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As filed with the Securities and Exchange Commission on June 9, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CAPITAL AUTOMOTIVE REIT
(Exact name of registrant as specified in its charter)
Maryland 6798 54-1870224
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification Number)
organization) ___________________________
1420 Spring Hill Road, Suite 525
McLean, Virginia 22102
(703) 288-3075
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
Thomas D. Eckert, President and Chief Executive Officer, Capital Automotive REIT
1420 Spring Hill Road, Suite 525
McLean, Virginia 22102
(703) 288-3075
(Name, address, including zip code, and telephone number, including area code, of agent for service)
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With a copy to:
John B. Watkins, Esquire
Wilmer, Cutler & Pickering
2445 M Street, N.W.
Washington, D.C. 20037
(202) 663-6000
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Approximate date the registrant proposes to begin selling securities to
the public: From time to time after the effective date of this registration
statement.
--------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered in connection with
dividend or interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.[_]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.[_]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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Proposed maximum Proposed maximum
Title of securities Amount offering price per share aggregate offering Amount of
to be registered to be registered (1) price registration fee
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Common Shares of
Beneficial Interest, par
value $.01 per share 541,325 $12.75 $6,901,894 $1,918.73
=========================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) on the basis of the average of the high and low reported sales
prices for the registrant's common shares of beneficial interest, as reported on
The Nasdaq Stock Market National Market on June 7, 1999.
This registration statement relates to the possible offering and sale of
common shares of Capital Automotive REIT upon the redemption of units of limited
partnership interest in Capital Automotive L.P. 453,681 of these units were
issued in transactions that closed June 4, 1998 and become redeemable on June 4,
1999 and 87,644 of these units were issued in transactions that closed June 17,
1998 and become redeemable on June 17, 1999.
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
files a further amendment which specifically states that this registration
statement is to become effective in accordance with Section 8(a) of the
Securities Act or until the registration statement becomes effective on the date
the SEC, acting under Section 8(a), determines.
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SUBJECT TO COMPLETION, DATED JUNE 9, 1999
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
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PROSPECTUS
[LOGO] CAPITAL AUTOMOTIVE REIT
541,325 COMMON SHARES of BENEFICIAL INTEREST
We may offer up to 541,325 common shares for redemption of units of
limited partnership interest issued by Capital Automotive L.P. Capital
Automotive L.P. issued 453,681 units in connection with acquisitions of real
estate properties that closed on June 4, 1998 and 87,644 units in connection
with acquisitions of properties that closed on June 17, 1998, as more fully
described in our prospectus. Holders of units have the right to notify Capital
Automotive L.P. that they want their units redeemed. We have the right to assume
the obligations of Capital Automotive L.P. to redeem units. If a unitholder
exercises his right to have his units redeemed, we may issue common shares in
exchange for those units. Our registration of our common shares does not mean
that we will offer or sell our common shares to unitholders, if and when
unitholders redeem units. We may choose not to assume the obligations of Capital
Automotive L.P. or we may choose to pay cash in exchange for the units. We will
not receive any money from the offer and sale of our common shares to
unitholders.
We are also registering the resale of our common shares by the
recipients. We will not receive any money from the offer and sale of common
shares by any selling shareholder. See "Use of Proceeds" "Selling Shareholders"
and "Plan of Distribution." Our registration of our common shares for possible
resale does not mean that any person who receives common shares from us for his
units will offer and sell his shares.
Our common shares are quoted on the Nasdaq National Market under the
symbol CARS. On June 7, 1999, the average high and low sales prices of our
common shares as reported on the Nasdaq National Market was $12.75 per share.
To maintain our qualification as a real estate investment trust, we
limit the transfer of our common shares. No person may own more than 9.9% of our
outstanding shares or 9.9% of our outstanding convertible preferred stock, as
determined under the attribution rules of the Internal Revenue Code, subject to
statutory exceptions.
You should be aware that an investment in our common shares involves
various risks. See "Risk Factors" on page 1 and in our Current Report on Form
8-K filed on February 26, 1999, which is incorporated in our prospectus by
reference.
Holders of units should also realize that the redemption of a unit will be
treated as a taxable sale of the unit. As such, holders will recognize gain or
loss from the sale of the unit equal to the difference between the amount
considered realized for tax purposes and the holder's adjusted tax basis in the
unit.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
The date of this prospectus is _____________
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TABLE OF CONTENTS
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PAGE No
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About this Prospectus................................................................................................i
Risk Factors.........................................................................................................1
When you redeem your units you will recognize gain or loss because the redemption and
exchange of the units is treated as a sale and is taxable. .................................................1
We will determine whether you receive shares for your units, which will change your
investment from an ownership interest in a partnership to an ownership interest in a real
estate investment trust.....................................................................................1
This prospectus contains forward-looking statements which may not prove to be accurate or
complete....................................................................................................2
Capital Automotive...................................................................................................2
Use of Proceeds......................................................................................................4
Market Price of Common Shares........................................................................................4
Description of Shares of Beneficial Interest.........................................................................5
Description of Partnership Agreement................................................................................15
Redemption of Units.................................................................................................18
Comparison of Capital Automotive REIT and the Partnership...........................................................21
Federal Income Tax Consequences.....................................................................................29
Plan of Distribution................................................................................................56
Legal Matters.......................................................................................................56
Experts.............................................................................................................57
Where You Can Find More Information.................................................................................57
</TABLE>
<PAGE>
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with
the Securities and Exchange Commission using a "shelf" registration process.
Under this shelf process, we may offer and sell common shares described in our
prospectus on redemption of units of limited partnership interest of Capital
Automotive L.P. in one or more offerings to persons who acquired their units on
June 4, 1998 and June 17, 1998. The person who receives common shares from us
may also resell those shares. Our prospectus provides you with a general
description of our common shares. We will deliver or provide our prospectus
supplement if and when we offer and sell any common shares, or when a selling
shareholder offers and resells any common shares that will contain specific
information about all of the terms of that offering. Our prospectus supplement
may also add, update or change information contained in this prospectus. You
should read both our prospectus and any prospectus supplement together with
the additional information described under the heading "Where You Can Find More
Information."
i
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Capital Automotive REIT is a Maryland real estate investment trust
formed in October 1997. Capital Automotive L.P. is a Delaware limited
partnership formed in October 1997. Capital Automotive REIT owns interests in
real estate through Capital Automotive L.P. and its subsidiaries and is the sole
general partner of Capital Automotive L.P. References to "we," "us" or "our"
refer to Capital Automotive REIT or, if the context requires, our business and
operations conducted through Capital Automotive L.P. and/or directly or
indirectly owned subsidiaries. As appropriate, Capital Automotive L.P. and its
direct and indirect subsidiaries are referred to as the Partnership. In the
section captioned "Federal Income Tax Consequences" Capital Automotive L.P. is
referred to as the Partnership and Capital Automotive REIT is referred to as the
Company.
RISK FACTORS
You should carefully review the following risks and the risk factors
incorporated by reference from our Form 8-K filed on February 26, 1999 as well
as the other information in this prospectus or referred to in this prospectus,
before buying our common shares.
When you redeem your units you will recognize gain or loss because the
redemption and exchange of the units is treated as a sale and is taxable.
The redemption of units has tax consequences. If you redeem units for
cash or common shares, you will recognize gain or loss because the redemption
and exchange is treated as a sale and is taxable. Such a sale will be taxable to
you in an amount equal to the cash or the value of the common shares received on
redemption, plus the amount of Capital Automotive L.P.'s nonrecourse liabilities
that are allocated to the redeemed units at the time of the redemption. The
amount of gain you recognize, or even the tax liability resulting from such
gain, could exceed the amount of cash or the value of the common shares you
receive upon redemption. Your tax liability may differ if you redeem only a
portion of your units and Capital Automotive L.P. uses its funds to redeem those
units for cash. See "Federal Income Tax Consequences--Redemption of Units--Tax
Consequences of Redemption." In addition, because the price of our common shares
fluctuates, the price you receive when you sell your common shares may not equal
the value of your units at the time of redemption.
We will determine whether you receive shares for your units, which will change
your investment from an ownership interest in a partnership to an ownership
interest in a real estate investment trust.
If you exercise your unit redemption right, we will determine whether
you receive cash or common shares in exchange for your units. If you receive
common shares, you will become a shareholder of Capital Automotive REIT rather
than a holder of units in Capital Automotive L.P. Although an investment in
common shares is substantially equivalent to an investment in units, there are
some differences between ownership of units and ownership of common shares.
These differences include the form of organization, management structure,
investor rights, marketability of interests, liquidity and federal income tax
consequences. These differences, some of which may be material to you, are
discussed in "Redemption of Units -- Comparison of Ownership of Units and Common
Shares."
1
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This prospectus contains forward-looking statements which may not prove to be
accurate or complete.
Our prospectus, including our documents incorporated by reference,
contains forward-looking statements within the meaning of Section 27A of the
Securities Act. Also, documents which we subsequently file with the SEC and are
incorporated by reference will contain forward-looking statements. When we refer
to forward-looking statements or information, sometimes we use words such as
"may," "will," "could," "should," "plans," "intends," "expects," "believes,"
"estimates," "anticipates" and "continues." In particular, the risk factors
included or incorporated by reference in our prospectus describe forward-looking
information. The risk factors are not all inclusive, particularly with respect
to possible future events. Other parts of, or documents incorporated by
reference into, our prospectus may also describe forward-looking information.
Many things can happen that can cause our actual results to be very different
than those described. We are under no duty to update any of the forward-looking
statements after the date of our prospectus to conform such statements to actual
results and we do not intend to do so.
CAPITAL AUTOMOTIVE
We closed our initial public offering of common shares and began
generating rental income in February 1998.
Our primary business purpose is to own and lease real estate
properties (land, buildings and other improvements) to operators of franchised
automobile dealerships, motor vehicle service, repair or parts businesses and
related businesses. In our prospectus, we use the term dealerships to refer to
the types of businesses that are operated on our properties.
As of March 31, 1999, we owned 142 properties located in 19 states,
making up approximately 793 acres of land and containing approximately 5.0
million square feet of buildings and improvements. Our tenants operate 215 motor
vehicle franchises on our properties, representing 36 brands of motor vehicles,
including Acura, Audi, BMW, Buick, Cadillac, Chevrolet, Chrysler, Dodge, Dodge
Trucks, Ford, Freightliner, GMC, Honda, Hyundai, Infiniti, Isuzu, Jaguar, Jeep,
Kia, Land Rover, Lexus, Lincoln-Mercury, Mazda, Mercedes-Benz, Mitsubishi,
Nissan, Oldsmobile, Plymouth, Pontiac, Porsche, Saab, Saturn, Subaru, Toyota,
Volkswagen and Volvo.
We focus on buying properties from third parties that have a long
history of operating multi-site, multi-franchised dealerships. In our
prospectus, we use the term dealer group to refer to a group of related persons
and companies who sell us properties. We also use the terms dealer group, tenant
or lessee to refer to the related persons and companies that lease our
properties.
As of March 31, 1999, we had invested approximately $600 million in
properties. Most of our properties have been leased to tenants who are related
to the sellers of such properties. In certain cases, we may lease property to,
or assume an existing lease with, a tenant that is not related to the seller
from whom we purchased the property.
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We purchase properties in exchange for cash, units of limited
partnership interest in Capital Automotive L.P., the assumption of debt, or a
combination of all three. We usually pay off any assumed debt in full at
closing. In certain cases, we assume and do not pay off a dealer group's loan
under an existing mortgage as part of the purchase of real estate. At times, we
have agreed in advance to purchase property in the future only after the
dealership buildings have been constructed by the seller.
We generally lease our properties to established, creditworthy
tenants, for a period of ten to 20 years. We usually give the tenant the option
to renew the lease on the same terms and conditions for one or more additional
periods of five to ten years each. We typically require our tenants to pay all
operating expenses of the property, including all real estate taxes and
assessments, utilities, insurance, repairs, maintenance and other expenses. This
type of lease is commonly known as a triple-net lease.
When we evaluate dealer groups and potential properties for purchase,
we consider such factors as:
. the management and operating experience of the dealer group;
. the adequacy of a dealer group's historical, current and forecasted
cash flow to meet the operating needs of the business, expenses and
lease payments or debt service obligations;
. the type of franchises operated by the dealer group;
. the value of the land, buildings and other improvements as determined
by us and our consultants, but not by an independent MAI appraisal;
. the construction quality, condition and design of the dealership
buildings and other improvements located on the property;
. the geographic area in which the property is located; and
. the environmental condition of the real estate.
We intend to acquire more properties. Those transactions may be
structured in ways that are similar or different from those described above.
We have, and will continue to, borrow funds to buy properties. As of
March 31, 1999, we had mortgage indebtedness totaling $162 million secured by 64
properties. As of March 31, 1999, we had commitments for short term, revolving
credit, from financial institutions, in the aggregate amount of $70.0 million,
of which $20.0 million had been drawn down. We intend to increase the capacity
and term of the revolving facility by including additional financial
institutions. During April 1999, we entered into a commitment letter for a
$100.0 million permanent loan to be secured by various properties. We may also
issue debt securities, including senior or subordinated notes.
3
<PAGE>
These notes may be secured by properties or leases. We have adopted a policy to
limit debt to approximately 50% of our assets. This policy may be changed by our
Board of Trustees at any time without shareholder approval.
As a real estate investment trust, we acquire properties through our
direct and indirect subsidiaries, including Capital Automotive L.P., and manage
our business in a manner that is intended to be consistent with the requirements
of the Internal Revenue Code and the regulations of the Internal Revenue Service
that govern taxation of real estate investment trusts. We have paid, and expect
to continue to pay, regular cash dividends to our shareholders; to provide our
shareholders the opportunity for increased dividends from increasing annual
rental income; to preserve and protect the investments of our shareholders; and
to provide our shareholders with the opportunity to increase the value of their
investments.
Capital Automotive REIT is a self-administered and self-managed real
estate investment trust, meaning that our trustees, officers and employees
manage and administer our business. Our executive officers are Thomas D. Eckert,
President and Chief Executive Officer; Donald L. Keithley, Executive Vice
President of Business Development; David S. Kay, Vice President and Chief
Financial Officer; John M. Weaver, Vice President, Secretary and General
Counsel; and Peter C. Staaf, Vice President and Treasurer.
Our principal executive office is located at 1420 Spring Hill Road,
Suite 525, McLean, Virginia 22102. Our telephone number is (703) 288-3075.
USE OF PROCEEDS
We will not receive any proceeds from common shares offered and sold
on redemption of units. We will not receive any proceeds from common shares sold
by selling shareholders.
MARKET PRICE OF COMMON SHARES
Our common shares have been trading on the Nasdaq National Market
under the symbol CARS since February 13, 1998. We list below the high and low
sales prices of our common shares as reported on the Nasdaq National Market and
the distributions declared by us for the periods indicated.
4
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High Low Distribution
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Fiscal year ended December 31, 1998
First fiscal quarter (from February 13, 1998) $19 3/4 $16 1/4 $0.076
Second fiscal quarter 19 3/8 13 1/8 0.210
Third fiscal quarter 15 3/4 10 7/8 0.270
Fourth fiscal quarter 14 7/8 8 13/16 0.320
Fiscal year ending December 31, 1999
First fiscal quarter $15 3/16 $11 1/4 $0.330
Second fiscal quarter (to June 7, 1999) $13 3/4 $11 3/8 --
</TABLE>
On June 7, 1999, the last reported closing sales price on the Nasdaq
National Market was $12.9375 per share and there were approximately 34 holders
of record of our common shares.
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
We are a Maryland real estate investment trust. Your rights as a
shareholder are governed by the Code of Maryland, including Title 8 of the
Corporations and Associations Article, and our Declaration of Trust and Bylaws.
The following summary of the terms of our shares of beneficial interest is not
complete. You should read our Declaration of Trust and Bylaws for more complete
information.
Authorized Shares
Our Declaration of Trust allows us to issue up to 100 million common
shares of beneficial interest, par value $.01 per share, and 20 million
preferred shares of beneficial interest, par value $.01 per share. As of June 7,
1999, we had 21,607,415 common shares outstanding and no preferred shares
outstanding.
Authority of the Board of Trustees. Our Declaration of Trust allows our
Board of Trustees to take the following actions without approval by you or other
shareholders:
. classify or reclassify any unissued common shares or preferred
shares into one or more classes or series of shares of
beneficial interest
. set or change the preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends or
distributions, qualifications or terms or conditions of
redemption of any class or series of shares of beneficial
interest
. amend our Declaration of Trust to change the total number of
shares of beneficial interest or the number of shares of any
class or series of shares of beneficial interest
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However, if there are any laws or stock exchange rules which require us to
obtain shareholder approval in order for us to take these actions, we will
contact you and other shareholders to solicit that approval.
We believe that the power of our Board of Trustees to issue additional
shares of beneficial interest will provide us with greater flexibility in
structuring possible future financings and acquisitions and in meeting other
future needs. Although our Board of Trustees does not currently intend to do so,
our Board has the ability to issue a class or series of beneficial share that
could have the effect of delaying or preventing a change of control that might
involve a premium price for holders of common shares or otherwise be favorable
to them.
Shareholder Liability. Under Maryland law, you will not be personally
liable for any of our obligations solely because you are a shareholder. Under
our Declaration of Trust you are not personally liable for our debts or
obligations and will not be subject to any personal liability, in tort, contract
or otherwise, to any person in connection with our property or affairs by reason
of being a shareholder.
Common Shares
All common shares offered through this prospectus will be duly
authorized, fully paid and nonassessable. As a shareholder, you will be entitled
to receive distributions on the shares you own if our Board of Trustees
authorizes a distribution out of our legally available assets. However, your
right to receive these distributions may be affected by the preferential rights
of any other class or series of shares of beneficial interest and the provisions
of our Declaration of Trust regarding restrictions on the transfer of shares of
beneficial interest. For example, you may not receive distributions if no funds
are available for distribution after we pay dividends to holders of preferred
shares. You will also be entitled to receive distributions based on our assets
available for distribution to common shareholders if we liquidate, dissolve or
wind-up our operations. The amount you, as an individual shareholder, would
receive in the distribution would be determined by your amount of beneficial
ownership of us in comparison with other beneficial owners. Assets will be
available for distribution to shareholders only after we have paid all our known
debts and liabilities and paid the holders of any preferred shares we may issue.
Voting Rights. Each outstanding common share owned by a shareholder
entitles that holder to one vote on all matters submitted to a vote of
shareholders, including the election of trustees. The right to vote is subject
to the provisions of our Declaration of Trust regarding the restriction on the
transfer of shares of beneficial interest, which we describe under "Restrictions
on Ownership and Transfer," below. There is no cumulative voting in the election
of our 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.
As a holder of a common share, you will not have any right to:
. convert your shares into any other security
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. have any funds set aside for future payments
. require us to repurchase your shares
. purchase any of our securities, if other securities are
offered for sale, other than as a member of the general public
Subject to the terms of our Declaration of Trust regarding the restrictions on
transfer of shares of beneficial interest, each common share has the same
dividend, distribution, liquidation and other rights as any other common share.
According to the terms of our Declaration of Trust and Bylaws, and
Maryland law, all matters submitted to the shareholders for approval, except for
those matters listed below, are approved if a majority of all the votes cast at
a meeting of shareholders duly called and at which a quorum is present are voted
in favor of approval. The following matters require approval other than by a
majority of all votes cast:
1. intentional disqualification of us as a real estate investment
trust or revocation of our 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
outstanding and entitled to vote on such a matter.
2. the election of trustees, which requires a plurality of all
the votes cast at a meeting of our shareholders at which a
quorum is present.
3. the removal of trustees, which requires the affirmative vote
of the holders of two-thirds of the number of common shares
outstanding and entitled to vote on such a matter.
4. the amendment of our 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 Company's Declaration of Trust
that require the affirmative vote of two-thirds of all the
votes entitled to be cast on the matter.
5. our dissolution, which requires the affirmative vote of
two-thirds of all the votes entitled to be cast on the matter.
6. the merger or consolidation of us with another entity or sale
of all or substantially all of our property, which requires
the approval of the Board of Trustees and an affirmative vote
of a majority of all the votes entitled to be cast on the
matter.
Our Declaration of Trust permits the trustees by a two-thirds vote to
amend our Declaration of Trust from time to time to qualify as a real estate
investment trust under Maryland law without the approval of you or other
shareholders. Our Declaration of Trust permits our Board of Trustees
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to amend the Declaration of Trust to change the total number of shares of
beneficial interest or the number of shares of any class of shares of beneficial
interest that we have authority to issue without approval by you or other
shareholders.
Our common shares are traded on the Nasdaq National Market System under
the trading symbol CARS.
Preferred Shares
General. Preferred shares may be offered and sold from time to time, in
one or more series, as authorized by our Board of Trustees. Our Board of
Trustees is required by Maryland law and our Declaration of Trust to set for
each series the terms, preferences, conversion or other rights, voting powers,
restrictions, limitations as to distributions, qualifications and terms or
conditions of redemption. Our Board of Trustees has the power to set
preferences, powers and rights, voting or other terms of preferred shares that
are senior to, or better than, the rights of holders of common shares or other
classes or series of preferred shares. The offer and sale of preferred shares
could have the effect of delaying or preventing a change of control of us that
might involve a premium price for holders of our common shares or otherwise be
favorable to them.
Restrictions on Ownership and Transfer
Restrictions on ownership and transfer of shares are important to
ensure that we meet certain conditions under the Code to qualify as a REIT. For
example, the Code contains the following requirements.
. No more than 50% in value of a REIT's shares may be owned,
actually or constructively, based on attribution rules in the
Code, by 5 or fewer individuals during the last half of a
taxable year or a proportionate part of a shorter taxable
year, the 5/50 Rule. The 5/50 Rule did not apply to our first
year as a REIT, but applies for years after 1998. Under the
Code, individuals include certain tax-exempt entities except
that qualified domestic pension funds are not generally
treated as individuals.
. If a REIT, or an owner of 10% or more of a REIT, is treated as
owning 10% or more of a lessee of the REIT's property, the
rent received by the REIT from the 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 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. The 100 owner rule also did not apply to our first year
as REIT, but applies for years after 1998.
Our Board of Trustees believes it is essential for us to continue to qualify as
a REIT. Therefore, our 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 9.9% of the
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outstanding common shares, preferred shares or any other series of capital
stock. In this prospectus, the term ownership limitation is used to describe
this provision of our Declaration of Trust.
Any transfer of common or preferred shares will be null and void, and
the intended transferee will acquire no rights in such common shares or
preferred shares if the transfer:
. results in any person owning, directly or indirectly, common
shares or preferred shares in excess of the Ownership
Limitation
. results in the common shares and preferred shares being owned
by fewer than 100 persons determined without reference to any
rules of attribution
. results in our being closely held, within the meaning of
Section 856(h) of the Code
. causes us to own, directly or constructively, 10% or more of
the ownership interests in a tenant of our property, within
the meaning of Section 856 (d) (2) (B) of the Code
Automatic Transfer of Shares to Trust. With certain exceptions
described below, the common shares or preferred shares will be designated as
shares-in-trust and transferred automatically to a trust, called the share
trust, if any transfer of common shares or preferred shares would violate any of
the four restrictions above which cause the transfer to be null and void. The
transfer to the share trust is effective as of the end of the business day
before the purported transfer of such common shares or preferred shares. The
record holder of the common shares or preferred shares that are designated as
shares-in-trust, called the prohibited owner, must deliver those shares to us
for registration in the name of the share trust. We will designate a share
trustee who is not affiliated with us. The beneficiary of the share trust will
be one or more charitable organizations named by us.
Any shares-in-trust remain issued and outstanding common shares or
preferred shares and are entitled to the same rights and privileges as all other
shares of the same class or series. The share trust receives all dividends and
distributions on the shares-in-trust and holds such dividends and distributions
in trust for the benefit of the beneficiary. The share trustee votes all
shares-in- trust. The share trustee may also designate a permitted transferee of
the shares-in-trust. The permitted transferee must purchase the shares-in-trust
for valuable consideration and acquire the shares-in-trust without resulting in
the transfer being null and void.
The prohibited owner with respect to shares-in-trust must pay the share
trust any dividends or distributions received by the prohibited owner (1) that
are attributable to any shares-in-trust and (2) the record date for which was on
or after the date that such shares became shares-in-trust. Upon sale or other
disposition of the shares-in-trust to a permitted transferee, the prohibited
owner generally will receive from the share trustee, the lesser of:
. the price per share, if any, paid by the prohibited owner for
the common shares or preferred shares, or if no amount was
paid for such shares (e.g., if such shares were received
through a gift or devise), the price per share equal to the
market price
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(which is calculated as defined in our Declaration of Trust)
on the date the shares were received
. 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 paid
to the prohibited owner will be distributed to the beneficiary. Unless sooner
sold to a permitted transferee, upon our liquidation, dissolution or winding up,
the prohibited owner generally will receive from the share trustee its share of
the liquidation proceeds but in no case more than the price per share paid by
the prohibited owner or, in the case of a gift or devise, the market price per
share on the date such shares were received.
The shares-in-trust will be offered for sale to us, or our designee, at
a price per share equal to the lesser of (1) 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 (2) the
market price per share on the date that we, or our designee, accept such offer.
We may accept such offer for a period of ninety days after the later of (1) the
date of the purported transfer which resulted in such shares- in-trust or (2)
the date we determine in good faith that a transfer resulting in such
shares-in-trust occurred.
Any person who acquires or attempts to acquire common shares or
preferred shares which would be null and void under the restrictions described
above, or any person who owned common shares or preferred shares that were
transferred to a share trust, must (1) give immediate written notice to us of
such event and (2) provide us such other information as requested in order to
determine the effect, if any, of such transfer on our status as a REIT.
If a shareholder owns more than 5% of our outstanding common shares and
preferred shares, then the shareholder must notify us of its share ownership by
January 30 of each year.
The ownership limitation generally does not apply to the acquisition of
common shares or preferred shares by an underwriter that participates in a
public offering of our common shares. In addition, our Board of Trustees may
exempt a person from the ownership limitation under certain circumstances and
conditions. Our Board may not grant an exemption from the ownership limit to any
proposed transferee whose ownership, direct or indirect, of our shares of
beneficial interest in excess of the ownership limit would result in the
termination of our status as a REIT. The restrictions described above will
continue to apply until (1) our Board of Trustees determines that it is no
longer in our best interests to attempt to qualify, or to continue to qualify,
as a REIT, and (2) 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 our
shareholders.
We have waived the ownership limitation with respect to Friedman,
Billings, Ramsey Group, Inc. and related persons to permit them to own our
common shares.
The ownership limitation could have the effect of delaying, deferring
or preventing a transaction or a change in control of us that might involve a
premium price for our common shares
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or preferred shares or otherwise be in the best interest of our shareholders.
All certificates representing our common shares or preferred shares will bear a
legend referring to the restrictions described above.
Warrants
Outstanding Warrants. As of June 7, 1999, we had warrants outstanding
to acquire a total of 3,141,952 common shares. Warrants for a total of 2,691,952
common shares were exercisable by the holders on that date. Warrants for a total
of 400,000 common shares will become exercisable for 25% of the common shares
each year over a four year period beginning on January 5, 2000. The warrant for
the remaining 50,000 common shares will become exercisable beginning on January
31, 2000. We have issued the warrants under written warrant agreements. The
exercise price of our common shares issuable under each outstanding warrant
is $15.00 per common share. Warrants for a total of 2,741,952 common shares are
terms of five years. Warrants for a total of 400,000 common shares are for terms
of 10 years. Under each warrant we are obligated to file a registration
statement after the warrant has been exercised by the holder to register our
common shares if the holder so requests or if we file a registration statement
for our own shares.
Registration Rights Agreements
Under various agreements, including the Partnership's partnership
agreement, we have agreed to file a registration statement that covers:
. the resale of our common shares upon exchange of units that
were issued in private placements at the time of and since our
formation
. the resale of common shares upon exercise of warrants
We must use our best efforts to maintain the effectiveness of these
registration statements. The exchange of outstanding securities for common
shares will increase the number of outstanding common shares and will increase
our percentage ownership interest in the Partnership.
Certain Provisions of Maryland Law and the Declaration of Trust and Bylaws
The following summary of certain provisions of the Maryland General
Corporation Law and our Declaration of Trust and Bylaws is not complete. You
should read the Maryland General Corporation Law and our Declaration of Trust
and Bylaws for more complete information. The business combination provisions
and the control share acquisition provisions of Maryland law, both of which are
discussed below, could have the effect of delaying or preventing a change in
control. Also, the removal of trustees provision of our Declaration of Trust and
the advance notice provisions of our Bylaws could have the effect of delaying or
preventing a transaction or a change in control. These provisions could have the
effect of discouraging offers to acquire us and of increasing the difficulty of
consummating any such offer, even if the offer contains a premium price for
holders of our common shares or otherwise benefits shareholders.
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Business Combinations. Maryland General Corporation Law prohibits us
from entering into business combinations and other corporate transactions unless
special actions are taken. The business combinations that require such special
actions include a merger, consolidation, share exchange, or, in certain
circumstances, an asset transfer or issuance of equity securities when the
combination is between us and an interested shareholder, as defined below. An
interested shareholder is (1) any person who beneficially owns 10% or more of
the voting power of our shares or (2) any affiliate which beneficially owned 10%
or more of the voting power of our shares within two years prior to the date in
question. We may not engage in a business combination with an interested
shareholder or any of its affiliates for five years after the interested
shareholder becomes an interested shareholder. This prohibition does not apply
to business combinations involving us that are exempted by our Board of Trustees
before the interested shareholder becomes an interested shareholder.
We may engage in business combinations with an interested shareholder
if at least five years have passed since the person became an interested
shareholder, but only if the transaction is:
1. recommended by our Board of Trustees; and
2. approved by at least
a. 80% of our outstanding shares entitled to vote, and
b. two-thirds of our outstanding shares entitled to vote
that are not held by the interested shareholder.
Shareholder approval will not be required if our shareholders receive a
minimum price, as defined in the statute, for their shares and the shareholders
receive cash or the same form of consideration as the interested shareholder
paid for its shares.
Control Share Acquisitions. Our Declaration of Trust exempts
acquisitions of shares of beneficial interest by any person from control share
acquisition requirements discussed below. There is no assurance that such
exemption will not be amended or eliminated in the future. If the exemption was
eliminated, control share acquisitions would be subject to the following
provisions.
The Maryland General Corporation Law provides that control shares of a
Maryland real estate investment trust acquired in a control share acquisition
have no voting rights unless two-thirds of the shareholders, excluding shares
owned by the acquirer, officers and trustees who are our employees, approve
their voting rights.
Control Shares are shares that, if added with all other shares
previously acquired, would entitle that person to vote, in electing our
trustees,
. 20% or more but less than one-third of our shares
. one-third or more but less than a majority of our shares
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. a majority of the our outstanding shares
Control shares do not include shares the acquiring person is entitled
to vote with shareholder approval. A control share acquisition means the
acquisition of control shares, subject to statutory exceptions.
If this provision becomes applicable to us, a person who has made or
proposes to make a control share acquisition could, under certain circumstances,
compel our Board of Trustees to call a special meeting of shareholders to
consider the voting rights of the control shares. We could also present the
question at any shareholders meeting on our own.
If this provision becomes applicable to us, subject to statutory
conditions and limitations, we would be able to redeem any or all control
shares. If voting rights for control shares were approved at a shareholders
meeting and the acquirer is entitled to vote a majority of the shares entitled
to vote, all other shareholders could exercise appraisal rights and exchange
their shares for a fair value as defined by statute.
Limitation of Liability of Trustees and Officers. Our Declaration of
Trust provides that, to the fullest extent that limitations on the liability of
our trustees and officers are permitted by the Maryland General Corporation Law,
no trustee or officer shall be liable to us or our shareholders for money
damages. The Maryland General Corporation Law provides that we may restrict or
limit the liability of our trustees or officers for money damages except
. to the extent anyone actually received an improper benefit or
profit in money, property or services
. a judgment or other final adjudication adverse to the person
is entered in a proceeding based on a finding that the
person's action was material to the cause of action
adjudicated and the action or failure to act was the result of
bad faith or active and deliberate dishonesty
Indemnification of Trustees and Officers. Our Declaration of Trust and
Bylaws permit us to indemnify any of our employees or agents. Our Bylaws require
us to indemnify each trustee or officer who has been successful in defending any
proceeding to which he or she is made a party by reason of his or her service.
We have also entered into separate indemnification agreements with each of our
trustees and certain of our executive officers. The agreements require that we
indemnify our trustees and officers to the fullest extent permitted by Maryland
General Corporation Law. The agreements also require us to indemnify and advance
all expenses incurred by our trustees and officers seeking to enforce their
indemnification agreements. We must also cover trustees and officers under our
trustees' and officers' liability insurance. Although the form indemnification
agreement offers substantially the same scope of coverage as our Declaration of
Trust and Bylaws, the agreements provide greater assurance to the trustees and
officers that indemnification will be available because, as a contract, it
cannot be modified unilaterally in the future by the Board of Trustees or by our
shareholders.
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The Maryland General Corporation Law provides that we may indemnify our
trustees and officers unless
. our trustee actually received an improper benefit or profit in
money property or services
. the act or omission of our trustee was material to the matter
giving rise to the proceeding and was committed in bad faith
or was the result of active and deliberate dishonesty
. in a criminal proceeding, our trustee had reasonable cause to
believe that the act or omission was unlawful
Our Bylaws require, as a condition to advancing expenses, (1) a written
affirmation by the trustee or officer of his good faith belief that he has met
the standard of conduct necessary for indemnification by us and (2) a written
affirmation to repay the amount paid by us if it is determined that the trustee
or officer was not entitled to indemnification.
Maryland Asset Requirements. To maintain our qualification as a
Maryland real estate investment trust, we must 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. We
are also prohibited from using or applying land for farming, agricultural,
horticultural or similar purposes.
Meetings of Shareholders. Our Bylaws provide for annual meetings of
shareholders to elect our board of trustees and transact such other business as
may properly be brought before the meeting. Special meetings of our shareholders
may be called by our President, our Board of Trustees or our Chairman of the
Board and will be called at the request in writing of the holders of 50% or more
of our outstanding shares of beneficial interest entitled to vote.
Our Bylaws provide that any action required or permitted to be taken at
a meeting of shareholders may be taken by unanimous written consent without a
meeting. The written consent must, among other items, specify the action to be
taken and be signed by each shareholder entitled to vote on the matter.
Transfer Agent and Registrar
Our transfer agent and registrar for the common shares is American
Stock Transfer & Trust Company.
DESCRIPTION OF THE PARTNERSHIP AGREEMENT
The following summary of the Partnership Agreement of Capital
Automotive L.P., as currently in effect, including the descriptions of certain
provisions described elsewhere in this prospectus, is qualified in its entirety
by reference to the Partnership Agreement. We have filed the
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Partnership Agreement as an exhibit to this Registration Statement. You should
read the Partnership Agreement for a complete description of all the terms.
Management
The Partnership was formed as a Delaware limited partnership in October
1997. We are the sole general partner and the holder of a majority of the units
of the Partnership. Under the Partnership Agreement, we have full, exclusive and
complete responsibility and discretion in the management and control of the
Partnership, subject to certain limited exceptions. The limited partners of the
Partnership generally have no authority to participate in or exercise control or
management power over the business and affairs of the Partnership.
Indemnification
The Partnership provides for indemnification of us, as general partner,
its officers and trustees and such other persons we may designate to the same
extent indemnification is provided in our Declaration of Trust. Our liability
and the liability of our officers and trustees to the Partnership are limited to
the same extent as under our Declaration of Trust.
Transferability of Interests
The Partnership Agreement generally provides that we may not
voluntarily withdraw from the Partnership, or transfer or assign our interest in
the Partnership. The limited partners, on the other hand, may transfer their
units if the Partnership consents and the transfer does not violate federal and
state securities laws or REIT qualification rules under the Code. The limited
partners may also transfer units to a qualified transferee as described in the
Partnership Agreement. We have a right of first refusal in the case of transfer
by the limited partners. No transferee may become a substituted limited partner
without our consent.
Extraordinary Transactions
Except as permitted under the Partnership Agreement, we may not (1)
engage in any merger, consolidation or other combination, (2) sell all or
substantially all of our assets, or (3) reclassify, recapitalize or change our
outstanding common shares. These transactions will be referred to as business
combinations. We may not participate in a business combination unless the
holders of units will receive the same consideration per unit or preferred unit,
if any, as shareholders receive per common share or preferred share, and no more
than 75% of the equity securities of the acquiring person will be owned by us or
related persons. If there is an offer to purchase, tender or exchange common
shares, each holder of units will be able to exchange its units for the greatest
amount of cash, securities or property that a limited partner would have
received had he redeemed his units for common shares, and then accepted the
sale, tender or exchange offer for those shares.
We can merge into or consolidate with another person if immediately
after the merger or consolidation substantially all of the assets of the
successor person are contributed to the Partnership
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<PAGE>
as a capital contribution in exchange for units and the surviving person agrees
to assume the obligations of the general partner.
Offers and Sales of Additional Units
The Partnership has and will continue to issue additional units. The
Partnership may also issue additional units representing general partnership
interests, common limited partnership interests or preferred limited partnership
interests of any class or series, with such rights, powers and preferences as
the general partner sets.
Capital Contributions and Additional Funds
If the Partnership requires additional funds at any time, then we, to
the extent consistent with our REIT status, may borrow such funds from a lender
and lend such funds to the Partnership on comparable loan terms. We may also
give the Partnership additional funds by making additional capital contributions
in return for units. If we sell additional securities, we will contribute the
net proceeds to the Partnership by making additional capital contributions. If
we contribute additional capital to the Partnership, our limited partnership
interest in the Partnership will increase on a proportionate basis based upon
the amount of the additional capital. If the additional capital contribution
arises from the sale of securities, we will receive units of limited partnership
interest with rights comparable to the rights of the securities that were sold
by us. If our limited partnership interest increases, the limited partnership
interests of the limited partners will decrease proportionately.
Limited Partner Redemption Rights
Under the Partnership Agreement, each limited partner has the right to
require the Partnership to redeem part or all of his units for cash after a
specified holding period that is at least one year from the date such units were
first acquired by the limited partner. We may elect to assume the obligations of
the Partnership and may acquire the units for common shares on a one-for-one
basis. The Partnership can refuse or delay a redemption if it would cause any
person to violate any ownership limitation or provision of our Declaration of
Trust or otherwise jeopardize our status as a REIT. See "Description of Shares
of Beneficial Interest--Restrictions on Ownership and Transfer." The holders of
units have been given registration rights requiring us to register the re-sale
of any common shares issued in exchange for units.
Tax Matters
As provided in the Partnership Agreement, we are the tax matters
partner of the Partnership. Accordingly, we make whatever tax elections must be
made under the Code. The net income or net loss of the Partnership will
generally be allocated to us and the limited partners in accordance with
priorities of distribution. See "Federal Income Tax Consequences-Tax Aspects of
the Company's Investments in the Partnership and Subsidiary Partnerships."
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Distributions
Subject to the terms of any preferred units, the Partnership
distributes cash on a quarterly basis (or if we elect more frequently), to its
limited partners on a pro rata basis.
Operations
The Partnership Agreement requires that the Partnership be operated in
a manner that will enable us to satisfy the requirements for classification as a
real estate investment trust and to ensure that we will not be classified as a
publicly-traded partnership under the Code. Under the Partnership Agreement,
except as otherwise provided, the Partnership will also assume and pay when due,
or reimburse us for payment of, all costs and expenses relating to the ownership
of interests in and operation of the Partnership.
Duties and Conflicts
The Partnership Agreement provides generally that all business
activities must be conducted through the Partnership.
Term
The term of the Partnership continues until December 31, 2073, or until
sooner dissolved upon the occurrence of certain other events.
REDEMPTION OF UNITS
Terms of Redemption of Units
On June 4, 1998 the Partnership closed the sale of 453,681 units, and
on June 17, 1998 the Partnership closed the sale of 87,644 units, to the prior
owners of, or to persons related to the entities that owned, certain properties
as consideration for the contribution of these properties to the Partnership.
Information about the properties, date of contribution, the date the units
become exchangeable and the number of units that were sold by the Partnership is
set forth below:
<TABLE>
<CAPTION>
Number
Date First of
Unitholder Dealership Property Contribution Date Exchangeable Units
---------- -------- ----------------- ------------ ------
<S> <C> <C> <C> <C> <C>
Roundtree Automotive Group, L.L.C.
- ----------------------------------
Roundtree Automotive
Group, L.L.C. (1) Champion Ford Sherevport, LA June 4, 1998 June 4, 1999 453,681
Roundtree Oldsmobile-
Cadillac Sherevport, LA
Roundtree Brocks
Service Facility Sherevport, LA
Roundtree Hyundai-
Subaru Sherevport, LA
Roundtree Car
Central Bossier City, LA
Roundtree Champion
Mitsubishi Sherevport, LA
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C>
Rountree Auto Trim
Design Sherevport, LA
Midwest Auto Realty Co., L.P.
- -----------------------------
Midwest Auto Realty Co., L.P. Midwest Auto
Parts, Inc. Fort Wayne, IN June 17, 1998 June 17, 1999 87,644
</TABLE>
- -------------
(1) 453,681 units were issued by the Partnership as part of the acquisition
cost for six Properties located in Sherevport, LA and one Property
located in Bossier City, LA, which units have not been allocated on a
per Property basis.
Beginning on June 4, 1999, the holder of 453,681 units, and, beginning
on June 17, 1999, the holder of 87,644 units, can cause the Partnership to
redeem the units for cash. We have the right to assume the obligations of the
Partnership to redeem units and may redeem the units for cash or may issue
common shares for units on a one-for-one basis, subject to adjustment. The
number of common shares that could be issued to holders of units on redemption
will be adjusted in the event of stock splits, stock dividends, issuances of
certain rights, certain extraordinary distributions and similar events.
We will only issue our common shares if a holder decides to redeem his
units; we decide to assume the Partnership's redemption obligation; and we
decide to offer and sell common shares. We are also now registering the resale
of such common shares for the recipients, if and when such shares are offered
and sold.
A holder of units must deliver a notice of redemption to the
Partnership. That holder will have the right to receive an amount of cash from
the Partnership equal to the cash amount, as defined in the Partnership
Agreement. The cash amount will be determined as of the date that the
Partnership receives the notice of redemption. If the common shares are then
quoted on the Nasdaq National Market or are listed on a national securities
exchange, the cash amount will be the average of the daily sale prices of common
shares for the 20 consecutive trading days immediately preceding the five
trading days prior to the date that the Partnership received the notice of
redemption. If we elect to redeem the units for common shares, the holder will
have no right to receive cash.
We will deliver duly authorized, validly issued, fully paid and
nonassessable common shares, free and clear of any pledge, lien, encumbrance or
restriction, other than those provided in the Declaration of Trust and Bylaws or
under applicable state and federal securities laws, on redemption of units. The
common shares that we deliver will be subject to the terms of the registration
rights that relate to those shares.
Certain Conditions to the Exchange
If we decide to assume the Partnership's obligation to redeem units and
to offer common shares in exchange for such units, we will issue such common
shares to a redeeming holder promptly upon receipt of a notice of redemption
unless:
* a redemption would cause a holder or any other person to
violate the restrictions on ownership and transfer provisions
of our Declaration of Trust
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* a redemption is for less than 1,000 units, or if the redeeming
holder holds less than 1,000 units, the redemption is for less
than all units
* the redeeming holder has delivered more than four notices of
redemption during a calendar year
* a redemption would cause the Partnership to be a "publicly
traded partnership" under Section 7704 of the Code
The redeeming holder will have no right to receive any Partnership
distribution on any units that have been tendered for redemption if the record
date for such distribution is on or after a date that is 30 days after the date
of the notice of redemption to the Partnership.
Any attempted exchange in violation of any of the above conditions will
have no effect.
We will not issue common shares in exchange for units if the issuance
of the common shares would:
. result in any person owning, directly or indirectly,
common shares in excess of 9.9% of our outstanding
common shares
. result in our common shares being owned by fewer than
100 persons, determined without reference to any
rules of attribution
. result in our being closely held within the meaning
of Section 856(h) of the Code
. cause us to own, actually or constructively, 10% or
more of the ownership interests in a tenant of our
property, within the meaning of Section 856(d)(2)(B)
of the Code
. otherwise violate our Declaration of Trust or Bylaws
. be integrated with any other distribution of our
shares of beneficial interest for purposes of
complying with the registration provisions of the
Securities Act of 1933, as amended.
COMPARISON OF CAPITAL AUTOMOTIVE REIT AND THE PARTNERSHIP
Generally an investment in our common shares is economically equivalent
to an investment in the units of the Partnership. Currently, only our common
shares and units of the Partnership are outstanding. Holders of our common
shares and holders of units receive similar distributions.
However, there are also differences between ownership of units and
ownership of our common shares, some of which may be material to investors. The
information below highlights a
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number of the significant differences between us and the Partnership, including
form of organization, management control, voting rights, liquidity and federal
income tax considerations. These comparisons are intended to assist holders of
units in understanding how their investment will be changed if they receive our
common shares on redemption of their units. This discussion is only a summary
and does not constitute a complete discussion of these matters. Holders of units
should carefully review the balance of our prospectus and the registration
statement of which our prospectus is a part for additional important
information.
Form of Organization and Assets Owned
The Partnership is organized as a Delaware limited partnership. The
Partnership owns interests in properties and its subsidiary partnerships and
limited liability companies. The Partnership's purpose is to conduct any
business that may be lawfully conducted by a limited partnership organized under
the Delaware Revised Uniform Limited Partnership Act. However, business must be
conducted in a manner that permits us to qualify as a REIT unless we otherwise
cease to qualify as a REIT.
We are a Maryland real estate investment trust. We intend to elect to
be taxed as a REIT under the Code, commencing with the taxable year ended
December 31, 1998. We intend to maintain our qualification as a REIT. Our
primary asset is our interest in the Partnership, the Partnership subsidiaries
and in our direct subsidiaries, which gives us an indirect investment in the
properties and subsidiaries of the Partnership. Under our Declaration of Trust,
we may engage in any lawful activity permitted under Maryland law. However,
under the Partnership Agreement, we, as general partner, may not conduct any
business other than the business of the Partnership.
Additional Equity
The Partnership may issue units (which are substantially equivalent to
our common shares), preferred units and other partnership interests (including
partnership interests of different series or classes that may be senior to
units) in exchange for additional capital contributions as we determine as the
Partnership's sole general partner. In exchange for capital contributions, the
Partnership may issue units, preferred units and other partnership interests to
us, may issue units, preferred units and other partnership interests to existing
limited partners and others, and may admit third parties as additional limited
partners. As long as the Partnership is in existence, the proceeds of all equity
capital raised by us will be contributed to the Partnership in exchange for
units, preferred units or other partnership units whose terms will mirror the
terms of the securities that we sell to raise such capital.
Our Board of Trustees may, in its discretion, authorize the offer and
sale of additional common shares or preferred shares (including shares of
different series or classes that may be senior to common shares). Our Board may
authorize shares in any class and series and may set the terms, preferences,
rights and privileges of our shares. Our Board or a committee may also set the
offering price for our shares. Our Declaration of Trust also permits our Board
to increase the aggregate number of shares or the number of shares of any class
or series without any action by our shareholders.
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We may also raise capital by selling debt securities or entering into
loan or financing arrangements with third parties. Properties of Partnership
subsidiaries have been pledged, and other properties and assets of the
Partnership or its subsidiaries may also be pledged as security for such debt.
We will contribute any borrowed funds to the Partnership as a loan, except in
limited circumstances described in the Partnership Agreement. The terms of the
indebtedness of the Partnership will be equivalent to the terms of our debt.
Management Control
We exercise all management powers over the business and affairs of the
Partnership as the general partner. No limited partner of the Partnership has
any right to participate in or exercise control or management power over the
business and affairs of the Partnership. We cannot be removed as general partner
by the holders of units with or without cause.
We are managed under the direction of our Board of Trustees. We are
required under our Declaration of Trust to hold an annual meeting for the
election of trustees. Our Board of Trustees may alter or eliminate business
policies without a vote of the shareholders. Accordingly, except for their vote
in the election of trustees, shareholders have no control over our policies.
Voting Rights
General. We may generally amend the Partnership Agreement as we deem
necessary, without the consent of limited partners. As a limited partner, you
will have the right to vote on the following amendments to the Partnership
Agreement, which require the consent of limited partners, other than us in our
capacity as a limited partner, holding at least two-thirds of the equity
ownership of the Partnership:
* an amendment affecting the operation of the redemption right
or conversion formula for units, except as provided in the
Partnership Agreement, in a manner adverse to the limited
partners
* an amendment that would adversely affect the rights of the
limited partners to receive the distributions payable to them
other than with respect to the issuance of additional units
pursuant to Section 4.02 of the Partnership Agreement
* an amendment that would alter the Partnership's allocations of
profit and loss to the limited partners in a manner adverse to
limited partners, other than with respect to the issuance of
additional units pursuant to Section 4.02 of the Partnership
Agreement
* an amendment that would impose on the limited partners any
obligation to make additional capital contributions to the
Partnership
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* an amendment to Section 8.07 of the Partnership Agreement
providing for certain registration rights, in a manner adverse
to any limited partner
* an amendment to Article XI of the Partnership Agreement
relating to when limited partner consent is required
Each outstanding common share owned by a shareholder entitles that
holder to one vote on all matters submitted to a vote of shareholders, including
the election of trustees. The right to vote is subject to the provisions of our
Declaration of Trust regarding the restrictions on transfer of shares of
beneficial interest, which are described under "Description of Shares of
Beneficial Ownership--Restrictions on Ownership and Transfer." There is no
cumulative voting in the election of trustees, which means that the holders of a
majority of our 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.
Under our Declaration of Trust and Bylaws and Maryland law, all matters
submitted to the shareholders for approval, except for those matters listed
below, are approved if a majority of all the votes cast on the matter at a
meeting of shareholders duly called and at which a quorum is present are voted
in favor of approval. The following matters require approval other than by a
majority of all votes cast on the matter:
1. our intentional disqualification as a real estate investment
trust or revocation of our 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
outstanding and entitled to vote on such a matter
2. the election of trustees, which requires a plurality of all
the votes cast at a meeting of our shareholders at which a
quorum is present
3. the removal of trustees, which requires the affirmative vote
of the holders of two-thirds of the number of common shares
outstanding and entitled to vote on such a matter
4. the amendment of our Declaration of Trust by shareholders,
which requires the affirmative vote of a majority of votes
entitled to be cast on the matter, except under circumstances
specified in our Declaration of Trust that require the
affirmative vote of two-thirds of all the votes entitled to be
cast on the matter
Our Declaration of Trust permits our trustees by a two-thirds vote to
amend our Declaration of Trust from time to time to qualify as a real estate
investment trust under Maryland law without the approval of you or other
shareholders. Our Declaration of Trust permits our Board of Trustees to amend
our Declaration of Trust to change the total number of shares of beneficial
interest or the number of shares of any class of shares of beneficial interest
that we have authority to issue without approval by shareholders.
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Vote Required to Dissolve Capital Automotive REIT or the Partnership.
Limited Partners will have no right to vote to dissolve the Partnership. Under
the Partnership Agreement, the Partnership will dissolve upon the following
events:
. the bankruptcy of the general partner
. 90 days after the sale or disposition of all or substantially
all of the assets of the Partnership
. the redemption of all limited partnership interests
. the election of the general partner
Under our Declaration of Trust, our shareholders may elect to terminate
our existence upon the affirmative vote of two-thirds of all votes entitled to
be cast on the matter.
Vote Required to Sell Assets or Merge. Under the Partnership Agreement,
the disposition of all or substantially all of the Partnership's assets or
merger or consolidation of the Partnership requires the consent of limited
partners, including our approval in our capacity as a limited partner, holding
at least two-thirds of the equity ownership of the Partnership. The sale of less
than all or substantially all of the properties and assets of the Partnership
does not require the approval of the limited partners. We hold a majority of
limited partnership interests in the Partnership.
Under our Declaration of Trust, the sale of all or substantially all of
our assets or a merger or consolidation requires the approval of our Board of
Trustees and the holders of a majority of all votes entitled to be cast on the
matter. The sale of less than 90% of our total assets within a 12 month period
does not require the approval of our shareholders.
Duties of General Partner and Trustees
Under Delaware law, we, as general partner, have a duty of care to the
Partnership and is accountable to the Partnership as a fiduciary. Consequently,
we are required to exercise good faith in all of our dealings with respect to
partnership affairs. However, under the Partnership Agreement, we, and our
officers and trustees, are not liable for monetary damages for losses sustained
or liabilities incurred by partners as a result of errors of judgment or acts or
omissions if we, or they, acted in good faith.
Under our Declaration of Trust, our trustees must perform their duties
in good faith. Any determination made in good faith by our Board concerning its
powers and authority will be conclusive.
Management Liability and Indemnification
As a matter of Delaware law, we, as the general partner, have liability
for the payment of the obligations and debts of the Partnership unless
limitations upon such liability are stated in the
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document or instrument evidencing the obligations. Under the Partnership
Agreement, the Partnership we, and our officers and trustees have been
indemnified for any and all losses, claims, damages, liabilities, joint or
several; expenses, including reasonable legal fees and expenses; judgments;
fines; settlements; and other amounts arising from any and all claims, demands,
actions, suits or proceedings, civil, criminal, administrative or investigative,
that relate to the operations of the Partnership, unless it is established that:
(1) the our act or omission, or the act or omission of any officer or trustee,
was material to the matter giving rise to the proceeding and either was
committed in bad faith or was the result of active and deliberate dishonesty;
(2) we, or the officer or trustee, actually received an improper personal
benefit in money, property or services; or (3) in the case of any criminal
proceeding, we, or the officer or trustee, had reasonable cause to believe that
the act or omission was unlawful. Any indemnification is payable only out of the
assets of the Partnership.
The reasonable expenses incurred by an indemnitee may be reimbursed by
the Partnership before the final disposition of the proceeding. First, however,
the indemnitee must deliver to the Partnership an affirmation of his, her or its
good faith belief that the standard of conduct necessary for indemnification has
been met and an undertaking that the indemnitee shall repay the amount if it is
determined that such standard was not met.
Our Declaration of Trust contains a provision which eliminates the
liability of our trustees and officers and shareholders to the fullest extent
permitted by Maryland law in effect from time to time. The Bylaws provide
indemnification to trustees and officers to the maximum extent permitted by
Maryland law in effect from time to time. Such indemnification is to the same
extent that the trustees and officers have indemnification rights under the
Partnership Agreement (in their capacity as officers and trustees of the general
partner of the Partnership) as described above.
We and the Partnership may also indemnify costs and expenses of
shareholders, employees and agents to the maximum extent permitted by law and
authorized by our trustees.
Anti-Takeover Provisions
Except in limited circumstances (see "-- Voting Rights"), we have
exclusive management power over the business and affairs of the Partnership. We
may not be removed as general partner by the limited partners with or without
cause. A limited partner may generally not transfer its units without the our
consent unless:
* the transfer is a result of the exercise of a redemption right
* the transfer is to an affiliate, subsidiary or successor-in-
interest of a limited partner organized as a corporation or
other business entity
* the transfer is for donative purposes to an immediate family
member or trust owned by the limited partner or his immediate
family members
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The limited partners may pledge units as collateral for any borrowing
from an institutional lender with our consent.
Our Declaration of Trust and Bylaws contain a number of provisions that
may delay or discourage an unsolicited proposal for an acquisition involving us
and may prevent or delay the removal of incumbent trustees or management. These
provisions include:
. authorized shares that may be issued as preferred shares in
the discretion of our Board of Trustees, with voting or other
rights superior to the common shares
. a requirement that trustees be removed only for cause, only at
a meeting of shareholders and only by the affirmative vote of
two-thirds of the aggregate number of votes then outstanding
and entitled to vote generally in the election of our trustees
. provisions designed to avoid concentration of share ownership
in a manner that would jeopardize our status as a REIT under
the Code. See "Description of Shares of Beneficial Interest--
Restrictions on Ownership and Transfer."
Maryland law also contains certain provisions which could delay, defer
or prevent a change of control or other transaction. See "Description of Share
of Beneficial Interest--Certain Provisions of Maryland Law and the Declaration
of Trust and Bylaws."
Compensation, Fees and Distributions
We do not receive any compensation for our services as general partner
of the Partnership. As a partner in the Partnership, however, we have the same
right to receive pro rata allocations and distributions as other partners of the
Partnership. In addition, the Partnership generally will reimburse us for all
expenses incurred relating to our ongoing operation and business and any
offering of additional partnership interests in the Partnership. The Partnership
will also pay the compensation of our officers and employees providing services
to the Partnership.
Our officers and outside trustees receive compensation for their
services.
Liability of Limited Partners and Shareholders
Under the Partnership Agreement and applicable Delaware law, the
liability of the holders of units and exchangeable preferred units for the
Partnership's debts and obligations is generally limited to the amount of their
investment in the Partnership.
Under our Declaration of Trust, our shareholders are not personally
liable for our debts or obligations and will not be subject to any personal
liability, in tort, contract or otherwise, to any person in connection with our
property or affairs by reason of being a shareholder.
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Liquidity
We may not transfer or assign any of our general partnership interest
or withdraw as a general partner except as a result of certain extraordinary
transactions such as a merger, consolidation or other combination or sale of all
or substantially all Partnership assets (which requires the consent of limited
partners). We may not transfer our units except to a successor general partner
with the consent of a majority in interest of the limited partners. We have
agreed that we will hold at least a 20% ownership interest in the Partnership at
all times.
A limited partner may generally not transfer its units without our
consent unless:
* the transfer is a result of the exercise of a redemption right
* the transfer is to an affiliate, subsidiary or successor-in-
interest of a limited partner organized as a corporation or
other business entity
* the transfer is for donative purposes to an immediate family
member or trust owned by the limited partner or his immediate
family members
The limited partners may pledge units as collateral for any borrowing
from an institutional lender with our consent.
The common shares received by a unitholder on redemption will be freely
transferrable as registered securities under the Securities Act, subject to
prospectus delivery and other requirements for registered securities under
federal or state law.
Taxes
The Partnership is not subject to federal income taxes. Instead, each
holder of units includes his allocable share of the Partnership's taxable income
or loss in determining his individual federal income tax liability. The maximum
effective federal tax rate for individuals under current law is 39.6%.
Income and loss from the Partnership generally are subject to the
"passive activity" limitations. Under the "passive activity" rules, income and
loss from the Partnership that is considered "passive activity"generally can be
offset against income and loss from other investments that constitute "passive
activities," unless the Partnership is considered a "publicly traded
partnership," in which case income and loss from the Partnership can be offset
only against other income and loss from the Partnership.
Cash distributions from the Partnership are not taxable to a holder of
units except to the extent they exceed such holder's basis in his interest in
the Partnership, which includes such holder's allocable share of the
Partnership's debt.
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Each year, holders of units receive a Schedule K-1 tax form containing
detailed tax information for inclusion in preparing their federal income tax
returns.
Holders of units are required, in some cases, to file state income tax
returns and/or pay state income taxes in the states in which the Partnership
owns property, even if they are not residents of those states.
We intend to elect to be taxed as a REIT. So long as we qualify as a
REIT, we will be permitted to deduct distributions paid to our shareholders,
which effectively will reduce the "double taxation" that typically results when
a corporation earns income and distributes that income to its shareholders in
the form of dividends.
Distributions paid by us are treated as "portfolio" income and cannot
be offset with losses from "passive activities."
Distributions made by us to our taxable domestic shareholders out of
current or accumulated earnings and profits are taken into account by them as
ordinary income. Distributions in excess of current or accumulated earnings and
profits that are not designated as capital gain dividends are treated as a
non-taxable return of basis to the extent of a shareholder's adjusted basis in
our common shares, with the excess taxed as capital gain. Distributions that are
designated as capital gain dividends generally are taxed as gains from the sale
or exchange of a capital asset held for more than one year, to the extent they
do not exceed our actual net capital gain for the taxable year. We may elect to
require our shareholders to include our undistributed net capital gains in their
income. If we so elects, shareholders would include their proportionate share of
such gains in their income and be deemed to have paid their share of the tax
paid by us on such gains. Each year, shareholders will receive Form 1099 used by
corporations to report dividends paid to their shareholders. Shareholders who
are individuals generally are not required to file state income tax returns
and/or pay state income taxes outside of their state of residence with respect
to our operations and distributions. We may be required to pay state income
taxes in certain states.
FEDERAL INCOME TAX CONSEQUENCES
The following sections summarize the federal income tax issues that
you, as a redeeming limited partner and shareholder, may consider relevant.
Because this section is a summary, it does not address all of the tax issues
that may be important to you. In addition, this section does not address the tax
issues that may be important to certain types of shareholders that are subject
to special treatment under the federal income tax laws, such as insurance
companies, tax-exempt organizations (except to the extent discussed in
"--Taxation of Tax-Exempt U.S. Shareholders" below), financial institutions and
broker-dealers, and non-U.S. individuals and foreign corporations (except to the
extent discussed in "--Taxation of Non-U.S. Shareholders" below).
The statements in this section are based on the current federal income
tax laws governing the Company's qualification as a REIT. The Company cannot
assure you that new laws, interpretations of laws or court decisions, any of
which may take effect retroactively, will not cause any statement in this
section to be inaccurate.
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The Company urges you to consult your own tax advisor regarding the
specific tax consequences to you of redeeming your units and of the Company's
election to be taxed as a REIT. Specifically, you should consult your own tax
advisor regarding the federal, state, local, foreign and other tax consequences
of such investment and election, and regarding potential changes in applicable
tax laws.
Tax Consequences of Redemption
The following discussion summarizes certain federal income tax
considerations that may be relevant to a limited partner who exercises his right
to require the Partnership to redeem his units.
Tax Treatment of Redemption of Units. If the Company assumes the
redemption obligation and purchases units from a limited partner, the
Partnership Agreement provides that the redemption will be treated by the
Company, the Partnership, and the redeeming limited partner as a sale of units
by the limited partner to the Company. The sale will be fully taxable to the
limited partner, and he will realize for tax purposes an amount equal to the sum
of the cash or the value of the common shares received in exchange for the
units, plus the amount of any partnership liabilities allocable to the redeemed
units at the time of the purchase.
If the Company does not elect to assume the obligation to redeem a
limited partner's units, then the Partnership will redeem the units for cash. If
the Partnership redeems the units for cash contributed by the Company, the
redemption likely would be treated for tax purposes as a sale of such units in a
fully taxable transaction. In that event, the redeeming partner will realize an
amount equal to the sum of the cash received in connection with the redemption,
plus the amount of any partnership liabilities allocable to the redeemed units
at the time of the redemption. The determination of the amount of gain or loss
in the event of sale treatment is discussed more fully below.
If the Partnership redeems units for cash that is not contributed by
the Company to effect the redemption, the tax consequences would be the same as
described in the previous paragraph, except that if the Partnership redeems less
than all of the units owned by a limited partner, the limited partner would not
be permitted to recognize any loss occurring on the transaction. The limited
partner would recognize taxable gain only to the extent that the sum of the cash
and the amount of any partnership liabilities allocable to the redeemed units
exceeds his adjusted basis in all of his units immediately before the
redemption.
Tax Treatment of Disposition of Units by Limited Partner Generally. If
a unit is redeemed in a manner that is treated as a sale of the unit, or if a
limited partner otherwise disposes of a unit (other than in a transaction that
is treated as a redemption for tax purposes), the determination of gain or loss
from such sale or other disposition will be based on the difference between the
amount realized for tax purposes and the tax basis in such unit. See "--Basis of
Units."
Upon the sale of a unit, the "amount realized" will be measured by the
sum of the cash and fair market value of other property (e.g., common shares)
received, plus the amount of any partnership liabilities allocable to the unit
sold. To the extent that the amount realized exceeds the
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limited partner's basis in the unit sold, the limited partner will recognize
gain. The amount of gain recognized, or the tax liability resulting from such
gain, could exceed the amount of cash and the value of any other property
received during the sale.
Except as described below, any gain recognized upon a sale or other
disposition of units will be treated as gain attributable to the sale or
disposition of a capital asset. However, the excess of (A) the amount realized
upon the sale of a unit that is attributable to a limited partner's share of the
Partnership's "unrealized receivables" (as defined in Section 751 of the Code)
over (B) the basis attributable to those assets will be ordinary income.
Unrealized receivables include, to the extent not previously included in the
Partnership's income, any rights to payment for services rendered or to be
rendered. Unrealized receivables also include amounts that would be subject to
recapture as ordinary income if the Partnership had sold its assets at their
fair market value at the time of the transfer of a unit.
Basis of Units. In general, if a limited partner is treated as having
received units upon liquidation of a partnership, he will have an initial tax
basis in his units ("Initial Basis") equal to his basis in his interest in the
liquidated partnership. Similarly, in general, if a limited partner received his
units in exchange for a contribution of a partnership interest or other property
to Partnership, he will have an Initial Basis equal to his basis in the
contributed partnership interest or other property.
A limited partner's Initial Basis generally is increased by (1) his
share of the Partnership's income and (2) increases in his share of the
Partnership's liabilities (including any increase in his share of liabilities
occurring in connection with the transactions resulting in the issuance of the
units).
Generally, a limited partner's basis in his units is decreased (but not
below zero) by (1) his share of the Partnership's distributions, (2) decreases
in his share of the Partnership's liabilities (including any decrease in his
share of liabilities occurring in connection with the transactions resulting in
the issuance of the units), (3) his share of the Partnership's losses and (4)
his share of the Partnership's nondeductible expenditures that are not
chargeable to capital.
Potential Application of Disguised Sale Regulations to a Redemption of
Units. There is a risk that a redemption of units may cause the limited
partner's original transfer of property to the Partnership in exchange for units
to be treated as a "disguised sale" of property.
The Code and the related Treasury Regulations (the "Disguised Sale
Regulations") generally provide that, unless an exception applies, if (A) a
partner contributes property to a partnership and (B) a partnership at the same
time or afterwards transfers money or other consideration (including the
assumption of or taking subject to a liability) to the partner, then the
transaction will be presumed to be a sale, in whole or in part, of the property
by the partner to the partnership.
The Disguised Sale Regulations provide generally that, in the absence
of an applicable exception, if money or other consideration is transferred by a
partnership to a partner within two years of the partner's contribution of
property to the partnership, the transactions will, when viewed together, be
presumed to be a sale of the contributed property unless the facts and
circumstances
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clearly establish that the transfers do not constitute a sale. The Disguised
Sale Regulations also provide that, if two years have passed between the
contribution of property and the transfer of money or other consideration from
the partnership to a partner, the transactions will be presumed not to be a sale
unless the facts and circumstances clearly establish that the transfers
constitute a sale. A Disguised Sale may exist in cases in which the transfers
are not made simultaneously only if based on all the facts and circumstances the
later transfer is not dependent on the entrepreneurial risks of partnership
operations.
Accordingly, if the Partnership redeems a unit, the Internal Revenue
Service could argue that the Disguised Sale Regulations apply, because the
redeeming limited partner will receive cash or common shares after he has
contributed property to the Partnership. If the Internal Revenue Service were to
take such a position and sustain it in court, the original issuance of the units
could be taxable as a disguised sale under the Disguised Sale Regulations. Any
gain recognized thereby may be eligible for installment reporting under Section
453 of the Code, subject to certain limitations.
Taxation of the Company
The Company will elect to be taxed as a REIT under the federal income
tax laws when it files its 1998 tax return. The Company has operated in a manner
intended to qualify as a REIT and it intends to continue to operate in that
manner. This section discusses the laws governing the federal income tax
treatment of a REIT and its shareholders. These laws are highly technical and
complex.
In the opinion of the Company's tax counsel, Wilmer, Cutler &
Pickering, (1) the Company will qualify as a REIT under section 856 through 859
of the Code with respect to the Company's first taxable year ended December 31,
1998; and (2) the Company is organized in conformity with the requirements for
qualification as a REIT under the Code and its current method of operation will
enable it to meet the requirements for qualification as a REIT for the current
taxable year and for future taxable years. With respect to its current and
future years, however, the Company's status as a REIT at any time is dependent,
among other things, upon its meeting certain requirements through out the year
as a whole. You should be aware that opinions of counsel are not binding on the
IRS or any court. Wilmer, Cutler & Pickering based this opinion on various
assumptions and factual representations made by the Company. The Company's
qualification as a REIT depends on its ability to meet, on a continuing basis,
certain qualification tests set forth in the federal tax laws. Those
qualification tests involve the percentage of income that the Company earns from
specified sources, the percentage of its assets that fall within certain
categories, the diversity of its share ownership, and the percentage of its
earnings that it distributes. We describe the REIT qualification tests in more
detail below. Wilmer, Cutler & Pickering will not monitor the Company's
compliance with the requirements for REIT qualification on an ongoing basis.
Accordingly, no assurance can be given that the Company's actual operating
results will satisfy the qualification tests. For a discussion of the tax
treatment of the Company and its shareholders if the Company fails to qualify as
a REIT, see "--Failure to Qualify."
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If the Company qualifies as a REIT, it generally will not be subject to
federal income tax on the taxable income that it distributes to its
shareholders. The benefit of that tax treatment is that it avoids the "double
taxation" (i.e., at both the corporate and stockholder levels) that generally
results from owning stock in a corporation. However, the Company will be subject
to federal tax in the following circumstances:
. the Company will pay federal income tax on taxable income (including
net capital gain) that it does not distribute to its shareholders
during, or within a specified time period after, the calendar year in
which the income is earned;
. the Company may be subject to the " alternative minimum tax" on any
items of tax preference that it does not distribute or allocate to its
shareholders;
. the Company will pay income tax at the highest corporate rate on (i)
net income from the sale or other disposition of property acquired
through foreclosure ("foreclosure property") that it holds primarily
for sale to customers in the ordinary course of business and (ii) other
non-qualifying income from foreclosure property;
. the Company will pay a 100% tax on net income from certain sales or
other dispositions of property (other than foreclosure property) that
it holds primarily for sale to customers in the ordinary course of
business ("prohibited transactions");
. if the Company fails to satisfy the 75% gross income test or the 95%
gross income test (as described below under "--Requirements for
Qualification -- Income Tests"), and nonetheless continues to qualify
as a REIT because it meets certain other requirements, it will pay a
100% tax on (i) the gross income attributable to the greater of the
amounts by which it fails the 75% and 95% gross income tests,
multiplied by (ii) a fraction intended to reflect its profitability;
. if the Company fails to distribute during a calendar year at least the
sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of
its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, it will pay a 4%
excise tax on the excess of such required distribution over the amount
it actually distributed;
. the Company may elect to retain and pay income tax on its net long-term
capital gain; or
. if the Company acquires any asset from a C corporation (i.e., a
corporation generally subject to full corporate-level tax) in a merger
or other transaction in which it acquires a "carryover" basis in the
asset (i.e., basis determined by reference to the C corporation"s basis
in the asset (or another asset)), it will pay tax at the highest
regular corporate rate applicable if it recognizes gain on the sale or
disposition of such asset during the 10-year period after it acquires
such asset. The amount of gain on which it will pay tax is the lesser
of (i) the amount of gain that it recognizes at the time of the sale or
disposition and (ii) the amount of gain that it would have recognized
if it had sold the asset at the time it acquired the asset.
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The rule described in this paragraph will apply assuming that the
Company makes an election under IRS Notice 88-19 upon its acquisition
of an asset from a C corporation.
Requirements for REIT Qualification
In order to qualify as a REIT, the Company must be a corporation, trust
or association that meets the following requirements:
1. it is managed by one or more trustees or directors;
2. its beneficial ownership is evidenced by transferable shares,
or by transferable certificates of beneficial interest;
3. it would be taxable as a domestic corporation, but for
sections 856 through 860 of the Code;
4. it is neither a financial institution nor an insurance company
subject to certain provisions of the Code;
5. at least 100 persons are beneficial owners of its shares or
ownership certificates;
6. not more than 50% in value of its outstanding shares or
ownership certificates is owned, directly or indirectly, by
five or fewer individuals (as defined in the Code to include
certain entities) during the last half of any taxable year
(the "5/50 Rule");
7. it elects to be a REIT (or has made such election for a
previous taxable year) and satisfies all relevant filing and
other administrative requirements established by the Service
that must be met to elect and maintain REIT status;
8. it uses a calendar year for federal income tax purposes and
complies with the record keeping requirements of the Code and
the related Treasury Regulations; and
9. it meets certain other qualification tests, described below,
regarding the nature of its income and assets.
The Company must meet requirements 1 through 4 during its entire
taxable year and must meet requirement 5 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. The Company was not required to meet requirements 5 and 6 during
1998. If the Company complies with all the requirements for ascertaining the
ownership of its outstanding shares in a taxable year and has no reason to know
that it violated the 5/50 Rule, it will be deemed to have satisfied the 5/50
Rule for such taxable year. For purposes of determining share ownership under
the 5/50 Rule, an "individual" generally includes a supplemental unemployment
compensation benefits plan, a private foundation, or a portion of a trust
permanently set aside or used exclusively for charitable purposes. An
"individual," however, generally does not include a trust that is a qualified
employee pension or profit sharing trust under
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Code section 401(a), and beneficiaries of such a trust will be treated as
holding shares of the Company in proportion to their actuarial interests in the
trust for purposes of the 5/50 Rule.
The Company believes it has issued sufficient common shares with
sufficient diversity of ownership to satisfy requirements 5 and 6 set forth
above. In addition, the Company's Declaration of Trust restricts the ownership
and transfer of the common shares so that the Company should continue to satisfy
requirements 5 and 6. The provisions of the Declaration of Trust restricting the
ownership and transfer of the common shares are described in "Description of
Shares of Beneficial Ownership--Restrictions on Ownership and Transfer."
The Company currently has several direct corporate subsidiaries and may
have additional corporate subsidiaries in the future. A corporation that is a
"qualified REIT subsidiary" is not treated as a corporation separate from its
parent REIT. All assets, liabilities, and items of income, deduction, and credit
of a "qualified REIT subsidiary" are treated as assets, liabilities, and items
of income, deduction, and credit of the REIT. A "qualified REIT subsidiary" is a
corporation, all of the capital stock of which is owned by the REIT. Thus, in
applying the requirements described herein, any "qualified REIT subsidiary" of
the Company will be ignored, and all assets, liabilities, and items of income,
deduction, and credit of such subsidiary will be treated as assets, liabilities,
and items of income, deduction, and credit of the Company. The Company believes
its direct corporate subsidiaries are qualified REIT subsidiaries. Accordingly,
they are not subject to federal corporate income taxation, though they may be
subject to state and local taxation.
A REIT is treated as owning its proportionate share of the assets of
any partnership in which it is a partner and as earning its allocable share of
the gross income of the partnership for purposes of the applicable REIT
qualification tests. Thus, the Company's proportionate share of the assets,
liabilities and items of income of the Partnership and of any other partnership
(or limited liability company treated as a partnership) in which the Company has
acquired or will acquire an interest, directly or indirectly (a "Subsidiary
Partnership"), are treated as assets and gross income of the Company for
purposes of applying the various REIT qualification requirements.
Income Tests
The Company must satisfy two gross income tests annually to maintain
its qualification as a REIT:
. At least 75% of its gross income (excluding gross income from
prohibited transactions) for each taxable year must consist of defined
types of income that it derives, directly or indirectly, from
investments relating to real property or mortgages on real property or
temporary investment income (the "75% gross income test"). Qualifying
income for purposes of the 75% gross income test includes "rents from
real property," interest on debt secured by mortgages on real property
or on interests in real property, and dividends or other distributions
on and gain from the sale of shares in other REITs; and
. At least 95% of its gross income (excluding gross income from
prohibited transactions) for each taxable year must consist of income
that is qualifying income for purposes of the 75%
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gross income test, dividends, other types of interest, gain from the
sale or disposition of stock or securities, or any combination of the
foregoing (the "95% gross income test").
The following paragraphs discuss the specific application of these tests to the
Company.
Rental Income. The Partnership's primary source of income derives from
leasing properties to dealer groups. The leases generally are on a "triple-net"
basis, which 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.
Rents under the leases 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: (1) the intent of the parties; (2) the form of the
agreement; (3) 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); (4) 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 risks of increases in
operating expenses or the risk of damage to the property); and (5) the extent to
which the property owner retains the burdens and benefits of ownership of the
property.
Capital Automotive Group believes that each lease will be treated as a
true lease for federal income tax purposes. Such belief is based, in part, on
the following facts:
1. Capital Automotive Group and the lessees intend for the
relationship with the Partnership to be that of a lessor and
lessee and such relationship will be documented by lease
agreements;
2. the lessees will have the right to exclusive possession and
use and quiet enjoyment of the properties during the term of
the leases;
3. 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;
4. the lessees will bear all of the costs and expenses of
operating the properties during the terms of the leases;
5. the lessees will benefit from any savings in the costs of
operating the properties during the terms of the leases;
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6. the lessees will generally indemnify Capital Automotive Group
against all liabilities imposed on Capital Automotive Group
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;
7. the lessees are obligated to pay fixed rent for the period of
use of the properties;
8. the lessees stand to reap substantial gains (or incur
substantial losses) depending on how successfully they operate
the properties;
9. the useful lives of the properties are significantly longer
than the terms of the leases; and
10. Capital Automotive Group will receive the benefit of increases
in value, and will bear the risk of decreases in value, of the
properties during the terms of the leases.
If the IRS were to challenge successfully the characterization of the
leases as true leases, the Partnership would not be treated as the owner of the
property in question for federal income tax purposes and the Partnership would
lose tax depreciation and cost recovery deductions with respect to such
property, which in turn could cause the Company to fail to qualify as a REIT.
See "-- Distribution Requirements."
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
Partnership 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 REIT status.
Capital Automotive Group received an opinion of counsel at the time of its
initial public offering that the leases entered into at that time were true
leases. That opinion is not binding on the IRS. Capital Automotive Group will
use its best efforts to structure any leasing transaction for properties
acquired in the future such that the lease will be characterized as a "true
lease " and the Partnership will be treated as the owner of the property in
question for federal income tax purposes and has generally entered into leases
substantially similar to those entered into at the time of the initial public
offering. The Company will not seek an advance ruling from the IRS and does not
intend to seek an opinion of counsel that it will be treated as the owner of any
other leased properties for federal income tax purposes, and thus there can be
no assurance that future leases will be treated as true leases for federal
income tax purposes.
In addition, rent that the Partnership receives from real property that
it owns and leases to lessees will qualify as "rents from real property" (which
is qualifying income for purposes of the 75% and 95% gross income tests) only if
several conditions are met under the REIT tax rules:
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. The rent must not be based, in whole or in part, on the income or
profits of any person although, generally, rent may be based on a fixed
percentage or percentages of receipts or sales. The Partnership has not
entered into any lease based in whole or part on the net income of any
person and does not anticipate entering into such arrangements.
. Neither the Company nor someone who owns 10% or more of the Company's
shares may own 10% or more of a lessee from whom the Partnership
receives rent. The ownership of the Company and a lessee is determined
based on direct, indirect and constructive ownership. 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 Partnership
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 Partnership 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. The
Company believes that the Partnership has not leased property to any
Related Party Tenant.
. The rent attributable to any personal property leased in connection
with a lease of property is no more than 15% of the total rent received
under the lease. In general, the Partnership has not leased personal
property under its current leases. If any incidental personal property
has been leased, Capital Automotive Group believes that rent from the
personal property would be less than 15% of total rent from that lease.
If the Partnership were to lease personal property in connection with a
future lease, Capital Automotive Group intends to satisfy the 15% test
described above.
. Capital Automotive Group generally must not operate or manage its
property or furnish or render services to its lessees, other than
through an "independent contractor" who is adequately compensated and
from whom Capital Automotive Group does not derive revenue. Capital
Automotive Group may provide services directly, if the services are
"usually or customarily rendered" in connection with the rental of
space for occupancy only and are not otherwise considered "rendered to
the occupant." In addition, Capital Automotive Group may render
directly a de minimis amount of "non-customary" services to the lessees
of a property without disqualifying the income as "rents from real
property," as long as its income from the services does not exceed 1%
of its income from the related property. Capital Automotive Group has
not provided services to leased properties itself or through an
independent contractor. In the future, Capital Automotive Group intends
that any services provided will not cause rents to be disqualified as
rents from real property.
Based on the foregoing, the Company believes that rent from leases
should qualify as "rents from real property" for purposes of the 75% and 95%
gross income tests. As described above,
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however, there can be no complete assurance that the IRS 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 to cause
the Partnership 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);
. 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 Lessee
is not material and will not jeopardize the Company's status as a REIT;
. 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
. 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.
Interest Income. Capital Automotive Group may offer financing to dealer
groups for the development of property used by dealerships and earn interest
with respect to such financings. For purposes of the 75% and 95% gross income
tests, amounts received or accrued (directly or indirectly), which are based in
whole or in part on the income or profits of any person are generally not
treated as interest. An amount received or accrued will generally be treated as
interest even if it is based (1) on a fixed percentage or percentages of
receipts or sales or (2) on the income or profits of a debtor if the debtor
derives substantially all of its gross income from the related property through
the leasing of substantially all of its interests in the property, but only 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 tests. However, if Capital Automotive Group receives interest
income with respect to a loan that is secured by both real
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property and other property and the highest principal amount of the loan
outstanding during a taxable year exceeds the fair market value of the real
property on the date Capital Automotive Group acquired the loan, the interest
income from the loan will be apportioned between the real property and the other
property. This 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 arrangement such that it will continue
to qualify as a REIT.
Tax on Income From Property Acquired in Foreclosure. 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 any real property (including interests in
real property) and any personal property incident to such real property:
. that is acquired by a REIT at a foreclosure sale, or having otherwise
become the owner or in possession of the property by agreement or
process of law, after a default (or imminent default) on a lease of
such property or on an indebtedness owed to the REIT secured by the
property;
. for which the related loan was acquired by the REIT at a time when
default was not imminent or anticipated; and
. for which the REIT makes a proper election to treat the property as
foreclosure property.
A REIT will not be considered to have foreclosed on a property where it takes
control of the property as a mortgagee-in-possession and cannot receive any
profit or sustain any loss except as a creditor of the mortgagor. Generally,
property acquired as described above ceases to be foreclosure property on the
earlier of:
. the last day of the third taxable year following the taxable year in
which the Partnership acquired the property (or longer if an extension
is granted by the Secretary of the Treasury);
. the first day 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;
. the first day 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
. the first day 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).
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Tax on Prohibited Transactions. A REIT will incur a 100% tax on net
income derived from any "prohibited transaction." A "prohibited transaction"
generally is a sale or other disposition of property (other than foreclosure
property) that the REIT holds primarily for sale to customers in the ordinary
course of a trade or business. Capital Automotive Group believes that none of
its assets is held for sale to customers and that a sale of any such asset would
not be in the ordinary course of its business. Whether a REIT holds an asset
"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. Capital Automotive Group will
attempt to comply with the terms of safe-harbor provisions in the Code
prescribing when an asset sale will not be characterized as a prohibited
transaction if Capital Automotive Group determines that an asset is held
primarily for sale to customers in the ordinary course of business. Capital
Automotive Group may fail to comply with such safe-harbor provisions or may own
property that could be characterized as property held "primarily for sale to
customers in the ordinary course of a trade or business."
Relief from Consequences of Failing to Meet Income Tests. If the
Company fails to satisfy one or both of the 75% and 95% gross income tests for
any taxable year, it nevertheless may qualify as a REIT for such year if it
qualifies for relief under certain provisions of the Code. Those relief
provisions generally will be available if the Company's failure to meet such
tests is due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its tax return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. The Company may not qualify for the relief provisions in all circumstances.
In addition, as discussed above in "--Taxation of the Company," even if the
relief provisions apply, the Company would incur a 100% tax on gross income to
the extent it fails the 75% and 95% gross income tests (whichever amount is
greater), multiplied by a fraction intended to reflect its profitability.
Asset Tests
To maintain its qualification as a REIT, the Company also must satisfy
two asset tests at the close of each quarter of each taxable year:
. At least 75% of the value of its total assets must consist of cash or
cash items (including certain receivables), government securities,
"real estate assets," or qualifying temporary investments (the "75%
asset test").
* "Real estate assets" include interests in real
property, interests in mortgages on real property and
stock in other REITs. The Company believes that the
properties qualify as real estate assets.
* "Interests in real property" includes an interest in
mortgage loans or land and improvements thereon, such
as buildings or other inherently permanent structures
(including items that are structural components of
such buildings or structures), a leasehold of real
property, and an option to acquire real property (or
a leasehold of real property).
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* Qualifying temporary investments are investments in
stock or debt instruments during the one-year period
following the Company's receipt of new capital that
it raises through equity or long-term (at least
five-year) debt offerings.
. For investments not included in the 75% asset test, (A) the value of
its interest in any one issuer's securities (which does not include its
equity ownership of other REITs, the Partnership or any qualified REIT
subsidiary) may not exceed 5% of the value of its total assets (the "5%
asset test") and (B) the Company may not own more than 10% of any one
issuer's outstanding voting securities which does not include its
equity ownership in other REITs, the Partnership or any qualified REIT
subsidiary (the "10% asset test").
The Company intends to select future investments so as to comply with the asset
tests.
If the Company failed to satisfy the asset tests at the end of a
calendar quarter, it would not lose its REIT status if (i) it satisfied the
asset tests at the close of the preceding calendar quarter and (ii) the
discrepancy between the value of its assets and the asset test requirements
arose from changes in the market values of its assets and was not wholly or
partly caused by the acquisition of one or more non-qualifying assets. If the
Company did not satisfy the condition described in clause (ii) of the preceding
sentence, it still could avoid disqualification as a REIT by eliminating any
discrepancy within 30 days after the close of the calendar quarter in which the
discrepancy arose.
Distribution Requirements
Each taxable year, the Company must distribute dividends (other than
capital gain dividends and deemed distributions of retained capital gain) to its
shareholders as follows:
. an aggregate amount at least equal to (1) the sum of 95% of (A) its
"REIT taxable income" (computed without regard to the dividends paid
deduction and its net capital gain or loss) and (B) its net income
(after tax), if any, from foreclosure property, minus (2) certain items
of non-cash income.
. at least 95% of the built-in gain (after tax), if any, recognized on
the disposition of any asset acquired from a C corporation in a
carryover basis transaction during its Recognition Period (pursuant to
Treasury regulations which have not yet been promulgated).
The Company must pay such distributions in the taxable year to which they
relate, or in the following taxable year if it declares the distribution before
it timely files its federal income tax return for such year and pays the
distribution on or before the first regular dividend payment date after such
declaration.
The Company will pay federal income tax on taxable income (including
net capital gain) that it does not distribute to shareholders. Furthermore, it
will incur a 4% nondeductible excise tax if it fails to distribute during a
calendar year (or, in the case of distributions with declaration and record
dates falling in the last three months of the calendar year, by the end of
January following
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such calendar year) at least the sum of (1) 85% of its REIT ordinary income for
such year, (2) 95% of its REIT capital gain income for such year, and (3) any
undistributed taxable income from prior periods. The excise tax is on the excess
of such required distribution over the amounts it actually distributed. The
Company may elect to retain and pay income tax on the net long-term capital gain
it receives in a taxable year. See "--Taxation of Taxable U.S. Shareholders."
For purposes of the 4% excise tax, it will be treated as having distributed any
such retained amount. The Company has made, and the Company intends to continue
to make, timely distributions sufficient to satisfy the annual distribution
requirements.
It is possible that, from time to time, the Company may experience
timing differences between (1) the actual receipt of income and actual payment
of deductible expenses and (2) the inclusion of that income and deduction of
such expenses in arriving at its REIT taxable income. For example, the Company
may not deduct recognized capital losses from its "REIT taxable income."
Further, it is possible that, from time to time, the Company may be allocated a
share of net capital gain attributable to the sale of depreciated property that
exceeds its allocable share of cash attributable to that sale. As a result of
the foregoing, the Company may have less cash than is necessary to distribute
all of its taxable income and thereby avoid corporate income tax and the excise
tax imposed on certain undistributed income. In such a situation, it may need to
borrow funds or issue preferred shares or additional common shares.
The Company intends to calculate its "REIT taxable income" based upon
the conclusion that the 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 IRS 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 correct a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to its shareholders in a later year. The Company may include such
deficiency dividends in its deduction for dividends paid for the earlier year.
Although the Company may be able to avoid income tax on amounts distributed as
deficiency dividends, it will be required to pay interest to the IRS based upon
the amount of any deduction it takes 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 that authorizes
the IRS, in certain "abusive" transactions involving partnerships, to disregard
the form of the transaction and recast it for federal tax purposes as the IRS
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'
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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
shares (at the corporation'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 IRS.
Based on the foregoing, the Company believes 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 IRS is authorized
to take appropriate enforcement action, including disregarding the Partnership
for federal tax purposes or treating one or more of its partners as
non-partners. Any such action potentially could jeopardize the Company's status
as a REIT.
Record keeping Requirements
The Company must maintain certain records in order to qualify as a
REIT. In addition, to avoid a monetary penalty, it must request on an annual
basis certain information from its shareholders designed to disclose the actual
ownership of its outstanding stock. The Company has complied, and the Company
intends to continue to comply, with such requirements.
Failure to Qualify
If the Company failed to qualify as a REIT in any taxable year, and no
relief provision applied, it would be subject to federal income tax (including
any applicable alternative minimum tax) on its taxable income at regular
corporate rates. In calculating its taxable income in a year in which it failed
to qualify as a REIT, the Company would not be able to deduct amounts paid out
to shareholders. In fact, the Company would not be required to distribute any
amounts to shareholders in such year. In such event, to the extent of its
current and accumulated earnings and profits, all distributions to shareholders
would be taxable as ordinary income. Subject to certain limitations of the Code,
corporate shareholders might be eligible for the dividends received deduction.
Unless the Company qualified for relief under specific statutory provisions, it
also would be disqualified from taxation as a REIT for the four taxable years
following the year during which it ceased to qualify as
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a REIT. The Company cannot predict whether in all circumstances it would qualify
for such statutory relief.
Taxation of Taxable U. S. Shareholders
As long as the Company qualifies as a REIT, a taxable "U.S.
shareholder" must take into account distributions out of the Company's current
or accumulated earnings and profits (and that it does not designate as capital
gain dividends or retained long-term capital gain) as ordinary income. A U.S.
Stockholder will not qualify for the dividends received deduction generally
available to corporations. As used herein, the term "U.S. shareholder" means a
holder of common Shares that for U.S. federal income tax purposes is
. a citizen or resident of the United States,
. a corporation, partnership, or other entity created or organized in or
under the laws of the United States or of a political subdivision
thereof,
. an estate whose income is subject to U.S. federal income taxation
regardless of its source, or
. any trust with respect to which (A) a U.S. court is able to exercise
primary supervision over the administration of such trust and (B) one
or more U.S. persons have the authority to control all substantial
decisions of the trust.
A U.S. shareholder will recognize distributions that the Company
designates as capital gain dividends as long-term capital gain (to the extent
they do not exceed the Company's actual net capital gain for the taxable year)
without regard to the period for which the U.S. shareholder has held its common
shares. Subject to certain limitations, the Company will designate its capital
gain dividends as either 20% or 25% rate distributions. A corporate U.S.
shareholder, however, may be required to treat up to 20% of certain capital gain
dividends as ordinary income.
The Company may elect to retain and pay income tax on the net long-term
capital gain that it receives in a taxable year. In that case, a U.S.
shareholder would be taxed on its proportionate share of the Company's
undistributed long-term capital gain. The U.S. shareholder would receive a
credit or refund for its proportionate share of the tax the Company paid. The
U.S. shareholder would increase the basis in its stock by the amount of its
proportionate share of the Company's undistributed long-term capital gain, minus
its share of the tax the Company paid.
A U.S. shareholder will not incur tax on a distribution in excess of
the Company's current and accumulated earnings and profits if such distribution
does not exceed the adjusted basis of the U.S. shareholder's common shares.
Instead, such distribution will reduce the adjusted basis of such common shares.
A U.S. shareholder will recognize a distribution in excess of both the Company's
current and accumulated earnings and profits and the U.S. shareholder's adjusted
basis in its common shares as long-term capital gain (or short-term capital gain
if the common shares have been held for one year or less), assuming the common
shares are a capital asset in the hands of the U.S. shareholder. In addition, if
the Company declares a distribution in October, November, or
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December of any year that is payable to a U.S. Stockholder of record on a
specified date in any such month, such distribution shall be treated as both
paid by the Company and received by the U.S. shareholder on December 31 of such
year, provided that the Company actually pays the distribution during January of
the following calendar year. The Company will notify U.S. shareholders after the
close of its taxable year as to the portions of the distributions attributable
to that year that constitute ordinary income or capital gain dividends.
Taxation of U.S. Shareholders on the Disposition of the Common Shares.
In general, a U.S. shareholder who is not a dealer in securities must treat any
gain or loss realized upon a taxable disposition of the common shares as
long-term capital gain or loss if the U.S. shareholder has held the common stock
for more than one year and otherwise as short-term capital gain or loss.
However, a U.S. shareholder must treat any loss upon a sale or exchange of
common shares held by such shareholder for six months or less (after applying
certain holding period rules) as a long-term capital loss to the extent of
capital gain dividends and other distributions from the Company that such U.S.
shareholder treats as long-term capital gain. All or a portion of any loss a
U.S. shareholder realizes upon a taxable disposition of the common shares may be
disallowed if the U.S. shareholder purchases additional common shares within 30
days before or after the disposition.
Capital Gains and Losses. A taxpayer generally must hold a capital
asset for more than one year for gain or loss derived from its sale or exchange
to be treated as long-term capital gain or loss. The highest marginal individual
income tax rate is 39.6%. The maximum tax rate on long-term capital gain
applicable to non-corporate taxpayers is 20% for sales and exchanges of assets
held for more than one year. The maximum tax rate on long-term capital gain from
the sale or exchange of "section 1250 property" (i.e., depreciable real
property) is 25% to the extent that such gain would have been treated as
ordinary income if the property were "section 1245 property." With respect to
distributions that the Company designates as capital gain dividends and any
retained capital gain that it is deemed to distribute, the Company may designate
(subject to certain limits) whether such a distribution is taxable to its
non-corporate shareholders at a 20% or 25% rate. Thus, the tax rate differential
between capital gain and ordinary income for non-corporate taxpayers may be
significant. A U.S. shareholder required to include retained long-term capital
gains in income 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 U.S. shareholder in respect of such gains.
In addition, the characterization of income as capital gain or ordinary income
may affect the deductibility of capital losses. A non-corporate taxpayer may
deduct capital losses not offset by capital gains against its ordinary income
only up to a maximum annual amount of $3,000. A non-corporate taxpayer may carry
forward unused capital losses indefinitely. A corporate taxpayer must pay tax on
its net capital gain at ordinary corporate rates. A corporate taxpayer can
deduct capital losses only to the extent of capital gains, with unused losses
being carried back three years and forward five years.
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Information Reporting Requirements and Backup Withholding. The Company
will report to its shareholders and to the IRS the amount of distributions it
pays during each calendar year, and the amount of tax it withholds, if any.
Under the backup withholding rules, a shareholder may be subject to backup
withholding at the rate of 31% with respect to distributions unless such holder
(1) is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact or (2) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with the applicable requirements of the backup withholding
rules. A shareholder who does not provide the Company with its correct taxpayer
identification number also may 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. The Treasury Department has issued
final regulations regarding the backup withholding rules as applied to Non-U.S.
shareholders. Those regulations alter the current system of backup withholding
compliance and are effective for distributions made after December 31, 1999. See
"--Taxation of Non-U.S. Shareholders."
Taxation of Tax-Exempt U.S. Shareholders
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts and annuities ("Exempt
Organizations"), generally are exempt from federal income taxation. However,
they are subject to taxation on their unrelated business taxable income
("UBTI"). While many investments in real estate generate UBTI, the IRS has
issued a published ruling that dividend distributions from a REIT to an exempt
employee pension trust do not constitute UBTI, provided that the exempt employee
pension trust does not otherwise use the shares of the REIT in an unrelated
trade or business of the pension trust. Based on that ruling, amounts that the
Company distributes to Exempt Organizations generally should not constitute
UBTI. However, if an Exempt Organization were to finance its acquisition of the
common shares with debt, a portion of the income that they receive from the
Company would constitute UBTI pursuant to the "debt-financed property" rules.
Furthermore, social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans that are
exempt from taxation under paragraphs (7), (9), (17), and (20), respectively, of
Code section 501(c) are subject to different UBTI rules, which generally will
require them to characterize distributions that they receive from the Company as
UBTI. Finally, in certain circumstances, a qualified employee pension or profit
sharing trust that owns more than 10% of the Company's shares is required to
treat a percentage of the dividends that it receives from the Company as UBTI
(the "UBTI Percentage"). The UBTI Percentage is equal to the gross income the
Company derives from an unrelated trade or business (determined as if it were a
pension trust) divided by its total gross income for the year in which it pays
the dividends. The UBTI rule applies to a pension trust holding more than 10% of
the Company's shares only if:
. the UBTI Percentage is at least 5%;
. the Company qualifies as a REIT by reason of the modification of the
5/50 Rule that allows the beneficiaries of the pension trust to be
treated as holding the Company's shares in proportion to their
actuarial interests in the pension trust; and
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. the Company is a "pension-held REIT" (i.e., either (1) one pension
trust owns more than 25% of the value of its shares or (2) a group of
pension trusts individually holding more than 10% of the value of its
shares collectively owns more than 50% of the value of its shares).
Tax-exempt entities will be subject to the rules described above, under
the heading "--Taxation of Taxable 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.
Taxation of 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. This section
is only a summary of such rules. We urge Non-U.S. shareholders to consult their
own tax advisors to determine the impact of federal, state, and local income tax
laws on ownership of common shares, including any reporting requirements.
Ordinary Dividends. A Non-U.S. shareholder that receives a distribution
that is not attributable to gain from the Company's sale or exchange of U.S.
real property interests (as defined below) and that the Company does not
designate as a capital gain dividend or retained capital gain will recognize
ordinary income to the extent that the Company pays such distribution out of its
current or accumulated earnings and profits. A withholding tax equal to 30% of
the gross amount of the distribution ordinarily will apply to such distribution
unless an applicable tax treaty reduces or eliminates the tax. However, if a
distribution 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 federal income tax on the distribution at graduated rates, in the
same manner as U.S. shareholders are taxed with respect to such distributions
(and also may be subject to the 30% branch profits tax in the case of a Non-U.S.
shareholder that is a non-U.S. corporation). The Company plans to withhold U.S.
income tax at the rate of 30% on the gross amount of any such distribution paid
to a Non-U.S. shareholder unless (i) a lower treaty rate applies and the
Non-U.S. shareholder files the required form evidencing eligibility for that
reduced rate with the Company or (ii) the Non-U.S. shareholder files an IRS Form
4224 with the Company claiming that the distribution is effectively connected
income. The U.S. Treasury Department has issued final regulations that modify
the manner in which the Company will comply with the withholding requirements.
Those regulations are effective for distributions made after December 31, 1999.
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.
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Return of Capital. A Non-U.S. shareholder will not incur tax on a
distribution in excess of the Company's current and accumulated earnings and
profits if such distribution does not exceed the adjusted basis of its common
shares. Instead, such a distribution will reduce the adjusted basis of such
common shares. A Non-U.S. shareholder will be subject to tax on a distribution
that exceeds both the Company's current and accumulated earnings and profits and
the adjusted basis of its common shares, if the Non-U.S. shareholder otherwise
would be subject to tax on gain from the sale or disposition of its common
shares, as described below. Because the Company generally cannot determine at
the time it makes a distribution whether or not the distribution will exceed its
current and accumulated earnings and profits, it normally will withhold tax on
the entire amount of any distribution at the same rate as it would withhold on a
dividend. However, a Non-U.S. shareholder may obtain a refund of amounts that
the Company withholds if it later determines that a distribution in fact
exceeded its current and accumulated earnings and profits.
The Company must withhold 10% of any distribution that exceeds its
current and accumulated earnings and profits. Consequently, although it intends
to withhold at a rate of 30% on the entire amount of any distribution, to the
extent that it does not do so, it will withhold at a rate of 10% on any portion
of a distribution not subject to withholding at a rate of 30%.
Capital Gain Dividends. For any year in which the Company qualifies as
a REIT, a Non-U.S. shareholder will incur tax on distributions that are
attributable to gain from its sale or exchange of "U.S. real property interests"
under the provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). The term "U.S. real property interests" includes certain interests
in real property and stock in corporations at least 50% of whose assets consists
of interests in real property, but excludes mortgage loans and mortgage-backed
securities. Under FIRPTA, a Non-U.S. shareholder is taxed on distributions
attributable to gain from sales of U.S. real property interests as if such gain
were effectively connected with a U.S. business of the Non-U.S. shareholder. A
Non-U.S. shareholder thus would be taxed on such a distribution at the normal
capital gain rates applicable to U.S. shareholders (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of a
nonresident alien individual). A non-U.S. corporate shareholder not entitled to
treaty relief or exemption also may be subject to the 30% branch profits tax on
distributions subject to FIRPTA. The Company must withhold 35% of any
distribution that it could designate as a capital gain dividend. However, if the
Company makes a distribution and later designates it as a capital gain dividend,
then (although such distribution may be taxable to a Non-U.S. shareholder) it is
not subject to withholding under FIRPTA. Instead, the Company must make-up the
35% FIRPTA withholding from distributions made after the designation, until the
amount of distributions withheld at 35% equals the amount of the distribution
designated as a capital gain dividend. A Non-U.S. shareholder may receive a
credit against its FIRPTA tax liability for the amount the Company withholds.
Sale of Shares. A Non-U.S. shareholder generally will not incur tax
under FIRPTA on gain from the sale of its common shares as long as the Company
is a "domestically controlled REIT." A "domestically controlled REIT" is a REIT
in which at all times during a specified testing period non-U.S. persons held,
directly or indirectly, less than 50% in value of the stock. The Company
anticipates that it will continue to be a "domestically controlled REIT."
However, a Non-U.S. shareholder will incur tax on gain not subject to FIRPTA if
(1) the gain is effectively connected
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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 (2) the Non-U.S. shareholder is a nonresident alien
individual who was present in the U.S. for 183 days or more during the taxable
year and has a "tax home" in the United States, in which case the Non-U.S.
shareholder will incur a 30% tax on his capital gains. Capital gains dividends
not subject to FIRPTA will be subject to similar rules. However, a Non-U.S.
shareholder that owned, actually or constructively, 5% or less of outstanding
common shares at all times during a specified testing period will not incur tax
under FIRPTA if the common shares are "regularly traded" on an established
securities market. If the gain on the sale of the common shares were taxed under
FIRPTA, a Non-U.S. shareholder would be taxed in the same manner as U.S.
shareholders with respect to such gain (subject to applicable alternative
minimum tax, a special alternative minimum tax in the case of nonresident alien
individuals, and the possible application of the 30% branch profits tax in the
case of non-U.S. corporations).
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 (1) dividends subject to the 30% (or lower treaty rate) withholding
tax discussed above, (2) capital gains dividends, or (3) 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
U.S. 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. The Treasury Department
has issued final regulations regarding backup withholding rules. Those
regulations alter the current system of backup withholding compliance and are
effective for distributions made after December 31, 1999.
Other Tax Consequences
State and Local Taxes. The Company and/or you may be subject to state
and local tax in various states and localities, including those states and
localities in which the Company or you transact business, own property or
reside. The state and local tax treatment in such jurisdictions may differ from
the federal income tax treatment described above. Consequently, you should
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consult your own tax advisor regarding the effect of state and local tax laws
upon an investment in the Common Stock.
Tax Aspects of the Company's Investments in the Partnership and Subsidiary
Partnerships
The following discussion summarizes certain federal income tax
considerations applicable to the Company's direct or indirect investments in the
Partnership and its subsidiaries. The discussion does not cover state or local
tax laws or any federal tax laws other than income tax laws.
Classification as Partnerships. The Company is entitled to include in
its income its distributive share of the Partnership's income and to deduct its
distributive share of the Partnership's losses only if the Partnership is
classified for federal income tax purposes as a partnership rather than as a
corporation or association taxable as a corporation. An organization will be
classified as a partnership, rather than as a corporation, for federal income
tax purposes if it (1) is treated as a partnership under Treasury Regulations,
effective January 1, 1997, relating to entity classification (the "Check-the-Box
Regulations") and (2) is not a "publicly traded" partnership.
Under the Check-the-Box Regulations, an unincorporated entity with at
least two members may elect to be classified either as an association taxable as
a corporation or as a partnership. If such an entity fails to make an election,
it generally will be treated as a partnership for federal income tax purposes.
The Company believes that the Partnership and its subsidiaries are classified as
partnerships for federal income tax purposes.
A publicly traded partnership is a partnership whose interests are
traded on an established securities market or are readily tradable on a
secondary market (or the substantial equivalent thereof). While the 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 limited partners to dispose of their units. A publicly
traded partnership will not, however, be treated as a corporation for any
taxable year if 90% or more of the partnership's gross income for such year
consists of certain passive-type income, including (as may be relevant here)
real property rents, gains from the sale or other disposition of real property,
interest, and dividends (the "90% Passive Income Exception").
The U.S. Treasury has issued regulations (the "PTP Regulations") that
provide limited safe harbors from the definition of a publicly traded
partnership. Pursuant to one of those safe harbors (the "Private Placement
Exclusion"), 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 of 1933, as amended, 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, 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 (i)
substantially all of the value of the owner's interest in the flow-through
entity is attributable to the flow-through entity's interest (direct or
indirect) in the partnership and (ii) a principal purpose of the use of the
flow-through entity is to permit the partnership to satisfy the 100-partner
limitation.
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The Company believes that the Partnership qualified for the Private Placement
Exclusion in 1998 and intends to continue to qualify for the Private Placement
Exclusion unless it qualifies for another exception. It is possible that in the
future the Partnership might not qualify for the Private Placement Exclusion.
If the Partnership is considered a publicly traded partnership under
the PTP Regulations because it is deemed to have more than 100 partners, such
Partnership would need to qualify under another safe harbor in the PTP
Regulations or for the 90% Passive Income Exception. Because of the substantial
ownership of the Partnership by certain partners who also own, directly or
indirectly, lessees, the Partnership would not currently be eligible for the 90%
Passive Income Exception, but it may so qualify in the future.
If, however, for any reason the Partnership were taxable as a
corporation, rather than as a partnership, for federal income tax purposes, the
Company would not be able to qualify as a REIT. See "--Requirements for
Qualification -- Income Tests" and "--Requirements for Annual Qualification --
Asset Tests." In addition, any change in the Partnership's status for tax
purposes might be treated as a taxable event, in which case the Company might
incur tax liability without any related cash distribution. See "--Requirements
for Qualification -- Distribution Requirements." Further, items of income and
deduction of the Partnership would not pass through to its partners, and its
partners would be treated as shareholders for tax purposes. Consequently, the
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 such Partnership's taxable income.
Income Taxation of the Partnerships and their Partners. Partners, not
the Partnership, are subject to taxation. The Partnership is not a taxable
entity for federal income tax purposes. Rather, the Company is required to take
into account its allocable share of the Partnership's income, gains, losses,
deductions and credits for any taxable year of the Partnership ending during the
taxable year of the Company, without regard to whether the Company has received
or will receive any distribution from the Partnership.
Partnership Allocations. Although a partnership agreement generally
will 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. 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
Partnership's allocations of taxable income, gain 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 Contributed Properties. Pursuant to
section 704(c) of the Code, income, gain, loss and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated in a manner such
that the contributing partner is charged with, or benefits from, respectively,
the
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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
solely for federal income tax purposes and do not affect the book capital
accounts or other economic or legal arrangements among the partners. The
Partnership was formed by way of contributions of appreciated property and has
received contributions of appreciated property since the Company's formation.
Consequently, the Partnership Agreement requires such allocations to be made in
a manner consistent with section 704(c) of the Code.
In general, the partners who contribute property to the Partnership
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 contributing partners 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 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 of the 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 -- 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 at
their agreed values.
The U.S. Treasury has issued regulations requiring partnerships to use
a "reasonable method" for allocating items affected by section 704(c) of the
Code and outlining several reasonable allocation methods. The general partner of
the Partnership 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. The Partnership generally has elected to use the "traditional
method with ceiling rule" for allocating Code section 704(c) items with respect
to the properties that it acquires in exchange for units. 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. If this occurred, a larger
portion of shareholder distributions would be taxable income as opposed to the
return of capital that might arise if another method were used. The Company has
not determined which method of accounting for Book-Tax Differences will be
elected for properties contributed to the Partnership in the future.
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Basis in Partnership Interest. The Company's adjusted tax basis in its
partnership interest in the Partnership generally is equal to (1) the amount of
cash and the basis of any other property contributed to the Partnership by the
Company, (2) increased by (A) its allocable share of the Partnership's income
and (B) its allocable share of indebtedness of the Partnership, and (3) reduced,
but not below zero, by (A) the Company's allocable share of the Partnership's
loss, and (B) the amount of cash distributed to the Company, and (C)
constructive distributions resulting from a reduction in the Company's share of
indebtedness of the Partnership.
If the allocation of the Company's distributive share of the
Partnership's loss would reduce the adjusted tax basis of the Company's
partnership interest in the Partnership below zero, the recognition of such loss
will be deferred until such time as the recognition of such loss would not
reduce the Company's adjusted tax basis below zero. To the extent that the
Partnership's distributions, or any decrease in the Company's share of the
indebtedness of the Partnership (such decrease being considered a constructive
cash distribution to the partners), would reduce the Company's adjusted tax
basis below zero, such distributions (including such constructive distributions)
would constitute taxable income to the Company. Such distributions and
constructive distributions normally will be characterized as capital gain, and,
if the Company's interest in the 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.
Sale of a Partnership's Property. Generally, any gain realized by the
Partnership on the sale of property held by the Partnership for more than one
year will be long-term capital gain, except for any portion of such gain that is
treated as depreciation or cost recovery recapture. Any gain recognized by the
Partnership on the disposition of contributed properties will be allocated first
to the partners of the Partnership under section 704(c) of the Code to the
extent of their "built-in gain" on those properties for federal income tax
purposes. The partners' "built-in gain" on the contributed properties sold will
equal the excess of the partners' proportionate share of the book value of those
properties over the partners' tax basis allocable to those properties at the
time of the sale. Any remaining gain recognized by the Partnership on the
disposition of the contributed properties, and any gain recognized by the
Partnership on the disposition of the other properties, will be allocated among
the partners in accordance with their respective percentage interests in the
Partnership.
The Company's share of any gain realized by the Partnership on the sale
of any property held by the Partnership as inventory or other property held
primarily for sale to customers in the ordinary course of the Partnership's
trade or business will be treated as income from a prohibited transaction that
is subject to a 100% penalty tax. Such prohibited transaction income also may
have an adverse effect upon the Company's ability to satisfy the income tests
for REIT status. See "-- Requirements for Qualification -- Income Tests." The
Company, however, does not presently intend to allow the Partnership to acquire
or hold any property that represents inventory or other property held primarily
for sale to customers in the ordinary course of the Company's or the
Partnership's trade or business.
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SELLING SHAREHOLDERS
The selling shareholders will have received any common shares they may
offer for sale under our prospectus by redeeming units received in connection
with the contribution of certain properties to the Partnership. Under the
Partnership Agreement, the holder of 453,681 units has the right to redeem its
units beginning on June 4, 1999 and the holder of 87,644 units has the right to
redeem its units beginning on June 17, 1999. If one or more unitholders requests
redemption by the Partnership, we may assume the obligation of the Partnership
and may elect to purchase the units with common shares or with cash. The
following table lists the selling shareholders and the number of common shares
which could be resold if the units they hold were redeemed for common shares. We
are registering our common shares under registration rights granted to such
holders in the Partnership Agreement.
<TABLE>
<CAPTION>
Selling Shareholder Shares(1)
- ------------------- ---------
<S> <C>
Roundtree Automotive Group, L.L.C. (2) 453,681
Midwest Auto Realty Co., L.P. (3) 87,644
All Selling Shareholders
as a Group (2 Persons) 541,325
</TABLE>
- --------------------
(1) At our option, the units can be redeemed for common shares on a
one-for-one basis, as adjusted. The number of common shares that could
be issued to holders of units on redemption will be adjusted in the
event of stock splits, stock dividends, issuance of certain rights,
certain extraordinary transactions and similar events.
(2) The units owned were issued on June 4, 1998 and such units first became
eligible for redemption on June 4, 1999.
(3) The units owned were issued on June 17, 1998 and such units first
became eligible for redemption on June 17, 1999.
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PLAN OF DISTRIBUTION
This prospectus relates to our offering of up to 541,325 common shares
if, and to the extent that, holders of up to 541,325 units tender such units for
redemption. We are registering the common shares to provide the holders with
freely tradeable securities, but the registration of these common shares does
not necessarily mean that we will issue any of these shares, or, if issued, will
be offered or sold by the holders.
We have paid for all expenses in connection with the registration
statement. We will not pay any commissions or selling expenses in connection
with the offering and sale of our common shares or the resale of our shares.
We will not receive any proceeds from the offering and sale of our
common shares to holders on redemption of their units. We will acquire and own
the units that are redeemed for shares.
The holders may resell any common shares on a negotiated or competitive
bid basis to or through one or more underwriters or dealers. Such shares may
also be sold directly to institutional investors or other purchasers or through
agents. To the extent required by law, any underwriter, dealer or agent involved
in the offer and sale of such shares, and any applicable commissions, discounts
and other items constituting compensation to such underwriters, dealers or
agents, will be identified in a prospectus supplement. Such common shares may be
distributed from time to time in one or more transactions at a fixed price or
prices (which may be changed) or at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, or at negotiated
prices.
LEGAL MATTERS
Certain legal matters in connection with any offering of securities
made by this prospectus will be passed upon for us by Wilmer, Cutler &
Pickering, Washington, D.C. In addition, the description of federal income tax
consequences contained in this prospectus under "Federal Income Tax
Consequences" is, to the extent that it constitutes matters of law, summaries of
legal matters or legal conclusions, the opinion of Wilmer, Cutler & Pickering.
EXPERTS
Our financial statements and schedules incorporated by reference in our
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 incorporated by reference herein in
reliance upon the authority of said firm as experts in giving said reports.
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. Our SEC filings are available to the public over
the SEC's website at http://www.sec.gov. You may also read and copy any document
we files at the SEC's public reference rooms at:
* Public Reference Section
Securities and Exchange Commission
Room 1024, Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
* Midwest Regional Office:
Citicorp Center
500 West Madison Street
Suite 1400
Chicago, Illinois 60661-2511
* Northeast Regional Office:
7 World Trade Center
Suite 1300
New York, New York 10048
Please call the SEC at 1-800-SEC-0330 for further information on public
reference rooms.
The SEC allows us to "incorporate by reference" the information we file
with them, which means we can disclose important information to you by referring
you to those documents. The information that we incorporate by reference is an
important part of our prospectus, and all information that we will later file
with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below as well as any future
filings made with the SEC under Sections 13(a), 13(c), 12, or 15(d) of the
Securities Exchange Act of 1934 until we sell all of our common shares under our
prospectus.
. Our Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 (File No. 000-23733).
. Our Quarterly Report on Form 10-Q for the quarter ended March
31, 1999 (File No. 000-23733).
. The description of our common shares contained in the
Registration Statement on Form 8-A filed with the SEC on
February 5, 1998 (File No. 000-1049316).
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<PAGE>
. Our Current Reports on Form 8-K filed with the SEC on August
7, 1998, December 3, 1998, December 7, 1998 and February 26,
1999 (File No. 000-23733).
You may request a copy of these filings at no cost, by writing or
telephoning us. Those copies will not include exhibits to those documents unless
the exhibits are specifically incorporated by reference in the documents or
unless you specifically request them. You may also request copies of any
exhibits to the registration statement. Please direct your request to:
Ms. Lisa M. Clements
Capital Automotive REIT
1420 Spring Hill Road, Suite 525
McLean, Virginia 22102
(703) 288-3075
Our prospectus and any accompanying prospectus supplement do not
contain all of the information included in the registration statement. We have
omitted certain parts of the registration statement in accordance with the rules
and regulations of the SEC. For further information, we refer you to the
registration statement, including its exhibits and schedules. Statements
contained in our prospectus and any accompanying prospectus supplement about the
provisions or contents of any contract, agreement or any other document referred
to are not necessarily complete. Please refer to the actual exhibit for a more
complete description of the matters involved. You may get copies of the exhibits
by contacting the person named above.
You should rely only on the information in our prospectus, any
prospectus supplement and the documents that are incorporated by reference. We
have not authorized anyone else to provide you with different information. We
are not offering these securities in any state where the offer is prohibited by
law. You should not assume that the information in our prospectus, any
prospectus supplement or any incorporated document is accurate as of any date
other than the date of the document.
56
<PAGE>
CAPITAL AUTOMOTIVE REIT
541,325 COMMON SHARES OF BENEFICIAL INTEREST
($0.01 Par Value Per Share)
PROSPECTUS
The date of this Prospectus is __________
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table itemizes the expenses incurred, or to be incurred,
by the Registrant in connection with the registration and issuance of the common
shares being registered hereunder. As indicated below, all amounts shown are
estimates except for the SEC registration fee.
<TABLE>
<S> <C>
Registration Fee -- Securities and Exchange
Commission....................................... $ 1,918.00
Printing and Engraving Expenses.................... 10,000.00
Accounting Fees and Expenses....................... 5,000.00
Legal Fees and Expenses............................ 25,000.00
Blue Sky Fees and Expenses......................... 1,000.00
Miscellaneous (including listing fees)............. 20,000.00
-------------
Total......................................... $ 62,918.00
</TABLE>
Item 15. Indemnification of Trustees and Officers
Our Declaration of Trust and By-laws authorize us to indemnify our
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. The Maryland
General Corporation Law, 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.
Our officers and trustees are also indemnified pursuant to the Partnership
Agreement and their respective employment agreements, which agreements are filed
as exhibits hereto. We intend to purchase an insurance policy which purports to
insure our officers and trustees 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.
II-1
<PAGE>
Item 16. Exhibits
Number Description
3.1 Amended and Restated Declaration of Trust of Capital
Automotive REIT (previously filed as Exhibit 3.1 to the
Company's Registration Statement on Form S-11 filed with the
SEC on November 26, 1997, as subsequently amended (File No.
333- 41183) (the "Registration Statement on Form S-11") and
incorporated herein by reference)
3.2 Amended and Restated Bylaws of Capital Automotive REIT
(previously filed as Exhibit 3.2 to the Company's Registration
Statement on Form S-3 filed with the SEC on March 2, 1999
(File No. 333-73183) (the "Unit Redemption Registration
Statement") and incorporated herein by reference)
3.3 First Amendment to Bylaws (previously filed as Exhibit 3.2 to
the Company's Unit Redemption Registration Statement on Form
S-3 and incorporated herein by reference)
3.4 Second Amendment to Bylaws (previously filed as Exhibit 3.4 to
the Company's Unit Redemption Registration Statement on Form
S-3 filed on May 11, 1999 and incorporated herein by
reference)
4.1 Specimen of certificate representing common shares of
beneficial interest (previously filed as Exhibit 4.2 to the
Registration Statement on Form S-11 and incorporated herein by
reference)
4.5 Form of Share Warrant (previously filed as Exhibit 3.2 to the
Company's Unit Redemption Registration Statement on Form S-3
and incorporated herein by reference)
5.1* Form of Opinion of Wilmer, Cutler & Pickering regarding the
validity of the Offered Securities being registered
8.1* Form of Opinion of Wilmer, Cutler & Pickering regarding
certain federal income tax matters
10.43 Second Amended and Restated Partnership Agreement of Capital
Automotive L.P. (previously filed as Exhibit 3.2 to the
Company's Unit Redemption Registration Statement on Form S-3
and incorporated herein by reference)
23.1 Consent of Wilmer, Cutler & Pickering (included as part of
Exhibits 5.1 and 8.1)
23.2* Consent of Arthur Andersen LLP
25 Power of Attorney (included on signature page)
- ---------------------
* Included with this filing.
II-2
<PAGE>
Item 17. Undertakings.
(a) The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any acts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement; notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form
of prospectus filed with the SEC pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price
set forth in "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change to such
information in the registration statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) herein do not apply
if the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed with or furnished to the
SEC by the undersigned registrant(s) pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
II-3
<PAGE>
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrants pursuant to the provisions described under Item 15
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 respective registrant of expenses incurred or paid by a
director, officer, or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, such
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
II-4
<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-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the County of Fairfax, Commonwealth of Virginia, on June 8,
1999.
Capital Automotive REIT
By: /s/ THOMAS D. ECKERT
----------------------------------
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 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 securities 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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/S/ THOMAS D. ECKERT President and Chief June 8, 1999
- ---------------------------------- Executive Officer and
Thomas D. Eckert Trustee (principal
executive officer)
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C> <C>
/S/ DAVID S. KAY Vice President and Chief June 8, 1999
- ----------------------------------------- Financial Officer (principal
David S. Kay financial and accounting
officer)
/S/ CRAIG L. FULLER Trustee June 8, 1999
- -------------------------------------
Craig L. Fuller
/S/ WILLIAM E. HOGLUND Trustee June 8, 1999
- ----------------------------------
William E. Hoglund
/S/ R. MICHAEL MCCULLOUGH Trustee June 8, 1999
- -----------------------------
R. Michael McCullough
/S/ LEE P. MUNDER Trustee June 8, 1999
- -------------------------------------------
Lee P. Munder
/S/ JOHN J. POHANKA Trustee June 8, 1999
- ------------------------------------------
John J. Pohanka
/S/ JOHN E. REILLY Trustee June 8, 1999
- -------------------------------------------
John E. Reilly
/S/ ROBERT M. ROSENTHAL Trustee June 8, 1999
- --------------------------------
Robert M. Rosenthal
/S/ VINCENT A. SHEEHY Trustee June 8, 1999
- ------------------------------------
Vincent A. Sheehy
</TABLE>
II-6
<PAGE>
<TABLE>
<S> <C> <C>
/S/ WILLIAM R. SWANSON Trustee June 8, 1999
-----------------------------------
William R. Swanson
----------------------------------- Trustee June__, 1999
David Gladstone
</TABLE>
II-7
<PAGE>
EXHIBIT 5.1
WILMER, CUTLER & PICKERING Washington
2445 M STREET N.W. Baltimore
WASHINGTON, D.C. 20037-1420 New York
---- London
Telephone (202) 663-6000 Brussels
Facsimile (202) 663-6363 Berlin
June 9, 1999
Capital Automotive REIT
1420 Spring Hill Road, Suite 525
McLean, Virginia 22102
Re: Capital Automotive REIT Registration Statement on Form S-3
----------------------------------------------------------
Dear Ladies and Gentlemen:
We have acted as counsel to Capital Automotive REIT, a Maryland real
estate investment trust (the "Company"), in connection with a Registration
Statement on Form S-3 (the "Registration Statement") filed with the Securities
and Exchange Commission under the Securities Act of 1933, as amended. The
Registration Statement relates to the offering of up to 541,325 common shares of
beneficial interest, par value $.01 per share (the "Shares"), of the Company,
that may be offered and sold from time to time if, and to the extent that,
certain holders of units of limited partnership interest ("Units") in Capital
Automotive L.P., a Delaware limited partnership (the "Partnership"), tender
their Units to the Partnership for redemption and the Company exercises its
contractual right to assume this obligation of the Partnership and decides to
redeem the Units for Shares in accordance with the terms of the Agreement of
Limited Partnership (the "Partnership Agreement"), as amended, restated or
supplemented, of the Partnership.
For the purposes of this opinion, we have examined copies of the
following documents:
1. The Registration Statement;
2. The Declaration of Trust of the Company (the "Declaration of
Trust"), as amended, restated or supplemented, as certified by
Maryland State Department of Assessments and Taxation on
February 23, 1999;
<PAGE>
Capital Automotive REIT
June 9, 1999
Page 2
3. The Bylaws of the Company (the "Bylaws"), as amended, restated
or supplemented, as of the date hereof;
4. The Partnership Agreement, as amended, restated or
supplemented, as of the date hereof;
5. The Resolutions of the Board of Trustees of the Company dated
February 2, 1999; and
6. Such other documents, corporate records, certificates of
public officials and other instruments as we have deemed
necessary for the purposes of rendering this opinion.
In our examination of the aforesaid documents, we have assumed the
legal capacity of all natural persons, the genuineness of all signatures, the
completeness and authenticity of all documents submitted to us as originals, and
the conformity to original documents of all documents submitted to us as
certified, telecopied, photostatic or reproduced copies.
In connection with the opinions expressed below, we have assumed that,
at and prior to the time of the sale and delivery of Shares pursuant to the
Registration Statement, (i) the Resolutions of the Board of Trustees authorizing
the offering and sale of the Shares have not have been amended, modified or
rescinded, (ii) the Registration Statement has been declared effective and no
stop order suspending the effectiveness of the Registration Statement has been
issued and no proceedings with respect thereto have been commenced or
threatened, and (iii) there has not occurred any change in law materially
adversely affecting the power of the Company to offer and sell the Shares or the
validity of the Shares. We have also assumed that the offering, sale and
delivery of Shares will not at the time of such offering and sale violate or
conflict with (1) the Declaration of Trust, as then amended, restated and
supplemented, and Bylaws, as then amended, restated and supplemented, of the
Company (or the Partnership Agreement, as then amended, restated or
supplemented, of the Partnership), (2) any provision of any license, indenture,
instrument, mortgage, contract, document or agreement to which the Company (or
the Partnership) is a party or by which the Company (or the Partnership) is then
bound, or (3) any law or regulation or any decree, judgment or order applicable
to the Company (or the Partnership). We have further assumed that the number of
Shares to be offered and sold pursuant to the Registration Statement will not at
the time of such offering and sale exceed the amount of such class of capital
shares authorized in the Declaration of Trust, as then amended, restated or
supplemented, and unissued at such time.
<PAGE>
Capital Automotive REIT
June 9, 1999
Page 3
Based upon, subject to, and limited by the foregoing, we are of the
opinion that the Shares have been duly authorized and when sold and issued by
the Company, and paid for by delivery of the Units, pursuant to the Partnership
Agreement, the Shares will be validly issued, fully paid and nonassessable.
This opinion is limited to the laws of the United States and the
General Corporation Law of Maryland. We are members of the Bar of the State of
Maryland and do not hold ourselves out as being experts in the laws of any other
jurisdiction. Our opinion is rendered only with respect to the laws and the
rules, regulations and orders thereunder that are currently in effect. We assume
no obligation to advise you of any changes in the foregoing subsequent to the
delivery of this opinion. This opinion has been prepared solely for your use in
connection with the filing of the Registration Statement, and should not be
quoted in whole or in part or otherwise be referred to, nor otherwise be filed
with or furnished to any governmental agency or other person or entity, without
our express prior written consent.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name therein under the caption
"Legal Matters."
Very truly yours,
WILMER, CUTLER & PICKERING
By: /s/ JOHN B. WATKINS
-----------------------
John B. Watkins, a partner
<PAGE>
Exhibit 8.1
June 9, 1999
Capital Automotive REIT
1420 Spring Hill Road, Suite 525
McLean, Virginia 22102
Capital Automotive REIT
-----------------------
Qualification as Real Estate Investment Trust
---------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Capital Automotive REIT, a Maryland real
estate investment trust ("Capital Automotive"), in connection with the
preparation of a Form S-3 regis tration statement (the "Registration
Statement") filed with the Securities and Exchange Commis sion on June 9, 1999,
with respect to the offering of up to 541,325 common shares of beneficial
interest, par value $.01 per share ("Common Shares"), of Capital Automotive that
may be offered and sold from time to time if, and to the extent that, certain
limited partners of Capital Automotive L.P., a Delaware limited partnership (the
"Partnership"), seek to redeem their units of limited partnership interest
("Units") and the Company exercises its contractual right to assume the
Partnership's obligation and redeems the Units for Common Shares. You have re
quested our opinion regarding certain U.S. federal income tax matters in
connection with the Registration Statement. Unless specifically defined
otherwise, all terms used herein have the meaning set forth in the Registration
Statement.
In giving this opinion letter, we have examined and relied on
originals, or copies certified or otherwise identified to our satisfaction, of
the following: (1) the Declaration of Trust of Capital Automotive, as amended,
restated and supplemented (the "Declaration of Trust"), as certified by the
Department of Assessments and Taxation of the State of Maryland on February 23,
1999; (2) the Bylaws of Capital Automotive, as amended, restated and
supplemented (the "Bylaws"), to the date hereof; (3) the Registration Statement,
including the prospectus contained as part of the Registration Statement (the
"Prospectus"); (4) the Agreement of Limited Partnership of the Partnership, as
amended, restated and supplemented (the "Partnership Agreement"), to the date
hereof, among Capital Automotive, in its capacity as general partner, and the
limited partners (the general partner and the limited partners are collectively
referred to herein as "Partners"); (5) the representations contained in a
certificate dated June 9, 1999 and executed by a duly appointed officer of
Capital Automotive (the "Officer's Certificate) and (6) such other documents as
we have deemed necessary or appropriate for purposes of this opinion.
<PAGE>
Capital Automotive REIT
June 9, 1999
Page 2
In connection with the opinions rendered below, we have assumed, with
your consent, that: (i) each of the documents referred to above has been duly
authorized, executed and delivered; is authentic, if an original, or is
accurate, if a copy; has not been amended; and any unexecuted documents have
been or will be executed substantially in the form and content reviewed by us;
(ii) Capital Automotive will elect REIT status in conformity with the
requirements of Treas. Reg. Section 1.856-2(b) in its federal income tax return
for 1998; (iii) during its taxable year ending December 31, 1998 and subsequent
taxable years, Capital Automotive operated and intends to continue to operate in
such a manner that will make the representations contained in the Officer's
Certificate, true for such years; (iv) Capital Automotive does not intend to
make any amendments to the Declaration of Trust and Bylaws, the Partnership
Agreement or any other agreements, after the date of this opinion that would
affect its quali fication as a real estate investment trust for U.S. federal
income tax purposes for any taxable year; and (v) no action will be taken by
Capital Automotive, the Partnership or the Partners after the date hereof that
would have the effect of altering the facts upon which the opinions set forth
below are based.
Unless facts material to the opinions expressed herein are
specifically stated to have been independently established or verified by us, we
have relied as to such facts solely upon the correctness of the representations
made by Capital Automotive and the Partnership. For the purposes of rendering
this opinion, we have not made an independent investigation of the facts set
forth in any of the aforementioned documents, including without limitation the
Prospectus and the Officer's Certificate. We have consequently relied upon your
representations that the information presented in such documents or otherwise
furnished to us accurately and completely describes all material facts relevant
to this opinion. After reasonable inquiry, no facts have come to our attention
that would cause us to question the accuracy and completeness of the facts
contained in the documents and assumptions set forth above, the representations
set forth in the Officer's Certificate, or the Prospectus in a material way.
Based on the documents and assumptions set forth above, the
representations set forth in the Officer's Certificate, and the discussion in
the Prospectus under the caption "Federal Income Tax Consequences" (which is
incorporated herein by reference), we are of the opinion that:
(a) Capital Automotive will qualify as a REIT under sections 856
through 859 of the Internal Revenue Code of 1986, as amended (the "Code")
with respect to the Company's first taxable year ended December 31, 1998,
is organized in conformity with the requirements for qualification as a
REIT under the Code, and its current method of operation will enable it to
meet the requirements for qualification as a REIT for the current taxable
year and for future taxable years. With respect to its current and future
years, however, Capital Automotive's status as a REIT at any time is
dependent, among other things, upon its meeting certain requirements
throughout the year as a whole; and
(b) the descriptions of the law and the legal conclusions contained in
the Prospectus under the caption "Federal Income Tax Consequences" are
correct in all
<PAGE>
Capital Automotive REIT
June 9, 1999
Page 3
material respects, and the discussion thereunder fairly
summarizes the federal income tax consequences that are likely to be
material to a holder of the Common Shares.
We will not review on a continuing basis Capital Automotive's
compliance with the documents or assumptions set forth above, or the
representations set forth in the Officer's Certificate. Accordingly, no
assurance can be given that the actual results of Capital Automotive's
operations for any given taxable year will satisfy the requirements for
qualification and taxation as a REIT.
The foregoing opinions are based on current provisions of the Code and
the Treasury regulations thereunder (the "Regulations"), published
administrative interpretations thereof, and published court decisions. The
Internal Revenue Service has not issued Regulations or administrative
interpretations with respect to various provisions of the Code relating to REIT
qualification. No assurance can be given that the law will not change in a way
that will prevent Capital Automotive from qualifying as a REIT for federal
income tax purposes.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the references to Wilmer, Cutler &
Pickering under the caption "Federal Income Tax Consequences" in the Prospectus.
The foregoing opinions are limited to the U.S. federal income tax
matters addressed herein, and no other opinions are rendered with respect to
other federal tax matters or to any issues arising under the tax laws of any
other country, or any state or locality. We undertake no obligation to update
the opinions expressed herein after the date of this letter. This opinion
letter is solely for the information and use of the addressees, and it may not
be distributed, relied upon for any purpose by any other person, quoted in whole
or in part or otherwise reproduced in any document, or filed with any
governmental agency without our express written consent.
Very truly yours,
Wilmer, Cutler & Pickering
/s/ William J. Wilkins
--------------------------------
By William J. Wilkins, a Partner
<PAGE>
Exhibit 23.2
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our reports dated January 29, 1999
included in Capital Automotive REIT's Form 10-K for the year ended December 31,
1998 and to all references to our Firm included in this registration statement.
/s/ ARTHUR ANDERSEN LLP
Washington, D.C.
June 8, 1999
