CAPITAL AUTOMOTIVE REIT
8-K/A, 2001-01-19
REAL ESTATE INVESTMENT TRUSTS
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<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                ----------------
                                   FORM 8-K/A
                                 CURRENT REPORT

     Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

       Date of Report (Date of earliest event reported): February 26, 1999

                                ----------------
                             CAPITAL AUTOMOTIVE REIT
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
                                ----------------
<TABLE>
<S>                                 <C>                                   <C>
          MARYLAND                          000-23733                           54-1870224
(State or other jurisdiction        (Commission file number)                 (I.R.S. Employer
      of incorporation)                                                   Identification Number)
</TABLE>

                        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)

                                 NOT APPLICABLE
          (Former name or former address, if changed since last report)



<PAGE>   2


        On February 26, 1999, Capital Automotive REIT (the "Company") filed a
Form 8-K dated February 26, 1999 listing certain factors that may affect the
Company's operating results and, therefore, the accuracy of its forward-looking
statements. On January 19, 2000, the Company amended and restated the disclosure
contained in the Form 8-K. This Form 8-K/A amends and restates the disclosure in
the Form 8-K/A filed on January 19, 2000 to reflect certain changes in the
factors that may affect the Company's operating results and, therefore, the
accuracy of its forward-looking statements.

ITEM 5.  OTHER EVENTS.

        Before investing in the securities of the Company, investors should be
aware that there are various risks. Investors should carefully consider, among
other factors, the factors discussed in this Form 8-K/A, as well as the risks
discussed in any prospectus or prospectus supplement of the Company. This Form
8-K/A contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, Section 21E of the Securities Exchange
Act of 1934, as amended, and the Private Securities Litigation Reform Act of
1995 (the "Reform Act"). Also, documents subsequently filed by the Company with
the Securities and Exchange Commission (the "SEC") will contain forward-looking
statements. When the Company refers to forward-looking information, sometimes
the Company uses words such as "may," "will," "could," "should," "plans,"
"intends," "expects," "believes," "estimates," "anticipates" and "continues."
The factors that may affect these statements are not all-inclusive, particularly
with respect to possible future events. Many things can happen that can cause
actual results to be very different than those described by the Company. Given
these uncertainties, readers are cautioned not to place undue reliance on these
forward-looking statements. We also make no promise to update any of the
forward-looking statements, or to publicly release the results if we revise any
of them. Any statements made by the Company that are not historical facts should
be considered to be forward-looking statements. The Company desires to invoke to
the fullest extent possible the protections of the Reform Act and the judicially
created "bespeaks caution" doctrine with respect to such forward-looking
statements.

        The Company owns interests in real estate through Capital Automotive
L.P., a Delaware limited partnership, and its subsidiaries. The Company 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 our direct or indirect subsidiaries, including
Capital Automotive L.P. and/or its directly or indirectly owned subsidiaries.
References to the "Company" refer only to Capital Automotive REIT. As
appropriate, Capital Automotive L.P. and its direct and indirect subsidiaries
are referred to as the Partnership.

                                  RISK FACTORS


OUR ABILITY TO GROW WILL BE LIMITED IF WE CANNOT OBTAIN ADDITIONAL CAPITAL.

        Our growth strategy includes continuing to acquire properties that are
used by motor vehicle dealerships and related businesses. We believe that it
will be difficult to fund our expected growth with cash from operating
activities because the Company is required to distribute to its shareholders at
least 90% of the Company's taxable income each year to qualify as a REIT. These
circumstances will require us to rely primarily upon the availability of debt or
equity capital to fund acquisitions. The debt could include loans from third
parties or the sale of debt securities by the Company. Equity capital could
include common or preferred shares of the Company or units of limited
partnership interest of the Partnership. We cannot guarantee that additional
financing, refinancing or other capital will be available. Future equity
securities issued by us may have terms more favorable to investors in such
securities than those of currently outstanding equity securities.

        We may be unable to obtain capital on terms acceptable or advantageous
to our long-term interests. Several factors affect our ability to complete
capital market financings, including: (1) conditions in the securities markets
generally, including volatility of the credit markets; (2) conditions in the
commercial mortgage and asset-backed securities markets specifically; (3) the
credit quality and rating given to such securities; (4) compliance with the
eligibility requirements established by the financing documents; and (5) the
downgrading or withdrawal of ratings given to such securities. Depending on the
outcome of any ratings and these other factors, we could experience delay or
difficulty in implementing our growth strategy on satisfactory terms, or could
be unable to implement this strategy, which may cause a reduction in the amount
of distributions to our shareholders.



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<PAGE>   3

WE MAY INCUR DEBT THAT IS SIGNIFICANT IN RELATION TO SHAREHOLDERS' EQUITY AND
ASSETS.

        As of December 31, 2000, we had invested approximately $1.04 billion in
properties. We have borrowed, and will continue to borrow, funds to buy
properties. As of December 31, 2000, we had total debt outstanding of $585.7
million. Of this debt, approximately $571.5 million (consisting of $481.9
million of fixed rate indebtedness and $89.6 million of variable rate
indebtedness) was mortgage indebtedness secured by approximately 210 of our
dealership properties. In addition, we had $14.2 million outstanding on our
variable rate revolving credit facilities. In the event of a default under a
mortgage or other loan secured by properties, the lender could take possession
of the properties securing that mortgage or loan. We have adopted a policy to
limit debt to approximately 65% of our assets (calculated as total assets plus
accumulated depreciation). This policy may be changed by our Board of Trustees
at any time without shareholder approval. Under the current leverage policy, we
would be permitted to and intend to obtain additional financing for our short-
and long-term capital needs.

        In addition, to minimize interest rate risk, we currently intend to
maintain at least 85% of our total outstanding debt as long-term fixed rate debt
or floating rate debt that is substantially match-funded with our leases.
However, such target may be changed by our Board of Trustees at any time without
shareholder approval. If or when we obtain additional debt or issue debt
securities, our interest rate risk and interest expense may change. Additional
indebtedness may also increase our exposure to the general risks associated with
debt financing. For example, outside lenders may impose restrictions on our
ability to obtain additional debt capital or may limit our ability to engage in
certain transactions. Any breach of these limitations could result in a default,
which could mean that the lender would require all outstanding indebtedness to
be immediately paid in full. To the extent any debt is secured by properties, we
could risk losing the properties if there is a default. We may be unable to
repay or refinance this indebtedness. We could also have to dispose of the
properties on disadvantageous terms to repay indebtedness.

RENTAL PAYMENT DEFAULTS BY SIGNIFICANT TENANTS COULD ADVERSELY AFFECT OUR
REVENUES.

        For the year ended December 31, 2000, Sonic Automotive, Inc. and its
affiliates ("Sonic") accounted for approximately 25% of our total rental revenue
and, as of December 31, 2000, approximately 28% of our annualized total rental
revenue. If Sonic were to default on its lease obligations or declare
bankruptcy, we may have significantly reduced rental revenues until the
properties could be leased to a new tenant or tenants.

WE MAY NOT BE ABLE TO ACQUIRE ADDITIONAL PROPERTIES ON TERMS WE BELIEVE ARE
APPROPRIATE, OR AT ALL.

        There may not be opportunities for further acquisitions of properties or
opportunities to finance the acquisition of properties on terms that meet our
investment criteria. We may not be able to take advantage of the opportunities
with which we are presented. This may affect our expected growth.

WE MAY SUFFER IF DEALER GROUPS AND OTHER TENANTS GENERATE INSUFFICIENT CASH
FLOWS FROM THEIR OPERATIONS TO PERMIT THEM TO PAY THEIR RENT AND FULFILL THEIR
OTHER OBLIGATIONS UNDER THEIR LEASES.

        We depend on tenants who lease our properties to pay rent and meet their
other lease obligations. If a tenant fails to pay its rent or to perform any
other obligation under the lease, the tenant could be in default under the
lease. We could wait to see if the tenant resumes paying rent or otherwise
starts to comply with the lease or we may be able to declare the lease in
default and seek to enforce our remedies under the lease. If the lease has been
guaranteed, we could also attempt to collect unpaid rent or other money that is
owed by the tenant from the guarantor. We may never collect the money that is
owed by the defaulting tenant or by a guarantor. We also may seek to evict a
defaulting tenant. Often eviction is a time-consuming legal process. Assuming we
were successful in evicting a tenant or obtaining another legal remedy, we could
incur substantial expenses and legal fees. These and other events could divert
the attention of management from day-to-day business. If the tenant is evicted
or otherwise vacates the property, we would have to re-lease the property, which
could also be a time-consuming and expensive process. We may not be able to
re-lease a property on the same or better terms than the prior lease, or at all.
Also, a tenant and/or guarantor can take actions to attempt to avoid paying rent
or other money or to prevent a remedy (such as eviction). A tenant and/or
guarantor can attempt to seek protection under the bankruptcy laws, which could
result in a delay or reduction in the payments to us or could result in
termination of the lease at the request of the tenant.

        We could face other risks from our relationship with the tenants. For
example, the tenants could be limited partners of the Partnership, which could
make us less inclined to take an action or influence the timing of any action,


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<PAGE>   4

if there is a default. Also, we depend on our tenants to maintain good
relationships with motor vehicle manufacturers and to comply with their
franchise agreements. If a tenant does not comply, the manufacturer could take
actions that could affect the ability of a tenant to pay rent or comply with
other lease terms. We also depend on the tenant to keep the property adequately
insured. If the tenant does not have enough insurance and there is a loss, we
could incur all or some of the cost to repair or replace the property. In
addition, if the tenant fails to pay taxes when due, we may be required to pay
such taxes. This list of ways that we are dependent on the tenants is not
all-inclusive. There are other ways in which actions by the tenant could have an
adverse effect on us. The actions discussed above, as well as other events
involving the tenant/lessor relationship, could adversely affect our financial
condition and results of operations.

WE MAY SUFFER IF THE DEALER GROUPS THAT LEASE THE PROPERTIES OWNED BY US ARE
UNABLE TO COMPETE EFFECTIVELY IN THE HIGHLY COMPETITIVE AUTOMOTIVE RETAIL
INDUSTRY.

        The operation of dealerships and related businesses is highly
competitive. Many factors affect the automotive retail industry, including
general economic conditions and consumer confidence, the level of discretionary
personal income, interest rates and credit availability. Some of the dealer
groups that lease our properties compete with dealerships that are larger and
have greater financial and marketing resources. State franchise laws currently
regulate competition and fair business practices between dealerships and
prohibit manufacturers from selling directly to consumers. Competition may
become stiffer if the state franchise laws are modified. In addition, the
automotive retail industry is undergoing consolidation. Dealer groups which sell
motor vehicles of a single or a limited number of brands are increasingly being
acquired by dealer groups that represent many manufacturers and brands,
resulting in larger and more efficient competitors.

        In addition, the dealer groups that lease our properties may face
increased pricing pressure on new vehicle sales as a result of the emergence of
the Internet. Consumers are placing an increased reliance on information found
online to help them decide which vehicle to purchase. Dealer groups have also
been using online buying or referral services, such as Microsoft CarPoint,
Autobytel and Autoweb, to generate sales leads, for which the dealer groups pay
a fee. The use of the Internet by consumers and dealer groups' use of online
buying or referral services may have a negative effect on new vehicle sales
margins. In order to compete effectively over the long term, we expect that our
tenants will have to respond adequately to this new area of competition.

        The failure of the dealer groups that lease our properties to compete
effectively in the changing industry environment may adversely affect our
financial condition and results of operation.

WE MAY BE HARMED IF AUTOMOTIVE SALES AND SERVICING PROFITABILITY DECLINE.

        Our strategy focuses on acquiring real estate used by multi-site,
multi-franchised automotive dealerships and related businesses located primarily
in major metropolitan areas throughout the United States. As a result, we may be
exposed to risks common to the automotive retail industry. A dealership's
success depends on general economic and other factors. Various factors, many of
which are beyond the control of the dealer group that operates the dealership,
may adversely affect motor vehicle sales and servicing profitability. These
factors include circumstances that affect consumer spending, such as rates of
employment, income growth or interest rates; as well as other national and local
conditions, automotive innovations and general consumer sentiment. An economic
downturn within the automotive retail industry may have a more significant
effect on cash available for distribution to shareholders than if we had
diversified our investments into properties used by other types of businesses.

WE MAY BE HARMED IF MANUFACTURERS CHANGE PRODUCTION, INVENTORY, MARKETING OR
OTHER PRACTICES.

        A tenant's ability to pay rent and perform its other obligations under a
lease will be dependent to a significant extent on its relationship with the
motor vehicle manufacturer. The tenants or their related dealer groups generally
operate dealerships that sell the products of more than one manufacturer. The
sales mix of makes and models of motor vehicles tends to change periodically;
therefore, sales of the makes or models of one manufacturer today may not
reflect the level of future sales of that manufacturer's products. A reduction
in inventory, particularly certain models, could lower automobile sales, which
in turn could impact service and parts sales. Certain other factors can also
affect sales, including the manufacturer's financial condition, marketing
programs and expenditures; vehicle design; production capabilities and
management of the manufacturer; strikes and other labor actions by unions;
negative publicity; product recalls; or litigation. The tenant may be unable to
pay rent or meet other lease obliga-


                                     - 4 -
<PAGE>   5

tions if a dealership's motor vehicle inventory is reduced or its profitability
otherwise declines. Manufacturers exercise a substantial degree of control over
dealerships, and the franchise agreements between the dealer groups and the
manufacturers provide for termination or non-renewal for a variety of causes. We
have no rights under the franchise agreements. If a manufacturer terminates or
declines to renew one or more franchise agreements or negotiates terms for
renewal that are better for the manufacturer, the tenant may be unable to pay
rent to the Company and perform its other obligations under the lease.

THE COMPANY'S ABILITY TO MAKE DISTRIBUTIONS TO ITS SHAREHOLDERS AND OUR
OPERATIONS AND FINANCIAL CONDITION COULD BE ADVERSELY AFFECTED BY A NUMBER OF
FACTORS AFFECTING THE VALUE OF REAL ESTATE.

        The Company's ability to make distributions to its shareholders depends
upon our ability to generate revenues in excess of expenses, including debt
service. Our investments are and will continue to be subject to the risks
generally incident to the ownership of real property, including: (1) adverse
changes in national or local economic conditions, (2) changes in the investment
climate for real estate, (3) changes in real estate tax rates and other
operating expenses, (4) adverse changes in governmental rules and fiscal
policies, including zoning and land use, (5) acts of God which may result in
uninsured losses, and (6) other factors which are beyond our control. Several
material factors are discussed below.

        Common real estate risks could reduce our revenues or increase our
expenses. The properties may generate total revenues lower than those
anticipated. This would reduce the amount of funds available for distribution by
the Company to its shareholders. If a property is not returned to us in good
condition at the end of a lease, we may be required to expend our own funds to
restore the property. These repair and restoration costs could be significant.

        Real estate tax levels could increase. Certain local real property tax
assessors may seek to reassess the properties as a result of our acquisition of
such properties. Those properties may be subject to higher real estate tax
rates. While the lease obligates the tenant to pay taxes, a tenant may be unable
to pay the amount of any increase in taxes, or the increased costs could make
the property less valuable in the future.

        Operating expenses could increase. The properties will be exposed to
risks common to operating a commercial real estate property, any or all of which
may affect us. For example, the properties will be subject to increases in tax
rates, utility costs, operating expenses, insurance costs, repairs and
maintenance, and administrative expenses. If we are unable to lease properties
on a basis that obligates the tenants to pay such amounts, or if a tenant fails
to or is unable to pay required amounts, then we could be required to pay those
costs. To the extent we cover these costs, the funds available for distributions
or for future acquisitions could be reduced.

        We could have difficulty selling real estate we no longer want to hold.
The illiquidity of real estate investments may delay our reaction to changes in
economic or other conditions.

        We do not exercise complete control over the management or maintenance
of the properties we lease.

        The tenants of the properties control the management and maintenance of
the properties under the leases. The leases generally require that the tenants
maintain the properties in good order, repair and appearance, and in compliance
with all applicable laws. During the terms of the leases, we do not have the
authority to require any tenants to operate the properties in a particular
manner or to govern any particular aspect of their operation, except as set
forth broadly in the leases.

IF OPTIONS AND WARRANTS FOR THE COMPANY'S COMMON SHARES AND REDEMPTION RIGHTS
FOR THE PARTNERSHIP'S UNITS ARE EXERCISED, THE NUMBER OF COMMON SHARES
OUTSTANDING WILL INCREASE, WHICH MAY DEPRESS THE PRICE SHAREHOLDERS WOULD
RECEIVE IF THEY SOLD THEIR COMMON SHARES.

        There are a large number of common shares reserved for issuance upon
exercise of outstanding options and warrants which may increase the number of
common shares that could be sold, including the following as of December 31,
2000:

        -       options to acquire approximately 3,160,000 common shares, as
                well as options for approximately 390,000 additional common
                shares available under the Capital Automotive Group Amended 1998
                Equity Incentive Plan, of which approximately 1,902,000 options
                are currently exercisable at a weighted average exercise price
                of $14.85, with a weighted average remaining contractual life of
                7.3 years; and


                                     - 5 -
<PAGE>   6

        -       warrants to acquire approximately 3,142,000 common shares, of
                which warrants for approximately 2,942,000 common shares are
                currently exercisable at an exercise price of $15.00, with a
                weighted average remaining contractual life of 2.6 years.

        In addition, units issued by the Partnership for the acquisition of
properties are redeemable by the holder generally after at least a one year
holding period. The Partnership is obligated to redeem the units for cash, but
the Company may elect to assume the obligation of the Partnership in which case
the Company may pay cash or issue common shares. Units that are redeemed for
shares will be exchanged on a one-for-one basis. As of December 31, 2000,
approximately 8,453,000 units were outstanding, of which approximately 7,172,000
units were redeemable on such date.

THE MARKET PRICE OF THE COMPANY'S COMMON SHARES MAY VARY SUBSTANTIALLY.

        The trading prices of equity securities issued by REITs have
historically been affected by changes in broader market interest rates. An
increase in market interest rates may lead prospective purchasers of the
Company's common shares to demand a higher annual yield, which could reduce the
market price of the common shares. Other factors could affect the market price
of the Company's common shares. Some factors to consider include: (1)
differences between the Company's actual financial results or operations and
those expected by investors and analysts, (2) changes in analysts'
recommendations or projections, (3) changes in general economic or market
conditions, and (4) broad market fluctuations.

ENVIRONMENTAL AND OTHER GOVERNMENTAL LAWS AND REGULATIONS COULD REDUCE THE VALUE
OR PROFITABILITY OF OUR PROPERTIES.

        We and the tenants are subject to a wide range of federal, state and
local laws and regulations, such as local licensing requirements, consumer
protection laws and regulations relating to gasoline storage, waste treatment
and other environmental matters, including those discussed in the following
paragraphs.

        Environmental Laws. All real property and the operations conducted on
real property are subject to federal, state and local laws and regulations
relating to hazardous materials, environmental protection and human health and
safety. Certain of these laws and regulations may impose joint and several
liability on certain statutory classes of persons including tenants, owners or
operators, for the costs of investigation or remediation of contaminated
properties, regardless of fault or the legality of the original disposal.

        These laws and regulations apply to such past and present business
operations of the dealer groups and other tenants as to the use, storage,
handling and contracting for recycling or disposal of hazardous or toxic
substances or wastes. Our tenants, like many of their competitors, have
incurred, and will continue to incur, capital and operating expenditures and
other costs associated with complying with such laws and regulations.

        We cannot predict what other environmental legislation or regulations
will be enacted in the future, how existing or future laws or regulations will
be administered or interpreted or what environmental conditions may be found to
exist on the properties in the future. Compliance with new or more stringent
laws or regulations, stricter interpretation of existing laws or the future
discovery of environmental contamination may require us or the tenants to spend
funds to remedy environmental problems. As a current or previous owner, the
Company, the Partnership and/or a subsidiary may be held liable under certain
laws for the costs of removal or remediation of certain hazardous or toxic
substances found at a property. These costs could be substantial.

        Generally, the tenants must comply with environmental laws and meet
remediation requirements. Our leases typically impose obligations on the tenants
to indemnify us from any compliance costs we may experience as a result of the
environmental conditions on the property. However, if a lease does not require
compliance, or if a tenant fails to or cannot comply, we could be forced to pay
such costs. If not addressed, environmental conditions could impair our ability
to sell or re-lease the affected properties in the future or result in lower
sales prices or rent payments.

        Americans With Disabilities Act of 1990. The properties, as commercial
facilities, are required to comply with Title III of the Americans with
Disabilities Act of 1990. Investigation of a property may reveal non-compliance
with the Americans with Disabilities Act of 1990. The requirements of the
Americans with Disabilities Act of 1990 may change in the future. Future
compliance with the Act may require expensive changes to the prop-



                                     - 6 -
<PAGE>   7

erties. Although the tenant will typically have primary responsibility for
complying with the Act, we may have to pay the costs if a tenant does not or
cannot comply.

        Other Regulations. State and local fire, life-safety and similar
requirements regulate the use of the properties. The leases typically require
that each tenant comply with all regulations. Failure to comply could result in
fines by governmental authorities, awards of damages to private litigants, or
restrictions on the ability to conduct business on such properties.
Non-compliance of this sort could affect our revenues from a tenant and our
ability to re-sell or re-lease a property.

SHAREHOLDERS MUST RELY UPON MANAGEMENT TO IDENTIFY AND EVALUATE PROPERTIES AND
MAKE OPERATIONAL DECISIONS.

        Shareholders will not have an opportunity to approve or evaluate any
properties we acquire, or the terms of the acquisition and lease. Shareholders
must depend upon the ability and judgment of the management of the Company with
respect to the identification and selection of properties and the negotiation of
acquisition and lease terms.

OUR OPERATIONS AND BUSINESS PROSPECTS MAY SUFFER IF CERTAIN OFFICERS LEAVE THE
COMPANY.

        The Company is managed by a small group of senior executives. The loss
of one or more of these officers could have a material adverse effect on the
Company.

CERTAIN MEMBERS OF THE COMPANY'S BOARD OF TRUSTEES HAVE INTERESTS THAT COULD
CONFLICT WITH THE INTERESTS OF OTHER SHAREHOLDERS.

        Certain conflicts of interest exist between us and Mr. Pohanka, Mr.
Rosenthal, or Mr. Sheehy, each of whom is a Trustee of the Company and
affiliated with certain tenants and entities which have sold property to us.
Messrs. Pohanka, Rosenthal, and Sheehy may have the ability to influence our
business and operations in connection with (1) the terms of the leases for
future properties which may be acquired from any one of them, (2) the exercise
or waiver of the Company's rights under a lease with one of them, including
rights of first offer and repurchase rights, (3) the decision to sell or
refinance a property, (4) the terms of any "lock-out" restrictions, which limit
our ability to sell or refinance particular properties, and (5) the enforcement
or waiver of the terms of any leases or other agreements with Messrs. Pohanka,
Rosenthal or Sheehy or related persons or entities.

IF OTHER COMPANIES SEEK TO ACQUIRE PROPERTIES USED BY MOTOR VEHICLE DEALERSHIPS
OR RELATED BUSINESSES, OUR ACQUISITION COSTS MAY GO UP AND THE NUMBER OF
AVAILABLE ACQUISITION OPPORTUNITIES AND LEASE RATES MAY GO DOWN.

        Other public or private entities may also target properties used by
motor vehicle dealerships and related businesses for acquisition. Some of these
companies may have greater financial resources and/or general real estate
experience than we have. We believe that competition for properties will
primarily be on the basis of established relationships in the market place,
acquisition price and rental and other lease terms. Competition could increase
acquisition prices and decrease rents. This in turn would adversely impact our
financial results and reduce the funds available for distribution to the
Company's shareholders.

THE COMPANY'S DISTRIBUTIONS TO SHAREHOLDERS MAY GO DOWN IF THE COMPANY FAILS TO
CONTINUE TO QUALIFY AS A REIT.

        The Company believes that it is organized and qualified as a REIT, and
currently intends to operate in a manner that will allow the Company to continue
to qualify as a REIT for federal income tax purposes under the Internal Revenue
Code of 1986, as amended (the "Code"). However, the Company cannot be assured
that it is qualified as such, or that it will remain qualified as such in the
future.

        Qualification as a REIT involves the application of highly technical and
complex Code provisions. The complexity of these provisions and of the
applicable income tax regulations that have been issued under the Code (the
"Treasury Regulations") is greater in the case of a REIT that holds its assets
in partnership form. Certain facts and circumstances not entirely within the
Company's control may affect the Company's ability to qualify as a REIT. For
example, in order to qualify as a REIT, at least 95% of the Company's gross
income in any year must be derived from qualifying rents and other income.
Satisfying this requirement could be difficult, for example, if defaults by

                                     - 7 -
<PAGE>   8

tenants were to reduce the amount of income from qualifying rents. Also, the
Company must make distributions to shareholders aggregating annually at least
90% of its net taxable income (excluding capital gains). In addition, new
legislation, new regulations, new administrative interpretations or new court
decisions may significantly change the tax laws with respect to qualification as
a REIT or the federal income tax consequences of such qualification.

        If the Company fails to qualify as a REIT:

        -       it would not be allowed a deduction for distributions to
                shareholders in computing taxable income;

        -       it would be subject to federal income tax at regular corporate
                rates;

        -       it could be subject to the federal alternative minimum tax;

        -       unless it is entitled to relief under specific statutory
                provisions, it could not elect to be taxed as a REIT for four
                taxable years following the year during which the Company was
                disqualified; and

        -       the funds available for distribution to shareholders would be
                reduced substantially for each of the years involved.

        Meeting Minimum Distribution Requirements. Generally, a REIT must
distribute 90% of its REIT taxable income annually to shareholders. The Company
will be subject to income tax on amounts of undistributed REIT taxable income
and net capital gain. In addition, the Company would be subject to a 4% excise
tax if it fails to distribute sufficient income to meet a minimum distribution
test based on the Company's ordinary income, capital gain and aggregate
undistributed income from prior years.

        The Company intends to make distributions to shareholders to comply with
the Code's distribution provisions and to avoid federal income and excise tax.
Because the Company's income is derived primarily from its share of income from
the Partnership, the Company's cash flow will consist primarily of distributions
from the Partnership. The Company may need to borrow funds to meet its
distribution requirements because:

        -       the Company's or the Partnership's income may not be matched by
                their related expenses at the time the income is received for
                purposes of determining taxable income; and

        -       non-deductible capital expenditures, creation of reserves, or
                required debt payments may reduce available cash but not taxable
                income.

In these circumstances, the Company might have to borrow funds even if its
management believes the market conditions make borrowing financially
unattractive or that such funds would not be borrowed absent tax considerations.

        Failing to Qualify as a Partnership. We believe that the Partnership is
treated as a partnership, and not as a corporation, for federal income tax
purposes. If the IRS were to challenge successfully the status of the
Partnership as a partnership for federal income tax purposes:

        -       the Partnership would be taxed as a corporation;

        -       the Company would cease to qualify as a REIT for federal income
                tax purposes; and

        -       the amount of cash available for distribution to the Company's
                shareholders would be substantially reduced.

        Tax Treatment of Leases. We believe that the leases of properties owned
by us will be treated as leases for federal income tax purposes. If the IRS were
to challenge successfully the characterization of these leases, the Partnership
would not be treated as the owner of the property for federal income tax
purposes. As a result, the Partnership would lose tax depreciation and cost
recovery deductions with respect to such properties, which in turn could cause
the Company to fail to qualify as a REIT. Although we will use our best efforts
to structure any leasing transaction for properties acquired in the future such
that the lease will be characterized as a lease and the Partnership will be
treated as the owner of the property for federal income tax purposes, we will
not seek an advance ruling from the IRS and do not intend to seek an opinion of
counsel that the Partnership will be treated as the owner of any leased
properties for federal income tax purposes. Thus, there can be no assurance that
future leases will be treated as leases for federal income tax purposes.



                                     - 8 -
<PAGE>   9

        Other Tax Liabilities. Even if the Company qualifies as and maintains
its status as a REIT, it may be subject to certain federal income taxes if it
has a certain amount of non-qualified income. For example, if the Company has
net income from a "prohibited transaction," such income will be subject to a
100% tax. In addition, the Company and the Partnership may be subject to state
and local taxes on their properties and income.

TO MAINTAIN ITS STATUS AS A REIT, THE COMPANY LIMITS THE AMOUNT OF SHARES ANY
ONE SHAREHOLDER CAN OWN.

        The Code imposes certain limitations on the ownership of the stock of a
REIT. For example, not more than 50% in value of the Company's outstanding
shares of capital stock may be owned, actually or constructively, by five or
fewer individuals (as defined in the Code). To protect the Company's REIT
status, the Declaration of Trust prohibits any one shareholder from owning
(actually or constructively) more than (1) 9.9% of the outstanding common shares
or (2) 9.9% of any class or series of outstanding preferred shares. The
constructive ownership rules are complex. Shares of the Company's capital stock
owned, actually or constructively, by a group of related individuals and/or
entities may be treated as constructively owned by one of those individuals or
entities. As a result, the acquisition of less than 9.9% of the outstanding
common shares and/or preferred shares (or the acquisition of an interest in an
entity that owns common or preferred shares), by an individual or entity could
cause that individual or entity (or another) to own constructively more than
9.9% of the outstanding stock. If that happened, the transfer or ownership would
be void or such shares would be transferred to a charitable trust and then sold
to someone who can own such shares without violating the 9.9% ownership limits.

        The Board of Trustees and two-thirds of shareholders eligible to vote at
a shareholder meeting may remove these restrictions if they determine it is no
longer in the Company's best interests to attempt to qualify, or to continue to
qualify, as a REIT. The 9.9% ownership restrictions may delay, defer or prevent
a transaction or a change in the Company's control that might involve a premium
price for the common shares or otherwise be in the shareholders' best interest.

CERTAIN TAX AND ANTI-TAKEOVER PROVISIONS OF THE COMPANY'S DECLARATION OF TRUST
AND BYLAWS MAY INHIBIT A CHANGE IN CONTROL OF THE COMPANY.

        Certain provisions contained in the Declaration of Trust and the Bylaws
of the Company and the Maryland General Corporation Law, as applicable to
Maryland REITs, may discourage a third party from making a tender offer or
acquisition proposal to the Company. If this were to happen, it would possibly
delay, deter or prevent a change in the Company's control or the removal of
existing management. These provisions also may delay or prevent the shareholders
from receiving a premium for their common shares over then-prevailing market
prices. These provisions include:

        -       the REIT ownership limits described above;

        -       authorization of the issuance of the Company's preferred shares
                with powers, preferences or rights to be determined by the Board
                of Trustees;

        -       the requirement that a two-thirds vote of the holders of common
                shares is needed to remove a member of the Board of Trustees;
                and

        -       the terms of the Maryland General Corporation Law regarding
                business combinations and control share acquisitions.

WE HAVE THE RIGHT TO CHANGE SOME OF OUR POLICIES THAT MAY BE IMPORTANT TO THE
COMPANY'S SHAREHOLDERS WITHOUT SHAREHOLDER CONSENT.

        Our major policies, including our policies with respect to investments,
leverage or financing, growth and debt capitalization, as well as the Company's
REIT qualification and distributions, are determined by the Board of Trustees or
those committees or officers to whom the Board of Trustees has delegated that
authority. The Board of Trustees may amend or revise these and other policies
from time to time without shareholder vote. Accordingly, the shareholders may
not have control over changes in our policies.





                                     - 9 -
<PAGE>   10




                                   SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.

                                  CAPITAL AUTOMOTIVE REIT



                                  By:    /s/ Thomas D. Eckert
                                         ------------------------------------
                                  Name:  Thomas D. Eckert
                                  Title: President and Chief Executive Officer

Date:    January 19, 2001






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