including possibly Common Shares,
will be available for issuance without further action by the Company's
shareholders, unless action by the shareholders is required by applicable law
or the rules of any stock exchange or automated quotation system on which the
Company's securities may be listed or traded. Although the Board of Trustees
currently has no intention of doing so, it could authorize the Company to
issue a class or series that could, depending on the terms of such class or
series, delay, defer or prevent a transaction or a change in control of the
Company that might involve a premium price for the Common Shares and might
otherwise be in the best interests of the shareholders.
The Maryland REIT Law provides that no shareholder of the Company will be
personally liable for any obligation of the Company solely as a result of his
or her status as a shareholder of the Company. The Declaration of Trust
provides that no shareholder shall be liable for any debt or obligation of the
Company by reason of being a shareholder nor shall any shareholder be subject
to any personal liability in tort, contract or otherwise to any person in
connection with the property or affairs of the Company by reason of being a
shareholder. The Company's By-laws further provide that the Company shall
indemnify each present or former shareholder against any claim or liability to
which the shareholder may become subject by reason of being or having been a
shareholder and that the Company shall reimburse each shareholder for all
reasonable expenses incurred by him in connection with any such claim or
liability. Inasmuch as the Company carries public liability insurance which it
considers adequate, any risk of personal liability to shareholders is limited
to situations in which the Company's assets plus its insurance coverage would
be sufficient to satisfy the claims against the Company and its shareholders.
COMMON SHARES
All Common Shares offered hereby will be duly authorized, fully paid and
nonassessable. Subject to the preferential rights of any other class or series
of shares of beneficial interest and to the provisions of the Declaration of
Trust regarding the restriction of the transfer of shares of beneficial
interest, holders of Common Shares will be entitled to receive distributions
on shares if, as and when authorized and declared by the Board of
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Trustees out of assets legally available therefor and to share ratably in the
assets of the Company legally available for distribution to the shareholders
in the event of the liquidation, dissolution or winding-up of the Company
after payment of, or adequate provision for, all known debts and liabilities
of the Company.
Subject to the provisions of the Declaration of Trust regarding the
restriction of the transfer of shares of beneficial interest, each outstanding
Common Share entitles the holder to one vote on all matters submitted to a
vote of shareholders, including the election of trustees and, except as
provided with respect to any other class or series of shares of beneficial
interest, the holders of Common Shares will possess the exclusive voting
power. There is no cumulative voting in the election of Trustees, which means
that the holders of a majority of the outstanding Common Shares can elect all
of the Trustees then standing for election, and the holders of the remaining
shares will not be able to elect any trustees.
Holders of Common Shares have no conversion, sinking fund, redemption,
exchange or appraisal rights, and have no preemptive rights to subscribe for
any securities of the Company. Subject to the provisions of the Declaration of
Trust regarding the restriction on transfer of shares of beneficial interest,
Common Shares have equal dividend, distribution, liquidation and other rights.
Under the Maryland REIT Law, a Maryland real estate investment trust
generally cannot dissolve, amend its declaration of trust or merge, unless
approved by the affirmative vote or written consent of shareholders holding at
least two-thirds of the shares entitled to vote on the matter unless a lesser
percentage (but not less than a majority of all of the votes entitled to be
cast on the matter) is set forth in the real estate investment trust's
declaration of trust. The Company's Declaration of Trust provides for approval
by a majority of all the votes entitled to be cast on the matter in all
situations permitting or requiring action by the shareholders except with
respect to (a) the intentional disqualification of the Company as a real
estate investment trust or revocation of its election to be taxed as a real
estate investment trust (which requires the affirmative vote of the holders of
two-thirds of the number of Common Shares entitled to vote on such matter at a
meeting of the shareholders of the Company), (b) the election of Trustees
(which requires a plurality of all the votes cast at a meeting of shareholders
of the Company at which a quorum is present), (c) the removal of Trustees
(which requires the affirmative vote of the holders of a [majority] the
outstanding voting shares of the Company), (d) the amendment or repeal of the
[Independent Trustee provision] in the Declaration of Trust (which requires
the affirmative vote of [85%] of the Trustees or the holders of two-thirds of
the outstanding shares entitled to vote on the matter), (e) the amendment of
the Declaration of Trust by shareholders (which requires the affirmative vote
of a majority of votes entitled to be cast on the matter, [except under
certain circumstances specified in the Declaration of Trust which require the
affirmative vote of [two-thirds] of all the votes entitled to be cast on the
matter]), and (f) the dissolution of the Company (which requires the
affirmative vote of [two-thirds] of all the votes entitled to be cast on the
matter). Under the Maryland REIT Law, a declaration of trust may permit the
trustees by a two-thirds vote to amend the declaration of trust from time to
time to qualify as a real estate investment trust under the Code or the
Maryland REIT Law without the approval of the shareholders. The Company's
Declaration of Trust permits such action by the Board of Trustees. As
permitted by the Maryland REIT Law, the Declaration of Trust contains a
provision permitting the Board of Trustees, without any action by the
shareholders of the Trust, to amend the Declaration of Trust to increase or
decrease the aggregate number of shares of beneficial interest or the number
of shares of any class of shares of beneficial interest that the Trust has
authority to issue.
The registrar and transfer agent and registrar for the Common Shares is
American Stock Transfer & Trust Company.
The Company has applied for trading of the Common Shares on the Nasdaq
National Market System under the trading symbol "CARS."
PREFERRED SHARES
Preferred Shares may be issued from time to time, in one or more series, as
authorized by the Board of Trustees. Prior to the issuance of shares of each
series, the Board of Trustees is required by the Maryland REIT
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Law and the Declaration of Trust to fix for each series, subject to the
provisions of the Declaration of Trust the terms, preferences, conversion or
other rights, voting powers, restrictions, limitations as to distributions,
qualifications and terms or conditions of redemption, as permitted by Maryland
law. Because the Board of Trustees has the power to establish the preferences,
powers and rights of each series of Preferred Shares, it may afford the
holders of any series of Preferred Shares preferences, powers and rights,
voting or otherwise, senior to the rights of holders of Common Shares. The
issuance of Preferred Shares could have the effect of delaying or preventing a
change of control of the Company that might involve a premium price for
holders of Common Shares or otherwise be in their best interest. The Board of
Trustees has no present plans to issue any Preferred Shares.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For the Company to qualify as a REIT under the Code, among other things, no
more than 50% in value of its outstanding shares of beneficial interest may be
owned, actually or constructively under the applicable attribution rules of
the Code, by five or fewer individuals (as defined in the Code to include
certain tax-exempt entities other than, in general, qualified domestic pension
funds) during the last half of a taxable year (other than the first year for
which the election to be taxed as a REIT has been made) or during a
proportionate part of a shorter taxable year (the "Five or Fewer
Requirement"). In addition, if the Company, or an owner of 10% or more of the
Company, actually or constructively owns 10% or more of a Lessee of the
Company, the rent received by the Company (either directly or through any such
partnership) from such Lessee will not be qualifying income for purposes of
the REIT gross income tests of the Code. A REIT's stock or beneficial
interests must also be owned by 100 or more persons during at least 335 days
of a taxable year of 12 months or during a proportionate part of a shorter
taxable year (other than the first year for which an election to be treated as
a REIT has been made).
Because the Board of Trustees believes it is essential for the Company to
continue to qualify as a REIT, the Declaration of Trust, subject to certain
exceptions described below, provides that no person may own, or be deemed to
own by virtue of the attribution provisions of the Code, more than the
Ownership Limitation. Any transfer of Common or Preferred Shares that would
(i) result in any person owning, directly or indirectly, Common or Preferred
Shares in excess of the Ownership Limitation, (ii) result in the Common and
Preferred Shares 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, or (iv) cause
the Company to own, directly 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, shall be
null and void, and the intended transferee will acquire no rights in such
Common or Preferred Shares.
Subject to certain exceptions described below, if any purported transfer of
Common or Preferred Shares would (i) result in any person owning, directly or
indirectly, Common or Preferred Shares in excess of the Ownership Limitation,
(ii) result in the Common and Preferred Shares 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, or (iv) cause the Company to own, directly 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, the Common or Preferred Shares will be
designated as "Shares-in-Trust" and transferred automatically to a trust (the
"Share Trust") effective on the day before the purported transfer of such
Common or Preferred Shares. The record holder of the Common or Preferred
Shares that are designated as Shares-in-Trust (the "Prohibited Owner") will be
required to submit such number of Common or Preferred Shares to the Company
for registration in the name of the Share Trust. The Share Trustee will be
designated by the Company, but will not be affiliated with the Company. The
beneficiary of the Share Trust (the "Beneficiary") will be one or more
charitable organizations that are named by the Company.
Shares-in-Trust will remain issued and outstanding Common or Preferred
Shares and will be entitled to the same rights and privileges as all other
shares of the same class or series. The Share Trust will receive all dividends
and distributions on the Shares-in-Trust and will hold such dividends and
distributions in trust for the
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benefit of the Beneficiary. The Share Trustee will vote all Shares-in-Trust.
The Share 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 Share Trust and
resulting in the redesignation of such Common or Preferred Shares as Shares-
in-Trust.
The Prohibited Owner with respect to Shares-in-Trust will be required to
repay to the Share Trust 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 for which was on or after the date that such shares
became Shares-in-Trust. The Prohibited Owner generally will receive from the
Share Trustee the lesser of (i) the price per share such Prohibited Owner paid
for the Common or Preferred Shares 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) and (ii) the price per share received by
the Share Trustee from the sale of such Shares-in-Trust. Any amounts received
by the Share 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 the
Company, or its designee, at a price per share equal to the lesser of (i) the
price per share in the transaction that created such 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 the Company, or
its designee, accepts such offer. The Company 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 and (ii) the date
the Company 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 last sale price,
regular way, or, in case no such sale takes place on such day, the average of
the closing bid and asked prices, regular way, in either case as reported in
the principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the NYSE or, if the Common or
Preferred Shares are not listed or admitted to trading on the NYSE, as
reported in the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange on
which the Common or Preferred Shares are listed or admitted to trading or, if
the Common or Preferred Shares are not listed or admitted to trading on any
national securities exchange, the last quoted price, or if not so quoted, the
average of the high bid and low asked prices in the over-the-counter market,
as reported by the National Association of Securities Dealers, Inc. Automated
Quotation System or, if such system is no longer in use, the principal
automated quotations system that may then be in use or, if the Common or
Preferred Shares are not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker
making a market in the Common or Preferred Shares selected by the Board of
Trustees. "Trading Day" shall mean a day on which the principal national
securities exchange on which the Common or Preferred Shares are listed or
admitted to trading is open for the transaction of business or, if the Common
or Preferred Shares are not listed or admitted to trading on any national
securities exchange, 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 Common or Preferred Shares in
violation of the foregoing restrictions, or any person who owned Common or
Preferred Shares that were transferred to a Share Trust, will be required (i)
to give immediately written notice to the Company of such event and (ii) to
provide to the Company such other information as the Company may request in
order to determine the effect, if any, of such transfer on the Company's
status as a REIT.
The Declaration of Trust requires 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 Common and Preferred Shares,
within 30 days after January 1 of each year, to provide to the Company a
written statement or affidavit
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stating the name and address of such direct or indirect owner, the number of
Common and Preferred Shares owned directly or indirectly, and a description of
how such shares are held. In addition, each direct or indirect shareholder
shall provide to the Company such additional information as the Company may
request in order to determine the effect, if any, of such ownership on the
Company's status as a REIT and to ensure compliance with the Ownership
Limitation.
The Ownership Limitation generally will not apply to the acquisition of
Common or Preferred Shares by an underwriter that participates in a public
offering of such shares. In addition, the Board of Trustees, upon receipt of a
ruling from the Service or an opinion of counsel and upon such other
conditions as the Board of Trustees may direct, may exempt a person from the
Ownership Limitation under certain circumstances. However, the Board may not
grant an exemption from the Ownership Limit to any proposed transferee whose
ownership, direct or indirect, of shares of beneficial interest of the Company
in excess of the Ownership Limit would result in the termination of the
Company's status as a REIT. The foregoing restrictions will continue to apply
until (i) the Board of Trustees determines that it is no longer in the best
interests of the Company to attempt to qualify, or to continue to qualify, as
a REIT, and (ii) there is an affirmative vote of two-thirds of the votes
entitled to be cast on such matter at a regular or special meeting of the
shareholders of the Company.
The Ownership Limitation could have the effect of delaying, deferring or
preventing a transaction or a change in control of the Company that might
involve a premium price for the Common Shares or otherwise be in the best
interest of the shareholders of the Company.
All certificates representing Common or Preferred Shares will bear a legend
referring to the restrictions described above.
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE DECLARATION OF TRUST AND BY-LAWS
The following paragraphs summarize certain provisions of Maryland law and of
the Declaration of Trust and the By-laws of the Company. This summary does not
purport to be complete and is subject to and qualified in its entirety by
reference to the MGCL, the Maryland REIT Law, the Declaration of Trust and the
By-laws of the Company. The business combination provisions and, if the
applicable provision in the By-laws is rescinded, the control share
acquisition provisions of the MGCL, the provisions of the Declaration of Trust
on the removal of Trustees and the advance notice provisions of the By-laws
could have the affect of delaying, deferring or preventing a transaction or a
change in control of the Company that might involve a premium price for
holders of Common Shares or otherwise be in their best interest.
Business Combinations. Under the MGCL, as applicable to Maryland REITs,
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 REIT and any person
who beneficially owns ten percent or more of the voting power of the trust's
shares or an affiliate of the trust who, at any time within the two-year
period prior to the date in question, was an Interested Shareholder or an
affiliate of such an Interest Shareholder are prohibited for five years after
the most recent date on which the Interested Shareholder becomes an Interested
Shareholder. Thereafter, any such business combination must be recommended by
the board of trustees of such trust and approved by the affirmative vote of at
least (a) 80% of the votes entitled to be cast by holders of the trust'
outstanding voting shares of beneficial interest, and (b) two-thirds of the
votes entitled to be cast by holders of the trust's outstanding voting shares
of beneficial interest other than shares held by the Interested Shareholder
with whom or with whose Affiliate the business combination is to be effected,
unless, among other conditions, the trust's common shareholders receive a
minimum price (as defined in the MGCL) for their shares of beneficial interest
and the consideration is received in cash or in the same form as previously
paid by the Interested Shareholder for its shares. These provisions of the
MGCL do not apply, however, to business combinations that are approved or
exempted by the board of trustees of the trust prior to the time that the
Interested Shareholder becomes an Interested Shareholder. As permitted by the
MGCL, the Declaration of Trust exempts any "Business Combinations" involving
the issuance of Common Shares to any
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Initial Seller upon the exchange of Units acquired by any of them in
connection with the Formation Transactions or the acquisition by any of them
of any additional shares of beneficial interest in the Company. Accordingly,
the five-year prohibition and the super-majority vote requirement will not
apply to any "Business Combinations" between the Initial Sellers and the
Company. As a result, the Initial Sellers may be able to enter into "Business
Combinations" with the Company, which may or may not be in the best interests
of the shareholders, without the super-majority shareholder approval. See
"Description of Shares of Beneficial Interest--Certain Provisions of Maryland
Law and of the Company's Declaration of Trust and By-laws--Business
Combinations."
Control Share Acquisitions. The Declaration of Trust will contain a
provision exempting from the control share acquisition statute any and all
acquisitions by any person of the Company's shares of beneficial interest.
There can be no assurance that such provision will not be amended or
eliminated at any point in the future. The MGCL, as applicable to Maryland
REITs, provides that "control shares" of a Maryland real estate investment
trust 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 beneficial interest owned by the
acquiror or by officers or trustees who are employees of the trust. "Control
shares" are voting shares of beneficial interest which, if aggregated with all
other such shares previously acquired by the acquiror or in respect of which
the acquiror is able to exercise or direct the exercise of voting power
(except solely by virtue of a revocable proxy), would entitle the acquiror to
exercise voting power in electing trustees within one of the following ranges
of voting power: (i) one-fifth or more but less than one-third, (ii) one-third
or more but less than a majority, or (iii) 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 shareholder
approval. A "control share acquisition" means the acquisition of 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 Trustees
to call a special meeting of shareholders to be held within 50 days of demand
to consider the voting rights of the shares. If no request for a meeting is
made, the Company may itself present the question at any shareholders'
meeting.
Limitation of Liability and Indemnification. The Maryland REIT Law permits a
Maryland real estate investment trust to indemnify and advance expenses to its
Trustees, officers, employees and agents to the same extent as permitted by
the MGCL for trustees and officers of Maryland corporations. The MGCL permits
a corporation to indemnify its present and former trustees and officers, among
others, against judgments, penalties, fines, settlements and reasonable
expenses actually incurred by them in connection with any proceeding to which
they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the
trustees or officer was material to the matter giving rise to the proceeding
and (i) was committed in bad faith or (ii) was the result of active and
deliberate dishonesty, (b) the trustee or officer actually received an
improper personal benefit in money, property or services or (c) in the case of
any criminal proceeding, the trustee or officer had reasonable cause to
believe that the act or omission was unlawful. However, a Maryland corporation
may not indemnify for an adverse judgment in a suit by or in the right of the
corporation. In accordance with the MGCL, the By-laws of the Company require
it, as a condition to advancing expenses, to obtain (a) a written affirmation
by the director or officer of his good faith belief that he has met the
standard of conduct necessary for indemnification by the Company as authorized
by the By-laws and (b) a written statement by or on his behalf to repay the
amount paid or reimbursed by the Company if it shall ultimately be determined
that the standard of conduct was not met. The Declaration of Trust authorizes
the Company to indemnify its officers and Trustees to the maximum extent
permitted by Maryland law. The Declaration of Trust and By-laws also permit
the Company to indemnify any employee or agent of the Company or a predecessor
of the Company. The By-laws require the Company to indemnify each Trustee 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.
The Company intends to enter into separate indemnification agreements with
each of the Company's trustees and certain of its executive officers. The
indemnification agreements will require, among other things, that the Company
indemnify its Trustees and officers to the fullest extent permitted by law,
and advance to the
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Trustees and officers all related expenses, subject to reimbursement if it is
subsequently determined that indemnification is not permitted. The Company
also must indemnify and advance all expenses incurred by Trustees and officers
seeking to enforce their rights under the indemnification agreements and cover
trustees and officers under the Company's Trustees' and officers' liability
insurance. Although the form of indemnification agreement offers substantially
the same scope of coverage afforded by provisions in the Declaration of Trust
and By-laws, it provides greater assurance to Trustees and officers that
indemnification will be available, because as a contract, it cannot be
unilaterally modified by the Board of Trustees or by the shareholders to
eliminate the rights it provides.
Maryland Asset Requirements. To maintain its qualification as a Maryland
real estate investment trust, the Maryland REIT Law requires that the Company
hold, either directly or indirectly, at least 75% of the value of its assets
in real estate assets, mortgages or mortgage related securities, government
securities, cash and cash equivalent items, including high-grade short-term
securities and receivables. The Maryland REIT Law also prohibits using or
applying land for farming, agricultural, horticultural or similar purposes.
Meetings of Shareholders. The By-laws provide for annual meetings of
shareholders, commencing with the year 1998, to elect the Board of Trustees
and transact such other business as may properly be brought before the
meeting. Special meetings of shareholders may be called by the President, the
Board of Trustees or the Chairman of the Board and shall be called at the
request in writing of the holders of 50% or more of the outstanding shares of
beneficial interest of the Company entitled to vote.
The By-laws provide that any action required or permitted to be taken at a
meeting of shareholders may be taken without a meeting by unanimous written
consent, if such consent sets forth such action and is signed by each
shareholder entitled to vote on the matter and a written waiver of any right
to dissent is signed by each shareholder entitled to notice of the meeting but
not entitled to vote at such meeting.
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COMMON SHARES ELIGIBLE FOR FUTURE SALE
General. Prior to the date of this Prospectus, there has been no public
market for the Common Shares. The Company has applied for trading of the
Common Shares on the Nasdaq National Market System, subject to official notice
of issuance. No prediction can be made as to the effect, if any, that future
sales of Common Shares (including sales pursuant to Rule 144) or the
availability of Common Shares for future sale will have on the market price
prevailing from time to time. Sales of substantial amounts of Common Shares
(including Common Shares issued upon the exercise of options or the exchange
of Units), or the perception that such sales could occur, could adversely
affect prevailing market prices of the Common Shares and impair the Company's
ability to obtain additional capital through the sale of equity securities.
See "Risk Factors--Possible Adverse Effects on Share Price Arising from Common
Shares Eligible for Future Sale." For a description of certain restrictions on
transfers of Common Shares held by certain shareholders of the Company, see
"Underwriting" and "Description of Shares of Beneficial Interest."
The officers and Trustees of the Company have agreed not to, directly or
indirectly, offer, sell, offer to sell, contract to sell, grant any option to
purchase or otherwise sell or dispose (or announce any offer, sale, offer of
sale, contract of sale, grant of any option to purchase or other sale or
disposition) of any Units or Common Shares or other shares of beneficial
interest of the Company, or any securities convertible or exercisable or
exchangeable for any Units or Common Shares or other shares of beneficial
interest of the Company (other than pursuant to the Plan) for a period of two
years from the date of this Prospectus without the prior written consent of
the Representative. The Representative, at any time and without notice, may
release all or any portion of the Common Shares subject to the foregoing lock-
up agreements.
The Common Shares owned by "Affiliates" of the Company and the Common Shares
issuable upon exchange of Units, exercise of the Underwriting Warrants and
Dealer Warrants, will be subject to 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. In general, under Rule 144 as currently in
effect, a person (or persons whose shares are aggregated with them in
accordance with Rule 144) who has beneficially owned "restricted securities"
(defined generally as securities acquired from the issuer or an Affiliate of
the issuer in a transaction not involving a public offering) for at least one
year, and including the holding period of any seller of securities unless such
seller is an Affiliate, would be entitled to sell within any three-month
period a number of Common Shares that does not exceed the greater of 1% of the
then-outstanding number of Common Shares or 1% of the average weekly trading
volume of the Common Shares on the Nasdaq National Market during the four
calendar weeks preceding each such sale. Sales under Rule 144 are also subject
to certain manner of sale provisions, notice requirements and the availability
of current public information about the Company. Any person (or persons whose
shares are aggregated with them in accordance with Rule 144) who is not deemed
to have been an Affiliate of the Company at any time during the three months
preceding a sale, and who has beneficially owned shares for at least two years
(including any period of ownership of preceding non-affiliated holders), would
be entitled to sell such shares under Rule 144(k) without regard to the volume
limitations, manner of sale provisions, notice requirements or public
information requirements. An "Affiliate" of the Company is a person that
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or under common control with, the Company.
The Company has established the Plan for the purpose of attracting and
retaining executive officers, Trustees and other key employees. See
"Management Incentive Plan." Contemporaneously with the completion of the
Offering, the Company will issue in the aggregate options to purchase a number
of Common Shares and Units in an aggregate of 6.625% of the Common Shares to
be outstanding on the closing of the Offering (including exercise of the
Underwriters' over-allotment option) on a fully diluted basis to executive
officers and will reserve an additional number of Common Shares and Units
equal to 1.375% of the Common Shares to be outstanding on the closing of the
Offering (including exercise of the Underwriters' over-allotment option) on a
fully diluted basis for future issuance under the Plan. The Company intends to
file a registration statement under the Securities Act registering the Common
Shares reserved for issuance upon the exercise of options granted under the
Plan.
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See "Management-- Incentive Plan." This registration statement is expected to
be filed as of the date of the Prospectus and to become effective
automatically upon the effective date of registration of the Common Shares.
Underwriting Warrants. The Representative of the Underwriters, will receive
Underwriting Warrants representing the right to acquire a number of Common
Shares equal to 4% of the Common Shares to be outstanding on the closing of
the Offering (including exercise of the Underwriters' over-allotment option)
on a fully-diluted basis, at the initial public offering price of the Common
Shares, exercisable beginning on the closing date of the Offering and for a
period of five years thereafter, as compensation for its assistance in the
formation and structuring of the Company, identifying key managers of the
Company and raising the initial capital necessary to form the Company.
Dealer Warrants. Messrs. Pohanka and Rosenthal, Trustees of the Company,
will each be granted the Dealer Warrants representing the right of each of
them to acquire a number of Common Shares equal to 2% of the Common Shares to
be outstanding on the closing of the Offering (including exercise of the
Underwriters' over-allotment option) on a fully-diluted basis, at the initial
public offering price, exercisable beginning on the closing of the Offering
and for a period of five years thereafter.
REGISTRATION OF COMMON SHARES ISSUED UPON REDEMPTION OF UNITS; REGISTRATION
RIGHTS
The Partnership Agreement provides that the Company will deliver to the
Sellers registered Common Shares upon redemption of their Units, at the option
of the Company, for Common Shares. The Company will bear the expenses of
registering those Common Shares.
The Company has granted demand registration rights to register the Common
Shares being privately placed with FBR Asset Investment Corporation.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of the taxation of the Company and the material
federal income tax consequences to holders of the Common Shares is for general
information only, and is not tax advice. The tax treatment of a holder of
Common Shares will vary depending upon the holder's particular situation, and
this discussion addresses only holders that hold Common Shares as capital
assets and does not purport to deal with all aspects of taxation that may be
relevant to particular holders in light of their personal investment or tax
circumstances, or to certain types of holders (including dealers in securities
or currencies, banks, tax-exempt organizations, except as described herein,
life insurance companies, persons that hold Common Shares that are a hedge or
that are hedged against currency risks or that are part of a straddle or
conversion transaction) subject to special treatment under the federal income
tax laws. This summary is based on the Code, its legislative history, existing
and proposed regulations thereunder, published rulings and court decisions,
all as currently in effect and all subject to change at any time, perhaps with
retroactive effect.
SHAREHOLDERS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE
TAX CONSEQUENCES TO THEM OF THE ACQUISITION, OWNERSHIP AND SALE OF COMMON
SHARES, INCLUDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF
SUCH ACQUISITION, OWNERSHIP AND SALE IN THEIR PARTICULAR CIRCUMSTANCES AND
POTENTIAL CHANGES IN APPLICABLE LAWS.
TAXATION OF THE COMPANY AS A REIT
General. The Company plans to make an election to be taxed as a REIT under
Sections 856 through 859 of the Code, commencing with its taxable year ending
December 31, 1998. The Company believes that, commencing with such taxable
year, it will be organized and will operate in such a manner as to qualify for
taxation as a REIT under the Code.
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In the opinion of Wilmer, Cutler & Pickering, commencing with its taxable
year ending December 31, 1998, the Company will be organized in conformity
with, and its proposed method of operation will enable it to meet, the
requirements for qualification and taxation as a REIT under the Code.
Shareholders should be aware, however, that opinions of counsel are not
binding upon the Internal Revenue Service or any court. In providing its
opinion, Wilmer, Cutler & Pickering is relying upon representations received
from the Company. The qualification and taxation of the Company as a REIT
depends upon its ability to meet, through actual annual operating results,
distribution levels, share ownership requirements and the various
qualification tests imposed under the Code. Accordingly, while the Company
intends to qualify to be treated as a REIT, no assurance can be given that the
actual results of the Company's operations for any particular year will
satisfy such requirements. Wilmer, Cutler & Pickering will not monitor the
compliance of the Company with the requirements for REIT qualification on an
ongoing basis. Accordingly, no assurance can be given that the actual results
of the Company's operations for any particular year will satisfy such
requirements.
The sections of the Code applicable to REITs are highly technical and
complex. Certain aspects thereof are summarized below.
As a REIT, the Company generally will not be subject to federal corporate
income tax on its net income that is currently distributed to its
shareholders. This treatment substantially eliminates the "double taxation"
(at the corporate and shareholder levels) that generally results from
investment in a regular corporation. However, the Company will be subject to
federal income tax as follows. First, the Company will be taxed at regular
corporate rates on any undistributed real estate investment trust taxable
income, including undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the "alternative minimum tax" on
its undistributed items of tax preference. Third, if the Company has (i) net
income from the sale or other disposition of "foreclosure property" which is
held primarily for sale to customers in the ordinary course of business or
(ii) other non-qualifying income from foreclosure property, it will be subject
to tax at the highest corporate rate on such income. Fourth, if the Company
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 the Company should fail to
satisfy the 75% gross income test or the 95% gross income test (as discussed
below), but has nonetheless maintained its qualification as a REIT because
certain other requirements have been met, it will be subject to a 100% tax on
an amount equal to (a) the gross income attributable to the greater of the
amount by which the Company fails the 75% or 95% test, multiplied by (b) a
fraction intended to reflect the Company's profitability. Sixth, if the
Company should fail to distribute during each calendar year at least the sum
of (i) 85% of its real estate investment trust ordinary income for such year,
(ii) 95% of its real estate investment trust capital gain net income for such
year, and (iii) any undistributed taxable income from prior periods, the
Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. Seventh, if the Company
acquires any asset from a C corporation (i.e., generally a corporation subject
to full corporate-level tax) in certain transactions in which the basis of the
asset in the hands of the Company is determined by reference to the basis of
the asset (or any other property) in the hands of the C corporation, and the
Company recognizes gain on the disposition of such asset during the ten-year
period beginning on the date on which such asset was acquired by the Company
(the "Recognition Period"), then, pursuant to Treasury regulations that have
not yet been issued and to the extent of the excess of the fair market value
of the asset as of the date of the Company's acquisition over the Company's
adjusted basis in such asset on such date, such gain will be subject to tax at
the highest regular corporate rate. The results described above with respect
to assets acquired from a C corporation assume that the Company will make an
election pursuant to Internal Revenue Service Notice 88-19.
Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (1) which is managed by one or more trustees or
directors, (2) the beneficial ownership of which is evidenced by transferable
shares, or by transferable certificates of beneficial interest, (3) which
would otherwise be taxable as a domestic corporation, but for Sections 856
through 859 of the Code, (4) which is neither a financial institution nor an
insurance company subject to certain provisions of the Code, (5) the
beneficial ownership of which is
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held by 100 or more persons, (6) during the last half of each taxable year,
not more than 50% in value of the outstanding shares of which is owned,
directly or constructively, by five or fewer individuals (as defined in the
Code to include certain entities) and (7) which meets certain other tests,
described below, regarding the nature of its income and assets. The Code
provides that conditions (1) to (4) must be met during the entire taxable year
and that condition (5) 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 (5) and (6) will not apply until after the first taxable
year for which an election is made to be taxed as a REIT.
The Company's Declaration of Trust provides for restrictions regarding the
ownership and transfer of the Company's shares of beneficial interest, which
restrictions are intended to assist the Company in satisfying the share
ownership requirements described in (5) and (6) above. The ownership and
transfer restrictions pertaining to the Common Shares are described under the
heading "Description of Shares of Beneficial Interest--Restrictions on
Ownership and Transfer."
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 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. The Company's
proportionate share of the assets and gross income of the Operating
Partnership will be treated as assets and gross income of the Company for
purposes of applying the requirements described herein.
Income Tests. In order to maintain qualification as a REIT, the Company
annually must satisfy two gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived directly or indirectly
from investments relating to real property or mortgages on real property
(including "rents from real property") or from certain types of temporary
investments. Second, at least 95% of the Company's gross income (excluding
gross income from prohibited transactions) for each taxable year must be
derived from such real property investments, dividends, interest and gain from
the sale or disposition of stock or securities (or from any combination of the
foregoing).
Pursuant to the Leases, the Lessees will lease from the Company the land,
buildings and improvements comprising the Properties for initial terms ranging
from ten to 12 years. The Leases will be "triple-net" leases which will
require the Lessees to pay substantially all expenses associated with the
operation of the Properties, such as real estate taxes, insurance, utilities,
services, maintenance and other operating expenses and any ground lease
payments. During the Fixed Term and the Extended Terms of the Leases, the
Lessees will pay the Initial Annual Base Rent and, thereafter, the Annual Base
Rent which will be payable in monthly installments. Initial Base Annual Rent
and Annual Base Rent will be adjusted upward periodically based on a factor of
the CPI, ranging from one-half of CPI adjusted every other year to full CPI
adjusted every year, which may be subject to periodic minimum or maximum
adjustment rates-ranging from zero to 2%, respectively.
Rents under the Leases (the "Rent") will constitute "rents from real
property" only if the Leases are treated as true leases for federal income tax
purposes and are not treated as service contracts, joint ventures, financing
arrangements or some other type of arrangement. The determination of whether
the Leases are true leases depends on an analysis of all surrounding facts and
circumstances. In making such a determination, courts have considered a
variety of factors, including the following: (i) the intent of the parties;
(ii) the form of the agreement; (iii) the degree of control over the property
that is retained by the property owner (e.g., whether the lessee has
substantial control over the operation of the property or whether the lessee
was required simply to use its best efforts to perform its obligations under
the agreement); (iv) the extent to which the property owner retains the risk
of loss with respect to the operation of the property (e.g., whether the
lessee bears the risk of increases in operating expenses or the risk of damage
to the property); and (v) the extent to which the property owner retains the
burdens and benefits of ownership of the property.
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Wilmer, Cutler & Pickering is of the opinion that each Initial Lease will be
treated as a true lease for federal income tax purposes. Such opinion is
based, in part, on the following facts: (i) the Company and the Lessees intend
for their relationship to be that of a lessor and lessee and such relationship
will be documented by lease agreements; (ii) the Lessees will have the right
to exclusive possession and use and quiet enjoyment of the Properties during
the term of the Leases; (iii) the Lessees will bear the cost of, and be
responsible for, day-to-day maintenance and repair of the Properties, and will
dictate how the Properties are operated, maintained, and improved; (iv) the
Lessees will bear all of the costs and expenses of operating the Properties
during the terms of the Leases; (v) the Lessees will benefit from any savings
in the costs of operating the Properties during the terms of the Leases; (vi)
the Lessees will generally indemnify the Company against all liabilities
imposed on the Company during the term of the Leases by reason of (a) injury
to persons or damage to property occurring at the Properties, or (b) the
Lessees' use, management, maintenance or repair of the Properties; (vii) the
Lessees are obligated to pay substantial fixed rent for the period of use of
the Properties; (viii) the Lessees stand to incur substantial losses (or reap
substantial gains) depending on how successfully it operates the Properties;
(ix) the useful lives of the Properties are significantly longer than the
terms of the Leases; and (x) the Company will receive the benefit of any
increase in value, and will bear the risk of any decrease in value, of the
Properties during the terms of the Leases.
Risks Regarding Characterization of Initial Leases. Wilmer, Cutler &
Pickering will deliver to the Company its opinion that each Initial Lease will
be treated as a true lease for federal income tax purposes. Such opinion is
not binding on the IRS. If the IRS were to challenge successfully the
characterization of the Initial Leases as true leases, the Operating
Partnership would not be treated as the owner of the Property in question for
federal income tax purposes and the Operating Partnership would lose tax
depreciation and cost recovery deduction with respect to such Property, which
in turn could cause the Company to fail to qualify as a REIT.
Shareholders should be aware that there are no controlling Treasury
regulations, published rulings, or judicial decisions involving leases with
terms substantially similar to those contained in the Leases that address
whether such leases constitute true leases for federal income tax purposes. If
the Leases are recharacterized as financing arrangements or partnership
agreements, rather than true leases, part or all of the payments that the
Company receives from the Lessees may not be considered rent or may not
otherwise satisfy the various requirements for qualification as "rents from
real property." In that case, the Company likely would not be able to satisfy
either the 75% or 95% gross income tests and, as a result, would lose its REIT
status.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements 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 terms "rents from
real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. The Company has represented that Rent paid
by the Lessees for the Properties will be a fixed amount, and will not be
based in whole or in part on the net income of any person with respect to the
Properties. Thus, the Rent should also satisfy this requirement.
A second requirement for qualification of the Rent as "rents from real
property" is that the Company must not own, directly or constructively, 10% or
more of any Initial Lessee or any other Lessee of the Properties (a "Related
Party Tenant"). The constructive ownership rules generally provide that if 10%
or more in value of the shares of the Company are owned, directly or
indirectly, by or for any person, the Company is considered as owning the
shares owned, directly or indirectly, by or for such person. The applicable
attribution rules, however, are highly complex and difficult to apply, and the
Company may inadvertently enter into leases with Lessees who, through
application of such rules, will constitute Related Party Tenants. In such
event, rent paid by the Related Party Tenant will not qualify as "rents from
real property," which may jeopardize the Company's status as a REIT. The
Company will use its best efforts not to rent any property to a Related Party
Tenant (taking into account the applicable constructive ownership rules),
unless the Company determines in its discretion that the rent received from
such Related Party Tenant is not material and will not jeopardize the
Company's status as a REIT.
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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". The Rent attributable to the
personal property associated with a property is the amount that bears the same
ratio to total rent for the taxable year as the average of the adjusted bases
of the personal property in the property at the beginning and at the end of
the taxable year bears to the average of the aggregate adjusted bases of both
the real and personal property comprising the property at the beginning and at
the end of such taxable year (the "Adjusted Basis Ratio"). The Company will
not lease any personal property to the Lessees pursuant to the Leases.
Accordingly, Rent received by the Company should satisfy this requirement.
A fourth requirement for qualification of the Rent as "rents from real
property" is that the Company cannot furnish or render noncustomary services
to the Lessees of its properties, or manage or operate such properties, other
than through an independent contractor who is adequately compensated and from
whom the Company itself does not derive or receive any income provided,
however, that the Company may directly perform certain services that are
"usually or customarily rendered" in connection with the rental of space for
occupancy only or are not considered "rendered to the occupant" of the
property. Provided that the Leases are respected as true leases, the Company
should satisfy this requirement with respect to the Rent because it will not
perform any service for the Lessees. If the Company were to provide services
to a Lessee that are other than those usually or customarily provided in
connection with the rental of space for occupancy only, amounts received by
the Company for such services would not be treated as "rents from real
property" for purposes of the REIT gross income tests but would not cause
other amounts received with respect to the property to fail to be treated as
"rents from real property" unless the amounts received in respect of such
services, together with amounts received for certain management services,
exceeds 1% of all amounts received or accrued by the Company during the
taxable year with respect to such property. However, if the 1% threshold is
exceeded, then all amounts received or accrued by the Company with respect to
the property will not qualify as "rents from real property." The Leases do not
provide for the Company to render any noncustomary services to the Lessees.
Further, the Company will not offer any services to the Lessees.
Based on the foregoing, the Rent should qualify as "rents from real
property" for purposes of the 75% and 95% gross income tests. As described
above, however, there can be no complete assurance that the Service will not
assert successfully a contrary position and, therefore, prevent the Company
from qualifying as a REIT.
On an ongoing basis, the Company will use its best efforts not: (i) to
charge rent for any property that is based in whole or in part on the income
or profits of any person (except by reason of being based on a percentage of
receipts or sales, as described above); (ii) to rent any property to a Related
Party Lessee (taking into account the applicable constructive ownership
rules), unless the Company determines in its discretion that the rent received
from such Related Party Lessee is not material and will not jeopardize the
Company's status as a REIT; (iii) to derive rental income attributable to
personal property (other than personal property leased in connection with the
lease of real property, the amount of which is less than 15% of the total rent
received under the lease); and (iv) to perform services considered to be
rendered to the occupant of the property, unless such services generate rents
not in excess of 1% of all amounts received or accrued during the taxable year
with respect to such property, other than through an independent contractor
from whom the Company derives no revenue or if the provisions of such services
will not jeopardize the Company's status as a REIT. Because the Code
provisions applicable to REITs are complex, however, the Company may fail to
meet one or more of the foregoing
As part of its acquisition strategy, the Company may provide financing to
Operators for the development of Dealerships or Related Businesses and earn
interest with respect to such financings. 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
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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 generally is qualifying income for purposes of the
75% gross income test. However, if the Company receives interest income with
respect to a 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 fair market value of the real property on the date the Company
acquired the loan, the interest income from the loan will be apportioned
between the real property and the other property, which apportionment may
cause the Company to recognize income that is not qualifying income for
purposes of the 75% gross income test. The Company intends to structure any
such financing arrangements such that it will continue to qualify as a REIT.
The Company will be 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 to 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.
However, a REIT will not be considered to have foreclosed on a property where
such REIT takes control of the property as a mortgage-in-possession and cannot
receive any profit or sustain any loss except as a creditor of the mortgagor.
Under the Code for taxable years of REITs beginning after August 5, 1997,
property generally ceases to be foreclosure property with respect to a REIT on
the last day of the third taxable year following the taxable year in which the
REIT acquired such property (or longer if an extension is granted by the
Secretary of the Treasury). The foregoing grace period is terminated and
foreclosure property ceases to be foreclosure property on the first day (i) on
which a lease is entered into with respect to such property that, by its
terms, will give rise to income that does not qualify under the 75% gross
income test or any amount is received or accrued, directly or indirectly,
pursuant to a lease entered into on or after such day that will give rise to
income that does not qualify under the 75% gross income test, (ii) on which
any construction takes place on such property (other than completion of a
building, or any other improvement, where more than 10% of the construction of
such building or other improvement was completed before default became
imminent) or (iii) that is more than 90 days after the day on which such
property was acquired by the REIT and the property is used in a trade or
business that is conducted by the REIT (other than through an independent
contractor from whom the REIT itself does not derive or receive any income).
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 the Company 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 the Company's or the Operating
Partnership's business. Whether an asset 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 asset. Nevertheless, the Company 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 the Company 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."
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If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such
year if it is entitled to relief under certain provisions of the Code. These
relief provisions will generally be available if the Company's failure to meet
such tests was due to reasonable cause and not due to willful neglect, the
Company attaches a schedule of the sources of its income to its federal income
tax 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 the Company would be entitled to the benefit of these relief
provisions. As discussed above under "--General," even if these relief
provisions apply, a tax would be imposed with respect to the excess income.
Asset Tests. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets must be represented by
real estate assets (including (i) real estate assets held by the Company's
qualified REIT subsidiaries and the Company's allocable share of real estate
assets held by partnerships in which the Company owns an interest, (ii) for a
period of one year from the date of the Company's receipt of proceeds of an
offering of its shares of beneficial interest or long-term (at least five
years) debt, stock or debt instruments purchased with such proceeds and (iii)
stock issued by another REIT), cash, cash items and government securities.
Second, not more than 25% of the Company's total assets may be represented by
securities other than those in the 75% asset class. Third, of the investments
included in the 25% asset class, the value of any one issuer's securities
(other than securities issued by another REIT) owned by the Company may not
exceed 5% of the value of the Company's total assets and the Company may not
own more than 10% of any one issuer's outstanding voting securities (other
than securities issued by another REIT). All of the Initial Properties will
qualify as real estate assets. The Company intends to select future
investments so as to remain in compliance with REIT asset qualification tests.
Annual Distribution Requirements. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends)
to its shareholders in an amount at least equal to (A) the sum of (i) 95% of
the Company's "real estate investment trust taxable income" (computed without
regard to the dividends paid deduction and the Company's net capital gain) and
(ii) 95% of the net income (after tax), if any, from foreclosure property
minus (B) the sum of certain items of non-cash income. In addition, if the
Company disposes of any asset acquired from a C corporation in a carryover
basis transaction during its Recognition Period, the Company will be required,
pursuant to Treasury regulations which have not yet been promulgated, to
distribute at least 95% of the built-in gain (after tax), if any, recognized
on the disposition of such asset. Such distributions must be paid in the
taxable year to which they relate, or in the following taxable year if
declared before the Company timely files its tax return for such year and if
paid on or before the first regular dividend payment after such declaration.
To the extent that the Company does not distribute all of its net capital gain
or distributes at least 95%, but less than 100%, of its "real estate
investment trust taxable income," as adjusted, it will be subject to tax
thereon at regular ordinary and capital gain corporate tax rates. Furthermore,
if the Company should fail to distribute during each calendar year at least
the sum of (i) 85% of its ordinary income for such year, (ii) 95% of its
capital gain net income for such year, and (iii) any undistributed taxable
income from prior periods, the Company would be subject to a 4% excise tax on
the excess of such required distribution over the amounts actually
distributed. The Company intends to satisfy the annual distribution
requirements.
The Company may elect to retain and pay income tax on the net long-term
capital gain it receives in a taxable year. In that case, the Company's
shareholders would include in income their proportionate share of the
Company's undistributed long-term capital gain. In addition, the shareholders
would be deemed to have paid their proportionate share of the tax paid by the
Company, which would be credited or refunded to the shareholders. Each
shareholder's basis in his shares would be increased by the amount of the
undistributed long-term capital gain included in the shareholder's income,
less the shareholder's share of the tax paid by the Company. Such amount would
be treated as having been distributed for purposes of the 4% excise tax
described above.
It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement due to
timing differences between (i) the actual receipt of income and
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actual payment of deductible expenses and (ii) the inclusion of such income
and deduction of such expenses in arriving at taxable income of the Company.
In the event that such timing differences occur, in order to meet the 95%
distribution requirement, the Company may find it necessary to arrange for
short-term, or possibly long-term, borrowings or to pay dividends in the form
of taxable share dividends.
The Company intends to calculate its "REIT taxable income" based upon the
conclusion that the Operating Partnership is the owner for federal income tax
purposes of all of the Properties. As a result, the Company expects that
depreciation deductions with respect to all such Properties will reduce its
"REIT taxable income". If the Service were to successfully challenge this
position, the Company might be deemed retroactively to have failed to meet the
distribution requirement and would have to rely on the payment of a
"deficiency dividend" in order to retain its REIT status.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends"
to shareholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company will be required to pay interest based upon the amount of
any deduction taken for deficiency dividends.
Partnership Anti-Abuse Rule. The United States Treasury Department has
issued a regulation (the "Anti-Abuse Rule") under the partnership provisions
of the Code (the "Partnership Provisions") that authorizes the Service, in
certain "abusive" transactions involving partnerships, to disregard the form
of the transaction and recast it for federal tax purposes as the Service deems
appropriate. The Anti-Abuse Rule applies where a partnership is formed or
utilized in connection with a transaction (or series of related transactions)
with a principal purpose of substantially reducing the present value of the
partners' aggregate federal tax liability in a manner inconsistent with the
intent of the Partnership Provisions. The Anti-Abuse Rule states that the
Partnership Provisions are intended to permit taxpayers to conduct joint
business (including investment) activities through a flexible economic
arrangement that accurately reflects the partners' economic agreement and
clearly reflects the partners' income without incurring any entity-level tax.
The purposes for structuring a transaction involving a partnership are
determined based on all of the facts and circumstances, including a comparison
of the purported business purpose for a transaction and the claimed tax
benefits resulting from the transaction. A reduction in the present value of
the partners' aggregate federal tax liability through the use of a partnership
does not, by itself, establish inconsistency with the intent of the
Partnership Provisions.
The Anti-Abuse Rule contains an example in which a corporation that elects
to be treated as a REIT contributes substantially all of the proceeds from a
public offering to a partnership in exchange for a general partner interest.
The limited partners of the partnership contribute real property assets to the
partnership, subject to liabilities that exceed their respective aggregate
bases in such property. In addition, the limited partners have the right,
beginning one year after the formation of the partnership, to require the
redemption of their limited partnership interests in exchange for cash or REIT
stock (at the Company's option) equal to the fair market value of their
respective interests in the partnership at the time of the redemption. The
example concludes that the use of the partnership is not inconsistent with the
intent of the Partnership Provisions and, thus, cannot be recast by the
Service. Based on the foregoing, Wilmer, Cutler & Pickering is of the opinion
that the Anti-Abuse Rule will not have any adverse impact on the Company's
ability to qualify as a REIT. However, the Anti-Abuse Rule is extraordinarily
broad in scope and is applied based on an analysis of all of the facts and
circumstances. As a result, there can be no assurance that the Service will
not attempt to apply the Anti-Abuse Rule to the Company. If the conditions of
the Anti-Abuse Rule are met, the Service is authorized to take appropriate
enforcement action, including disregarding the Operating Partnership for
federal tax purposes or treating one or more of its partners as nonpartners.
Any such action potentially could jeopardize the Company's status as a REIT.
Failure to Qualify. If the Company fails to qualify for taxation as a REIT
in any taxable year, and the relief provisions do not apply, the Company will
be subject to tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. Distributions to shareholders in
any year in which the
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Company fails to qualify will not be deductible by the Company nor will they
be required to be made. In such event, to the extent of current and
accumulated earnings and profits, all distributions to shareholders 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, the Company
will also be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost. It is not possible to
state whether in all circumstances the Company would be entitled to such
statutory relief.
TAXATION OF HOLDERS OF COMMON SHARES
U.S. Shareholders. As used herein, the term "U.S. Shareholder" means a
holder of Common Shares who (for United States federal income tax purposes) is
(i) a citizen or resident of the United States, (ii) a corporation,
partnership or other entity created or organized in or under the laws of the
United States or of any political subdivision thereof, (iii) an estate the
income of which is subject to United States federal income taxation, or (iv) a
trust with respect to the administration of which a court within the United
States is able to exercise primary supervision and one or more United States
fiduciaries have the authority to control all substantial decisions of the
trust.
As long as the Company qualifies as a REIT, distributions made by the
Company out of its current or accumulated earnings and profits (and not
designated as capital gain dividends) will constitute dividends taxable to its
taxable U.S. Shareholders as ordinary income. Such distributions will not be
eligible for the dividends-received deduction in the case of U.S. Shareholders
that are corporations. Distributions made by the Company that are properly
designated by the Company as capital gain dividends will be taxable to U.S.
Shareholders as gain from the sale and exchange of a capital asset (to the
extent that they do not exceed the Company's actual net capital gain for the
taxable year) without regard to the period for which a U.S. Shareholder has
held his Common Shares. U.S. Shareholders that are corporations may, however,
be required to treat up to 20% of certain capital gain dividends as ordinary
income.
Recently enacted legislation (The Taxpayer Relief Act of 1997 (the "1997
Act")) reduces the maximum rate on long-term capital gains of non-corporate
taxpayers from 28% to 20% (10% for taxpayers in the 15% tax bracket). The
lower rates generally apply to sales or exchanges of capital assets occurring
after May 6, 1997. However, the reduced long-term capital gains rates are
currently only available for sales or exchanges of capital assets held for
more than 18 months. Any long-term capital gains from the sale or exchange of
depreciable real property that would be subject to ordinary income taxation
(i.e., "depreciation recapture') if it were treated as personal property will
be subject to a maximum tax rate of 25% instead of the 20% maximum rate for
gains taken into account after July 28, 1997. In Notice 97-64, released
November 10, 1997, the IRS described temporary regulations to be published in
the near future pursuant to which a REIT may designate a capital gain dividend
as a 20% rate gain dividend, an unrecaptured section 1250 gain distribution in
the 25% rate group or as a 28% rate gain distribution.
To the extent that the Company makes distributions (not designated as
capital gain dividends) in excess of its current and accumulated earnings and
profits, such distributions will be treated first as a tax-free return of
capital to each U.S. Shareholder, reducing the adjusted basis which such U.S.
Shareholder has in his Common Shares for tax purposes by the amount of such
distribution (but not below zero), with distributions in excess of a U.S.
Shareholder's adjusted basis in his shares taxable as capital gains (provided
that the Common Shares have been held as a capital asset). Dividends
authorized by the Company in October, November or December of any year and
payable to a shareholder of record on a specified date in any such month shall
be treated as both paid by the Company and received by the shareholder on
December 31 of such year, provided that the dividend is actually paid by the
Company on or before January 31 of the following calendar year. Shareholders
may not include in their own income tax returns any net operating losses or
capital losses of the Company.
Distributions made by the Company and gain arising from the sale or exchange
by a U.S. Shareholder of Common Shares will not be treated as passive activity
income, and, as a result, U.S. Shareholders generally will not be able to
apply any "passive losses" against such income or gain.
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Upon any sale or other disposition of Common Shares, a U.S. Shareholder will
recognize gain or loss for federal income tax purposes in an amount equal to
the difference between (i) the amount of cash and the fair market value of any
property received on such sale or other disposition, and (ii) the holder's
adjusted basis in the Common Shares for tax purposes. Such gain or loss will
be capital gain or loss if the Common Shares have been held by the U.S.
Shareholder as a capital asset. Long-term capital gain of an individual U.S.
Shareholder is generally subject to a maximum tax rate of 28% in respect of
property held for more than one year and the maximum rate is reduced to 20% in
the case of property held in excess of 18 months. In general, any loss
recognized by a U.S. Shareholder upon the sale or other disposition of Common
Shares of the Company that have been held 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 received by such U.S. Shareholder from
the Company which were required to be treated as long-term capital gains.
U.S. Shareholders holding Common Shares at the close of the Company's
taxable year will be required to include, in computing their long-term capital
gains for the taxable year in which the last day of the Company's taxable year
falls, such amount of undistributed long-term capital gains as the Company may
designate in a written notice mailed to its shareholders. The Company may not
designate amounts in excess of the Company's undistributed net capital gain
for the taxable year. Each U.S. Shareholder required to include such a
designated amount in determining such shareholder's long-term capital gains
will be deemed to have paid, in the taxable year of the inclusion, its
proportionate share of the tax paid by the Company in respect of such
undistributed net capital gains. U.S. Shareholders subject to these rules will
be allowed a credit or a refund, as the case may be, for the tax deemed to
have been paid by such shareholders. U.S. Shareholders will increase their
basis in their Common Shares by the difference between the amount of such
includible gains and the tax deemed paid by the shareholder in respect of such
gains.
Backup Withholding. The Company will report to its U.S. Shareholders and the
IRS the amount of dividends paid during each calendar year, and the amount of
tax withheld, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at the rate of 31% with respect to dividends
paid unless such holder (a) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact, or (b) provides
a taxpayer identification number, certifies as to no loss of exemption from
backup withholding, and otherwise complies with applicable requirements of the
backup withholding rules. A U.S. Shareholder that does not provide the Company
with his correct taxpayer identification number may also be subject to
penalties imposed by the IRS. Any amount paid as backup withholding will be
creditable against the shareholder's income tax liability. In addition, the
Company may be required to withhold a portion of capital gain distributions to
any shareholders who fail to certify their non-foreign status to the Company.
Taxation of Tax-Exempt Shareholders. The IRS has ruled that amounts
distributed as dividends by a REIT generally do not constitute unrelated
business taxable income ("UBTI") when received by a tax-exempt entity. Based
on that ruling, provided that a tax-exempt shareholder (except certain tax-
exempt shareholders described below) has not held its Common Shares as "debt
financed property" within the meaning of the Code and such Common Shares are
not otherwise used in a trade or business, the dividend income from Common
Shares will not be UBTI to a tax-exempt shareholder. Similarly, income from
the sale of Common Shares will not constitute UBTI unless such tax-exempt
shareholder has held such Common Shares as "debt financed property" within the
meaning of the Code or has used the Common Shares in a trade or business.
For tax-exempt shareholders that are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Sections
501(c)(7), (c)(9), (c)(17), and (c)(20) of the Code, respectively, income from
an investment in the Company's Common Shares will constitute UBTI unless the
organization is able to properly deduct amounts set aside or placed in reserve
for certain purposes so as to offset the income generated by its Common
Shares. Such prospective shareholders should consult their own tax advisors
concerning these "set aside" and reserve requirements.
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Notwithstanding the foregoing, however, a portion of the dividends paid by a
"pension-held REIT" will be treated as UBTI to any trust which (i) is
described in Section 401(a) of the Code, (ii) is tax-exempt under Section
501(a) of the Code, and (iii) holds more than 10% (by value) of the equity
interests in the REIT. Tax-exempt pension, profit-sharing and stock bonus
funds that are described in Section 401(a) of the Code are referred to below
as "qualified trusts."
A REIT is a "pension-held REIT" if (i) it would not have qualified as a REIT
but for the fact that Section 856(h)(3) of the Code provides that stock owned
by qualified trusts shall be treated, for purposes of the "not closely held"
requirement, as owned by the beneficiaries of the trust (rather than by the
trust itself) and (ii) either (A) at least one qualified trust holds more than
25% (by value) of the interests in the REIT or (B) one or more qualified
trusts, each of which owns more than 10% (by value) of the interests in the
REIT, hold in the aggregate more than 50% (by value) of the interests in the
REIT. The percentage of any REIT dividend treated as UBTI is equal to the
ratio of (i) the gross income (less direct expenses related thereto) of the
REIT from unrelated trades or businesses (determined as though the REIT were a
qualified trust) to (ii) the total gross income (less direct expenses related
thereto) of the REIT. A de minimis exception applies where this percentage is
less than 5% for any year. The Company does not expect to be classified as a
"pension-held REIT".
Tax-exempt entities will be subject to the rules described above, under the
heading "--U.S. Shareholders" concerning the inclusion of the Company's
designated undistributed net capital gains in the income of its shareholders.
Thus, such entities will, after satisfying filing requirements, be allowed a
credit or refund of the tax deemed paid by such entities in respect of such
includible gains.
Non-U.S. Shareholders. The rules governing U.S. federal income taxation of
nonresident alien individuals, foreign corporations, foreign partnerships and
other foreign shareholders (collectively, "Non-U.S. Shareholders") are complex
and no attempt will be made herein to provide more than a limited summary of
such rules. Prospective Non-U.S. Shareholders should consult with their own
tax advisors to determine the impact of U.S. federal, state and local income
tax laws with regard to an investment in Common Shares, including any
reporting requirements.
Ordinary Dividends. Distributions, other than distributions that are treated
as attributable to gain from sales or exchanges by the Company of U.S. real
property interests (discussed below) and other than distributions designated
by the Company as capital gain dividends, will be treated as ordinary income
to the extent that they are made out of current or accumulated earnings and
profits of the Company. Such distributions to Non-U.S. Shareholders will
ordinarily be subject to a withholding tax equal to 30% of the gross amount of
the distribution, unless an applicable tax treaty reduces that tax. However,
if income from the investment in the Common Shares is treated as effectively
connected with the Non-U.S. Shareholder's conduct of a U.S. trade or business,
the Non-U.S. Shareholder generally will be subject to tax at graduated rates
in the same manner as U.S. Shareholders are taxed with respect to such
dividends (and may also be subject to the 30% branch profits tax if the
shareholder is a foreign corporation).
The Company expects to withhold U.S. tax at the rate of 30% on the gross
amount of any dividends, other than dividends treated as attributable to gain
from sales or exchanges of U.S. real property interests and capital gain
dividends, paid to a Non-U.S. Shareholder, unless (i) a lower treaty rate
applies and the required form evidencing eligibility for that reduced rate is
filed with the Company or the appropriate withholding agent or (ii) the Non-
U.S. Shareholder files an IRS Form 4224 (or a successor form) with the Company
or the appropriate withholding agent claiming that the distributions are
"effectively connected" income.
Pursuant to current Treasury Regulations, dividends paid to an address in a
country outside the United States are generally presumed to be paid to a
resident of such country for purposes of determining the applicability of
withholding discussed above and the applicability of a tax treaty rate.
Under the recent Final Regulations that are proposed to be effective for
distributions made after December 31, 1998 (the "New Withholding
Regulations"), however, a Non-U.S. Shareholder who wishes to
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claim the benefit of an applicable treaty rate would be required to satisfy
applicable certification requirements. In addition, under the Final
Regulations, in the case of Common Shares held by a foreign partnership, (x)
the certification requirement would generally be applied to the partners in
the partnership and (y) the partnership would be required to provide certain
information, including a United States taxpayer identification number. The New
Withholding Regulations provide look-through rules in the case of tiered
partnerships. Shareholders that are partnerships or entities that are
similarly fiscally transparent for federal income tax purposes, and persons
holding Common Shares through such entities, may be subject to restrictions on
their ability to claim benefits under U.S. tax treaties and should consult a
tax advisor.
The New Withholding Regulations also require a corporation that is a REIT to
treat as a dividend the portion of a distribution that is not designated as a
capital gain dividend or return of basis and apply the 30% withholding tax
(subject to any applicable deduction or exemption) to such portion, and to
apply the FIRPTA withholding rules (discussed below) with respect to the
portion of the distribution designated by the REIT as capital gain dividend.
The New Withholding Regulations will generally be effective for payments made
after December 31, 1998, subject to certain transition rules. THE DISCUSSION
SET FORTH IN "TAXATION OF NON-U.S. SHAREHOLDERS" DOES NOT TAKE THE NEW
WITHHOLDING REGULATIONS INTO ACCOUNT. PROSPECTIVE NON-U.S. SHAREHOLDERS ARE
STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE NEW
WITHHOLDING REGULATIONS.
Distributions to a Non-U.S. Shareholder that are designated by the Company
at the time of distribution as capital gain dividends which are not
attributable to or treated as attributable to the disposition by the Company
of a U.S. real property interest generally will not be subject to U.S. federal
income taxation, except as described below.
Return of Capital. Distributions in excess of current and accumulated
earnings and profits of the Company, which are not treated as attributable to
the gain from disposition by the Company of a U.S. real property interest,
will not be taxable to a Non-U.S. Shareholder to the extent that they do not
exceed the adjusted basis of the Non-U.S. Shareholder's Common Shares, but
rather will reduce the adjusted basis of such Common Shares. To the extent
that such distributions exceed the adjusted basis of a Non-U.S. Shareholder's
Common Shares, they will give rise to tax liability if the Non-U.S.
Shareholder otherwise would be subject to tax on any gain from the sale or
disposition of its Common Shares, as described below. If it cannot be
determined at the time a distribution is made whether such distribution will
be in excess of current and accumulated earnings and profits, the distribution
will be subject to withholding at the rate applicable to dividends. However,
the Non-U.S. Shareholder may seek a refund of such amounts from the IRS if it
is subsequently determined that such distribution was, in fact, in excess of
current and accumulated earnings and profits of the Company.
Capital Gain Dividends. For any year in which the Company qualifies as a
REIT, distributions that are attributable to gain from sales or exchanges by
the Company of U.S. real property interests will be taxed to a Non-U.S.
Shareholder under the provisions of the Foreign Investment in Real Property
Tax Act of 1980, as amended ("FIRPTA"). Under FIRPTA, these distributions are
taxed to a Non-U.S. Shareholder as if such gain were effectively connected
with a U.S. business. Thus, Non-U.S. Shareholders will be taxed on such
distributions at the normal capital gain rates applicable to U.S. Shareholders
(subject to any applicable alternative minimum tax and special alternative
minimum tax in the case of nonresident alien individuals). The Company is
required by applicable Treasury regulations under FIRPTA to withhold 35% of
any distribution that could be designated by the Company as a capital gain
dividend. However, if the Company designates as a capital gain dividend a
distribution made prior to the day the Company actually effects such
designation, then (although such distribution may be taxable to a Non-U.S.
Shareholder) such distribution is not subject to withholding under FIRPTA;
rather, the Company must effect the 35% FIRPTA withholding from distributions
made on and after the date of such designation, until the distributions so
withheld equal the amount of the prior distribution designated as a capital
gain dividend. The amount withheld is creditable against the Non-U.S.
Shareholder's U.S. tax liability.
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Sales of Common Shares. Gain recognized by a Non-U.S. Shareholder upon a
sale or exchange of Common Shares generally will not be taxed under FIRPTA if
the Company is a "domestically controlled REIT," defined generally as a REIT
in respect of which at all times during a specified testing period less than
50% in value of the stock is and was held directly or indirectly by foreign
persons. It is currently anticipated that the Company will continue to be a
"domestically controlled REIT," and, therefore, that the sale of Common Shares
will not be subject to taxation under FIRPTA. However, gain not subject to
FIRPTA will be taxable to a Non-U.S. Shareholder if (i) investment in the
Common Shares is treated as "effectively connected" with the Non- U.S.
Shareholder's U.S. trade or business, in which case the Non-U.S. Shareholder
will be subject to the same treatment as U.S. Shareholders with respect to
such gain, or (ii) the Non-U.S. Shareholder is a nonresident alien individual
who was present in the United States for 183 days or more during the taxable
year and has a "tax home" in the United States, or maintains an office or a
fixed place of business in the United States to which the gain is
attributable, in which case the nonresident alien individual will be subject
to a 30% tax on the individual's capital gains. A similar rule will apply to
capital gain dividends not subject to FIRPTA.
If the Company were not a domestically-controlled REIT, a Non-U.S.
Shareholder's sale of Common Shares would be subject to tax under FIRPTA only
if the selling Non-U.S. Shareholder owned more than 5% of the class of Common
Shares sold at any time during a specified period (generally the shorter of
the period that the Non- U.S. Shareholder owned the Common Shares sold or the
five-year period ending on the date of disposition). If the gain on the sale
of Common Shares were to be subject to tax under FIRPTA, the Non-U.S.
Shareholder would be subject to the same treatment as U.S. Shareholders with
respect to such gain (subject to any applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien individuals)
and the purchaser of such Common Shares would be required to withhold 10% of
the gross purchase price.
Backup Withholding. Backup withholding tax (which generally is withholding
tax imposed at the rate of 31% on certain payments to persons that fail to
furnish certain information under the United States information reporting
requirements) and information reporting will generally not apply to
distributions to Non-U.S. Shareholders outside the United States that are
treated as (i) dividends subject to the 30% (or lower treaty rate) withholding
tax discussed above, (ii) capital gains dividends, or (iii) distributions
attributable to gain from the sale or exchange by the Company of United States
real property interests. As a general matter, backup withholding and
information reporting will not apply to a payment of the proceeds of a sale of
Common Shares by or through a foreign office of a foreign broker. Information
reporting (but not backup withholding) will apply, however, to a payment of
the proceeds of a sale of Common Shares by a foreign office of a broker that
(a) is a United States person, (b) derives 50% or more of its gross income for
certain periods from the conduct of a trade or business in the United States,
or (c) is a "controlled foreign corporation" (generally, a foreign corporation
controlled by United States shareholders) for United States tax purposes,
unless the broker has documentary evidence in its records that the holder is a
Non-U.S. Shareholder and certain other conditions are met, or the shareholder
otherwise establishes an exemption. Payment to or through a United States
office of a broker of the proceeds of a sale of Common Shares is subject to
both backup withholding and information reporting unless the shareholder
certifies under penalty of perjury that the shareholder is a Non-U.S.
Shareholder, or otherwise establishes an exemption. Backup withholding is not
an additional tax. A Non-U.S. Shareholder may obtain a refund of any amounts
withheld under the backup withholding rules by filing the appropriate claim
for refund with the IRS.
OTHER TAX CONSEQUENCES
The Company and its shareholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its shareholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective shareholders are urged to consult
their own tax advisors regarding the effect of state and local tax laws on an
investment in the Company.
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TAX ASPECTS OF THE OPERATING PARTNERSHIP
The following discussion summarizes certain federal income tax
considerations applicable to the Company's investment in the Operating
Partnership. The discussion does not cover state or local tax laws or any
federal tax laws other than income tax laws.
Classification as a Partnership. The Company will be entitled to include in
its income its distributive share of the Operating Partnership's income and to
deduct its distributive share of the Operating Partnership's losses only if
the Operating Partnership is classified for federal income tax purposes as a
partnership rather than as a corporation or an association taxable as a
corporation. An organization formed as a partnership will be treated as a
partnership, rather than as a corporation, for federal income tax purposes if
(i) it is not expressly classified as a corporation under Section 301.7701-
2(b)(l) through (8) of the Treasury Regulations; (ii) it does not elect to be
classified as an association taxable as a corporation; and (iii) it is not
treated as a corporation by virtue of being classified as a "publicly traded
partnership."
The Operating Partnership will not request a ruling from the Service that it
will be classified as a partnership for federal income tax purposes. Instead,
at the Closing, Wilmer, Cutler & Pickering will deliver its opinion that,
based on the provisions of the Partnership Agreement, certain factual
assumptions and certain representations described in the opinion, the
Operating Partnership will be treated for federal income tax purposes as a
partnership and not as an association taxable as a corporation. Unlike a tax
ruling, an opinion of counsel is not binding upon the Service, and no
assurance can be given that the Service will not challenge the status of the
Operating Partnership as a partnership for federal income tax purposes. If
such challenge were sustained by a court, the Operating Partnership would be
treated as a corporation for federal income tax purposes, as described below.
In addition, the opinion of Wilmer, Cutler & Pickering is based on existing
law, which is to a great extent the result of administrative and judicial
interpretation. No assurance can be given that administrative or judicial
changes would not modify the conclusions expressed in the opinion.
Under Section 7704 of the Code, a partnership is treated as a corporation
for federal income tax purposes if it is a "publicly traded partnership"
(except in situations in which 90% or more of the partnership's gross income
is of a specified type). A partnership is deemed to be publicly traded if its
interests are either (i) traded on an established securities market, or (ii)
readily tradable on a secondary market (or the substantial equivalent
thereof). While the OP Units will not be traded on an established securities
market, they could possibly be deemed to be traded on a secondary market or
its equivalent due to the Redemption Rights enabling the partners to dispose
of their Units.
Under Treasury regulations governing the classification of partnerships
under Section 7704 (the "PTP Regulations"), the classification of partnerships
is generally based on a facts and circumstances analysis. However, the
regulations also provide limited "safe harbors" which preclude publicly traded
partnership status. Pursuant to one of those safe harbors, interests in a
partnership will not be treated as readily tradable on a secondary market or
the substantial equivalent thereof if (i) all interests in the partnership
were issued in a transaction (or transactions) that was not required to be
registered under the Securities Act, and (ii) the partnership does not have
more than 100 partners at any time during the partnership's taxable year. In
determining the number of partners in a partnership for this purpose, a person
owning an interest in a flow-through entity (i.e., a partnership, grantor
trust, or S corporation) that owns an interest in the partnership is treated
as a partner in such partnership only if (x) substantially all of the value of
the person's interest in the flow-through entity is attributable to the flow-
through entity's interest (direct or indirect) in the partnership and (y) a
principal purpose of the use of the tiered arrangement is to permit the
partnership to satisfy the 100-partner limitation.
The Operating Partnership is expected to have less than 100 partners
(including persons owning interests through flow-through entities). The
Operating Partnership has not issued any OP Units required to be registered
under the Securities Act. Thus, the Operating Partnership presently qualifies
for the safe harbors provided in the PTP Regulations. If the Operating
Partnership were to have more than 100 partners (including, in certain
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circumstances, persons owning interests through flow-through entities), it
nevertheless would be treated as a partnership for federal income tax purposes
(rather than an association taxable as a corporation) if at least 90% of its
gross income in each taxable year (commencing with the year in which it is
treated as a publicly traded partnership) consists of "qualifying income" with
the meaning of Section 7704(c) (2) of the Code (including interest, dividends,
"real property rents" and gains from the disposition of real property (the
"90% Passive-Type Income Exception"). For purposes of this test, Rents
received from greater than 10% owners of lessees, which owners also own 5% or
more of the interests in the Operating Partnership would not qualify as rents
from real property. Because of the substantial ownership of the Operating
Partnership by the Initial Lessees (or their Affiliates), the Operating
Partnership currently would not be eligible for the 90% Passive-Type Income
Exception. Thus, if the Operating Partnership were to have more than 100
partners (including, in certain circumstances, persons owning interests
through flow-through entities), the Company would be required to place
appropriate restrictions on the ability of the Limited Partners to exercise
their Redemption Rights as and if deemed necessary to ensure that the
Operating Partnership does not constitute a publicly traded partnership.
However, there is no assurance that the Operating Partnership will at all
times in the future be able to avoid treatment as a publicly traded
partnership. The opinion of Wilmer, Cutler & Pickering as to the
classification of the Partnership is based on an assumption that the Operating
Partnership will continue to fall within a safe harbor from publicly traded
partnership status.
If for any reason the Operating Partnership were taxable as a corporation,
rather than as a partnership, for federal income tax purposes, the Company
would not be able to satisfy the income and asset requirements for REIT
status. See "Federal Income Tax Considerations--Taxation of the Company as a
REIT--Requirements for Qualification--Income Tests" and "--Requirements for
Qualification--Asset Tests." In addition, any change in the Operating
Partnership's status for tax purposes might be treated as a taxable event, in
which case the Company might incur a tax liability without any related cash
distribution. See "Federal Income Tax Considerations--Taxation of the Company
as a REIT--Requirements for Qualification--Annual Distribution Requirements."
Further, items of income and deduction of the Operating Partnership would not
pass through to its partners, and its partners would be treated as
stockholders for tax purposes. Consequently, the Operating Partnership would
be required to pay income tax at corporate tax rates on its net income, and
distributions to its partners would constitute dividends that would not be
deductible in computing the Operating Partnership's taxable income.
The following discussion assumes that the Operating Partnership will be
treated as a partnership for federal income tax purposes.
Partnership Allocations. Although a partnership agreement will generally
determine the allocation of income and losses among partners, such allocations
will be disregarded for tax purposes if they do not comply with the provisions
of Section 704(b) of the Code and the Treasury Regulations promulgated
thereunder. Generally, Section 704(b) and the Treasury Regulations promulgated
thereunder require that partnership allocations respect the economic
arrangement of the partners.
If an allocation is not recognized for federal income tax purposes, the item
subject to the allocation will be reallocated in accordance with the partners'
interests in the partnership, which will be determined by taking into account
all of the facts and circumstances relating to the economic arrangement of the
partners with respect to such item. The Operating Partnership's allocations of
taxable income and loss are intended to comply with the requirements of
Section 704(b) of the Code and the Treasury Regulations promulgated
thereunder.
Tax Allocations With Respect to the Properties. Pursuant to Section 704(c)
of the Code, income, gain, loss and deduction attributable to appreciated or
depreciated property (such as the Properties) that is contributed to a
partnership in exchange for an interest in the partnership must be allocated
in a manner such that the contributing partner is charged with, or benefits
from, respectively, the unrealized gain or unrealized loss associated with the
property at the time of the contribution. The amount of such unrealized gain
or unrealized loss is generally equal to the difference between the fair
market value of contributed property at the time of contribution and the
adjusted tax basis of such property at the time of contribution (a "Book-Tax
Difference"). Such allocations are
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solely for federal income tax purposes and do not affect the book capital
accounts or other economic or legal arrangements among the partners. The
Operating Partnership was formed by way of contributions of appreciated
property (including the Properties). Consequently, the Partnership Agreement
will require such allocations to be made in a manner consistent with Section
704(c) of the Code.
In general, the Initial Sellers will be allocated depreciation deductions
for tax purposes which are lower than such deductions would be if determined
on a pro rata basis. In addition, in the event of the disposition of any of
the contributed assets (including the Properties) which have a Book-Tax
Difference, all income attributable to such Book-Tax Difference will generally
be allocated to the Initial Sellers and the Company will generally be
allocated only its share of capital gains attributable to appreciation, if
any, occurring after the closing of the Offering. This will tend to eliminate
the Book-Tax Difference over the life of the Operating Partnership. However,
the special allocation rules of Section 704(c) do not always entirely
eliminate the Book-Tax Difference on an annual basis or with respect to a
specific taxable transaction such as a sale. Thus, the carryover basis of the
contributed assets in the hands the Operating Partnership will cause the
Company to be allocated lower depreciation and other deductions, and possibly
an amount of taxable income in the event of a sale of such contributed assets
in excess of the economic or book income allocated to it as a result of such
sale. This may cause the Company to recognize taxable income in excess of cash
proceeds, which might adversely affect the Company's ability to comply with
the REIT distribution requirements. See "--Taxation of the Company as a REIT--
Annual Distribution Requirements." The foregoing principles also apply in
determining the earnings and profits of the Company for purposes of
determining the portion of distributions taxable as dividend income. The
application of these rules over time may result in a higher portion of
distributions being taxed as dividends than would have occurred had the
Company purchased the contributed assets entirely for cash.
The Treasury Regulations under Section 704(c) of the Code allow partnerships
to use any reasonable method of accounting for Book-Tax Differences so that
the contributing partner receives the tax benefits and burdens of any built-in
gain or loss associated with the contributed property. Under the Partnership
Agreement, the General Partner has the discretion to determine which of the
methods of accounting for Book-Tax Differences (specifically approved in the
Treasury Regulations) will be elected with respect to any properties
contributed to the Partnership. With respect to certain of the Initial
Properties, the Partnership has agreed to utilize the "traditional method with
ceiling rule" of eliminating the Book-Tax Difference with respect to such
Properties, except that the Operating Partnership will be permitted to utilize
a so-called "curative allocation" in connection with a sale of certain Initial
Properties in accordance with a special rule in the Treasury Regulations. The
use of this method may result in the Company being allocated less
depreciation, and therefore more taxable income in a given year than would be
the case if a different method for eliminating the Book-Tax Difference were
chosen. In such event, distributions to shareholders will be comprised of a
greater portion of taxable income as opposed to a return of capital than would
have been the case if another method were utilized. The Company has not
determined which of the alternative methods of accounting for Book-Tax
Differences will be elected with respect to its properties to be contributed
to the Operating Partnership in the future.
Basis in Operating Partnership Interest. The Company's adjusted tax basis in
its interest in the Operating Partnership generally (i) will be equal to the
amount of cash and the basis of any other property contributed to the
Operating Partnership by the Company, (ii) will be increased by (a) its
allocable share of the Operating Partnership's income and (b) its allocable
share of indebtedness of the Operating Partnership and (iii) will be reduced,
but not below zero, by the Company's allocable share of (a) losses suffered by
the Operating Partnership, (b) the amount of cash distributed to the Company
and (c) by constructive distributions resulting from a reduction in the
Company's share of indebtedness of the Operating Partnership.
If the allocation of the Company's distributive share of the Operating
Partnership's loss exceeds the adjusted tax basis of the Company's partnership
interest in the Operating Partnership, the recognition of such excess loss
will be deferred until such time and to the extent that the Company has
adjusted tax basis in its interest in the Operating Partnership. To the extent
that the Operating Partnership's distributions, or any decrease in the
Company's share of the indebtedness of the Operating Partnership (such
decreases being considered a cash
87
<PAGE>
distribution to the partners), exceeds the Company's adjusted tax basis, such
excess distributions (including such constructive distributions) constitute
taxable income to the Company. Such taxable income will normally be
characterized as a capital gain, and if the Company's interest in the
Operating Partnership has been held for longer than the long-term capital gain
holding period (currently one year), the distributions and constructive
distributions will constitute long-term capital gain. Under current law,
capital gains and ordinary income of corporations are generally taxed at the
same marginal rates.
Sale of the Properties. The Company's share of any gain realized by the
Operating Partnership on the sale of any property held by the Operating
Partnership as inventory or other property held primarily for sale to
customers in the ordinary course of the Operating Partnership's trade or
business will be treated as income from a prohibited transaction that is
subject to a 100% penalty tax. See "--Requirements for Qualification--Income
Tests." Such prohibited transaction income may also have an adverse effect
upon the Company's ability to satisfy the income tests for qualification as a
REIT. See "--Requirements for Qualification--Income Tests." Under existing
law, whether property is held as inventory or primarily for sale to customers
in the ordinary course of a partnership's trade or business is a question of
fact that depends on all the facts and circumstances with respect to the
particular transaction. The Operating Partnership intends to hold the
Properties for investment with a view to long-term appreciation, to engage in
the business of acquiring, providing financing for the development of, owning,
and operating the Properties (and other similar properties) and to make such
occasional sales of the Properties, including peripheral land, as are
consistent with the Operating Partnership's investment objectives.
88
<PAGE>
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 and the
Underwriters, for whom Friedman, Billings, Ramsey & Co., Inc. is acting as
Representative, has severally agreed to purchase, the number of Common Shares
offered hereby set forth below opposite its name.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc. ..........................
----
----
Total........................................................
====
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to purchase all the Common Shares offered hereby if
any are purchased.
The Underwriters propose initially to offer the Common Shares 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 Common Share. The Underwriters may allow and such dealers
may reallow a concession not to exceed $ per Common Share to certain other
dealers. After the Common Shares are released for sale to the public, the
offering price and other selling terms may be changed by the Underwriters.
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 2,250,000
Common Shares 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 that number of
additional Common Shares which is proportionate to such Underwriter's initial
commitment.
The Company has agreed to grant to the Underwriters the Underwriting
Warrants representing the right to acquire up to a number of Common Shares
equal to 4% of the Common shares to be outstanding on closing of the Offering
(including exercise of the Underwriters' over-allotment option) on a fully
diluted basis. at the initial public offering price of the Common Shares. The
Underwriting Warrants may not be sold, transferred, assigned or hypothecated
for one year following the date of this Prospectus, except to officers,
partners and shareholders of the Representative. The Underwriting Warrants
will be exercisable on the closing date of the Offering and have a term of
five years. The Company has also registered the Common Shares underlying the
Underwriting Warrants. The Underwriting Warrants enable the Representative to
profit from a rise in the market price of the Common Shares. Dilution to the
Common Shares will occur if the Underwriting Warrants are exercised at a time
when the exercise price is less than the market price of the Common Shares. In
addition, the terms upon which the Company will be able to obtain additional
equity capital may be adversely affected because the holders of the
Underwriting Warrants can be expected to exercise them at a time when the
Company likely would be able to obtain any needed capital on terms more
favorable to the Company than those provided in the Underwriting Warrants.
Prior to the Offering, Friedman, Billings, Ramsey Group, Inc. an affiliate
of the Representative established in the Company's favor a short-term
revolving loan facility on a secured basis in the principal amount of up to
approximately $2.3 million. Any outstanding loan amount and any accrued
interest are due and payable in full from the net proceeds of this Offering on
the closing date of this Offering.
Thomas D. Eckert, the Company's President and Chief Executive Officer, and
David S. Kay the Company's Chief Financial Officer have agreements with
Friedman, Billings, Ramsey Group, Inc. providing that if the Offering is not
completed for whatever reason, Friedman, Billings, Ramsey Group, Inc. will
employ them at a rate equal to their respective annual salaries and benefits
provided under their respective employment agreements with the Company for one
year following the abandonment of the Offering.
89
<PAGE>
FBR Asset Investment Corporation, an Affiliate of the Representative of the
Underwriters, has subscribed to purchase a number of Common Shares equal to
4.4% of the Common Shares to be outstanding on the closing of the Offering, up
to a maximum investment of $10 million at a purchase price equal to the
initial price to the public (less underwriting discount and commissions).
The Company has agreed to reimburse the Underwriters for their out-of-pocket
expenses, including fees and expenses of counsel to the Underwriters.
The Company has granted to the Representative of the Underwriters
preferential rights for three years from the date of the Registration
Statement, assuming completion of the Offering, to act as the exclusive
underwriter for, or advisor to, the Company in specified transactions or
offerings for customary fees to be mutually agreed to by the parties.
The Underwriters and dealers may engage in passive market making
transactions in the Common Shares in accordance with Rule 103 of Regulation M
promulgated by the Commission. In general, a passive market maker may not bid
for or purchase Common Shares at a price that exceeds the higher independent
bid. In addition, the net daily purchases made by any passive market maker
generally may not exceed 30% of its average daily trading volume in the Common
Shares during a specified two-month prior period, or 200 shares, whichever is
greater. A passive market maker must identify passive market making bids as
such on the Nasdaq electronic inter-dealer reporting system. Passive market
making may stabilize or maintain the market price of the Common Shares above
independent market levels. The Underwriters and dealers are not required to
engage in passive market making and may end passive market making activities
at any time.
In connection with this Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Shares. Specifically, the Underwriters may over-allot this Offering,
creating a syndicate short position. In addition, the Underwriters may bid for
and purchase Common Shares in the open market to cover syndicate short
positions or to stabilize the price of the Common Shares. Finally, the
underwriting syndicate may reclaim selling concessions from syndicate members
if the syndicate repurchases previously distributed Common Shares in syndicate
covering transactions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of the Common
Shares above independent market levels. The Underwriters are not required to
engage in these activities and may end any of these activities at any time.
The Company has agreed to indemnify the 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 Common
Shares. The initial public offering price has been determined by negotiation
between the Company and the Representative. 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 Initial
Properties and the Company's prospects for future earnings, the general
conditions of the economy and the securities markets, and the prices, dividend
yields and other financial characteristics of comparable publicly traded
REITs. There can, however, be no assurance that the price at which the Common
Shares will sell in the public market after this Offering will not be lower
than the price at which they are sold by the Underwriters.
The Company has been advised by the Representative that it and certain other
Underwriters intend to make a market in the Common Shares. However, the
Underwriters are not obligated to do so and such market making may be
interrupted or discontinued at any time without notice at the sole discretion
of the Underwriters. Application has been made by the Company to list the
Common Shares in The Nasdaq National Market under the symbol "CARS," but one
of the requirements for listing and continued listing is the presence of two
market makers for the Common Shares. The presence of a second market maker
cannot be assured. Accordingly, no assurance can be given as to the
development or liquidity of any market for the Common Shares.
90
<PAGE>
The Representative has informed the Company that the Underwriters do not
intend to confirm sales of the Common Shares offered hereby to any accounts
over which they exercise discretionary authority.
The officers and Trustees of the Company have agreed not to, directly or
indirectly, offer, sell, offer to sell, contract to sell, grant any option to
purchase or otherwise sell or dispose (or announce any offer, sale, offer of
sale, contract of sale, grant of any option to purchase or other sale or
disposition) of any Units or Common Shares or other shares of beneficial
interest of the Company, or any securities convertible or exercisable or
exchangeable for any Units or Common Shares or other shares of beneficial
interest of the Company (except for Options granted under the Plan) for a
period of two years from the date of this Prospectus The Representative, at
any time and without notice, may release all or any portion of the Common
Shares subject to the foregoing lock-up agreements.
LEGAL MATTERS
Certain legal matters in connection with the Offering will be passed upon
for the Company by Wilmer, Cutler & Pickering, Washington, D.C. and for the
Underwriters by Hunton & Williams, Richmond, Virginia. In addition, the
description of federal income tax consequences contained in this Prospectus
under "Federal Income Tax Considerations" is, to the extent that it
constitutes matters of law, summaries of legal matters or legal conclusions,
the opinion of Wilmer, Cutler & Pickering.
EXPERTS
The financial statements of the Company as of October 20, 1997 included in
this Prospectus and elsewhere in the Registration Statement have been audited
by Arthur Andersen LLP, independent 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 giving said reports.
The financial statements of Geneva Enterprises, Inc. and Affiliated Company
included in this Prospectus and elsewhere in the Registration Statement have
been audited by Walpert, Smullian & Blumenthal, P.A. independent 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
giving said reports.
The financial statements of the Pohanka Automotive Group included in this
Prospectus and elsewhere in the Registration Statement have been audited by
Beers & Cutler PLLC, independent 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 giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-11 under the Securities Act,
with respect to the Common Shares offered hereby (the "Registration
Statement"). This Prospectus, which is part of the Registration Statement,
does not contain all the information set forth in the Registration Statement
and the exhibits thereto. For further information with respect to the Company
and the Common Shares, reference is made to the Registration Statement and
such exhibits filed therewith. Any statements contained herein concerning the
provisions of any document are not necessarily complete, and in each instance,
reference is made to the copy of such document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference.
91
<PAGE>
For further information with respect to the Company and the Common Shares,
reference is made to the Registration Statement and such exhibits, copies of
which may be examined without charge at, or copies obtained upon payment of
prescribed fees from, the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 and will also be available for
inspection and copying at the regional offices of the Commission located at 7
World Trade Center, Suite 1300, New York, New York 10048. The Commission also
maintains a web site that contains reports, proxy and information statements
and other information regarding registrants that file documents with the
Commission, including the Company, and the address is http://www.sec.gov.
Following the closing of the Offering, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and will, therefore, be required to file reports, proxy
and information statements and other information with the Commission pursuant
to the reporting requirements of Section 13(a) thereof, in addition to any
other legal or Nasdaq requirements. Such reports, statements and information
can also be inspected and copied at the Commission's offices and web site
listed above.
The Company intends to furnish its shareholders with annual reports
containing consolidated financial statements audited by its independent
certified public accountants and with quarterly reports containing unaudited
condensed consolidated financial statements for each of the first three
quarters of each fiscal year.
92
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CAPITAL AUTOMOTIVE REIT:
Report of Independent Public Accountants--Arthur Andersen LLP........... F-2
Balance Sheet as of October 20, 1997.................................... F-3
Notes to Balance Sheet.................................................. F-4
Introduction to Pro Forma Financial Statements (Unaudited)..............
Pro Forma Balance Sheet as of October 20, 1997 (Unaudited).............. F-8
Pro Forma Statement of Operations for the Year Ended December 31, 1996
(Unaudited)............................................................ F-8
Pro Forma Statement of Operations for the Period Ended October 20, 1997
(Unaudited)............................................................ F-8
Notes to Pro Forma Financial Statements (Unaudited)..................... F-12
GENEVA ENTERPRISES, INC. AND AFFILIATED COMPANY:
Independent Auditors' Report--Walpert, Smullian & Blumenthal, P.A. ..... F-15
Combined Balance Sheets as of December 31, 1996 and September 30, 1997
(Unaudited)............................................................ F-16
Combined Statements of Income for the Year Ended December 31, 1996 and
the Nine Months Ended September 30, 1996 (Unaudited) and 1997
(Unaudited)............................................................ F-17
Combined Statements of Changes in Stockholders' Equity for the Year
Ended December 31, 1996 and the Nine Months Ended September 30, 1997
(Unaudited)............................................................ F-18
Combined Statements of Cash Flows for the Year Ended December 31, 1996
and the Nine Months Ended September 30, 1996 (Unaudited) and 1997
(Unaudited)............................................................ F-19
Notes to Combined Financial Statements.................................. F-20
POHANKA AUTOMOTIVE GROUP:
Independent Auditors' Report--Beers and Cutler PLLC..................... F-28
Combined Balance Sheets as of December 31, 1996 and September 30, 1997
(Unaudited)............................................................ F-29
Combined Statements of Operations for the Year Ended December 31, 1996
and the Nine Months Ended September 30, 1996 (Unaudited) and 1997
(Unaudited)............................................................ F-30
Combined Statements of Changes in Stockholders' Equity for the Year
Ended December 31, 1996 and the Nine Months Ended September 30, 1997
(Unaudited)............................................................ F-31
Combined Statements of Cash Flows for the Year Ended December 31, 1996
and the Nine Months Ended September 30, 1996 (Unaudited) and 1997
(Unaudited)............................................................ F-32
Notes to Combined Financial Statements.................................. F-34
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited the accompanying balance sheet of Capital Automotive REIT (a
Maryland real estate investment trust, the "Company") as of October 20, 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 Capital Automotive REIT as of
October 20, 1997, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Washington, D.C.,
November 24, 1997
F-2
<PAGE>
CAPITAL AUTOMOTIVE REIT
BALANCE SHEET
AS OF OCTOBER 20, 1997
<TABLE>
<S> <C>
ASSETS
Cash..................................................................... $ --
-----
Total assets........................................................... $ --
=====
LIABILITIES AND STOCKHOLDERS' EQUITY
Total liabilities........................................................ $ --
-----
Common stock, par value $.01, 10 shares issued and outstanding........... --
Additional paid-in capital............................................... 100
Stock subscriptions receivable........................................... (100)
-----
Total stockholders' equity............................................... --
-----
Total liabilities and stockholders' equity............................. $ --
=====
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-3
<PAGE>
CAPITAL AUTOMOTIVE REIT
NOTES TO BALANCE SHEET
AS OF OCTOBER 20, 1997
NOTE 1--THE COMPANY
Capital Automotive REIT (the "Company") was formed as a Maryland real estate
investment trust on October 20, 1997 and was initially capitalized on such
date through the sale of 10 shares of common stock for a $100 stock
subscription receivable. The Company's mission is to invest in the real
property and improvements used by operators of motor vehicle dealerships and
related businesses, through its ownership interest in Capital Automotive L.P.
(the "Operating Partnership"). After its formation, the Company will
consolidate the Operating Partnership due to its control as sole general
partner. The accompanying balance sheet includes all accounts of the Company.
The Company's sole activity through October 20, 1997, consisted of the
organization and start-up of the Company. Accordingly, no statement of
operations is presented.
The Company is in the process of filing a Registration Statement for
approximately 15.0 million shares of common stock (the "IPO"). Contingent upon
the consummation of the IPO, the Company will be liable for organization and
offering expenses in connection with the sale of the shares of the common
stock offered. The Company will contribute the proceeds from the IPO to the
Operating Partnership in exchange for 15.0 million units in the Operating
Partnership.
Contingent on the closing of the IPO, FBR Asset Investment Corporation, an
affiliate of Friedman, Billings, Ramsey & Co., Inc. ("FBR"), the
representatives of the underwriters in the IPO, will separately purchase
common shares of the Company in the amount of approximately 4.4% of the common
shares issued in the IPO, up to a maximum of $10 million, at 93 percent of the
IPO price (the "FBR Offering"). The Company will contribute the proceeds from
the FBR Offering to the Operating Partnership in exchange for an equal number
of units in the Operating Partnership.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INCOME TAXES
The Company intends to qualify as a real estate investment trust under the
provisions of the Internal Revenue Code of 1986, as amended. As a real estate
investment trust, the Company is required to distribute at least 95% of its
taxable income to shareholders and meet certain other requirements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-4
<PAGE>
CAPITAL AUTOMOTIVE REIT
NOTES TO BALANCE SHEET--(CONTINUED)
CONCENTRATION OF RISK
The Company is in the development stage, and therefore is subject to several
risk factors, including the following:
. The lack of operating history of the Company;
. Dependence on the ability of lessees to pay rent or perform obligations
under leases;
. Taxation of the Company as a regular corporation if it fails to qualify
as a real estate investment trust;
. The Company's dependence on key officers and trustees of the Company;
and
. The general risks relating to commercial real estate ownership and
investment.
NOTE 3--RELATED PARTY TRANSACTIONS
In October 1997, Friedman, Billings, Ramsey Group, Inc., an affiliate of
FBR, issued to the Company a short-term revolving line of credit in the amount
of approximately $2.3 million. Draws on the line of credit are to be used by
the Company for organizational costs and offering costs, are due on demand and
are to be repaid with the proceeds from the IPO. Draws on the line of credit
bear interest at a rate of 10 percent per annum.
An affiliate of FBR has initially capitalized the Company as described in
Note 1.
NOTE 4--SUBSEQUENT EVENTS
ACQUISITIONS
Since October 20, 1997, the Company, through the Operating Partnership, has
committed to acquire real property and improvements from the affiliates of
four motor vehicle dealers (the "Dealers") for a total purchase price of
approximately $116.9 million, for which approximately $75.7 million will be
paid with units in the Operating Partnership (valued at the same price as the
Company's shares sold in the IPO), and the remaining $41.2 million will
consist of mortgage debt assumed by the Company. The mortgage debt assumed
will be repaid with the proceeds of the IPO. These acquisitions are contingent
on the completion of the IPO as discussed above. Summarized financial
information for the Dealers (on a combined basis) as of September 30, 1997 and
for the year ended December 31, 1996 and the nine months ended September 30,
1997, is as follows (unaudited, in thousands):
BALANCE SHEET
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1997
-------------
(UNAUDITED)
<S> <C>
Inventory (dealer)............................................. $112,501
Real estate, net............................................... 10,941
Other assets................................................... 104,569
--------
Total assets................................................... $228,011
========
Mortgage and other debt........................................ $147,519
Other liabilities.............................................. 30,657
Shareholders' equity........................................... 49,835
--------
Total liabilities and shareholders' equity..................... $228,011
========
</TABLE>
F-5
<PAGE>
CAPITAL AUTOMOTIVE REIT
NOTES TO BALANCE SHEET--(CONTINUED)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE
ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Sales revenue................................ $ 1,173,649 $ 928,852
Cost of sales................................ (1,042,388) (826,714)
Net operating income......................... 131,261 102,138
Other income................................. 23,671 20,029
Selling, general and administrative.......... (141,499) (109,785)
----------- ---------
Net income................................... $ 13,433 $ 12,382
=========== =========
</TABLE>
RENTAL INCOME
As part of the acquisitions described above, the Company will enter into
lease agreements (the "Leases") with the operators of the Dealers (the
"Lessees"). The Leases generally have initial terms of ten to twelve years,
and may be extended upon the same terms and conditions for one or two
additional ten year terms, at the option of the Lessees. The Leases are
triple-net leases and require the Lessees to pay substantially all expenses
associated with operations, including taxes, insurance, utilities, service,
maintenance and ground lease payments. In addition, the majority of the Leases
are guaranteed by parent entities to the Lessees, but the Leases are not
cross-defaulted. Base rent will be increased annually over the term of the
Leases by a factor of the consumer price index. Minimum rental payments will
be received as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
- ------------------
<S> <C>
1997............................................................... $ 12,859
1998............................................................... 12,859
1999............................................................... 12,859
2000............................................................... 12,859
2001............................................................... 12,859
Thereafter......................................................... 64,295
--------
$128,590
========
</TABLE>
STOCK OPTION PLANS
The Company has established a plan (the "Plan") for the purpose of
attracting and retaining trustees, executive officers and other key employees.
Each option granted pursuant to the Plan shall be designated at the time of
grant as either an "incentive share option" or as a "non-qualified share
option." Under the Plan shares will be available for grant. The options
will become exercisable, subject to certain conditions, at a rate of 25
percent per year over a four year period, commencing on the first anniversary
of the date of grant and with a term of ten years.
Concurrent with the closing of the IPO, the Company will grant options in
the amount of 6.625 percent of the aggregate number of the Operating
Partnership's units outstanding as a result of the IPO, the FBR Offering, and
the acquisitions described above. Such options will be granted under the Plan
to several key officers and employees of the Company, exercisable at the IPO
price.
F-6
<PAGE>
CAPITAL AUTOMOTIVE REIT
NOTES TO BALANCE SHEET--(CONTINUED)
STOCK WARRANTS
As part of the IPO, the Company will issue warrants to two affiliates of the
Dealers, representing the right to acquire units in the Operating Partnership
in the aggregate amount of 4 percent of the Operating Partnership's
outstanding units as a result of the IPO, the FBR Offering and the
acquisitions described above. In addition, the Company will issue warrants to
FBR, representing the right to acquire common stock of the Company in the
amount of 4 percent of the Operating Partnership's outstanding units as a
result of the IPO, the FBR Offering and the acquisitions described above.
These warrants are exercisable on the effective date of the IPO and for a
period of five years thereafter, with an exercise price equal to the IPO
price.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of its four
executive officers. The agreements are for a four year term and provide that
the executive officers agree to devote their full time to the operation of the
Company (except as the Company otherwise agrees, including on behalf of the
Operating Partnership). The term is shortened to June 30, 1998 if the Company
has not completed its initial public offering by such date.
Two of the Company's executive officers have agreements with FBR providing
that if the IPO cannot be completed, FBR will employ each of them for a term
of one year (or until the individual finds new employment) at a compensation
equal to that under their current employment agreement.
F-7
<PAGE>
CAPITAL AUTOMOTIVE REIT
PRO FORMA BALANCE SHEET AS OF OCTOBER 20, 1997 AND
PRO FORMA STATEMENTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1996 AND THE PERIOD ENDED OCTOBER 20, 1997
(UNAUDITED)
The following unaudited pro forma balance sheet gives effect to: (i) the
completion of the Offering and the concurrent FBR Offering, (ii) the
acquisition of certain of the Initial Properties, (iii) the commencement of
the Initial Leases, and (iv) certain other transactions described in the notes
hereto as though such transactions occurred on October 20, 1997.
The following unaudited pro forma statements of operations give effect to
(i) the completion of the Offering and the concurrent FBR Offering, (ii) the
acquisition of certain of the Initial Properties, (iii) the commencement of
the Initial Leases, and (iv) certain other transactions described in the notes
hereto as though such transactions occurred at the beginning of the presented
period.
The following unaudited pro forma data is not necessarily indicative of what
the actual financial position or results of operations of the Company would
have been as of the date or for the period indicated, nor does it purport to
represent the financial position or results of operations for the Company for
future periods.
F-8
<PAGE>
CAPITAL AUTOMOTIVE REIT
PRO FORMA BALANCE SHEET
AS OF OCTOBER 20, 1997
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
PRO
HISTORICAL ADJUSTMENTS FORMA(H)
---------- ----------- --------
<S> <C> <C> <C>
ASSETS
Cash......................................... $-- $207,750 (A) $182,254
5,000 (B)
(41,198)(C)
9,631 (F)
1,071 (G)
Land......................................... -- 76,000 (D) 76,000
Building and improvements.................... -- 40,922 (D) 40,922
---- --------
Total real estate............................ -- 116,922
---- --------
Total assets............................. $-- $299,176
==== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage payable............................. $-- $ 41,198 (C) $ --
(41,198)(C)
Line of credit............................... -- 5,000 (B) 5,000
Security deposits payable.................... -- 1,071 (G) 1,071
---- --------
Total liabilities........................ -- 6,071
---- --------
Minority interest............................ -- 71,348 (E) 71,348
Shareholders' equity:
Common stock............................... -- 150 (A) 157
7 (F)
Additional paid-in capital................. -- 207,600 (A) 221,600
4,376 (D)
9,624 (F)
---- --------
Total shareholders' equity............... -- 221,757
---- --------
Total liabilities and shareholders'
equity.................................. $-- $299,176
==== ========
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma balance
sheet.
F-9
<PAGE>
CAPITAL AUTOMOTIVE REIT
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA (H)
---------- ----------- -------------
<S> <C> <C> <C>
Total revenue.......................... -- $12,859 (I) $12,859
Depreciation and amortization.......... -- 2,046 (D) 2,046
General and administrative expense..... -- 3,500 (J) 3,500
Interest expense....................... -- 400 (B) 400
--- -------
Total expenses....................... -- 5,946
--- -------
Net income before minority interest.... -- 6,913
Minority interest...................... -- (1,683)(E) (1,683)
--- -------
Net income applicable to common
shareholders.......................... -- $ 5,230
=== =======
Shares of common stock outstanding..... 15,690
=======
Earnings per share of common stock
outstanding........................... $ 0.33
=======
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
financial statements.
F-10
<PAGE>
CAPITAL AUTOMOTIVE REIT
PRO FORMA STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED OCTOBER 20, 1997
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA (H)
---------- ----------- -------------
<S> <C> <C> <C>
Total revenue.......................... -- $11,243 (I) $11,243
Depreciation and amortization.......... -- 1,790 (D) 1,790
General and administrative expense..... -- 3,063 (J) 3,063
Interest expense....................... -- 350 (B) 350
--- -------
Total expenses....................... -- 5,203
--- -------
Net income before minority interest.... -- 6,040
Minority interest...................... -- (1,470)(E) (1,470)
--- -------
Net income applicable to common
shareholders.......................... -- $ 4,570
=== =======
Shares of common stock outstanding..... 15,690
=======
Earnings per share of common stock
outstanding........................... $ 0.29
=======
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
financial statements.
F-11
<PAGE>
CAPITAL AUTOMOTIVE REIT
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
(A) Represents 15.0 million shares of common stock issued in the initial
public offering, at $15.00 per share with a par value of $.01 per share.
Adjustments consist of the following (in thousands):
<TABLE>
<S> <C>
Proceeds of offering............................................... $225,000
Underwriters discount.............................................. (15,750)
Offering expenses.................................................. (1,500)
--------
Net proceeds....................................................... $207,750
========
Common stock....................................................... $ 150
Additional paid-in capital......................................... 207,600
--------
Net proceeds....................................................... $207,750
========
</TABLE>
(B) Represents a draw of $5.0 million on a $100 million line of credit
intended to be obtained by management upon closing of the Offering. The $5.0
million draw will be guaranteed by certain of the Initial Sellers for tax
purposes. Draws on the line of credit are assumed to bear interest at a rate
of 8 percent.
(C) Represents assumption of mortgage debt from the Initial Properties, and
immediate repayment with proceeds from the Offering. See "Use of Proceeds"
elsewhere in this Prospectus.
(D) Represents contribution of the Initial Properties for units of the
Operating Partnership (assuming the IPO price of the Company's Common Shares)
and assumption of mortgage debt. In addition, the purchase price of real
property includes approximately $1.3 million in acquisition costs to be paid
by the Company. The purchase price of real property has been allocated 65%/35%
between land and buildings, respectively, for purposes of the unaudited pro
forma financial statements. Final allocations will be calculated and recorded
by the Operating Partnership upon closing. Adjustments are comprised of the
following:
<TABLE>
<CAPTION>
TOTAL LAND BUILDING
-------- ------- --------
<S> <C> <C> <C>
Rosenthal.......................................... $ 65,269 $42,425 $22,844
Pohanka............................................ 31,324 20,361 10,963
Sheehy............................................. 14,006 9,104 4,902
Cherner............................................ 6,323 4,110 2,213
-------- ------- -------
$116,922 $76,000 $40,922
======== ======= =======
Units issued-Minority interest..................... $ 71,348
Units issued-Additional paid-in capital............ 4,376
Mortgage debt assumed.............................. 41,198
--------
$116,922
========
</TABLE>
Depreciation is computed using the straight-line method assuming estimated
useful lives of 20 years for the buildings and improvements.
F-12
<PAGE>
CAPITAL AUTOMOTIVE REIT
NOTES TO PRO FORMA FINANCIAL STATEMENTS--(CONTINUED)
(E) Minority interest is calculated at approximately 24.3 percent of the
Operating Partnership's partners' capital and net income. The ownership of the
Operating Partnership is as follows (in thousands):
<TABLE>
<CAPTION>
$ UNITS %
--------- ------ -----
<S> <C> <C> <C>
Partners' capital:
Initial Sellers.................................... $ 75,724 5,048 24.3%
The Company........................................ 217,381 15,690 75.7%
--------- ------ -----
Total............................................ $ 293,105 20,738 100.0%
========= ====== =====
</TABLE>
(F) Represents 690,377 shares of common stock issued to FBR at the initial
public offering price (net of underwriting discounts and commissions).
(G) Represents security deposits to be received by the Initial Lessees in
the amount of one month's base rent.
(H) The Company, as sole general partner of the Operating Partnership, will
have, subject to certain protective rights of the Limited Partners, full,
exclusive and complete responsibility and discretion in the management and
unilateral control of the Operating Partnership. Such responsibilities permit
the Company to enter into certain major transactions including acquisitions,
dispositions and refinancings, and to cause changes in the Operating
Partnership's line of business and distribution policies. Further, the Company
may not be replaced as general partner by the Limited Partners, except in
certain limited circumstances. Accordingly, for accounting purposes, the
Company is considered to control the Operating Partnership and the
accompanying unaudited pro forma financial statements consolidate the accounts
of the Company and the Operating Partnership.
(I) Represents payments of base rent from the Initial Lessees to the Company
calculated on a pro forma basis as if the beginning of the period presented
was the beginning of a lease year.
(J) Adjustment represents management's estimate for legal, audit, office
costs, salaries and other general and administrative expenses to be paid by
the Company as follows:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, OCTOBER 20,
1996 1997
------------ ------------
<S> <C> <C>
Salaries and benefits--executive officers........ $1,800 $1,575
Other salaries and benefits...................... 400 350
Directors and officers insurance................. 300 263
Legal and accounting............................. 250 219
Directors fees and travel........................ 150 131
Travel and entertainment......................... 250 219
Office rent, telephone, supplies and other
administrative.................................. 250 219
Other............................................ 100 87
------ ------
Total.......................................... $3,500 $3,063
====== ======
</TABLE>
Salaries and benefits are based upon employee contracts with the respective
employees and executive management. Other amounts are based upon management's
estimates of expenses to be incurred given the Company's level of operations
and related administrative requirements.
F-13
<PAGE>
To The Board of Directors
Geneva Enterprises, Inc. and Affiliated Company
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying combined balance sheet of Geneva
Enterprises, Inc. and Affiliated Company as of December 31, 1996, and the
related combined statements of income, changes in stockholders' equity, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Geneva
Enterprises, Inc. and Affiliated Company as of December 31, 1996 and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ Walpert, Smullian & Blumenthal,
P.A.
Baltimore, Maryland
November 6, 1997
F-14
<PAGE>
GENEVA ENTERPRISES, INC. AND AFFILIATED COMPANY
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents........................ $ 1,556 $ 3,805
Accounts receivable
Customers...................................... 9,211 10,900
Contracts-in-transit........................... 9,864 8,791
Finance reserves............................... 635 906
Factory........................................ 2,670 2,095
Related parties................................ 2,318 1,902
Other.......................................... 963 195
Current portion of notes receivable--related
parties......................................... 3,089 3,968
Inventories...................................... 62,373 44,873
Prepaid expenses................................. 354 411
-------- --------
Total Current Assets......................... 93,033 77,846
-------- --------
Notes Receivable--related parties--Less Current
Portion........................................... 394 --
-------- --------
Property, Plant and Equipment--
At Cost
Land........................................... 881 881
Buildings and improvements..................... 639 639
Leasehold improvements......................... 3,237 3,251
Parts and services equipment................... 3,545 3,600
Furniture and fixtures......................... 4,788 4,888
Service vehicles............................... 832 804
-------- --------
13,922 14,063
Less: Accumulated depreciation and
amortization.................................. (10,189) (10,521)
-------- --------
3,733 3,542
-------- --------
Other Assets....................................... 61 93
-------- --------
Total Assets................................. $97,221 $81,481
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities................................
Bank overdraft................................... $ 5,626 $ 1,164
Notes payable--vehicles floor plan............... 64,228 47,913
Notes payable to related parties................. 1,624 1,124
Accounts payable.................................
Trade.......................................... 5,106 6,832
Related parties................................ 2,439 440
Customer deposits................................ 717 650
Accrued salaries and commissions................. 1,505 1,622
Other accrued liabilities........................ 6,406 8,308
-------- --------
Total Current Liabilities.................... 87,651 68,053
-------- --------
Stockholders' Equity
Common Stock..................................... 23 23
Additional paid-in capital....................... 3,969 4,532
Stockholders' notes receivable................... (820) (820)
Retained earnings................................ 6,398 9,693
-------- --------
Total Stockholders' Equity................... 9,570 13,428
-------- --------
Total Liabilities and Stockholders' Equity... $ 97,221 $ 81,481
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE>
GENEVA ENTERPRISES, INC. AND AFFILIATED COMPANY
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEAR MONTHS ENDED
ENDED SEPTEMBER 30,
DECEMBER 31, ------------------
1996 1996 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Sales.......................................... $489,065 $374,352 $397,371
Cost of Sales.................................. 434,502 334,181 355,823
-------- -------- --------
Gross Profit............................... 54,563 40,171 41,548
-------- -------- --------
Other Operating Income
Finance...................................... 5,927 4,971 4,590
Insurance.................................... 629 556 396
Warranty..................................... 2,960 2,388 1,758
Miscellaneous................................ 7,683 6,514 8,512
-------- -------- --------
17,199 14,429 15,256
-------- -------- --------
Selling, General, Administrative
and Interest Expenses......................... (68,768) (51,867) (53,509)
-------- -------- --------
Net Income................................. $ 2,994 $ 2,733 $ 3,295
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
GENEVA ENTERPRISES, INC. AND AFFILIATED COMPANY
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
STOCK- TOTAL
COMMON STOCK ADDITIONAL HOLDERS' STOCK-
------------- PAID-IN NOTES RETAINED HOLDERS'
SHARES AMOUNT CAPITAL RECEIVABLE EARNINGS EQUITY
------ ------ ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance--January 1,
1996................... 550 $25 $4,261 $(1,428) $3,367 $ 6,225
Net income.............. 2,994 2,994
Collections on
stockholders' notes
receivable............. -- -- -- 608 -- 608
Proceeds from stock
issuance............... 19 -- 650 -- -- 650
Stock retirements....... (20) (2) (942) -- 37 (907)
---- --- ------ ------- ------ -------
Balance--December 31,
1996................... 549 23 3,969 (820) 6,398 9,570
Net income (unaudited).. -- -- -- -- 3,295 3,295
Proceeds from stock
issuance (unaudited)... -- -- 563 -- -- 563
---- --- ------ ------- ------ -------
Balance, September 30,
1997 (unaudited)....... 549 $23 $4,532 $ (820) $9,693 $13,428
==== === ====== ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
GENEVA ENTERPRISES, INC. AND AFFILIATED COMPANY
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
FOR THE YEAR SEPTEMBER 30,
ENDED ----------------
DECEMBER 31, 1996 1996 1997
----------------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Cash Flow From Operating Activities
Net income............................... $ 2,994 $ 2,733 $ 3,295
------- ------- -------
Adjustments to reconcile net income to
net cash (used in)/provided by operating
activities:
Depreciation and amortization.......... 585 421 360
Gain on disposition of property and
equipment............................. (8) -- --
Forgiveness of debt from affiliate..... -- -- (500)
Changes in Assets and Liabilities
(Increase)/Decrease in Assets:
Accounts receivable.................... (959) (1,741) 872
Inventories............................ (8,490) 13,001 17,500
Prepaid expenses....................... (74) (293) (57)
Other assets........................... 271 261 (32)
Increase/(Decrease) in Liabilities:
Accounts payable....................... (986) (448) (273)
Customer deposits...................... 69 98 (67)
Accrued salaries and commissions....... 505 238 117
Other accrued liabilities.............. (1,259) 1,550 1,902
------- ------- -------
Total Adjustments.................... (10,346) 13,087 19,822
------- ------- -------
Net Cash (Used In)/Provided By
Operating Activities................ (7,352) 15,820 23,117
------- ------- -------
Cash Flow From Investing Activities
Advances to related parties.............. (433) (91) (550)
Loans to stockholders.................... (1,402) (1,072) --
Repayment from related parties........... 52 52 65
Proceeds from sale of property and
equipment............................... 57 -- --
Purchases of property and equipment...... (467) (190) (169)
------- ------- -------
Net Cash Used In Investing
Activities.......................... (2,193) (1,301) (654)
------- ------- -------
Cash Flow From Financing Activities
Stock retirements........................ (907) (907) --
Capital contributions.................... 650 650 563
Net borrowings under floor plan.......... 7,897 (11,776) (16,315)
Repayments of notes payable to related
parties................................. (761) (647) --
Collections on stockholders' notes
receivable.............................. 607 548 --
Increase/(Decrease) in bank overdraft.... 1,883 (2,187) (4,462)
------- ------- -------
Net Cash Provided By/(Used In)
Financing Activities............... 9,369 (14,319) (20,214)
------- ------- -------
Net (Decrease)/Increase in Cash and Cash
Equivalents............................... (176) 200 2,249
Cash and Cash Equivalents--Beginning of
Year...................................... 1,732 1,732 1,556
------- ------- -------
Cash and Cash Equivalents--End of Year..... $ 1,556 $ 1,932 $ 3,805
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
GENEVA ENTERPRISES, INC. AND AFFILIATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
NATURE OF BUSINESS
Geneva Enterprises, Inc. and Affiliated Company (the Company) has as its
principal business activity the sale and service of new and used vehicles in
the Washington, D.C. metropolitan area.
PRINCIPLES OF COMBINATION
The accompanying combined financial statements include the accounts of the
following entities which are affiliated through common ownership:
. Geneva Enterprises, Inc., which includes the accounts of the following
divisions (collectively called the Divisions):
Rosenthal Nissan/Mazda Rosenthal Chevrolet
Rosenthal Infiniti Landmark Honda
Rosenthal Gaithersburg Nissan Rosenthal Acura
Rosenthal Jaguar Rosenthal
Rosenthal Honda Cadillac/Buick/Isuzu
Rosenthal Mazda Geneva Management
All the Divisions except Geneva Management sell new and used vehicles
and related parts and service. Geneva Management provides management
services to all the Divisions, other related companies and outside
companies.
. Maryland Imported Cars, Inc.
All significant intercompany and interdivisional accounts and transactions
have been eliminated upon combination.
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Cash and Cash Equivalents: Cash and cash equivalents are comprised of
highly liquid instruments purchased with original maturities of three months
or less.
B. Concentration of Credit Risk: The Company maintains part of its cash in
bank deposit accounts at financial institutions, where the balances, at times,
may exceed federally insured limits. At December 31, 1996, the Company's cash
balance exceeded the insured limit by approximately $2,271,000.
Included in receivables at December 31, 1996 are significant concentrations
of amounts due from customers located in the Baltimore and Washington, D.C.
metropolitan areas. The Company generally requires no collateral in extending
credit to its customers other than the vehicles which are sold.
C. Accounts Receivable: The Company has established a mandatory write-off
policy for all receivables older than 90 days. At December 31, 1996, no
allowance for uncollectible accounts was deemed necessary.
D. Inventories: Inventories are stated at cost. Cost is determined by the
last-in, first-out (LIFO) method for new vehicles and parts and accessories,
and the specific cost method for used vehicles.
E. Property and Equipment and Related Depreciation and
Amortization: Equipment is recorded at cost and is depreciated using
accelerated methods over its estimated useful lives which range from 5 to 7
years. Buildings and leasehold improvements are amortized using the straight-
line method over its estimated useful lives which range from 31 1/2 to 39
years.
F. Recognition of Finance Fees and Insurance Commissions: The Company
arranges financing for its customers' vehicle purchases and arranges insurance
in connection therewith. The Company receives a fee from the financial
institution for arranging the financing and receives a commission for the sale
of an insurance policy.
F-19
<PAGE>
GENEVA ENTERPRISES, INC. AND AFFILIATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Company is charged back for a portion of this fee should the customer
terminate the finance or insurance contract before its scheduled term or
before specified dates under arrangements with such institutions. The
estimated allowance for these chargebacks (approximately $3,426,000 at
December 31, 1996) is reflected in Other Accrued Liabilities and is based upon
the Company's historical experience for prepayments or defaults on these
contracts. Finance reserves are fees due to the Company from financial
institutions for fees on contracts arranged to finance vehicle purchases.
G. Income Taxes: The Company has elected by consent of its stockholders, to
be taxed under the provisions of Subchapter "S" of the Internal Revenue Code,
whereby the Company's income is treated for federal and state income taxes
substantially as though the Company were a partnership. No provision for
income taxes has been reflected in the financial statements, since taxable
attributes flow through to the individual stockholders.
H. Major Suppliers: The Company purchases substantially all of its new
vehicles and parts and accessories from a limited number of suppliers.
I. Advertising Expense: The Company expenses costs associated with
advertising as incurred. Total advertising expense for the year ended December
31, 1996, the majority of which was purchased through an affiliated company
(Note 8), was approximately $6,642,000.
J. Use of Estimates: The preparation of financial statements requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from those estimates.
K. Interest: The Company earned approximately $260,000 in interest
reimbursements during the year ended December 31, 1996, which has been netted
against interest expense. These interest reimbursements compensated the
Company for incurring interest on floor plan notes for vehicle purchases which
were not received on the Company's lot until after the obligations were
incurred. The Company incurred floor plan and other interest expense of
$3,485,000 during the year ended December 31, 1996.
L. Interim Financial Statements: The accompanying unaudited financial
statements as of September 30, 1997 and for the nine month periods ended
September 30, 1997 and 1996 have been prepared in accordance with generally
accepted accounting principles ("GAAP"). Although certain information and
footnote disclosures normally included in financial statements prepared in
accordance with GAAP have been omitted, the Company believes that the
disclosures included herein are adequate to make the information presented not
misleading. Operating results for the nine month period ended September 30,
1997, are not necessarily indicative of the results that may be expected for
the year ended December 31, 1997. These unaudited financial statements should
be read in conjunction with the accompanying audited financial statements and
related footnotes as of and for the year ended December 31, 1996. In the
opinion of the Company, the unaudited financial statements contain all
adjustments (consisting only of normal recurring items) necessary for a fair
presentation of the results for the nine month periods ended September 30,
1997 and 1996.
F-20
<PAGE>
GENEVA ENTERPRISES, INC. AND AFFILIATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
M. Basis of Accounting: The accompanying combined financial statements are
prepared in accordance with generally accepted accounting principles. In
addition to these financial statements, Geneva Enterprises, Inc. and Maryland
Imported Cars, Inc. issue separate financial statements on the basis of
accounting each company uses for income tax purposes, which is a comprehensive
basis of accounting other than generally accepted accounting principles. The
differences between generally accepted accounting principles and the income
tax basis of accounting relating to retained earnings and net income are as
follows:
<TABLE>
<CAPTION>
INCOME
GAAP TAX BASIS DIFFERENCES
------- --------- -----------
<S> <C> <C> <C>
Retained Earnings/(Deficit), January 1,
1996......................................
Geneva Enterprises, Inc. ................ $ 4,395 $ 9,040 $(4,645)
Maryland Imported Cars, Inc. ............ (1,029) (916) (113)
------- ------- -------
$ 3,366 $ 8,124 $(4,758)
======= ======= =======
Net Income/(Loss)--1996
Geneva Enterprises, Inc. ................ $ 3,771 $ 3,342 $ 429
Maryland Imported Cars, Inc. ............ (777) (751) (26)
------- ------- -------
$ 2,994 $ 2,591 $ 403
======= ======= =======
Retained Earnings/(Deficit), December 31,
1996
Geneva Enterprises, Inc. ................ $ 8,166 $11,841 $(3,675)
Maryland Imported Cars, Inc. ............ (1,768) (1,629) (139)
------- ------- -------
$ 6,398 $10,212 $(3,814)
======= ======= =======
</TABLE>
NOTE 2--INVENTORIES
The classification of inventories is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
New vehicles.................................................... $59,110
Parts and accessories........................................... 5,684
-------
64,794
Less: Allowance to reduce carrying value to LIFO basis.......... (12,122)
-------
52,672
Used vehicles................................................... 9,701
-------
$62,373
=======
</TABLE>
If the first-in, first-out (FIFO) method had been used for new vehicles and
parts and accessories inventories, net income would have been approximately
$2,474,000 for the year ended December 31, 1996 and $2,097,000 and $2,371,000
for the nine month periods ended September 30, 1997 and 1996, respectively.
F-21
<PAGE>
GENEVA ENTERPRISES, INC. AND AFFILIATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--WHOLESALE FINANCE LIABILITY
The Company finances its acquisition of new and certain used vehicle
inventories through floor plan facilities with financial institutions. These
floor plan facilities are in the form of revolving credit arrangements
evidenced by floor plan notes, and are collateralized by new vehicle
inventories. The balance under the floor plan facility with respect to any
particular vehicle is due when the vehicle is sold. The floor plan notes bear
interest at the banks' prime rate (approximately 8.75% at December 31, 1996).
Vehicles securing floor plan notes of approximately $6,639,000 were sold
prior to December 31, 1996. The notes were paid in January 1997.
NOTE 4--NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Notes payable to uncombined affiliated company, due on
demand, interest payable at a variable rate based on the
prime rate as determined by First Virginia Bank
(approximately 8.75% at December 31, 1996).................. $ 500
Notes payable to stockholders, due on demand, interest
payable annually at a variable rate based on the prime rate
as determined by First Virginia Bank (approximately 8.75% at
December 31, 1996). ........................................ 437
9% notes payable to stockholders, due on demand, interest
payable annually............................................ 64
Note payable to stockholder, due on demand, with interest
payable annually at a variable rate based on the prime rate
as determined by First Virginia Bank (approximately 8.75% at
December 31, 1996). ........................................ 287
8.50% subordinated notes payable to stockholders, due on
demand, interest payable annually. ......................... 336
------
$1,624
======
</TABLE>
Interest expense on the notes payable to related parties was approximately
$161,000 for the year ended December 31, 1996. Although certain of the above
notes are due on demand, they may not be paid in the next year.
Other Operating Income includes $500,000 resulting from forgiveness of
indebtedness by an uncombined affiliated company.
NOTE 5--LEASES
The Company leases most of the premises it occupies under operating leases
with related parties. The majority of the leases have initial 10-year terms
with options to renew the leases for additional 5 year periods. The basic
annual rental is subject to adjustment every two years based on the Consumer
Price Index for the Metropolitan Washington area.
F-22
<PAGE>
GENEVA ENTERPRISES, INC. AND AFFILIATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum rental commitments under noncancellable leases are as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1997............................................................... $ 7,109
1998............................................................... 6,660
1999............................................................... 5,894
2000............................................................... 5,777
2001............................................................... 5,700
Thereafter......................................................... 25,879
-------
$57,019
=======
</TABLE>
Rent expense charged to operations amounted to approximately $7,396,000 for
the year ended December 31, 1996.
NOTE 6--SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was approximately $3,482,000 during the year ended
December 31, 1996.
NOTE 7--RELATED PARTY TRANSACTIONS
Accounts Receivable and Accounts Payable--Related Parties: Included in
related parties' receivable and payable balances are amounts due from and
payable to uncombined companies under common ownership control.
Notes Receivable: The Company has entered into various note receivable
agreements to fund amounts to uncombined affiliated companies, stockholders
and employees. The following notes are due from stockholders or uncombined
affiliated companies under common control (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Stockholders, due on demand, non-interest-bearing............. $1,402
Stockholder, due on demand, non-interest-bearing.............. 400
Stockholder, due on demand, non-interest-bearing.............. 75
Stockholder, due on demand, interest payable annually at 5%... 133
Stockholder, due on demand, interest payable annually at 5%... 719
Stockholder, due on demand, interest payable at 10%........... 20
Stockholder, due on demand, interest payable at 10%........... 15
Stockholder, due October 21, 1998, non-interest bearing....... 394
Hubert Hoff, due on demand, non-interest-bearing.............. 157
Yetta Rosenthal, due on demand, interest payable annually at
9%........................................................... 168
-------
3,483
Less: Current portion......................................... (3,089)
-------
Long-Term Portion........................................... $ 394
=======
</TABLE>
Interest income on the above notes was approximately $61,000 for the year
ended December 31, 1996.
During 1993, the Company issued 30,794 shares of common stock to existing
stockholders in exchange for notes totaling $1,598,000. The notes are due on
demand, but no later than December 31, 1997. Interest is due only if the
respective stockholder's employment ends. Upon separation of service, interest
would be computed on
F-23
<PAGE>
GENEVA ENTERPRISES, INC. AND AFFILIATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
a cumulative basis at the short-term blended federal rate for demand
instruments as announced year to year by the Internal Revenue Service (4.58%
at December 31, 1996) for each year the notes were outstanding and would be
recorded in the year that employment ends. During the year ended December 31,
1996, one of the stockholders terminated his employment. As a result,
approximately $43,000 was recognized as interest income during the year ended
December 31, 1996. As of December 31, 1996, the total outstanding balance on
these notes was approximately $820,000.
Advertising Expenditures: The Company incurred approximately $6,503,000 for
the year ended December 31, 1996 in advertising expenses purchased through an
affiliated company.
Inventory Purchases and Sales: The Company purchased and sold certain new
and used vehicles, at cost, to uncombined affiliated dealerships during the
year ended December 31, 1996.
Management Fees: Management fees earned from uncombined affiliated companies
amounted to approximately $450,000 for the year ended December 31, 1996.
NOTE 8--CONTINGENCIES
The Company is a party to various legal actions and claims arising during
the ordinary course of business. Although the total amount of liability with
respect to these legal actions and claims cannot be ascertained, management of
the Company believes that any resulting liability should not have a material
effect on the results of operations or the financial position of the Company.
In January, 1996, the Company and certain affiliates entered into a long-
term employment agreement (the "Agreement") with its President and Chief
Operating Officer (the "COO") which is effective January 1, 1996 through
December 31, 2000. The terms of the Agreement call for the Company and certain
affiliates to grant the COO an additional 2% ownership interest in the Company
and certain affiliates for each year of the Agreement. Per the Agreement,
compensation expense is to be computed at 2% of each respective Company's
adjusted net book value (FIFO basis) at each year-end discounted by 50%. For
the year ended December 31, 1996, the Company recognized approximately
$261,000 as compensation expense in connection with the Agreement. In
addition, the Agreement gives the COO a stated minimum compensation each year
through December 31, 2000. Should the COO be terminated for any reason, the
unearned compensation for the remainder of the Agreement will become due and
is to be paid over 48 months at the prime interest rate. Furthermore, should
the Company and certain affiliates be sold prior to December 31, 2000, or if
the COO is terminated for any reason, the COO is to receive a minimum of
$5,000,000 for his stock holdings acquired under this agreement.
NOTE 9--RETIREMENT PLAN
In 1995, the Company adopted a discretionary 401(k) retirement and profit-
sharing plan. All full-time employees having one year of continuous service
and who are at least 21 years of age at the specified entry dates are eligible
to participate. The Company makes a matching contribution of 20% of the first
5% for compensation each plan participant defers. The Company's contribution
for the year ended December 31, 1996 was approximately $149,000.
F-24
<PAGE>
GENEVA ENTERPRISES, INC. AND AFFILIATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--STOCKHOLDERS' EQUITY
Stockholders' equity is comprised of the following as of December 31, 1996
(in thousands):
<TABLE>
<CAPTION>
STOCK-
ADDITIONAL HOLDERS'
COMMON PAID-IN NOTES RETAINED
STOCK CAPITAL RECEIVABLES EARNINGS TOTAL
------ ---------- ----------- -------- -------
<S> <C> <C> <C> <C> <C>
Geneva Enterprises, Inc. .... $ 5 $3,650 $(820) $8,166 $11,001
Maryland Imported Cars,
Inc. ....................... 18 319 -- (1,768) (1,431)
--- ------ ----- ------- -------
$23 $3,969 $(820) $6,398 $ 9,570
=== ====== ===== ======= =======
</TABLE>
Common stock of the Companies with the following shares authorized, issued
and outstanding as of December 31, 1996 is as follows:
<TABLE>
<CAPTION>
SHARES
ISSUED
PAR SHARES AND
VALUE AUTHORIZED OUTSTANDING
----- ---------- -----------
<S> <C> <C> <C>
Geneva Enterprises, Inc. ....................... $ .01 1,000,000 531,286
Maryland Imported Cars, Inc. ................... $1.00 25,000 18,000
--------- -------
1,025,000 549,286
========= =======
</TABLE>
NOTE 11--SUBSEQUENT EVENT
As part of General Motors' Project 2000 marketing strategy, Geneva
Enterprises, Inc. transferred and sold the Cadillac and Buick franchises from
its Rosenthal Cadillac/Buick/Isuzu division to General Motors in October 1997.
F-25
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Pohanka Automotive Group
Marlow Heights, Maryland
We have audited the accompanying combined balance sheet of the Pohanka
Automotive Group as of December 31, 1996 and the related combined statements
of operations, changes in stockholders' equity and cash flows for the year
then ended. These combined financial statements are the responsibility of the
Group's management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used in significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that out audit provides a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Pohanka
Automotive Group as of December 31, 1996, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
August 13, 1997
/s/ Beers & Cutler PLLC
F-26
<PAGE>
POHANKA AUTOMOTIVE GROUP
COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents......................... $10,832 $15,466
Accounts receivable--trade, net of allowance for
doubtful accounts $204........................... 7,130 5,878
Inventories....................................... 33,746 29,688
Due from affiliates............................... 579 187
Due from stockholders............................. 478 418
Prepaid expenses.................................. 140 290
------- -------
Total current assets............................ 52,905 51,927
------- -------
Property and Equipment
Property and equipment............................ 5,365 5,566
Less accumulated depreciation..................... 4,136 4,339
------- -------
1,229 1,227
------- -------
Other Assets
Notes receivable--affiliates...................... 2,224 1,625
Other............................................. 305 305
Cash surrender value--officer life insurance...... 3,729 4,247
------- -------
6,258 6,177
------- -------
Total assets.................................... $60,392 $59,331
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable--vehicles floor planned............. $28,177 $23,911
Notes payable--affiliates......................... 2,907 3,814
Accounts payable--trade........................... 1,807 2,374
Accrued expenses.................................. 1,677 2,164
Reserve for chargebacks........................... 969 1,053
Current portion of long-term debt................. 225 208
------- -------
Total current liabilities....................... 35,762 33,524
------- -------
Long-Term Liabilities
Long-term debt, less current portion.............. 100 43
Notes payable--stockholders....................... 1,809 1,474
------- -------
1,909 1,517
------- -------
Total liabilities............................... 37,671 35,041
------- -------
Commitments and Contingencies
Stockholders' Equity
Common stock...................................... 2,078 2,078
Additional paid-in capital........................ 3,033 3,033
Retained earnings................................. 17,610 19,179
------- -------
Total stockholders' equity...................... 22,721 24,290
------- -------
Total liabilites and stockholders' equity....... $60,392 $59,331
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
POHANKA AUTOMOTIVE GROUP
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR NINE MONTHS ENDED
ENDED SEPTEMBER 30,
DECEMBER 31, ------------------
1996 1996 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Sales
Vehicles..................................... $236,468 $180,220 $192,582
Service, body, parts and other............... 52,733 40,372 42,362
-------- -------- --------
Net sales.................................. 289,201 220,592 234,944
-------- -------- --------
Cost of Sales
Vehicle...................................... 220,730 167,736 179,860
Services, body, parts and other.............. 27,809 21,165 21,521
-------- -------- --------
Cost of Sales.............................. 248,539 188,901 201,381
-------- -------- --------
Gross profit............................... 40,662 31,691 33,563
Selling, General and Administrative............ 34,826 26,069 27,847
-------- -------- --------
Income from operations..................... 5,836 5,622 5,716
Other Income (Expense)
Interest income.............................. 747 481 489
Interest expense............................. (2,528) (1,888) (1,906)
-------- -------- --------
Income Before Income Taxes..................... 4,055 4,215 4,299
Provision for Income Taxes..................... -- -- --
-------- -------- --------
Net Income..................................... $ 4,055 $ 4,215 $ 4,299
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
POHANKA AUTOMOTIVE GROUP
COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996.......... 204 $2,078 $3,033 $17,156 $22,267
Distributions to Stockholders..... -- -- -- (3,601) (3,601)
Net Income........................ -- -- -- 4,055 4,055
--- ------ ------ ------- -------
Balance, December 31, 1996........ 204 2,078 3,033 17,610 22,721
--- ------ ------ ------- -------
Distributions to Stockholders
(Unaudited)...................... -- -- -- (2,730) (2,730)
Net Income (Unaudited)............ -- -- -- 4,299 4,299
--- ------ ------ ------- -------
Balance, September 30, 1997
(Unaudited)...................... 204 $2,078 $3,033 $19,179 $24,290
=== ====== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
POHANKA AUTOMOTIVE GROUP
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR NINE MONTHS ENDED
ENDED SEPTEMBER 30,
DECEMBER 31, ------------------
1996 1996 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income.................................. $ 4,055 $ 4,215 $ 4,299
Reconciliation of net income to net cash
provided by operating activities...........
Gain on sale of fixed assets.............. (44) -- --
Depreciation.............................. 597 333 397
Increase in LIFO reserves................. 739 550 697
Changes in assets and liabilities:
Accounts receivable--trade.............. (1,525) (2,905) 1,252
Inventories............................. (671) (555) 3,361
Prepaid expenses........................ (35) (292) (150)
Accounts payable--trade................. 192 2,539 567
Accrued expenses........................ (84) 902 487
Reserve for chargebacks................. 55 91 84
------- -------- --------
Net cash provided by operating
activities........................... 3,279 4,878 10,994
------- -------- --------
Cash Flows from Investing Activities
Purchase of property and equipment.......... (617) (200) (395)
Proceeds from sale of property and
equipment.................................. 173 -- --
Premiums paid for officers' life insurance.. (523) (525) (518)
------- -------- --------
Net cash used for investing
activities........................... (967) (725) (913)
------- -------- --------
Cash Flows from Financing Activities
Due from affiliates......................... 70 (11) 392
Due from stockholders....................... 94 132 60
Notes payable--vehicles floor planned....... (2,372) (3,225) (4,266)
Proceeds on long-term debt.................. 47 71 (74)
Proceeds on notes receivable and notes
payable--affiliates and other.............. 743 334 1,506
Payments on notes payable--stockholders..... (339) (110) (335)
Distributions to stockholders............... (3,601) (3,426) (2,730)
------- -------- --------
Net cash used in financing activities....... (5,358) (6,235) (5,447)
------- -------- --------
Net (Decrease) Increase in Cash and Cash
Equivalents.................................. (3,046) (2,082) 4,634
Cash and Cash Equivalents, beginning of
year....................................... 13,878 13,878 10,832
------- -------- --------
Cash and Cash Equivalents, end of year........ $10,832 $ 11,796 $ 15,466
======= ======== ========
Supplemental Cash Flow Information:
Interest paid............................... $ 2,421 $ 1,769 $ 1,912
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
POHANKA AUTOMOTIVE GROUP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(IN THOUSANDS)
1. ORGANIZATION AND PRINCIPLES OF COMBINATION
The Pohanka Automotive Group (the "Companies") was started in 1919 with one
dealership and has since grown into eight corporations which are authorized
dealers of 16 franchises located in the greater Washington Metropolitan area.
The combined financial statements of the Pohanka Automotive Group include the
accounts of the following corporations, all of which are under common control:
<TABLE>
<CAPTION>
CORPORATION LOCATION AUTHORIZED FRANCHISES DATE INCORPORATED
----------- -------- --------------------- -----------------
<S> <C> <C> <C>
Pohanka Auto Center, Fredericksburg, VA Cadillac, Hyundai, September 7, 1979
Inc. Nissan, Oldsmobile
Pohanka Auto North, Inc. Bowie, MD and Saturn(2), Isuzu September 8, 1986
Marlow Heights, MD
Pohanka Auto West, Inc. Chantilly, VA Acura February 18, 1987
Pohanka of Chantilly, Chantilly, VA Lexus September 15, 1992
Inc.
Pohanka Chevrolet-GEO, Chantilly, VA Chevrolet-GEO July 1, 1986
Inc.
Pohanka Hyundai, Inc. Marlow Heights, MD Hyundai, Suburu September 13, 1985
Pohanka Imports, Inc. Marlow Heights, MD Honda March 5, 1974
Pohanka Oldsmobile-GMC Marlow Heights, MD Oldsmobile, GMC Truck January 6, 1977
Truck, Inc.
</TABLE>
All significant intercompany transactions have been eliminated in
combination.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited financial statements--The accompanying unaudited financial
statements as of September 30, 1997 and for the nine month periods ended
September 30, 1997 and 1996 have been prepared in accordance with generally
accepted accounting principles ("GAAP"). Although certain information and
footnote disclosures normally included in financial statements prepared in
accordance with GAAP have been omitted, the Companies believe that the
disclosures included herein are adequate to make the information presented not
misleading. Operating results for the nine months ended September 30, 1997,
are not necessarily indicative of the results that may be expected for the
year ended December 31, 1997. These unaudited financial statements should be
read in conjunction with the accompanying audited financial statements and
related footnotes as of and for the year ended December 31, 1996. In the
opinion of the Companies, the unaudited financial statements contain all
adjustments (consisting only of normal recurring items) necessary for a fair
presentation of the results for the nine month periods ended September 30,
1997 and 1996.
Cash and cash equivalents--The term cash and cash equivalents, as used in
the accompanying financial statements, includes currency on hand, demand
deposits with financial institutions and contracts in transit. Additionally,
the Companies invest excess cash on an overnight basis with its floor plan
lenders. The investments pay down the floor plan and earn interest at the
floor plan rate. Due to the short term nature of this paydown, the Companies
report such investments as cash and cash equivalents. The Companies believe
that no significant credit risk exists under these arrangements.
Inventories--Inventories are reported at the lower of cost or market value.
Cost is determined by the last-in first-out ("LIFO") method for new and used
vehicles. The LIFO method is also used for parts at Pohanka Oldsmobile-GMC
Truck and Pohanka Auto Center, and specific cost is used for parts and
accessories at all other Companies. Market value is considered to be the lower
of replacement cost or net realizable value. Some
F-31
<PAGE>
POHANKA AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
manufacturers provide cost assistance for specified vehicles. This assistance
is accounted for as a reduction in the cost of the acquired vehicle.
Depreciation--Property and equipment are recorded at cost and are
depreciated using Internal Revenue Service methods, generally the modified
accelerated cost recovery system, over the estimated useful lives of the
respective assets for both income tax and financial statement purposes. These
lives range from 5 to 39 years. There are no material differences between
these methods and others normally used under GAAP.
Income Taxes--The Companies, with consent of its stockholders, have elected
under the Internal Revenue Code to be treated as "S' Corporations.
Accordingly, no provision for federal or state income taxes has been reflected
in the financial statements because the stockholders of an "S' Corporation are
taxed on their proportionate share of the company's taxable income.
Revenues--Revenues from vehicle and parts sales and from service and body
shop operations are recognized at the time the vehicle is delivered to the
customer or service is completed.
Finance and insurance commission income--Finance and insurance commission
income is recognized when contracts are accepted by financial institutions.
The Companies are contingently liable for chargebacks in the event of
prepayments or cancellations of these contracts. The Companies have recorded
an estimated reserve of $969 for this contingent liability based upon the
Companies' historical experience.
Advertising costs--Advertising costs are expensed as they are incurred.
Advertising costs were $1,640 in 1996.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets, liabilities,
revenues, expenses and the disclosure of contingent assets and liabilities.
Major Supplier--The Companies purchase substantially all of their new
vehicles and parts inventory from various manufacturers at the prevailing
prices charged by the manufacturers to all franchised dealers. The Companies
overall sales could be impacted by the manufacturer's liability or
unwillingness to supply the dealerships with an adequate supply of popular
models.
Concentration of Credit Risk--Concentration of credit risk with respect to
trade receivables is limited due to the large number of customers comprising
the Companies' customer base.
3. INVENTORIES
Inventories consist of the following components:
<TABLE>
<S> <C>
New vehicles and demonstrators...................................... $29,235
Used vehicles....................................................... 8,569
Parts and accessories............................................... 3,020
-------
40,824
Less: cumulative LIFO reserve....................................... (7,078)
-------
$33,746
=======
</TABLE>
If the specific identification method of inventory accounting were used by
the Companies, net income would have been $4,794 in 1996.
F-32
<PAGE>
POHANKA AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<S> <C>
Office furniture and equipment...................................... $ 2,166
Parts and service equipment......................................... 2,462
Leasehold improvements.............................................. 331
Other............................................................... 406
-------
5,365
Less: accumulated depreciation...................................... (4,136)
-------
$ 1,229
=======
</TABLE>
5. NOTES PAYABLE--VEHICLES FLOOR PLANNED
Floor plan notes payable, in the amount of $28,177 at December 31, 1996 are
collateralized by inventories of new and used vehicles and generally require
repayment of the debt after sale of the respective vehicles. The floor plan
notes bear interest at the LIBOR rate plus 180 basis points which was 7.3% as
of December 31, 1996. The weighted average interest rate on floor plan
borrowings was 7.6% for the year ended December 31, 1996. Interest expense on
these notes in 1996 was $2,193.
6. COMMON STOCK
Common stock information as of December 31, 1996 is as follows:
<TABLE>
<CAPTION>
PAR SHARES SHARES
COMPANY VALUE AUTHORIZED OUTSTANDING AMOUNT
------- ------ ---------- ----------- ------
<S> <C> <C> <C> <C>
Pohanka Auto Center.................... $0.001 200 200 $ 200
Pohanka Auto North..................... 0.001 1 0.4 0.4
Pohanka Auto West...................... 0.001 1 0.4 0.4
Pohanka of Chantilly................... 0.001 1 0.4 0.4
Pohanka Chevrolet-GEO.................. 0.001 1 0.8 0.8
Pohanka Hyundai........................ 0.001 1 0.8 0.8
Pohanka Imports........................ 0.001 1 0.4 0.4
Pohanka Oldsmobile-GMC................. No Par 1 0.5 1,875
------
$2,078
======
</TABLE>
7. PROFIT SHARING PLAN
The Companies offer a 401(k) profit sharing plan for all employees.
Employees may make voluntary contributions up to ten percent of their salary,
subject to statutory limitations. The Companies provide matching contributions
of up to two percent of the employee's salary. Matching contributions and
related expenses amounted to $215 for 1996.
8. RELATED PARTY TRANSACTIONS
The eight dealership corporations, Pohanka Properties, Inc. including its
wholly owned subsidiary, Pohanka Auto Leasing, Inc., Pohanka Virginia
Properties Partnership and 1120 Developer Group, Inc. are controlled by
members of the Pohanka family. All are also majority owned by members of the
Pohanka family with the exception of one dealership which is 51% owned by a
non-family member of senior management.
Five of the dealerships are joint and several guarantors of a mortgage
payable by Pohanka Properties, Inc. Pursuant to this agreement, the five
dealerships are collectively required to meet certain financial covenants, on
a
F-33
<PAGE>
POHANKA AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
combined basis, related to debt to equity, net worth and fixed charge
coverage. The outstanding balance on this mortgage was $10,619 at December 31,
1996.
The following is a summary of the related party transactions for 1996:
Due from Affiliates--These advances are non-interest bearing and due on
demand, and were $579 as of December 31, 1996.
Due from Stockholders--These advances are non-interest bearing and due on
demand, and were $478 as of December 31, 1996.
Note Receivable--Affiliates--The notes receivable from affiliates were:
<TABLE>
<S> <C>
Pohanka Properties, Inc.--unsecured promissory note, interest at 6%
per annum, due on demand............................................ $2,000
Pohanka Virginia Properties Partnership--unsecured promissory notes,
interest at the floor plan rate, due on demand...................... 224
------
$2,224
======
</TABLE>
Interest income earned on these notes in 1996 was $121.
Notes Payable--Affiliates--The notes payable to affiliates were:
<TABLE>
<S> <C>
1120 Developer Group, Inc.--unsecured revolving line of credit,
interest at the floor plan rate, due on demand...................... $2,907
======
</TABLE>
Interest expense incurred on this note in 1996 was $171.
Notes Payable--Stockholders--The notes payable to stockholders were $1,809
at December 31, 1996. These notes are unsecured and bear interest at rates
between 6% and 8.75%. These notes are due on demand. Interest expense incurred
on these notes during 1996 was $150. Management does not expect to repay these
obligations within the next year.
Leased Facilities--The land and buildings used for the Companies' operations
are leased from Pohanka Properties, Inc. and Pohanka Virginia Properties
Partnership under various long-term leases expiring between 2000 and 2010. For
the year ended December 31, 1996 base rent was $2,841. In addition to base
rent, the Companies are also responsible for real estate taxes, insurance and
utilities.
Future annual minimum rents under all operating leases as of December 31,
1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1997................................................................ $ 3,192
1998................................................................ 3,338
1999................................................................ 3,341
2000................................................................ 2,903
2001................................................................ 2,041
Thereafter.......................................................... 12,517
-------
$27,332
=======
</TABLE>
F-34
<PAGE>
POHANKA AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Rental expenses incurred on all operating leases amounted to $3,169 for the
year ended December 31, 1996.
9. LONG-TERM DEBT
Long-term debt consists of various equipment loans which have interest rates
between 7% and 12% and are secured by the equipment and also a revolving line
of credit for rental vehicles, with an availability of $250, which bears
interest at 9% and is secured by those vehicles. The equipment loans mature at
various times through 1999. Interest expense on these debts in 1996 was $14.
10. CONTINGENCIES
The Companies are parties to various legal actions arising in the ordinary
course of business. While it is not feasible to determine the outcome of these
actions, the Companies' information available at this time, including
discussions with legal counsel, does not indicate that these matters will have
a material adverse effect upon financial condition, results of operations or
cash flows.
The Companies are also subject to federal and state environmental
regulations, including rules relating to air and water pollution and the
storage and disposal of gasoline, oil, other chemicals and waste. Local state
and federal regulations also affect automobiles dealerships' advertising,
sales, service and financing activities. The Companies believe that they
comply with all applicable laws relating to their businesses.
F-35
<PAGE>
GLOSSARY
Unless the context otherwise requires, the following capitalized terms shall
have the meanings set forth below for the purposes of this Prospectus:
"ADA" means the Americans with Disabilities Act of 1990, as amended, and the
regulations promulgated under the authority conferred thereby.
"Affiliates" means an affiliate as defined in Rule 405 of the Securities
Act.
"Annual Base Rent" means the annual base rent each Lessee or its assigns
will pay to Lessor each Lease year following the first Lease year annual base
rent which will be payable in monthly installments.
"Audit Committee" means the audit committee of the Board of Trustees of the
Company.
"Beneficiary" means the qualified charitable organization selected by the
Company which would receive the automatic transfer of any Excess Shares.
"Board of Trustees" means the board of trustees of the Company.
"Book-Tax Difference" means, with respect to appreciated or depreciated
property that is contributed to a partnership, the amount of unrealized gain
or unrealized loss associated with the property of the time of contribution,
which is generally equal to the difference between the fair market value of
the contributed property at the time of contribution and the adjusted tax
basis of such property at the time of contribution.
"Business Combination" means a merger, consolidation or other combination
with or into another person or sale of all or substantially all of its assets,
or any reclassification, recapitalization or change of outstanding Common
Shares.
"By-laws" means the by-laws of the Company, as amended.
"CMSA" means consolidated metropolitan statistical area.
"CARS" is the proposed trading symbol of the Company on The Nasdaq Stock
Market National Market.
"Code" means the Internal Revenue Code of 1986, as amended.
"Combined Financial Statements" means the combined financial statements of
the Properties and various affiliated entities related to certain of the
Properties or other assets being contributed to the Company.
"Commission" means the United States Securities and Exchange Commission.
"Common Shares" means the common shares of beneficial interest, par value
$.01 per share, of the Company.
"Company" means Capital Automotive REIT, a Maryland REIT, and its
subsidiaries.
"Contribution Agreements" means the respective agreements between the
Company and the Sellers relating to the acquisition of the Properties or
interests therein owned by the Sellers.
G-1
<PAGE>
"Control Shares" means voting shares of beneficial interest of a Maryland
REIT which, if aggregated with all other such shares of beneficial interest
previously acquired by the acquiror, or in respect of which the acquiror is
able to exercise or direct the exercise of voting power (except solely by
revocable proxy) would entitle the acquiror to exercise voting power in
electing trustees within one of the following ranges of voting power: (i) one-
fifth or more but less than one-third; (ii) one-third or more but less than a
majority, or (iii) a majority of all voting power. Control Shares do not
include shares the acquiror is then entitled to vote as a result of having
previously obtained shareholder approval.
"Control Share Acquisition" means the acquisition of Control Shares, subject
to certain exceptions.
"CPI" means the Consumer Price Index, the economic index issued by the U.S.
Department of Labor indicating price increases or decreases for the U.S.
economy.
"Dealer" means the signatory to the Franchise Agreement, or the operator of
a Dealership on Related Business.
"Dealer Warrants" means warrants that certain Trustees will receive to each
purchase a number of Units equal to 2% of the Common Shares to be outstanding
on closing of the Offering (including exercise of the Underwriters, over-
allotment option) on a fully diluted basis, at the initial public offering
price of the Common Shares, exercisable beginning on the closing date of the
Offering and for a period of five years thereafter.
"Dealerships" means franchised motor vehicle dealerships.
"Declaration of Trust" means the Amended and Restated Declaration of Trust
of the Company.
"Designee" means a person designated by an Initial Seller to receive any
Units issued by the Operating Partnership in consideration of the acquisition
of any Property.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Events of Default" means events of default under any Leases as generally
outlined in the Prospectus.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Executive Committee" means the executive committee of the Board of Trustees
of the Company.
"Executive Compensation Committee" means the executive compensation
committee of the Board of Trustees of the Company.
"Extended Term" means the one or two additional ten year terms for which the
respective Initial Leases may be extended at the option of the respective
Initial Lessees.
"FBR Loan" means the short term secured revolving loan in the principal
amount of $2,325,000 extended by Friedman, Billings, Ramsey Group, Inc. to the
Company.
"FFO" means Funds from Operations.
"Five or fewer requirement" means the requirement under the Code that not
more than 50% in value of the Company's outstanding shares of beneficial
interest may be owned directly or indirectly by five or fewer individuals (as
defined in the Code) during the last half of the taxable year (other than the
first year).
"Fixed Term" means the initial term of ten to 12 years that the Initial
Leases will generally have.
"Formation Transactions" means those transactions relating to the
organization of the Company, the Operating Partnership and their subsidiaries,
including the (i) transfer of the Initial Properties and other assets to the
Company in exchange for Units, (ii) the Offering and the FBR Offering, (ii)
the contribution of the net proceeds of the Offering and the FBR Offering by
the Company to the Operating Partnership in exchange for Units, and (iii) the
offering and qualification of the Company as a REIT for federal income tax
purposes for the taxable year beginning December 31, 1998, all as described
under "Structure and Formation of the Company--Formation Transactions."
G-2
<PAGE>
"Franchise Agreements" means certain Dealer Sales and Service Agreements and
related agreements, and the standard terms and conditions incorporated by
reference in such agreements, entered into between Manufacturers and
Dealerships.
"Funds from Operations" means funds from operations computed in accordance
with the resolution adopted by the Board of Governors of NAREIT in its March
1995 White Paper (with the exception that the Company expects to report base
rents on a cash basis, rather than a straight-line GAAP basis, which the
Company believes will result in a more accurate presentation of its actual
operating activities), as follows: net income (loss) (computed in accordance
with GAAP with the exception that base rents are reported on a cash basis as
described above), excluding gains (or losses) from debt restructuring and
sales of real property, plus real estate related depreciation and amortization
(excluding amortization of deferred financing costs), and after adjustments
for unconsolidated partnerships and joint ventures.
"GAAP" means generally accepted accounting principles in the United States.
"Initial Annual Base Rent" means the first year's rent under any Lease.
"Initial Grants" means the Options that the Company will grant to certain
key officers and employees of the Company upon completion of the Offering.
"Initial Leases" means the leases pursuant to which the Company will lease
back the Initial Properties to the Initial Lessees on a triple net basis.
"Initial Lessees" means the Lessees of the Initial Properties.
"Initial Sellers" means the respective Sellers of the Initial Properties
from whom the Company will acquire the Initial Properties.
"Initial Properties" means the 21 Properties that the Company currently has
entered into contracts to acquire.
"Interested Shareholder" means any person who beneficially owns 10% or more
of the voting power of a Maryland real estate investment trust's shares of
beneficial interest or an Affiliate of the trust which, 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 shares of
beneficial interest of the trust.
"Investment Company Act" means the Investment Company Act of 1940.
"IRA" means an individual retirement account as defined by the Code and the
applicable Treasury Regulations.
"IRS" means the United States Internal Revenue Service.
"Leases" means the Leases pursuant to which the Company will lease
Properties back to Lessees on a triple net basis.
"Lessees" means any owner, Operator thereof to whom the Company will lease
back any Property upon the acquisition thereof on a triple net basis.
"Limited Partner" initially means, any of the Company and the limited
partners, each of which holds Units and is a limited partner of the Operating
Partnership.
"Manufacturers" means motor vehicle or parts manufacturers (or authorized
distributors thereof).
"Market Price" means 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
G-3
<PAGE>
mean the last sale price, regular way, or, in case no such sale takes place on
such day, the average of the closing bid and asked prices, regular way, in
either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the NYSE
or, if the Common or Preferred Shares are not listed or admitted to trading on
the NYSE, as reported in the principal consolidated transaction reporting
system with respect to securities listed on the principal national securities
exchange on which the Common or Preferred Shares are listed or admitted to
trading or, if the Common or Preferred Shares are not listed or admitted to
trading on any national securities exchange, the last quoted price, or if not
so quoted, the average of the high bid and low asked prices in the over-the-
counter market, as reported by the National Association of Securities Dealers,
Inc. Automated Quotation System or, if such system is no longer in use, the
principal automated quotations system that may then be in use or, if the
Common or Preferred Shares are not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a professional
market maker making a market in the Common or Preferred Shares selected by the
Board of Trustees. "Trading Day" shall mean a day on which the principal
national securities exchange on which the Common or Preferred Shares are
listed or admitted to trading is open for the transaction of business or, if
the Common or Preferred Shares are not listed or admitted to trading on any
national securities exchange, 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.
"Maryland REIT Law" means Title 8 of the Corporations and Associations
Article of the Annotated Code of Maryland, as amended.
"MGCL" means the Maryland General Corporation Law, as amended.
"Mortgage Debt" means the $41.2 million of indebtedness secured by certain
Initial Properties that will be assumed by the Company pursuant to the
relevant Contribution Agreements.
"NADA" means the National Automobile Dealers Association.
"NAREIT" means the National Association of Real Estate Investment Trusts,
Inc.
"1997 Tax Act" means the Taxpayer Relief Act of 1997, as amended.
"Non-U.S. Shareholder" means a holder of Common Shares who is a nonresident
alien individual, foreign corporation, foreign partnership, foreign trust or
estate or other foreign shareholder.
"Nasdaq" means The Nasdaq Stock Market, Inc.
"Offer" means any right of first refusal pursuant to which any Initial
Seller receives a bona fide third party offer to purchase any interest in a
Property, prior to selling any interest in such Property, such Initial Seller
must first offer to sell the Property to the Company on the same terms and
conditions contained in such Offer within ten days after receipt of the Offer.
"Offering" means the offering of Common Shares of the Company pursuant to
and as described in this Prospectus.
"Operating Partnership" means Capital Automotive L. P., a Delaware limited
partnership having its principal offices at 1925 North Lynn Street, Suite 306,
Arlington, Virginia 22209.
"Options" means incentive share options which the Company is authorized to
grant pursuant to the Share Incentive Plan.
"Ownership Limit" means the prohibition in the Declaration of Trust on (i)
beneficial ownership of more than 9.9% of the Common Shares by one person and
(ii) ownership of more than 9.9% of the fully diluted Common Shares (assuming
no exchange of Units for Common Shares by one person).
"Partnership Agreement" means the Amended and Restated Limited Partnership
Agreement of the Operating Partnership.
"Plan" means the incentive plan established by the Company, as further
described in this Prospectus under the caption entitled "Management--Incentive
Plan."
G-4
<PAGE>
"Prohibited Transferee" means any purported transferee of Common Shares who
would otherwise violate the Ownership Limit or such other limit as provided in
the Declaration of Trust.
"Prohibited Owner" means any purported owner of Common Shares who would
otherwise violate the Ownership Limit or such other limit as provided in the
Declaration of Trust.
"Properties" means any real property and improvements acquired, or to be
acquired, from time to time, by the Company.
"Prospectus" means the prospectus used in connection with the Offering.
"Recognition Period" means the ten-year period beginning on the date a
"built-in gain asset" is acquired by the Company.
"Registrable Shares" means any Common Shares acquired by the FBR Asset
Investment Corporation.
"Registration Rights" means those certain registration rights granted to FBR
Asset Investment Corporation in connection with the Formation Transactions.
"Registration Statement" means the registration statement on Form S-11 filed
with the Commission in connection with the Offering.
"REIT" means a self-managed real estate investment trust as defined by the
Code and the applicable Treasury Regulations.
"REIT Requirements" means the requirements for qualifying as a REIT.
"Related Businesses" means any motor vehicle related businesses.
"Related Party Lessee" means a Lessee directly or constructively owned 10%
or more by the Company or by an owner of 10% or more of the Company.
"Rent Measurement Date" means the date of execution of a Initial Lease and a
date ending at each 24 month interval thereafter.
"Rent Measurement Period" means the 24-month prior period ending on each
Cash Flow Measurement Date.
"Rent Coverage Ratio" means a ratio of at least 1.5-to-1 as of the date of
the Lease and at each Rent Measurement Date, computed on an aggregate basis
for all affiliated Initial Lessees and Guarantors, if any, as the aggregate of
net income before taxes plus mortgage interest, rent expense, depreciation,
compensation of principals of the Initial Lessee, management fees plus the
annual LIFO adjustment and other non-cash expenses, less recurring capital
expenditures and gain (loss) on sale of real estate, dividends and/or profits
taken out of the Initial Lessees and Guarantors, if any, divided by the
aggregate of the Initial Lessees' and Guarantors', if any, obligations under
the Initial Leases.
"Representative" means Friedman, Billings, Ramsey & Co., Inc.
"Rule 144" means Rule 144 promulgated under the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Seller" means any owner from whom the Company acquires a Property.
"Share Trust" means a trust which holds Common or Preferred Shares of
beneficial interest of the Company which have been designated as Shares-in-
Trust.
G-5
<PAGE>
"Shares-in-Trust" means Common or Preferred Shares of beneficial interest of
the Company which are automatically converted into an equal number of Excess
Shares and transferred automatically to the Share Trust upon a purported
transfer of such Common or Preferred Shares which is violative of the
applicable restrictions on transfer.
"Tax Counsel" means the law firm of Wilmer, Cutler & Pickering, which has
acted as a special tax counsel to the Company in connection with the offering
and the preparation of the Prospectus.
"Total market capitalization" means the sum of the aggregate market value of
the outstanding Common Shares, assuming the full exchange of all Units for
Common Shares, plus the Company's total outstanding debt.
"Treasury Regulations" means the rules and regulations promulgated by the
United States Department of the Treasury under the Code, as such rules and
regulations are amended from time to time.
"Triple-Net Basis" means the leasing of a Property to a Lessee pursuant to a
Lease under which a Lessee is responsible for the base rent in addition to the
costs and expenses in connection with and related to property taxes, insurance
and repairs and maintenance applicable to the leased space.
"U.S. Shareholder" means a holder of Common Shares who (for United States
federal income tax purposes) (i) is a citizen or resident of the United States,
(ii) is a corporation, partnership, or other entity created or organized in or
under the laws of the United States or of any political subdivision thereof, or
(iii) is an estate or trust which is subject to taxation in the United States
regardless of the source of its income or which is under the primary
supervision or authority of a United States court or a United States fiduciary.
"United States" or "U.S." means the United States of America (including the
District of Columbia), its territories, possessions and other areas subject to
its jurisdiction.
"Units" means units of partnership interests representing the equity in the
Operating Partnership.
"Underwriters" means Friedman, Billings, Ramsey & Co., Inc. and members of
the Underwriting Syndicate as set forth in the section captioned "Underwriting"
in this Prospectus.
"Underwriting Warrants" means warrants that Friedman, Billings, Ramsey & Co.,
Inc., the Representative of the Underwriter of, will receive exercisable for a
number of Common Shares equal to 4% of the number of Common Shares to be
outstanding on closing of the Offering (including exercise of, the Underwriters
over-allotment option) on a fully diluted basis, at an exercise price equal to
the initial public offering price of the Common Shares, exercisable beginning
on the closing date of the Offering and for a period of five years thereafter.
G-6
<PAGE>
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION 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 COMMON SHARES OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE COMMON
SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION 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 ANY IN-
FORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
The Company.............................................................. 1
The Initial Properties, Leases and Dealerships........................... 3
Strategy................................................................. 6
Risk Factors............................................................. 7
Structure of the Company................................................. 10
Formation Transactions................................................... 12
Benefits to Related Parties.............................................. 12
Summary Selected Financial Information................................... 14
Distributions............................................................ 16
Tax Status of the Company................................................ 16
The Offering............................................................. 16
Risk Factors............................................................. 17
Use of Proceeds.......................................................... 31
Capitalization........................................................... 32
Dilution................................................................. 33
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 36
Business of the Company and Properties................................... 38
Management............................................................... 51
Structure and Formation of the Company................................... 56
Related Transactions..................................................... 59
Partnership Agreement.................................................... 60
Principal Shareholders of the Company.................................... 63
Description of Shares of Beneficial Interest............................. 64
Common Shares Eligible for Future Sale................................... 71
Federal Income Tax Considerations........................................ 72
Underwriting............................................................. 89
Legal Matters............................................................ 91
Experts.................................................................. 91
Additional Information................................................... 91
Index to Financial Statements............................................ F-1
Glossary................................................................. G-1
</TABLE>
---------------
UNTIL , 1998 (25 DAYS AFTER COMMENCEMENT OF THIS OFFERING), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMMON SHARES
LOGO
CAPITAL AUTOMOTIVE REIT
COMMON SHARES OF BENEFICIAL INTEREST
---------------
PROSPECTUS
---------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
SEC registration fee................................................ $88,950
NASD fee............................................................ 29,854
The Nasdaq Stock Market fee......................................... 50,000
Blue Sky fees and expenses.......................................... *
Printing and engraving expenses..................................... *
Legal fees and expenses............................................. *
Accounting fees and expenses........................................ *
Miscellaneous....................................................... *
-------
Total............................................................. $ *
=======
</TABLE>
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*To be completed by amendment.
ITEM 31. SALES TO SPECIAL PARTIES
See response to Item 32.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES
The following sets forth certain information as to all securities sold by
the Company within the last three years that were not registered under the
Securities Act of 1933, as amended (the "Securities Act"). As to all such
transactions, an exemption is claimed under Section 4(2) of the Securities
Act.
(1) Simultaneously with the completion of the Offering, the Company will cause
the Operating Partnership to issue 5,048,259 Units at the initial public
offering price to the Initial Sellers in exchange for their respective
interests in the Initial Properties.
(2) Simultaneously with the completion of the Offering, the Company will grant
options to purchase an aggregate number of Common Shares and Units equal to
3%, 1.65%, .75% and 1.25% of the Common Shares to be outstanding on closing of
the Offering (including exercise of the Underwriters' over-allotment option)
on a fully diluted basis to Messrs. Eckert, Stahr, Keithley and Kay,
respectively, exercisable at the initial public offering price under the
Company's Incentive Plan.
(3)Simultaneously with the completion of the Offering, FBR Investment Asset
Corporation will purchase an aggregate number of Common Shares equal to 4.4%
of the Common Shares to be outstanding on a closing of the Offering up to a
maximum investment of $10 million at the initial public offering price (less
underwriting discounts and commissions).
(4) Simultaneously with the completion of the Offering, the Company will issue
to each of Messrs. Pohanka and Rosenthal the Dealer Warrants which will be
exercisable for an aggregate number of Units equal to 2% of the Common Shares
to be outstanding on closing of the Offering (including exercise of the
Underwriters' over-allotment option) on a fully diluted basis, exercisable at
the initial public offering price.
(5) Simultaneously with the completion of the Offering, the Company will issue
to Friedman, Billings, Ramsey & Co., Inc the Underwriting Warrants, which will
be exercisable for a number of Common Shares equal to 4% of the Common Shares
to be outstanding on closing of the Offering (including exercise of the
Underwriters' over-allotment option) on a fully diluted basis, exercisable at
the initial public offering price.
ITEM 33. INDEMNIFICATION OF TRUSTEES AND OFFICERS
The Declaration of Trust and By-laws authorize the Company to indemnify its
present and former trustees and officers and to pay or reimburse expenses for
such individuals in advance of the final disposition of a
II-1
<PAGE>
proceeding to the maximum extent permitted from time to time under Maryland
law. The MGCL, as applicable to Maryland REITs, currently provides that
indemnification of a person who is a party, or threatened to be made a party,
to legal proceedings by reason of the fact that such a person is or was a
trustee, officer, employee or agent of a corporation, or is or was serving as
a trustee, officer, employee or agent of a corporation or other firm at the
request of a corporation, against judgments, fines, penalties, amounts paid in
settlement and reasonable expenses, is mandatory in certain circumstances and
permissive in others, subject to authorization by the board of trustees, a
committee of the board of trustees consisting of two or more trustees not
parties to the proceeding (if there does not exist a majority vote quorum of
the board of trustees consisting of trustees not parties to the proceeding),
special legal counsel appointed by the board of trustees or such committee of
the board of trustees, or by the shareholders, so long as it is not
established that the act or omission of such person was material to the matter
giving rise to the proceedings and was committed in bad faith, was the result
of active and deliberate dishonesty, involved such person receiving an
improper personal benefit in money, property or services, or, in the case of
criminal proceedings, such person had reason to believe that his or her act or
omission was unlawful.
The Company's officers and trustees are also indemnified pursuant to the
Partnership Agreement and their respective employment agreements, which
agreements are filed as exhibits hereto.
The Company intends to purchase an insurance policy which purports to insure
the officers and trustees of the Company against certain liabilities incurred
by them in the discharge of their functions as such officers and trustees,
except for liabilities resulting from their own malfeasance.
ITEM 34. TREATMENT OF PROCEEDS FROM COMMON SHARES BEING REGISTERED
Not Applicable.
ITEM 35. FINANCIAL STATEMENT AND EXHIBITS.
(a) FINANCIAL STATEMENTS
All other schedules are omitted because the required information is not
applicable or the information required has been disclosed in the financial
statements and related notes included in the Prospectus.
(c) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1.1* Underwriting Agreement
3.1* Amended and Restated Declaration of Trust of Capital Automotive
REIT
3.2* Form of By-laws of Capital Automotive REIT
4.1* Specimen Common Share certificate
5.1* Opinion of Wilmer, Cutler & Pickering regarding the validity of
the Common Shares being registered
8.1* Opinion of Wilmer, Cutler & Pickering regarding tax matters
10.1* Agreement of Limited Partnership of Capital Automotive L.P.
10.2* Form of Indemnification Agreement
10.3* Form of Incentive Plan
10.4* Employment Agreement by and between the Company and Thomas D.
Eckert
10.5* Employment Agreement by and between the Company and Scott M. Stahr
10.6* Employment Agreement by and between the Company and Donald L.
Keithley
10.7* Employment Agreement by and between the Company and David S. Kay
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.8* Form of Option Agreement
10.9* Bank Credit Agreement
10.10* FBR Asset Investment Purchase Agreement
10.11* Form of Contribution Agreement
10.12* Form of Lease Agreement
10.13* Form of Guaranty Agreement
21.1* Subsidiaries of the Company
23.1* Consent of Wilmer, Cutler & Pickering (included in Exhibits 5.1
and 8.1)
23.3 Consent of Arthur Andersen LLP
23.4 Consent of Beers & Cutler PLLC
23.5 Consent of Walpert, Smullian & Blumenthal, P.A.
23.6* Consent to be named Trustee of John J. Pohanka
23.7* Consent to be named Trustee of Robert M. Rosenthal
24.1 Powers of attorney (included on signature page in Part II of the
initial filing)
27.1* Financial Data Schedule
</TABLE>
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* To be filed by amendment.
ITEM 36. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the Underwriters,
at 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
registrant pursuant to the provisions described under Item 34 above, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a trustee, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
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 purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, 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 ARLINGTON, STATE OF VIRGINIA, ON
NOVEMBER 26, 1997.
Capital Automotive REIT
/s/ /Thomas D. Eckert
By: _________________________________
THOMAS D. ECKERT PRESIDENT AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW ON NOVEMBER 26, 1997 BY THE
FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
Each person whose signature appears below hereby constitutes and appoints
each of Thomas D. Eckert and David S. Kay as his attorney-in-fact and agent,
with full power of substitution and resubstitution for him in any and all
capacities, to sign any or all amendments or post-effective amendments to this
Registration Statement, or any Registration Statement for the same offering
that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933, and to file the same, with exhibits thereto and other
documents in connection therewith or in connection with the registration of
the Common Shares under the Securities Act of 1934, as amended, with the
Securities and Exchange Commission, granting unto such attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary in connection with such matters and hereby ratifying
and confirming all that such attorney-in-fact and agent or his substitutes may
do or cause to be done by virtue hereof.
SIGNATURE TITLE DATE
/s/ Thomas D. Eckert President and Chief November 26,
_____________________________________ Executive Officer 1997
THOMAS D. ECKERT and Trustee
(principal
executive officer)
/s/ David S. Kay Vice President and November 26,
_____________________________________ Chief Financial 1997
DAVID S. KAY Officer (principal
financial and
accounting officer)
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
on Capital Automotive REIT (and to all references to our firm) included in or
made a part of this Registration Statement.
/s/ Arthur Andersen LLP
Washington, D.C.
November 24, 1997
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report on the Pohanka Automotive Group (and to all references to our firm)
included in or made a part of this Registration Statement.
/s/ Beers & Cutler PLLC
Washington, D.C.,
November 24, 1997
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report on the Geneva Enterprises, Inc. and Affiliated Company (and to all
references to our firm) included in or made a part of this Registration
Statement.
/s/ Walpert, Smullian & Blumenthal,
P.A.
Washington, D.C.,
November 24, 1997
