<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 18, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
CHASTAIN CAPITAL CORPORATION
(Exact Name of Registrant as Specified in Governing Instruments)
CHASTAIN CAPITAL CORPORATION
C/O ERE YARMOUTH
3424 PEACHTREE ROAD, N.E., SUITE 800
ATLANTA, GEORGIA 30326
(404) 848-8600
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
KURT L. WRIGHT
C/O ERE YARMOUTH
3424 PEACHTREE ROAD, N.E., SUITE 800
ATLANTA, GEORGIA 30326
(404) 848-8600
(Name, address, including zip code, and telephone number, including area code of
agent for service)
Copies to:
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GEORGE C. HOWELL, III
JOHN J. KELLEY III RANDALL S. PARKS
KING & SPALDING HUNTON & WILLIAMS
191 PEACHTREE STREET 951 EAST BYRD STREET
ATLANTA, GEORGIA 30303 RICHMOND, VIRGINIA 23219
(404) 572-4600 (804) 788-8200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of the Registration Statement.
---------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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 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 this form is a post-effective amendment filed pursuant to Rule 462(d)
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,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
AMOUNT BEING OFFERING PRICE PER AGGREGATE REGISTRATION
TITLE OF SECURITIES TO BE REGISTERED REGISTERED(1) SHARE OFFERING PRICE(2) FEE
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Common Stock, par value $.01 per
share............................. 11,270,000 $15.00 $169,050,000 $49,870
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(1) Includes 1,470,000 shares that may be purchased pursuant to an
over-allotment option granted to the Underwriters.
(2) Estimated based on a bona fide estimate of the maximum offering price of
$15.00 solely for the purposes of calculating the registration fee pursuant
to Rule 457(a) of the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF SUCH STATE.
SUBJECT TO COMPLETION, PRELIMINARY PROSPECTUS DATED DECEMBER 18, 1997
9,800,000 SHARES
CHASTAIN CAPITAL CORPORATION
COMMON STOCK
---------------------
Chastain Capital Corporation ("Chastain" and, together with its
subsidiaries, the "Company") is a real estate company organized in December 1997
that will invest in commercial and multifamily mortgage and real estate related
assets. The Company will elect to be taxed as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended (the "Code").
Equitable Real Estate Investment Management, Inc. ("ERE" and together with its
successors, "ERE Yarmouth" or the "Manager"), a wholly-owned indirect subsidiary
of Lend Lease Corporation Limited ("Lend Lease"), will manage the day-to-day
operations of the Company, subject to the supervision of the Company's Board of
Directors.
All of the 9,800,000 shares of Common Stock offered pursuant to this
Prospectus are being offered by the Company. In addition, 1,166,567 shares of
Common Stock will be sold by the Company to a wholly-owned indirect subsidiary
of Lend Lease upon the consummation of this offering, at the initial public
offering price less underwriting discounts or commissions and 700,000 shares of
Common Stock will be sold by the Company to FBR Asset Investment Corporation, an
affiliate of Friedman, Billings, Ramsey & Co., Inc., one of the representatives
of the Underwriters, upon the consummation of this offering, at the initial
public offering price less underwriting discounts or commissions. After such
sale Lend Lease will beneficially own approximately 10.0% of the Common Stock of
the Company and FBR Asset Investment Corporation will beneficially own 6.0% of
the Common Stock of the Company, assuming that the Underwriters do not exercise
their over-allotment option.
The initial public offering price of the Common Stock currently is expected
to be $15.00 per share. Prior to this offering, there has been no market for the
shares of Common Stock of the Company. The public offering price has been
determined by negotiation between the Company and the Underwriters. See
"Underwriting." The Company intends to apply to list the Common Stock on the
Nasdaq National Market under the symbol "CHAS."
Certain terms used herein are defined in the Glossary beginning on page 88.
---------------------
SEE "RISK FACTORS" ON PAGE 11 HEREOF FOR MATERIAL RISKS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK INCLUDING, AMONG OTHERS:
- The Company was organized in December 1997, has no operating history and
currently has nominal assets;
- The Company and the Manager have common officers and directors, which may
present conflicts of interest in the Company's dealings with the Manager
and its affiliates;
- The yield on the Company's investments in mortgage loans and
mortgage-backed securities may be affected adversely by changes in
prevailing interest rates, rates of prepayment and credit losses;
- The Company intends to leverage its investments in an amount that is not
expressly limited and that will be determined by the Manager and,
ultimately, the Company's Board of Directors, which could lead to reduced
or negative cash flow and reduced liquidity;
- The Company has not identified any of the assets that it will purchase
following consummation of this offering and the Company will face
significant competition in acquiring such assets, which may adversely
affect the Company's ability to achieve its investment objectives;
- The Company may invest in distressed real estate, including real
properties with environmental risks, which may not generate sufficient
revenues to meet operating expenses and debt service obligations and may
expose the Company to liability substantially in excess of the Company's
investment therein;
- The Company will be taxed as a regular corporation if it fails to qualify
as a REIT.
- To qualify as a REIT, the Company must satisfy certain requirements
relating to its assets and income, which may restrict the Company's
investment opportunities, and the Company must distribute at least 95% of
its "REIT taxable income" each year, which could result in the Company
being compelled to sell assets or borrow money in order to satisfy this
requirement; and
- The Company's proposed investments could result in the Company recognizing
interest income (including, but not limited to, original issue discount)
for tax purposes without any corresponding cash receipts, which could
result in the Company being compelled to sell assets, borrow money or
raise capital in order to have the cash required to distribute all of its
taxable income and thereby avoid corporate income tax on its retained
earnings.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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Per Share............................ $ $ $
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Total(3)(4).......................... $ $ $
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(See footnotes on next page)
---------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1997.
---------------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC. EVEREN SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE> 3
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses in connection with the offering, estimated at
$750,000, which will be payable by the Company.
(3) The Company has granted the several Underwriters a 30-day option to purchase
up to 1,470,000 additional shares of Common Stock to cover overallotments.
If all such shares of Common Stock are purchased, the total Price to Public,
Underwriting Discount and Proceeds to Company, before expenses of this
offering, will be $ , $ and $ , respectively. See
"Underwriting."
(4) The total Price to Public and the total Proceeds to Company reflect the sale
of 1,166,567 shares of Common Stock to a wholly-owned indirect subsidiary of
Lend Lease and 700,000 shares of Common Stock to FBR Asset Investment
Corporation, less the Underwriting Discount.
---------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZATION, THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT
POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
[MAP OF ERE YARMOUTH OFFICES AND COMPASS
MANAGEMENT AND LEASING LOCATIONS WITHIN THE UNITED STATES]
ii
<PAGE> 4
TABLE OF CONTENTS
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PROSPECTUS SUMMARY......................... 1
ORGANIZATION AND RELATIONSHIPS............. 10
RISK FACTORS............................... 11
The Company is Newly Formed and Has No
Operating History; Reliance on Manager... 11
Uncertainty as to the Company's Ability
Successfully to Implement its Operating
Policies and Strategies Resulting From
its Lack of Operating History.......... 11
The Company's Success Will Depend on the
Services of External Management........
Appropriate Investments May Not Be
Available and Full Investment of Net
Proceeds May Be Delayed................ 11
Conflicts of Interest in the Business of
the Company May Result in Decisions of
the Company that Do Not Fully Reflect the
Interests of the Shareholders of the
Company.................................. 11
Benefits to Insiders, Common Officers and
Directors.............................. 11
Manager May Advise Others................ 12
Independent Directors Will Not
Participate in Day-to-Day Operations... 12
Purchase of Assets from Lend Lease and
its Affiliates and Clients............. 12
Risks Related To Investments In
Subordinated CMBS........................ 13
Subordinated CMBS are Subject to Greater
Credit Risks than More Senior
Classes................................ 13
Yields on Subordinated CMBS May be
Adversely Affected by Interest Rate
Changes................................ 13
Risks Related to Investments in Mortgage
Loans.................................... 14
Multifamily and Commercial Loans
Involve a Greater Risk of Loss than
Single Family Loans.................. 14
Volatility of Values of Mortgaged
Properties May Affect Adversely the
Company's Mortgage Loans............. 14
Delinquency and Loss Ratios May Be
Affected by Performance of
Third-Party Servicers................ 14
Limited Recourse Loans May Limit the
Company's Recovery to the Value of
the Mortgaged Property............... 15
Possible Losses on Mortgage Loans
During Warehousing Period............ 15
Lack of Access to Securitizations Would
Adversely Affect the Company......... 16
Construction and Mezzanine Investments
Involve Greater Risks of Loss than
Loans Secured by Income Producing
Properties........................... 16
Distressed Mortgage Loans May Have
Greater Default Risks than Performing
Loans................................ 16
Agricultural Lending is Subject to
Special Risks........................ 16
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One Action Rules May Limit The
Company's Rights Following
Defaults............................. 16
Risks Related To Investments In Real
Property................................. 17
Conditions Beyond Company's Control May
Affect Adversely the Value of Real
Property............................. 17
The Company's Insurance Will Not Cover
All Losses........................... 17
Property Taxes Decrease Returns on Real
Estate............................... 17
Compliance With Americans With
Disabilities Act and Other Changes in
Governmental Rules and Regulations
May be Costly........................ 17
Properties With Hidden Environmental
Problems May Increase Costs and
Create Liabilities for the Company... 18
Real Properties With Known
Environmental Problems May Create
Liability for the Company............ 18
Foreign Real Properties are Subject to
Currency Conversion Risks, Foreign
Tax Laws and Uncertainty of Foreign
Laws................................. 18
Economic and Business Risks................ 18
Interest Rate Changes May Affect
Adversely the Value of the Company's
Investments.......................... 18
The Company's Performance May be
Affected Adversely if its Hedging
Strategy Is Not Successful........... 19
Leverage Can Reduce Income Available
for Distribution and Cause Losses.... 20
Maturity Mismatch Between Asset
Maturities and Borrowing Maturities
May Affect Adversely the Company's
Net Income........................... 20
Interest Rate Mismatch Between Asset
Yields And Borrowing Rates May Affect
Adversely the Company's Net Income... 20
The Company May Not be Able To Borrow
Money on Favorable Terms............. 20
Adverse Changes in General Economic
Conditions Can Affect Adversely the
Company's Business................... 20
Significant Competition May Affect
Adversely the Company's Ability to
Acquire Assets at Favorable Spreads
Relative to Borrowing Costs.......... 21
Investments May Be Illiquid and Their
Value May Decrease................... 21
Legal and Tax Risks........................ 21
Adverse Consequences of Failure to
Maintain REIT Status May Include the
Company Being Subject to Taxation as
a Regular Corporation................ 21
Certain Investments May Generate
Phantom Income....................... 22
Investment in the Common Stock of the
Company by Certain Plans May Give
Rise to a Prohibited Transaction
Under ERISA and the Code............. 23
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iii
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Ownership Limitation May Restrict
Business Combination Opportunities... 23
Preferred Stock May Prevent Change in
Control.............................. 23
Georgia Anti-Takeover Statutes May
Restrict Business Combination
Opportunities........................ 23
Board of Directors May Change Certain
Policies Without Shareholder
Consent.............................. 23
Loss of Investment Company Act
Exemption Would Affect the Company
Adversely............................ 24
The Company's Responsibility to
Indemnify The Manager and Officers
and Directors of the Company May
Result in Liability for the Actions
of the Manager and Officers and
Directors of the Company............. 24
Other Risks................................ 24
Yield on IOs May be Adversely Affected
by Interest Rate Changes............. 24
The Failure to Develop a Market for
Common Stock May Result in a Decrease
in its Market Price.................. 25
Increases in Interest Rates May Affect
Adversely the Yield of the Common
Stock................................ 25
Possible Adverse Effects on Share Price
Arising from Shares of Common Stock
Eligible for Future Sale.............
Future Offerings of Capital Stock May
Result in Dilution of the Book Value
or Earnings Per Share of the
Outstanding Common Stock............. 26
OPERATING POLICIES AND OBJECTIVES.......... 26
Relationship with ERE Yarmouth and Lend
Lease.................................... 27
General................................ 27
Whole Loan Originations................ 27
Opportunistic Investing................ 27
CMBS Investment and Management......... 27
Mortgage Servicing..................... 28
The Company's Guidelines................... 28
General................................ 28
Purchase From the Manager and Its
Affiliates........................... 29
The Company's Assets....................... 30
Subordinated Interests................. 30
Commercial Mortgage-Backed
Securities........................... 32
Opportunistic Real Properties.......... 32
Mezzanine Investments.................. 33
Other Real Estate Related Assets....... 33
Construction Loans................... 33
Agricultural Loans................... 33
Foreign Real Properties.............. 33
Real Property With Known
Environmental Problems............ 34
Other MBS............................ 34
Real Estate Companies................ 34
Portfolio Management....................... 34
Leverage and Borrowing................. 34
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CMOs and Warehouse Lines of Credit..... 35
Reverse Repurchase Agreements.......... 35
Bank Credit Facilities................. 35
Mortgage Loans on Real Estate Owned by
the Company.......................... 35
Interest Rate Management Techniques.... 35
Hedging................................ 35
Asset Management........................... 36
MANAGEMENT OF OPERATIONS................... 38
Lend Lease................................. 38
The Manager................................ 38
The Management Agreement................... 40
Portfolio Management................... 40
Equity Acquisition and Loan
Origination.......................... 41
Equity Asset Management................ 41
Special Servicing...................... 42
Management Fees............................ 42
Stock Options.............................. 43
Eligibility and Awards................. 44
Exercise Price and Exercisability...... 44
Termination of Employment.............. 44
Amendment and Termination.............. 44
Limits of Responsibility................... 45
Certain Relationships; Conflicts of
Interest................................. 45
THE COMPANY................................ 48
Directors and Executive Officers........... 48
DISTRIBUTION POLICY........................ 50
YIELD CONSIDERATIONS RELATED TO THE
COMPANY'S INVESTMENTS.................... 51
Subordinated Interests..................... 51
Opportunistic Real Properties.............. 52
Mezzanine Investments...................... 52
Other Real Estate Related Assets........... 53
Construction Loans..................... 53
Agricultural Loans..................... 53
IOs and Inverse IOs.................... 54
CAPITALIZATION............................. 55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
LIQUIDITY AND CAPITAL RESOURCES.......... 56
DESCRIPTION OF CAPITAL STOCK............... 56
General.................................... 56
Common Stock............................... 56
Preferred Stock............................ 57
Restrictions on Ownership and Transfer..... 57
Registration Rights........................ 58
Dividend Reinvestment Plan................. 58
Reports to Shareholders.................... 58
Transfer Agent and Registrar............... 58
Listing of the Common Stock................ 58
CERTAIN PROVISIONS OF GEORGIA LAW AND OF
THE COMPANY'S ARTICLES OF INCORPORATION
AND BYLAWS............................... 59
Board of Directors......................... 59
Amendment.................................. 59
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iv
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Georgia Anti-Takeover Statutes............. 59
Operations................................. 60
Advance Notice of Director Nominations and
New Business............................. 60
COMMON STOCK AVAILABLE FOR FUTURE SALE..... 60
OPERATING PARTNERSHIP AGREEMENT............ 61
General.................................... 61
General Partner Not to Withdraw............ 62
Capital Contribution....................... 62
Redemption Rights.......................... 62
Operations................................. 63
Distributions.............................. 63
Allocations................................ 63
Term....................................... 63
Tax Matters................................ 63
FEDERAL INCOME TAX CONSIDERATIONS.......... 64
Taxation of the Company.................... 64
Requirements for Qualification............. 65
Income Tests........................... 67
Asset Tests............................ 69
Distribution Requirements.............. 70
Recordkeeping Requirements............. 71
Failure to Qualify......................... 71
Taxation of Taxable U.S. Shareholders...... 71
Taxation of Shareholders on the Disposition
of the Common Stock...................... 73
Capital Gains and Losses................... 73
Information Reporting Requirements and
Backup Withholding....................... 73
Taxation of Tax-exempt Shareholders........ 74
Taxation of Non-U.S. Shareholders.......... 75
State and Local Taxes...................... 76
Sale of the Company's Property............. 76
ERISA CONSIDERATIONS....................... 77
Employee Benefit Plans, Tax-Qualified
Retirement Plans, and IRAs............... 77
Status of the Company under ERISA.......... 78
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CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND
REAL PROPERTY INVESTMENTS................ 79
General.................................... 79
Types of Mortgage Instruments.............. 79
Leases and Rents........................... 80
Condemnation and Insurance................. 80
Foreclosure................................ 80
General................................ 80
Judicial Foreclosure................... 80
Non-Judicial Foreclosure/Power of
Sale................................. 81
Equitable Limitations on Enforceability
of Certain Provisions................ 81
Post-Sale Redemption................... 82
Anti-Deficiency Legislation............ 82
Cooperatives........................... 82
Bankruptcy Laws............................ 82
Default Interest and Limitations on
Prepayments.............................. 84
Forfeitures in Drug and RICO Proceedings... 84
Environmental Risks........................ 84
General................................ 84
CERCLA................................. 84
Certain Other Federal and State Laws... 85
Superlien Laws......................... 85
Additional Considerations.............. 85
Environmental Site Assessments......... 85
Applicability of Usury Laws................ 86
Americans With Disabilities Act............ 86
USE OF PROCEEDS............................ 86
UNDERWRITING............................... 87
LEGAL MATTERS.............................. 88
EXPERTS.................................... 88
ADDITIONAL INFORMATION..................... 89
The Company................................ 89
Lend Lease................................. 89
GLOSSARY OF TERMS.......................... 90
FINANCIAL STATEMENTS....................... F-1
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v
<PAGE> 7
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus. Unless otherwise indicated,
the information contained in this Prospectus assumes that (i) the transactions
relating to the formation of the Company (the "Formation Transactions") are
consummated, (ii) the Underwriters' over allotment option is not exercised and
(iii) the offering price (the "Offering Price") of the Common Stock is $15.00
per share. Unless the context otherwise requires, all references in this
Prospectus to (i) the "Company" shall mean Chastain Capital Corporation
("Chastain") and its wholly-owned subsidiaries, including (a) Chastain GP
Holdings, Inc. (the "General Partner"), (b) Chastain LP Holdings, Inc. (the
"Initial Limited Partner") and (c) Chastain Investments, L.P. (the "Operating
Partnership"); and (ii) "Common Stock" shall mean the Company's shares of common
stock, par value $.01 per share. Capitalized terms used but not defined herein
shall have the meanings set forth in the Glossary beginning on page 89.
References to "dollars" and "$" are to United States dollars.
THE COMPANY
The Company is a Georgia corporation that was organized on December 16,
1997 and will elect to be taxed as a real estate investment trust ("REIT") under
the Code. The Company will be managed and advised by ERE Yarmouth ("ERE
Yarmouth" or the "Manager"), a wholly-owned indirect subsidiary of Lend Lease
Corporation Limited ("Lend Lease"). See "Management of Operations." The Company
will invest in commercial and multifamily mortgage and real estate related
assets sourced, managed and actively serviced through ERE Yarmouth's offices
located in major metropolitan markets throughout the United States, with a view
to maximizing income for distribution to shareholders, consistent with levels of
risk that are perceived by the Company to be acceptable. The Company intends to
emphasize, in particular, origination of commercial mortgage loans for the
purpose of securitizing and retaining the subordinated interests in those loans.
INVESTMENT ACTIVITIES
The Company's investments will include several categories of commercial
mortgage and real estate related assets that will be sourced, managed and
actively serviced through ERE Yarmouth's twelve offices located in major
metropolitan markets throughout the United States. The Company intends to invest
throughout the real estate cycle, focusing on opportunities with respect to
which it perceives high relative value. Initially, the Company will emphasize
the creation of a mortgage portfolio collateralized by institutional quality
assets for the purpose of securitizing and retaining the subordinated interests
in such loans. The Company's operating income is expected to result primarily
from the excess of (i) the sum of the Company's cash flows on its assets,
reinvestment income thereon and related income over (ii) the sum of the
Company's borrowing costs and operating expenses. There can be no assurance,
however, that the Company's investment strategy will be successful.
The Company intends to invest in subordinated interests, opportunistic real
property, mezzanine investments and other real estate related assets, as
described below. The Company cannot anticipate with any certainty the percentage
of the proceeds of this offering that will be invested in any particular
category of real estate assets, except that the Company intends to invest at
least 75% of its assets in subordinated interests, opportunistic real property
and mezzanine investments.
Subordinated Interests. The Company's primary business will be the
origination of whole commercial and multifamily mortgage loans ("Mortgage
Loans") for the purpose of issuing non-REMIC collateralized mortgage obligations
("CMOs") secured by its Mortgage Loans and retaining the Mortgage Loans subject
to the CMO debt. As a result of such transactions, the Company will retain a
"first loss" subordinated equity ownership interest in the Mortgage Loans that
has economic characteristics similar to those of subordinated interests in
commercial mortgage-backed securities ("CMBS"). A first loss class is the most
subordinated class of a multi-class issuance of pass-through or debt securities
and is the first to bear loss upon a default of the underlying Mortgage Loans
("Subordinated Interests"). The Company may also acquire Subordinated Interests
in CMBS. In connection with its origination and acquisition of Subordinated
Interests, the Company
<PAGE> 8
will attempt, where appropriate, to mitigate these risks by obtaining "Special
Servicing" rights with respect to the underlying mortgage loans. In addition,
the Company expects that many of the Mortgage Loans will be serviced by the
Manager or its affiliates. See "Operating Policies and Objectives -- The
Company's Assets -- Subordinated Interests."
Opportunistic Real Property. The Company may invest in commercial and
multifamily real property ("Real Property"), including (i) performing Real
Property which may present opportunities for high risk-adjusted returns ("High
Yield Real Property"), (ii) properties acquired by a mortgage lender at
foreclosure (or by deed in lieu of foreclosure) ("REO Property") and other
underperforming or otherwise distressed real property (together with REO
Property, "Distressed Real Property") and (iii) Mortgage Loans that are in
default ("Nonperforming Mortgage Loans"), or with respect to which default is
likely or imminent or with respect to which the borrower is currently making
monthly payments in accordance with a forbearance plan ("Subperforming Mortgage
Loans" and, together with Nonperforming Mortgage Loans, "Distressed Mortgage
Loans", and together with Distressed Real Property and High Yield Real Property,
"Opportunistic Real Properties"). The Company's general goal, with respect to
each High Yield Real Property or Distressed Real Property, will be to purchase
it at a favorably low price, to reposition or convert the use of the property,
if required, to improve its cash flow by proper management or refinancing and to
enjoy the increased cash flow and long term appreciation of the asset. See
"Operating Policies and Objectives -- The Company's Assets -- Opportunistic Real
Properties."
Mezzanine Investments. The Company may originate or acquire investments
that are subordinated to first lien mortgage loans on commercial and multifamily
real estate ("Mezzanine Investments"). Mezzanine Mortgage Loans generally would
provide the Company the right to receive a stated interest rate on the loan
balance and may also include a percentage of gross revenues from the property,
payable to the Company on an ongoing basis, and/or a percentage of any increase
in value of the property, payable upon maturity or refinancing of the loan, or
otherwise would allow the Company to charge an interest rate that would provide
an attractive risk-adjusted return. Mezzanine Investments may also take the form
of preferred equity, which will have a claim against both the operating cash
flow and liquidation proceeds from the specific real estate assets. See
"Operating Policies and Objectives -- The Company's Assets -- Mezzanine
Investments."
Other Real Estate Related Assets. To enhance the Company's flexibility and
to respond quickly to market opportunities throughout the real estate cycle, the
Company may also invest in other real estate related assets, including (i) loans
secured by agricultural properties ("Agricultural Loans"), (ii) construction and
rehabilitation loans ("Construction Loans"), (iii) Real Property or Mortgage
Loans secured by Real Property that is (A) environmentally distressed or (B)
located outside the United States, (iv) various classes of mortgage-backed
securities ("MBS") other than Subordinated Interests and (v) companies primarily
engaged in the business of real estate ownership, real estate services or other
real estate intensive operating businesses. The assets described in this section
are hereinafter referred to as "Other Real Estate Related Assets." The Company
intends to limit its investment in Other Real Estate Related Assets to no more
than 25% of the Company's portfolio. See "Operating Policies and
Objectives -- The Company's Assets -- Other Real Estate Related Assets."
LEVERAGE
To create yields commensurate with its investment objectives, the Company
intends to leverage its assets primarily through the issuance of CMOs, reverse
repurchase agreements, warehouse lines of credit and other borrowing
arrangements, pledging its assets as collateral security for its repayment
obligations. The Company intends to use the proceeds from securitizations and
other borrowings to invest in additional Mortgage Loans, CMBS and other assets
and, in turn, to borrow against such assets and to repeat this process of
borrowing and investing until it has significantly leveraged its portfolio of
assets. A portion of the Company's borrowings may be in the form of reverse
repurchase agreements that are based on the market value of the CMBS pledged to
secure the specific borrowings. A decline in the market value of those CMBS
could limit the Company's ability to borrow or result in lenders initiating
margin calls, requiring the Company to sell assets under adverse market
conditions in order to maintain liquidity. If these sales were made at prices
lower than the carrying
2
<PAGE> 9
value of the assets, the Company would experience losses. A substantial portion
of the Company's net income is expected to consist of the difference between (i)
the income generated by its investments and (ii) the interest expense incurred
with respect to its borrowings, and hedging and other costs. The Company may
hedge all or a portion of the interest rate risk associated with its borrowings
through the use of interest rate caps, swaps and other derivative financial
products. To the extent consistent with maintaining the Company's status as a
REIT, the Company also may engage in a variety of interest rate risk management
techniques for the purpose of managing the effective maturity or interest rate
of its assets or borrowings. These techniques also may be used to attempt to
protect against declines in the market value of the Company's assets resulting
from general economic and market trends or to change the duration of or interest
rate risk associated with the Company's borrowings. Any such hedging and other
interest rate risk management techniques are subject to risks and may affect
adversely the Company's earnings. See "Risk Factors -- Economic and Business
Risks -- Leverage Can Reduce Income Available for Distribution." There can be no
assurance that the Company's investment and leverage strategy can be implemented
or will be successful and no hedging strategy will insulate the Company
completely from interest rate risk.
RISK FACTORS
An investment in the Common Stock involves various risks, and prospective
investors should consider carefully the matters discussed under "Risk Factors"
beginning on page 11 prior to an investment in the Company. Such risks include,
among others, the following:
THE COMPANY IS NEWLY FORMED; CONFLICTS OF INTEREST; RELIANCE ON MANAGER
- The Company has no operating history and currently has nominal assets
and, until appropriate commercial and multifamily mortgage and real estate
related acquisitions are made, the net proceeds of this offering may be
invested in readily marketable securities, consistent with maintaining the
Company's REIT qualification, or in interest-bearing deposit accounts. It
may take considerable time for the Company to find appropriate
investments, during which time the Company's assets will be invested in
relatively low yield instruments.
- The Company and the Manager have common officers and directors, which may
present conflicts of interest in the Company's dealings with the Manager
and its affiliates that may result in the Company making decisions that do
not fully reflect the interests of the Company's shareholders.
- Certain directors and officers of the Company will have demands on their
time other than those of the Company.
- The Company will contract with the Manager to advise the Board of
Directors of the Company (the "Board of Directors") and direct the
day-to-day business affairs of the Company. Thus, the Company's success
will depend largely on the skill and experience of the Manager's
employees. In particular, the independent members of the Board of
Directors (the "Independent Directors") will rely on information provided
by the Manager to review any proposed transactions of the Company with
Lend Lease and its affiliates. The Manager has only limited experience in
operating a REIT and management of the Company has no experience in
operating a REIT.
- The Company intends to rely extensively on the Manager as its principal
source of investments. The Manager advises other entities that may invest
primarily in commercial and multifamily equity real estate and Mortgage
Loans and CMBS. If the Manager is unable to provide the Company with
adequate investment opportunities, the Company's growth and results of
operations may be adversely affected.
RISKS RELATING TO THE COMPANY'S PROPOSED INVESTMENTS
- Investing in multifamily and commercial Mortgage Loans generally is
riskier than investing in single family residential Mortgage Loans, due to
dependency on successful operation of the underlying properties for
repayment, generally larger loan balances and balloon payments at stated
maturity.
3
<PAGE> 10
- The Company's investments and income will be sensitive to changes in
interest rates and prepayment rates. In periods of declining interest
rates, prepayments on Mortgage Loans and CMBS generally increase, and the
Company likely will have to reinvest such funds in lower-yielding
investments. Conversely, in periods of rising interest rates, prepayments
on Mortgage Loans and CMBS generally decrease, and the value of the
Company's fixed-rate investments generally will decline.
- Delinquency and loss rates on the Mortgage Loans may be affected by the
performance of third-party servicers and Special Servicers.
- The Company intends to acquire or retain significant amounts of
non-investment grade classes of CMBS. These investments are subject to a
greater risk of loss of principal and non-payment of interest than
investments in whole Mortgage Loans or senior, investment grade
securities.
- Investing in Mezzanine Investments generally is riskier than investing in
more senior equities or mortgage loans because a foreclosure by a senior
lienholder may result in the Mezzanine Investments becoming unsecured or
otherwise impaired, and the Company may not recover the full amount, or
indeed any, of its investment in such Mezzanine Investments.
- The Company's Opportunistic Real Properties (which may have significant
amounts of unleased space) may not generate sufficient revenues to provide
a return on investment after meeting operating expenses and debt service
obligations. In addition, declining real estate values may result in
losses on the Company's Real Properties.
- The Company may invest in Agricultural Loans, which are subject to
special risks related to changing weather conditions, economic downturns
and changing consumer attitudes towards food products.
- The Company may invest in Real Property, or Mortgage Loans secured by
Real Property, with known environmental problems that may materially
impair the value of the Real Property ("Environmentally Distressed Real
Property"), which may expose the Company to liability in excess of the
Company's investment therein.
- The Company may invest in Real Property, or Mortgage Loans secured by
Real Property, located outside the United States, which may expose the
Company to currency conversion risks, foreign tax laws and the uncertainty
of foreign laws.
- Certain of the Company's Other Real Estate Related Assets may require
significant management resources, may be illiquid and may decrease in
value because of changes in economic conditions.
- The Company intends to issue CMOs collateralized by its Mortgage Loans,
retaining the Mortgage Loans subject to the CMO debt. Any losses on such
Mortgage Loans would be borne by the Company to the extent of the
Company's remaining investment in such loans.
- The Company's borrowings are likely to include reverse repurchase
agreements with respect to its MBS. A decline in the market value of those
MBS could limit the Company's ability to borrow or result in lenders
initiating margin calls, requiring the Company to sell assets under
adverse market conditions in order to maintain liquidity. If such sales
are made at prices lower than the carrying value of the assets, the
Company will experience losses.
- The yield on the Company's subordinated interest only classes of MBS
("Sub IO") will be affected adversely by faster than anticipated
prepayment rates and particularly high rates of prepayment could result in
a failure of the Company to recover fully its initial investment in Sub
IOs.
- Borrower default, casualty losses and state or foreign law enforceability
issues, as well as other events and circumstances, may result in losses on
the Company's investments.
- The Company has not identified any assets to acquire and will face
significant competition in acquiring assets, which may adversely affect
the Company's ability to achieve its investment objectives.
4
<PAGE> 11
HEDGING; LEVERAGE
- The Company's performance may be affected adversely if the Company does
not hedge effectively against interest rate and other risks. No hedging
strategy will insulate the Company completely from interest rate risk.
- The Company's Articles of Incorporation (the "Charter"), Bylaws and
investment guidelines do not expressly limit the amount of indebtedness
the Company can incur. The Company intends to leverage its investments in
an amount to be determined by the Manager and, ultimately, the Board of
Directors. If borrowing costs increase, or if the cash flow generated by
the Company's assets decrease, the Company's use of leverage will increase
the likelihood that the Company will experience reduced or negative cash
flow and reduced liquidity.
TAX AND LEGAL RISKS
- The Company will be taxed as a regular corporation if it fails to qualify
as a REIT. In such event, the Company's cash available for distribution to
its shareholders will be reduced.
- In order to qualify as a REIT, the Company must satisfy certain
requirements concerning the nature of its assets and income, which may
restrict the Company's ability to invest in various types of assets.
- In order to maintain REIT status, the Company must distribute at least
95% of its taxable income each year.
- The Company's proposed investment in Subordinated Interests, Mezzanine
Investments and Distressed Mortgage Loans could result in the Company's
recognizing interest income (including, but not limited to, original issue
discount) for federal income tax purposes in advance of the corresponding
cash receipts ("Phantom Income"), which could result in the Company
needing to sell assets, borrow money or raise capital in order to have the
cash needed to distribute all of its taxable income and thereby avoid
corporate income tax on its retained earnings.
- Ownership of Common Stock by each shareholder is limited to 9.8% of the
outstanding Common Stock (except for Lend Lease and its affiliates so long
as Lend Lease is publicly held), which may deter third parties from
seeking to control or acquire the Company.
- To maintain its exemption from regulation under the Investment Company
Act of 1940, as amended (the "Investment Company Act"), the Company, among
other things, must maintain certain percentages of its investments in
assets that qualify for exemption from such regulation, which requirement
may restrict the Company's ability to invest in various types of assets.
THE MANAGER
The business and investment affairs of the Company will be managed by ERE
Yarmouth, subject to the supervision of the Company's Board of Directors. ERE
Yarmouth, a Delaware corporation indirectly wholly-owned by Lend Lease, is a
full-service real estate investment advisor with experience in investing and
managing commercial real estate assets for institutional lenders and owners.
According to Pension & Investments, an investment management industry journal,
as of June 30, 1997, ERE Yarmouth, along with Yarmouth Group, Inc. ("Yarmouth"),
also a wholly-owned indirect subsidiary of Lend Lease, manages the largest
portfolio in the United States of real estate assets owned by pension plans and
other tax exempt investors. ERE Yarmouth has substantial experience in the
origination and servicing of whole loans, the acquisition of CMBS, the
acquisition and resolution of troubled loans and the management of diverse real
estate related assets. Through special service subsidiaries and affiliates, ERE
Yarmouth provides additional services to its clients and other third parties. In
addition, ERE Yarmouth and Hyperion Capital Management, Inc. ("Hyperion"), a
fixed income manager, formed Equitable Real Estate Hyperion Capital Advisors,
LLC ("ERE Hyperion"), a joint venture that advises institutional clients on
investing in CMBS. The Manager intends to execute an agreement with ERE Hyperion
whereby ERE Hyperion will perform certain functions relating to the Company's
CMBS on behalf of the Manager. Hyperion manages over $5.3 billion of fixed-
5
<PAGE> 12
income securities with a specialization in MBS. For a description of the
operations and prior performance of ERE Hyperion, see Appendix A.
In June 1997, Lend Lease, a corporation incorporated in the state of New
South Wales, Australia, acquired ERE from The Equitable Companies Incorporated
("Equitable Companies") (the "ERE Acquisition"). Prior to consummation of this
offering, Yarmouth will be combined with ERE and the combined entity will
continue to be operated under the name "ERE Yarmouth." Lend Lease a large
Australian public real estate and financial services company, with substantial
global interests, operates in the United States, Australia and New Zealand,
Asia, South America and Europe. Established in 1958, Lend Lease has over 6,700
employees, 33,000 shareholders and a market capitalization exceeding $5.4
billion as of September 30, 1997. Lend Lease has maintained an AA rating from
Standard & Poor's since 1992. ERE Yarmouth believes that the acquisition of ERE
made Lend Lease's global real estate investment management business one of the
largest in the world, with approximately $32.5 billion in real estate assets
under management on five continents.
Although many of the Company's prospective competitors may have access to
greater capital and have other advantages, the Company believes that it has a
competitive advantage as a result of (i) ERE Yarmouth's twelve offices located
in major metropolitan markets throughout the United States and over 1,200
employees, (ii) the experience of ERE Yarmouth in originating and servicing
Mortgage Loans, (iii) the experience of ERE Yarmouth in acquiring and managing
CMBS and in acquiring, managing and resolving Opportunistic Real Property, (iv)
the experience of ERE Yarmouth in obtaining competitive financing on behalf of
its clients, (v) ERE Yarmouth's substantial investment in the computer systems,
research, property-specific and lease database technology and other resources
that the Company believes are necessary to conduct this business and (vi)
strategic relationships and contacts that ERE Yarmouth has developed in
conducting its real estate related businesses.
MANAGEMENT AGREEMENT
The Company will enter into an agreement (the "Management Agreement") with
the Manager pursuant to which the Manager, subject to the supervision of the
Company's Board of Directors, will, among other things: (i) recommend and
implement operating strategies for the Company; (ii) conduct due diligence on
potential investments for the Company; (iii) arrange for the acquisition of
assets and the origination of Mortgage Loans by the Company; (iv) arrange for
various types of financing for the Company, including reverse repurchase
agreements, warehouse lines of credit, mortgage loans and the issuance of CMOs;
(v) monitor the performance of the Company's assets; (vi) provide certain
administrative and managerial services in connection with the operations of the
Company; (vii) asset management of equity real estate and (viii) provide access
to the Manager's proprietary database of property and leasing information. The
Management Agreement will be approved by all of the Company's Independent
Directors.
The following table presents all compensation, fees and other benefits
(including reimbursement of certain out-of-pocket expenses) that the Manager may
earn or receive under the terms of the Management Agreement:
<TABLE>
<CAPTION>
AMOUNT RECIPIENT PAYOR
- ------ ---------- --------
<S> <C> <C> <C>
Quarterly base management fee equal to the following(1):
For the first four fiscal
quarters................ 1.00% per annum of the Average
Invested Assets(2) of the
Company
During each fiscal quarter
thereafter.............. 0.85% per annum of the Average
Invested Assets up to $1
billion
</TABLE>
6
<PAGE> 13
<TABLE>
<CAPTION>
AMOUNT RECIPIENT PAYOR
- ------ ---------- --------
<S> <C> <C> <C>
0.75% per annum of the Average
Invested Assets from $1 billion
to $1.25 billion
0.50% per annum of the Average
Invested Assets in excess of
$1.25 billion.................. Manager(3) Company
Quarterly incentive management fee based on the amount, if any,
by which the Company's Funds From Operations(4) and certain
net gains exceed a hurdle rate(5)............................. Manager Company
Termination fee equal to the sum of the base management fee and
incentive management fee, if any, earned during the
immediately preceding four fiscal quarters.................... Manager Company
Reimbursement of out-of-pocket expenses of the Manager paid to
third parties................................................. Manager Company
</TABLE>
- ---------------
(1) Intended to cover the Manager's costs in providing management services to
the Company. In connection with renewal of the Management Agreement, the
Board of Directors of the Company may adjust the base management fee in the
future to align it more closely with the actual costs of such services.
(2) The term "Average Invested Assets" for any period means the average of the
aggregate book value of the assets of the Company, including a proportionate
amount of the assets of all of its direct and indirect subsidiaries, before
reserves for depreciation or bad debts or other similar noncash reserves
less (i) uninvested cash balances and (ii) the book value of the Company's
CMO liabilities, computed by taking the daily average of such values during
such period.
(3) The Manager is a wholly-owned indirect subsidiary of Lend Lease.
(4) The term "Funds From Operations" as defined by the National Association of
Real Estate Investment Trusts ("NAREIT") means net income (computed in
accordance with generally accepted accounting principles ("GAAP")) excluding
gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization on real estate assets, and after deduction of
preferred stock dividends, if any, and adjustments for unconsolidated
partnerships and joint ventures. Funds From Operations does not represent
cash generated from operating activities in accordance with GAAP and should
not be considered as an alternative to net income as an indication of the
Company's performance or to cash flows as a measure of liquidity or ability
to make distributions.
(5) The incentive management fee is equal to the product of (A) 25% of the
dollar amount by which (1) (a) Funds From Operations (before the incentive
fee) of the Company for the applicable quarter per weighted average number
of shares of Common Stock outstanding plus (b) gains (or minus losses) from
debt restructuring or sales of assets not included in Funds From Operations
of the Company for such quarter per weighted average number of shares of
Common Stock outstanding, exceed (2) an amount equal to (a) the weighted
average of the price per share at initial offering and the prices per share
at any secondary offerings by the Company multiplied by (b) 25% of the sum
of the Ten-Year U.S. Treasury Rate plus four percent, and (B) the weighted
average number of shares of Common Stock outstanding. As used in calculating
the Manager's compensation, the term "Ten-Year U.S. Treasury Rate" means the
arithmetic average of the weekly average yield to maturity for actively
traded current coupon U.S. Treasury fixed interest rate securities (adjusted
to constant maturities of ten years) published by the Federal Reserve Board
during a quarter, or, if such rate is not published by the Federal Reserve
Board, any Federal Reserve Bank or agency or department of the federal
government selected by the Company. If the Company determines in good faith
that the Ten-Year U.S. Treasury Rate cannot be calculated as provided above,
then the rate shall be the arithmetic average of the per annum average
yields to maturities, based upon closing asked prices on each business day
during a quarter, for each actively traded marketable U.S. Treasury fixed
interest rate security with a final maturity date not less than eight nor
more than twelve years from the date of the closing asked prices as chosen
and quoted for each
7
<PAGE> 14
business day in each such quarter in New York City by at least three
recognized dealers in U.S. government securities selected by the Company.
A wholly-owned indirect subsidiary of Lend Lease will purchase 1,166,567
shares of Common Stock upon consummation of this offering at the initial public
offering price, less underwriting discounts and commissions, after which Lend
Lease will beneficially own approximately 10.0% of the Common Stock of the
Company (assuming that the Underwriters do not exercise their over-allotment
option). To provide an incentive for the Manager to enhance the value of the
Common Stock, the Company will grant the Manager options to purchase 1,166,667
shares of Common Stock (1,313,667 shares if the Underwriters exercise their
over-allotment option) or, if necessary to prevent Lend Lease from exceeding the
Ownership Limitation set forth in the Charter, units of limited partnership of
the Operating Partnership ("Units") at a price per share equal to the initial
public offering price of the Common Stock. The Manager may redeem any Units so
purchased for cash or, at the election of the General Partner, shares of Common
Stock on a one-for-one basis. See "Operating Partnership Agreement -- Redemption
Rights." One quarter of the Manager's options will become exercisable on each of
the four anniversaries of the consummation of this offering. Unexercised options
will terminate on the tenth anniversary of the consummation of this offering.
See "Management of Operations -- Stock Options."
CONFLICTS OF INTEREST
The Company will be managed by the Manager, a wholly-owned indirect
subsidiary of Lend Lease. The Company will be subject to various potential
conflicts of interest based on the Company's relationship with the Manager and
Lend Lease. First, although a majority of the Company's Board of Directors will
be Independent Directors, the remaining directors and each of the executive
officers of the Company also serve as directors or officers of the Manager.
Second, the Manager advises other entities that may invest primarily in
multifamily and commercial real estate, Mortgage Loans, CMBS and Opportunistic
Real Property. Third, the Manager will receive a management fee for services
rendered to the Company. Fourth, the Management Agreement may be terminated
without cause only if the Manager is paid a termination fee, which may adversely
affect the Company's ability to terminate the Manager without cause. Fifth, the
incentive management fee, which is based on the Company's income, may create an
incentive for the Manager to recommend investments that have greater income
potential but are generally more speculative than if the management fee did not
include a performance component.
To minimize the risks related to these potential conflicts, a majority of
the Board of Directors will be Independent Directors. The Independent Directors
will approve the execution of the Management Agreement and general guidelines
for the Company's investments, borrowings and operations (the "Guidelines").
Although the Manager will perform the day-to-day operations of the Company, the
Independent Directors will review transactions engaged in by the Company in the
quarter following completion to ensure compliance with the Guidelines. In
addition, the Independent Directors will review all transactions between the
Company, on the one hand, and the Manager or its affiliates, on the other hand,
prior to completion to ensure compliance with the Guidelines. In such review,
the Independent Directors are expected to rely primarily on information provided
by the Manager. See "Operating Policies and Objectives -- The Company's
Guidelines." Additionally, the Company believes that Lend Lease's investment in
the Company and the stock options granted to the Manager will more closely align
the goals of the Manager with those of the Company.
ERE Yarmouth utilizes an internal pipeline allocation and investment
committee approval process for every real estate investment, which is intended
to ensure that all clients, including the Company, will have fair access to new
opportunities without preference being accorded to any particular client. Each
client is assigned a portfolio manager who develops an annual plan detailing the
client's desired investment volume, deal structure and, by property type, the
desired physical characteristics, pricing, leasing risk and target markets. When
ERE Yarmouth has investment opportunities, the opportunity is prioritized among
its respective clients. The ultimate allocation decision is approved by an
allocation committee (the "Allocation Committee") in accordance with a fair and
impartial process, taking into account the investment criteria of each client
(the "Allocation Process"). See "Risk Factors -- Conflicts of Interest in the
Business of the Company May Result
8
<PAGE> 15
in Decisions of the Company that Do Not Fully Reflect the Interest of the
Shareholders of the Company" and "Management of Operations -- Certain
Relationships; Conflicts of Interest."
THE OFFERING
Shares offered to the public(1)......... 9,800,000 shares
Shares to be outstanding after the
offering(1)(2).......................... 11,666,667 shares
Proposed Nasdaq National Market
Symbol.................................. CHAS
- ---------------
(1) Assumes the Underwriters' over-allotment option is not exercised.
(2) Includes 1,166,567 shares to be sold to a wholly-owned indirect subsidiary
of Lend Lease and 700,000 shares to be sold to FBR Asset Investment
Corporation upon consummation of this offering. Does not include
shares reserved for issuance pursuant to the Company's Stock Option Plan.
Options to purchase 1,166,667 shares of Common Stock (1,313,667 shares if
the Underwriters' over-allotment option is exercised in full) are expected
to be granted to the Manager upon consummation of this offering. See
"Management of Operations -- Stock Options," "Capitalization" and
"Description of Capital Stock."
USE OF PROCEEDS
The Company intends temporarily to invest net proceeds of this offering in
readily marketable, interest-bearing securities consistent with the Company's
qualification as a REIT until the Company finds appropriate investments
consistent with its investment policies. See "Operating Policies and
Objectives."
DISTRIBUTION POLICY
The Company intends to make distributions to its shareholders of all or
substantially all of its net taxable income each year (subject to certain
adjustments) so as to qualify for the tax benefits accorded to REITs under the
Code. The Company intends to make four regular quarterly distributions per year.
To the extent necessary to maintain its REIT qualification or to avoid a
corporate income or excise tax in any particular year, the Company will declare
a fifth, special dividend. It is anticipated that the first distribution to
shareholders will be made promptly after the first full calendar quarter
following the consummation of this offering. See "Distribution Policy."
TAX STATUS OF THE COMPANY
The Company intends to qualify and will elect to be taxed as a REIT under
sections 856 through 860 of the Code, commencing with its first REIT taxable
year ending on December 31, 1998. If the Company qualifies for taxation as a
REIT, the Company generally will not be subject to federal corporate income tax
on its taxable income that is distributed to its shareholders. A REIT is subject
to a number of organizational and operational requirements, including a
requirement that it currently distribute at least 95% of its annual "REIT
taxable income." Although the Company does not intend to request a ruling from
the Internal Revenue Service (the "Service") as to its REIT status, the Company,
upon consummation of this offering, will receive an opinion of King & Spalding
that the Company will qualify as a REIT. Such opinion will be based on certain
assumptions and representations about the Company's ongoing businesses and
investment activities and other matters. There can be no assurance that the
Company will be able to comply with such assumptions and representations in the
future. In addition, such opinion will not be binding on the Service or on any
court. Failure to qualify as a REIT would subject the Company to federal income
tax (including any applicable alternative minimum tax) on its taxable income at
regular corporate rates, and distributions to the Company's shareholders would
not be deductible. Even if the Company qualifies for taxation as a REIT, the
Company may be subject to certain federal, state, local and foreign taxes on its
income and property. See "Risk Factors -- Legal and Tax Risks" and "Federal
Income Tax Considerations -- Taxation of the Company."
9
<PAGE> 16
ORGANIZATION AND RELATIONSHIPS
The Company intends to invest primarily in Mortgage Loans, Subordinated
Interests, Mezzanine Investments and Opportunistic Real Properties. The Manager
will manage the day-to-day operations of the Company, subject to the supervision
of the Company's Board of Directors. The relationship among the Company, its
affiliates and the Manager is depicted in the picture shown below.
[CHART]
(1) The Company will issue approximately 10% of its Common Stock to a
wholly-owned indirect subsidiary of Lend Lease, approximately 6% of its Common
Stock to FBR Asset Investment Corporation and approximately 84% of its Common
Stock to public investors.
(2) The Company has incorporated and capitalized two qualified REIT
subsidiaries, Chastain GP Holdings, Inc. ("General Partner") and Chastain LP
Holdings, Inc. ("Initial Limited Partner").
(3) Initial Limited Partner and General Partner will organize and
capitalize Chastain Investments, L.P. (the "Operating Partnership"), with the
Initial Limited Partner initially to hold a 99% interest as a limited partner in
the Operating Partnership, and the General Partner initially to hold a 1%
interest as a general partner in the Operating Partnership.
(4) The Operating Partnership will provide potential sellers of assets the
opportunity to transfer those assets to the Operating Partnership in a
tax-deferred exchange. Such sellers would receive units of limited partnership
interest ("Units") in the Operating Partnership that would be redeemable (in a
taxable transaction) for cash or, at the election of the General Partner, shares
of Common Stock on a one-for-one basis.
(5) ERE Yarmouth will enter into a Management Agreement with the Company,
pursuant to which ERE Yarmouth will formulate operating strategies and provide
certain managerial and administrative functions for the Company, subject to the
supervision of the Company's Board of Directors.
10
<PAGE> 17
RISK FACTORS
An investment in the Common Stock involves various risks. Before purchasing
shares of Common Stock offered hereby, prospective investors should give special
consideration to the information set forth below, in addition to the information
set forth elsewhere in this Prospectus.
THE COMPANY IS NEWLY FORMED AND HAS NO OPERATING HISTORY; RELIANCE ON MANAGER
Uncertainty as to the Company's Ability Successfully to Implement its
Operating Policies and Strategies Resulting From its Lack of Operating
History. The Company was organized on December 16, 1997. The Company has no
operating history and has not yet implemented its operating policies and
strategies. The Company is externally managed and will be dependent upon the
experience and expertise of the Manager in advising the Company and
administering its day-to-day operations. Management of the Company and the
Manager have only limited experience in operating a REIT.
The Company's Success will Depend on the Services of External
Management. The Company will contract with the Manager to advise the Board of
Directors and direct the day-to-day business affairs of the Company and will
rely on the Manager as its principal source of investment opportunities. Thus,
the Company's success will depend on the services of the Manager and its
officers and employees. Certain officers, directors and employees of the Company
and the Manager and its affiliates have experience in creating, evaluating,
acquiring and managing Mortgage Loans, Subordinated Interests, CMBS and
Opportunistic Real Property. However, such officers, directors and employees
have only limited experience in operating a REIT. The Manager will subcontract
with ERE Hyperion and may contract with other third parties to provide services
to the Company. These parties may provide similar services to other mortgage
REITs and other competitors of the Company. There can be no assurance that the
Company and the Manager will be able to implement successfully the strategies
that the Company intends to pursue. Subject to the Guidelines, the Manager is
expected to have significant latitude as to the types of assets it may determine
to be proper investments for the Company. There can be no assurance that the
Manager's decisions in this regard will result in a profit for the Company. The
Company's success will depend in part on the continuing ability of the Manager
and its affiliates to hire and retain knowledgeable personnel and the Manager's
ability to cause such personnel to focus their attention on the affairs of the
Company rather than the affairs of its other affiliates. The ability of the
Manager and its affiliates to attract and retain such personnel may be affected,
in turn, by Lend Lease's and the Manager's continued financial strength.
Finally, the Company is subject to the risk that the Manager will terminate the
Management Agreement and that no suitable replacement will be found to manage
the Company.
Appropriate Investments May Not Be Available and Full Investment of Net
Proceeds May Be Delayed. The Company intends to invest the net proceeds of this
offering in readily marketable, interest-bearing securities on a temporary basis
until the Company finds appropriate Mortgage Loans, Subordinated Interests,
Mezzanine Investments, Opportunistic Real Properties and Other Real Estate
Related Assets in which to invest. There can be no assurance, however, that the
Company will identify Mortgage Loans, Subordinated Interests, Mezzanine
Investments, Opportunistic Real Properties and Other Real Estate Related Assets
that meet its investment criteria or that any such assets will produce a return
on the Company's investments. Moreover, the Company and the Manager have broad
discretion in determining how to invest the net proceeds of this offering and
may change the current investment and operating policies of the Company without
a vote of the shareholders. Such deviations from current policies might expose
the Company to increased risks of loss or liability, which could affect
adversely the Company or the market price of the Common Stock.
CONFLICTS OF INTEREST IN THE BUSINESS OF THE COMPANY MAY RESULT IN DECISIONS OF
THE COMPANY THAT DO NOT FULLY REFLECT THE INTERESTS OF THE SHAREHOLDERS OF THE
COMPANY
Benefits to Insiders, Common Officers and Directors. The Company is
subject to various potential conflicts of interests arising from its
relationship with the Manager and its affiliates. First, after the consummation
of this offering, Lend Lease, the Manager's ultimate parent company, will
beneficially own 1,166,667 shares, representing 10.0% of the Common Stock, of
which 1,166,567 shares will be purchased for
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cash at the initial public offering price, less underwriting discounts and
commissions. Second, the Manager will render management services to the Company
for a management fee, which benefits Lend Lease. Additionally, the incentive
management fee, which is based on the Company's income, may create an incentive
for the Manager to recommend investments that have greater income potential but
are generally more speculative than if the management fee did not include a
performance component.
The Management Agreement will be approved by a majority of the Independent
Directors. Moreover, the renewal of the Management Agreement after the initial
two-year term will require the affirmative vote of a majority of the Independent
Directors. The Company may terminate, or decline to extend the term of, the
Management Agreement without cause at any time after the initial term upon 60
days written notice by a majority vote of the Independent Directors; provided
that the Company shall pay the Manager a termination fee equal to the sum of the
base management fee and incentive management fee, if any, earned during the
twelve months preceding such termination. This requirement may adversely affect
the Company's ability to terminate the Manager without cause. In addition, the
Company has the right to terminate the Management Agreement upon the occurrence
of certain specified events, including a material breach by the Manager of any
provision contained in the Management Agreement, without the payment of any
termination fee. See "Management of Operations -- The Management Agreement."
Two of the Company's directors and all of its executive officers serve as
directors or officers of the Manager. Moreover, Matthew Banks, Chairman of the
Board of the Company, is also Chief Executive Officer of ERE Yarmouth, and will
continue to serve in that capacity in the future. As such, he is expected to
provide services not only to the Company but also to Lend Lease and its
affiliates. Although the Company expects that Mr. Banks will devote adequate
time to the Company's operations, if the operations of Lend Lease or its
affiliates need immediate attention, there can be no assurance that he will have
adequate time for the Company.
Manager May Advise Others. The Management Agreement does not limit or
restrict the right of the Manager or any of its officers, directors, employees
or affiliates from engaging in any business or rendering services of any kind to
any other person, including the purchase of or rendering advice to others
purchasing real estate assets that meet the Company's policies and criteria. The
Manager has implemented an Allocation Process, which is intended to ensure that
all clients, including the Company, will have fair access to new business
opportunities without preference being accorded to any particular client.
Pursuant to the terms of the Management Agreement, the Manager must allocate all
investment opportunities among its clients, including the Company, in a fair and
impartial manner taking into account each client's individual investment goals
and criteria. There can be no assurance that the Company will be offered each
opportunity that may meet its investment Guidelines. The Management Agreement
requires the Manager to use commercially reasonable efforts in performing its
duties. However, the Manager may modify or terminate the Allocation Process at
any time without the Company's consent. See "Management of Operations -- Certain
Relationships; Conflicts of Interest."
Independent Directors Will Not Participate in Day-to-Day
Operations. Although the Management Agreement will be approved by the
Independent Directors, daily operations between the Company and the Manager and
its affiliates will not be required to be approved by a majority of the
Independent Directors. Instead, the Manager will conduct the day-to-day
operations of the Company in accordance with the Guidelines that will be
approved by a majority of the Independent Directors. The Independent Directors
will review transactions engaged in by the Company in the quarter following
completion to monitor compliance with the Guidelines. Moreover, the Independent
Directors will review the Guidelines at least annually. Investors should be
aware that, in conducting this review, the Independent Directors are expected to
rely primarily on information provided to them by the Manager.
Purchase of Assets from Lend Lease and its Affiliates and Clients. The
Company is subject to conflicts of interest with the Manager because the Company
may (although it does not currently intend to) purchase assets from the
Manager's affiliates, including Lend Lease, and their clients. The Independent
Directors will review any such transactions prior to completion to ensure that
they are consistent with the Guidelines. However, the Independent Directors are
expected to rely primarily on the advice of and information provided
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by the Manager in deciding whether to approve such transactions, and there can
be no assurance that the price and other terms of such transactions will be fair
to the Company.
RISKS RELATED TO INVESTMENTS IN SUBORDINATED CMBS
Subordinated CMBS are Subject to Greater Credit Risks than More Senior
Classes. The Company intends to originate and acquire a significant amount of
various classes of CMBS, including "first loss" classes of subordinated CMBS. A
first loss class is the most subordinated class of a multi-class issuance of
pass-through or debt securities and is the first to bear the loss upon a default
on the mortgage loans underlying CMBS ("Mortgage Collateral"). Subordinated CMBS
are subject to special risks, including a substantially greater risk of loss of
principal and non-payment of interest than more senior classes. The market
values of subordinated classes of CMBS tend to be more sensitive to changes in
economic conditions than more senior classes. As a result of these and other
factors, subordinated CMBS generally are not actively traded and may not provide
holders thereof with liquidity of investment.
The yield to maturity on subordinated CMBS of the type the Company intends
to acquire will be extremely sensitive to the default and loss experience of the
underlying Mortgage Collateral and the timing of any such defaults or losses.
Because the subordinated classes of the type the Company intends to acquire
generally have no credit support, to the extent there are realized losses on the
Mortgage Collateral, the Company may not recover the full amount, or indeed any,
of its investment in such subordinated CMBS.
When the Company acquires a subordinated CMBS interest, it typically will
be unable to obtain the right to service the underlying performing Mortgage
Collateral. In an attempt to control and minimize its losses, the Company will
seek to obtain the right to service any underlying Mortgage Collateral that is
in default (the servicing of defaulted mortgage loans is referred to as "Special
Servicing"), although in many cases it is not likely to obtain Special Servicing
rights on acceptable terms. If the Company does acquire Special Servicing
rights, then it will contract with a Special Servicer (which may be the Manager)
to perform the Special Servicing functions, and thus the performance of the
Company's investments will depend, at least in part, on such Special Servicer's
handling of defaulted loans. To the extent the Company does not obtain Special
Servicing rights with respect to the Mortgage Collateral underlying its CMBS,
the servicer of the Mortgage Collateral generally would be responsible to
holders of the senior classes of CMBS, whose interests may not be the same as
those of the holders of the subordinated classes. Accordingly, the Mortgage
Collateral may not be serviced in a manner that is most advantageous to the
Company as the holder of a subordinated class.
The subordination of CMBS to more senior classes may affect the yield on
the subordinated CMBS adversely even if realized losses ultimately are not
allocated to such classes. On any payment date, interest and principal generally
would be paid on the more senior classes before interest and principal would be
paid with respect to the subordinated classes. Typically, interest deferred on
subordinated classes would be payable on subsequent payment dates to the extent
funds become available, but such deferral itself may not bear interest. Such
deferral of interest generally will affect adversely the yield on the
subordinated classes.
In connection with the securitization and sale of self-originated loans,
the Company must also make certain representations and warranties to "conduit"
purchasers. These representations and warranties cover such matters as title to
the mortgaged property, lien priority, environmental reviews and certain other
matters. The Company's representations and warranties rely in part on similar
representations and warranties made by the borrower or others. The Company would
have a claim against the borrower or another party in the event of a breach of
any of these representations or warranties; however, the Company's ability to
recover on any such claim would be dependent upon the financial condition of the
party against which such claim is asserted. There can be no assurance that the
Company will not experience a material loss as a result of representation and
warranties that it makes.
Yields on Subordinated CMBS May be Adversely Affected by Interest Rate
Changes. The yield on subordinated classes generally will be affected by the
rate and timing of payments of principal on the Mortgage Collateral underlying a
series of CMBS. The rate of principal payments may vary significantly over time
depending on a variety of factors such as the level of prevailing mortgage loan
interest rates and economic, demographic, tax, legal and other factors.
Prepayments on the Mortgage Collateral underlying a series of
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CMBS generally are allocated to the more senior classes of CMBS until those
classes are paid in full. As a result, the weighted-average lives of the
subordinated classes may be longer than would be the case if, for example,
prepayments were allocated pro rata to all classes of CMBS. To the extent that
the holder of a subordinated class is not paid compensating interest on interest
shortfalls due to prepayments, liquidations or otherwise, the yield on the
subordinated class may be adversely affected.
RISKS RELATED TO INVESTMENTS IN MORTGAGE LOANS
Multifamily and Commercial Loans Involve a Greater Risk of Loss than Single
Family Loans. The Mortgage Loans that the Company expects to originate and
acquire generally will be secured by existing multifamily or commercial real
estate, including apartments, shopping centers, office buildings, hotels,
industrial properties, hospitals and nursing homes. Property pledged as security
for Mortgage Loans is referred to as "Mortgaged Property." Multifamily and
commercial real estate lending is considered to involve a higher degree of risk
than single family residential lending because of a variety of factors,
including generally larger loan balances, dependency on successful operation of
the Mortgaged Property and tenants operating businesses therein for repayment,
and loan terms that often require little or no amortization and, instead,
provide for balloon payments at stated maturity. In addition, the value of
multifamily and commercial real estate can be affected significantly by the
supply and demand in the market for that type of property. Market values may
vary as a result of economic events, governmental regulations or other factors
outside the control of the borrower or the Company, such as rent control laws in
the case of multifamily Mortgage Loans, which may impact the future cash flow of
the underlying Mortgaged Property.
The successful operation of a multifamily or commercial real estate project
is generally dependent on the performance and viability of the property manager
of that project. The property manager would be responsible for responding to
changes in the local market, planning and implementing the rental structure,
including establishing appropriate rental rates, and advising the owner so that
maintenance and capital improvements can be carried out in a timely fashion and
at an appropriate cost. There can be no assurance regarding the performance of
any operators and/or managers or persons who may become operators and/or
managers upon the expiration or termination of leases or management agreements
or following any default or foreclosure under a Mortgage Loan.
Volatility of Values of Mortgaged Properties May Affect Adversely the
Company's Mortgage Loans. Commercial and multifamily property values and net
operating income derived therefrom are subject to volatility and may be
adversely affected by a number of factors, including, but not limited to,
national, regional and local economic conditions (which may be adversely
impacted by plant closings, industry slowdowns and other factors); local real
estate conditions (such as an oversupply of housing, retail, industrial, office
or other commercial space); changes or continued weakness in specific industry
segments; perceptions by prospective tenants and, in the case of retail
properties, retailers and shoppers, of the safety, convenience, services and
attractiveness of the property; the willingness and ability of the property's
owner to provide capable management and adequate maintenance; construction
quality, age and design; demographic factors; retroactive changes to building or
similar codes; and increases in operating expenses (such as energy costs). The
historical operating results of the Mortgaged Properties may not be comparable
to future operating results. In addition, other factors may affect adversely the
Mortgaged Properties' value without affecting the net operating income,
including changes in governmental regulations, zoning or tax laws, potential
environmental or other legal liabilities, the availability of refinancing, and
changes in interest rate levels.
Delinquency and Loss Ratios May Be Affected by Performance of Third-Party
Servicers. The Manager intends to become a rated Special Servicer. However,
there can be no assurance that it will receive a rating in a timely fashion. In
the interim, the Company intends to contract for the servicing of its Mortgage
Loans with servicers and will be subject to risks associated with potentially
inadequate servicing. Many borrowers require notices and reminders to keep
Mortgage Loans current and to prevent delinquencies and foreclosures. A
substantial increase in the delinquency or foreclosure rate resulting from
inadequate servicing could affect adversely the Company's performance and
ability to access profitably the capital markets for its financing needs,
including future securitizations.
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The Company's servicing agreements with its servicers often will provide
that if the Company terminates the servicing agreement without cause (as defined
in the agreement), the Company may be required to pay the third-party servicer a
termination fee. Depending upon the size of the particular Mortgage Loan
portfolio then being serviced, the termination fee that the Company would be
obligated to pay upon termination of a servicing agreement without cause could
be substantial and could deter a termination without cause that otherwise would
be advantageous to the Company.
Limited Recourse Loans May Limit the Company's Recovery to the Value of the
Mortgaged Property. The Company anticipates that a substantial portion of the
Mortgage Loans that it will originate or acquire and of the Mortgage Collateral
that it will originate or acquire may contain limitations on the mortgagee's
recourse against the borrower. In other cases, the mortgagee's recourse against
the borrower may be limited by applicable provisions of the laws of the
jurisdictions in which the Mortgaged Properties are located or by the
mortgagee's selection of remedies and the impact of those laws on that
selection. In those cases, in the event of a borrower default, recourse may be
limited to only the specific Mortgaged Property and other assets, if any,
pledged to secure the relevant Mortgage Loan. As to those Mortgage Loans that
provide for recourse against the borrower and its assets generally, there can be
no assurance that such recourse will provide a recovery in respect of a
defaulted Mortgage Loan greater than the liquidation value of the Mortgaged
Property securing that Mortgage Loan.
Possible Losses on Mortgage Loans During Warehousing Period. The Company
intends to acquire and accumulate Mortgage Loans for securitization as part of
its investment strategy. The Manager, in its discretion, will determine the
quantity of Mortgage Loans sufficient for securitization after discussions with
potential underwriters and rating agencies and an evaluation of the costs of
securitization. During the accumulation period, the Company will be subject to
risks of borrower defaults, bankruptcies, fraud and losses and special hazard
losses that are not covered by standard hazard insurance. However, prior to
securitization, the Company generally does not intend to obtain credit
enhancements such as mortgage pool or hazard insurance. Typically, third parties
insure against these types of losses, and the Company would be dependent on the
creditworthiness of the insurer and timeliness of the reimbursement in the event
of a default on the underlying obligations. Further, the insurance coverage for
various type of losses is limited in amount, and losses in excess of the
limitation would be the responsibility of the Company. In the event of any
default under Mortgage Loans held by the Company, the Company will bear the risk
of loss of principal to the extent of any deficiency between the value of the
mortgage collateral and the principal amount of the Mortgage Loan. Also, during
the accumulation or warehousing period, the cost of financing and hedging the
Mortgage Loans could exceed the interest income on the Mortgage Loans. There can
be no assurance that any mortgage, fraud or hazard insurance will adequately
cover a loss suffered by the Company. It may not be possible or economical for
the Company to securitize all of the Mortgage Loans which it acquires, in which
case the Company will continue to hold the Mortgage Loans and bear the risks of
borrower defaults, bankruptcies, fraud losses and special hazard losses.
Furthermore, if the Company retains a Subordinated Interest in the
securitizations, it will retain many of these risks. See "Operating Policies and
Objectives -- The Company's Assets."
The Company expects that when it acquires Mortgage Loans, the seller of the
Mortgage Loans (the "Mortgage Seller") generally will represent and warrant to
the Company that there has been no fraud or misrepresentation during the
origination of the Mortgage Loans and will agree to repurchase any loan with
respect to which there is fraud or misrepresentation. Although the Company will
have recourse to the Mortgage Seller based on the Mortgage Seller's
representations and warranties to the Company, the Company will be at risk for
loss to the extent the Mortgage Seller does not or cannot perform its repurchase
obligations. The Company intends to acquire third party insurance, to the extent
that it is available at a reasonable price, for such risks. If the Company is
unable or fails to acquire such insurance, the Company would be relying solely
on the value of the collateral underlying the Mortgage Loans.
In addition, substantial delays could be encountered in connection with the
foreclosure of defaulted Mortgage Loans, with corresponding delays in the
receipt of related proceeds by the Company. State and local statutes and rules
may delay or prevent the Company's foreclosure on or sale of the mortgaged
property and may prevent the Company from receiving new proceeds sufficient to
repay all amounts due on the related Mortgage Loan. Moreover, the Company's
servicing agent may be entitled to receive all expenses reasonably
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incurred in attempting to recover amounts due and not yet repaid on liquidated
Mortgage Loans, thereby reducing amounts available to the Company.
Lack of Access to Securitizations Would Adversely Affect the Company. The
Company intends to rely upon securitizations of Mortgage Loans to generate cash
proceeds for the purchase of additional Mortgage Loans. Several factors will
affect the Company's ability to complete securitizations, including conditions
in the securities markets generally, conditions in the mortgage-backed
securities market specifically, the credit quality of the Company's portfolio of
Mortgage Loans and the Company's ability to obtain credit enhancement. If the
Company were unable to successfully securitize a sufficient amount of Mortgage
Loans, then the Company would have to rely on other, more expensive short-term
methods of financing, or curtail or reduce its acquisition of Mortgage Loans.
There can be no assurance that the Company will be able to successfully
securitize any Mortgage Loans which it acquires or, if it is not successful,
that the Company will obtain financing alternatives to securitization or that if
such financing is available, that it will be available on favorable terms.
Construction and Mezzanine Investments Involve Greater Risks of Loss than
Loans Secured by Income Producing Properties. The Company may acquire
Construction Loans and, in some cases, Mezzanine Investments. Construction Loans
and Mezzanine Investments are considered to involve a higher degree of risk than
term mortgage lending secured by income-producing Real Property due to a variety
of factors, including, in the case of Construction Loans, dependency on
successful completion and operation of the project for repayment, difficulties
in estimating construction or rehabilitation costs and loan terms that often
require little or no amortization, providing instead for additional advances to
be made and for a balloon payment at a stated maturity date. In the case of
Mezzanine Investments, such factors would include, among other things, that a
foreclosure by the holder of the senior loan could result in a Mezzanine
Investment becoming unsecured. Accordingly, the Company may not recover the full
amount, or indeed any, of its investment in Mezzanine Investments. In addition,
Construction Loans and Mezzanine Investments may have higher loan to value
ratios than conventional term loans because of shared appreciation provisions.
Although the borrower may have an initial equity investment of 10% to 15% of
total project costs, such initial equity may not be sufficient to protect the
Company's investment in Construction Loans and Mezzanine Investments.
Distressed Mortgage Loans May Have Greater Default Risks than Performing
Loans. The Company may acquire Nonperforming and Subperforming Mortgage Loans,
as well as Mortgage Loans that have had a history of delinquencies. These
Mortgage Loans presently may be in default or may have a greater than normal
risk of future defaults and delinquencies, as compared to newly originated, high
quality loans. Returns on an investment of this type depend on the borrower's
ability to make required payments (or, with respect to Subperforming Loans, the
modified monthly payments required under the applicable forbearance plan) or, in
the event of default, the ability of the loan's servicer to foreclose and
liquidate the Mortgaged Property underlying the Mortgage Loan. There can be no
assurance that the servicer can liquidate a defaulted Mortgage Loan successfully
or in a timely fashion. See "Certain Legal Aspects of Mortgage Loans and Real
Property Investments."
Agricultural Lending is Subject to Special Risks. The Company may
originate or acquire Agricultural Loans. In addition, the Company may acquire
underperforming agricultural real estate assets. The agriculture industry is
subject to special risks because the production of food and other agricultural
products are affected by weather conditions. Performance of the Company's
mortgage portfolio may be affected by an overall or localized economic downturn
due to changing governmental policies, changing market conditions, acts of God
and adverse changes in zoning laws. Changing consumer attitudes towards food
products due to health, price and environmental concerns may decrease demand for
certain commodities or commodities grown in certain localities. In addition, the
secondary market for agricultural mortgage investments is an emerging market
which may be illiquid.
One Action Rules May Limit The Company's Rights Following
Defaults. Several states have laws that prohibit more than one "judicial
action" to enforce a mortgage obligation, and some courts have construed the
term "judicial action" broadly. The servicer of the mortgage obligation may be
required to foreclose first on properties located in states where such "one
action" rules apply (and when non-judicial foreclosure is
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permitted) before foreclosing on properties located in states where judicial
foreclosure is the only permitted method of foreclosure. See "Certain Legal
Aspects of Mortgage Loans and Real Property Investments -- Foreclosure."
RISKS RELATED TO INVESTMENTS IN REAL PROPERTY
Conditions Beyond Company's Control May Affect Adversely the Value of Real
Property. Real Properties are subject to varying degrees of risk as described
under "-- Risks Related to Investments in Mortgage Loans -- Volatility of Values
of Mortgaged Properties May Affect Adversely the Company's Mortgage Loans." In
addition, Opportunistic Real Properties may have significant amounts of unleased
space and thus may not generate revenues sufficient to pay operating expenses
and meet debt service obligations. The value of the Company's investments in
Real Property and the Company's income and ability to make distributions to its
shareholders will be dependent upon the ability of the Manager to hire and
supervise capable property managers to operate the Real Property in a manner
that maintains or increases revenues in excess of operating expenses and debt
service or, in the case of Real Property leased to a single lessee, the ability
of the lessee to make rent payments. Revenues from Real Property may be affected
adversely by changes in national or local economic conditions, competition from
other properties offering the same or similar attributes, changes in interest
rates and in the availability, cost and terms of mortgage funds, the impact of
present or future environmental legislation and compliance with environmental
laws, the ongoing need for capital improvements (particularly in older
structures), changes in real estate tax rates and other operating expenses,
adverse changes in governmental rules and fiscal policies, civil unrest, acts of
God, including earthquakes, hurricanes and other natural disasters (which may
result in uninsured or underinsured losses), acts of war, adverse changes in
zoning laws and other factors which will be beyond the control of the Company.
The Company's Insurance Will Not Cover All Losses. The Company intends to
maintain comprehensive casualty insurance on its Real Property, including
liability and fire and extended coverage, in amounts sufficient to permit
replacement in the event of a total loss, subject to applicable deductibles. The
Company will endeavor to obtain coverage of the type and in the amount
customarily obtained by owners of properties similar to its Real Property. There
are certain types of losses, however, generally of a catastrophic nature, such
as earthquakes, floods and hurricanes, that may be uninsurable or not
economically insurable. Inflation, changes in building codes and ordinances,
environmental considerations, provisions in loan documents encumbering
properties that have been pledged as collateral security for loans, and other
factors also might make it economically impractical to use insurance proceeds to
replace a property if it is damaged or destroyed. Under such circumstances, the
insurance proceeds received by the Company, if any, might not be adequate to
restore the Company's investment with respect to the affected property.
Property Taxes Decrease Returns on Real Estate. All Real Property owned by
the Company will be subject to real property taxes and, in some instances,
personal property taxes. Such real and personal property taxes may increase or
decrease as property tax rates change and as the properties are assessed or
reassessed by taxing authorities. An increase in property taxes on the Company's
Real Property could affect adversely the Company's income and ability to make
distributions to its shareholders and could decrease the value of that Real
Property.
Compliance With Americans With Disabilities Act and Other Changes in
Governmental Rules and Regulations May be Costly. Under the Americans with
Disabilities Act of 1990 (the "ADA"), all public properties are required to meet
certain federal requirements related to access and use by disabled persons.
Certain Real Property that the Company acquires may not be in compliance with
the ADA. If such Real Property is not in compliance, the Company may be required
to make modifications to bring it into compliance or face the possibility of an
imposition of fines or an award of damages to private litigants. In addition,
changes in governmental rules and regulations or enforcement policies affecting
the use and operation of the Company's Real Property, including changes to
building codes and fire and life-safety codes, may occur. If the Company is
required to make substantial modifications at its Real Property to comply with
the ADA or other changes in governmental rules and regulations, the Company's
income and ability to make distributions to its shareholders could be affected
adversely.
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The Company may obtain engineering reports on Real Properties prior to
their acquisition. The purpose of engineering reports is, among other things, to
identify existing and potential violations of the ADA. However, the Company will
exercise judgment on this issue and may choose not to obtain engineering reports
on certain Real Property prior to its acquisition and to purchase Mortgage Loans
without engineering reports on the underlying Mortgaged Property if it deems
that to do so is prudent. Further, even if an engineering report is obtained,
there can be no assurance it will reveal all existing and potential
environmental risks and liabilities, and there can be no assurance that there
will be no unknown or material environmental obligations or liabilities.
Properties With Hidden Environmental Problems May Increase Costs and Create
Liabilities for the Company. The operating costs and values of Real Property
owned by the Company may be affected by the obligation to pay for the cost of
complying with existing environmental laws, ordinances and regulations, as well
as the cost of complying with future legislation. Under various federal, state
and local environmental laws, ordinances and regulations, a current or previous
owner or operator of Real Property may be liable for the costs of removal or
remediation of hazardous or toxic substances in, on, under or in the vicinity of
such Real Property. Such laws often impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. The Company's income and ability to make distributions to its
shareholders could be affected adversely by the existence of an environmental
liability with respect to its properties.
The Company may obtain Phase I environmental assessments on Real Properties
prior to their acquisition. The purpose of Phase I environmental assessments is
to identify existing and potential environmental contamination that is made
apparent from historical reviews of the properties, reviews of certain public
records, preliminary investigations of the sites and surrounding properties, and
screening for the presence of hazardous substances, toxic substances and
underground storage tanks. However, the Company will exercise judgment on this
issue and may choose not to obtain Phase I environmental assessments on certain
Real Property prior to its acquisition and to purchase Mortgage Loans without
Phase I environmental assessments on the underlying Mortgaged Property if it
deems that to do so is prudent. Further, even if a Phase I environmental
assessment is obtained, there can be no assurance it will reveal all existing
and potential environmental risks and liabilities, and there can be no assurance
that there will be no unknown or material environmental obligations or
liabilities.
Real Properties With Known Environmental Problems May Create Liability for
the Company. The Company may invest in environmentally distressed Real Property
or Mortgage Loans secured by such Real Property. If it does so, the Company may
take certain steps to limit its liability for such environmental problems, such
as creating a special purpose entity to own environmentally distressed Real
Property. Despite these steps, there are risks associated with such an
investment. The Manager and its affiliates have only limited experience in
investing in environmentally distressed Real Property.
Foreign Real Properties are Subject to Currency Conversion Risks, Foreign
Tax Laws and Uncertainty of Foreign Laws. The Company may invest in Real
Property, or Mortgage Loans secured by Real Property, located outside the United
States. Investing in Real Property located in foreign countries creates risks
associated with the uncertainty of foreign laws and markets. Moreover,
investments in foreign assets may be subject to currency conversion risks. In
addition, income from investment in foreign Real Property and, in some
instances, foreign Mortgage Loans may be subject to tax by foreign
jurisdictions, which would reduce the economic benefit of such investments. The
Manager has only limited experience in investing in foreign Real Property.
ECONOMIC AND BUSINESS RISKS
Interest Rate Changes May Affect Adversely the Value of the Company's
Investments. The value of the Company's Mortgage Loans will be affected by the
prepayment rates on such Mortgage Loans, although multifamily and commercial
Mortgage Loans, which will be the Company's primary investment focus, generally
provide for lock-out periods and prepayment penalties that reduce this risk.
There can be no assurance, however, that prepayment penalties will deter
prepayments. Similarly, the value of the Company's
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MBS will be affected by the prepayment rates on the mortgage loans comprising
the Mortgage Collateral for such securities. Prepayment rates on Mortgage Loans
and MBS are influenced by changes in current interest rates and a variety of
economic, geographic and other factors and cannot be predicted with certainty.
In periods of declining mortgage interest rates, prepayments on Mortgage Loans
and MBS generally increase. If general interest rates also decline, the funds
available for reinvestment by the Company during such periods are likely to be
reinvested at lower interest rates than the Company was earning on the Mortgage
Loans and MBS that were prepaid. Mortgage Loans and MBS may decrease in value as
a result of increases in interest rates and may benefit less than other
fixed-income securities from declining interest rates because of the risk of
prepayment. In general, changes in both interest rates and prepayment rates will
affect the total return on the Company's Mortgage Loans and MBS, which in turn
will affect the amount available for distribution to the Company's shareholders.
This volatility may be greater with certain MBS, such as IOs, Sub IOs and
Inverse IOs, that the Company may acquire. The value of adjustable rate Mortgage
Loans and MBS paying fixed coupon rates, which the Company may acquire,
generally will vary inversely with changes in prevailing interest rates. Under
certain interest rate and prepayment rate scenarios, the Company may not recover
fully its investment in such assets.
The Company's strategy is to leverage its investments significantly by
borrowing against them, investing the net proceeds of those borrowings in
additional Real Estate Related Assets, borrowing against those additional
assets, and repeating the process of borrowing and investing until it has a
significantly leveraged portfolio. See "Operating Policies and
Objectives -- Strategy." The Company will be required to bear interest costs,
transaction costs and other fees, costs and expenses related to its anticipated
borrowings that it will use in seeking to implement its strategy of achieving a
significantly leveraged portfolio. The Company's operating results depend in
part on the difference between the income earned on the Company's
income-generating assets and the interest expense incurred in connection with
its borrowings. See "-- Leverage Can Reduce Income Available for Distribution
and Cause Losses." As the positive spread between the two increases, the
Company's net income should increase. Accordingly, changes in the general level
of interest rates can affect the Company's income by affecting the spread
between the Company's income-earning assets and interest-bearing liabilities, as
well as, among other things, the value and the average life of the Company's
interest-earning assets and its ability to realize gains from the sale of its
assets. Interest rates are highly sensitive to many factors, including
governmental monetary, fiscal and tax policies, domestic and international
economic and political considerations, and other factors beyond the control or
anticipation of the Company.
The Company's Performance May be Affected Adversely if its Hedging Strategy
Is Not Successful. The Company's performance may be affected adversely if the
Company fails to limit the effects of changes in interest rates on its
operations by employing an effective hedging strategy, including engaging in
interest rate swaps, caps, floors and other interest rate exchange contracts,
and buying and selling interest rate futures and options on such futures. The
use of these instruments to hedge a portfolio carries certain risks, including
the risk that losses on a hedge position will reduce the funds available for
distribution to shareholders and, indeed, that such losses may exceed the amount
invested in such instruments. There is no perfect hedge for any investment and a
hedge may not perform its intended purpose of offsetting losses on an
investment. For example, the Company will attempt to match the interest rate
indexes and repricing terms of its Mortgage Loans with those of its borrowings,
but it may not be able to achieve a perfect match. During periods of volatile
interest rates, such interest rate mismatches could affect adversely the
Company's ability to hedge effectively its interest rate risk. The Company may
enter into over-the-counter hedging transactions in which the protections
afforded to participants in an organized exchange and in a regulated environment
may not be available, which will expose the Company to counterparty risk.
Although the Company intends to enter into such contracts only with
counterparties the Company believes to be financially sound and to monitor the
financial soundness of such parties on a periodic basis, the Company may be
exposed to the risk that the counterparties with which the Company trades may
become financially unsound or insolvent. If a counterparty ceases making markets
and quoting prices in such instruments, which may render the Company unable to
enter into an offsetting transaction with respect to an open position, the
Company may be forced to unwind its position, which may result in a loss on the
hedge position and could cause the Company to suffer the adverse consequence
against which the hedging transaction was designed to protect. Certain of the
hedging instruments acquired by the Company are traded on exchanges, which may
subject the Company to the risk of
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trading halts, suspensions, exchange or clearing house equipment failure,
insolvency of a brokerage firm or other disruptions of normal trading
activities.
Leverage Can Reduce Income Available for Distribution and Cause
Losses. The Charter and Bylaws do not limit the amount of indebtedness the
Company can incur. The Company intends to leverage its assets through
securitizations and other borrowings, generally through the issuance of CMOs and
the use of warehouse lines of credit, reverse repurchase agreements, bank credit
facilities and other borrowings. The Company will leverage its assets only when
it expects that such leverage will enhance returns, although there can be no
assurance that the Company's use of leverage will prove to be beneficial. The
extent to which the Company uses leverage will be determined by the Manager
pursuant to the Guidelines and ultimately, by the Board of Directors, who may
act at any time without the approval of or notice to the shareholders. The
percentage of leverage used will vary depending on, among other things, the
Company's estimate of the cash flow that its assets will generate, and the
stability of that cash flow. Leverage can reduce the cash flow available for
distributions to shareholders. Moreover, there can be no assurance that the
Company will be able to meet its debt service obligations resulting from
leverage and, to the extent that it cannot, the Company risks the loss of some
or all of its assets.
Maturity Mismatch Between Asset Maturities and Borrowing Maturities May
Affect Adversely the Company's Net Income. The Company's use of short-term
floating rate borrowings to acquire long term assets, including Mortgage Loans
and CMBS, some of which will bear a fixed rate of interest, may expose the
Company to a maturity mismatch. As a consequence, the Company's borrowing costs
could exceed the income earned on the Company's assets acquired with the
borrowed funds, thereby reducing the Company's income and ability to make
distributions to its shareholders. Further, CMBS subject to reverse repurchase
agreements periodically are marked to market by the repurchase lender, and a
decline in the value of CMBS pledged to secure reverse repurchase agreements may
result in margin calls. In addition, if renewals of or substitutes for maturing
or called short term borrowings are unavailable to the Company for any reason,
the Company may be required to sell assets quickly to repay those borrowings.
Certain of the Company's CMBS may be illiquid and a sale associated with a short
marketing period generally would result in the Company receiving a lower price
than otherwise would be available. There can be no assurance that the Company
will not incur losses associated with forced sales of illiquid collateral to
repay borrowings. Furthermore, the use of leverage will magnify the Company's
exposure to losses.
Interest Rate Mismatch Between Asset Yields And Borrowing Rates May Affect
Adversely the Company's Net Income. The Company's borrowings may be at interest
rates based on indexes and repricing terms similar to, but of somewhat shorter
maturities than, the interest rate indexes and repricing terms of various of the
Company's variable rate assets. While the historical spread between relevant
short-term interest rate indexes has been relatively stable, there have been
periods, such as the 1979 through 1982 high interest rate environment, when the
spread between those indexes was volatile. Further, certain of the Company's
assets will bear fixed rates of interest and have long term maturities. There
can be no assurance that such fixed rates of interest will exceed the variable
rates of interest on related borrowings. Interest rate mismatches could impact
the Company's financial condition in a material way, and could affect adversely
the Company's income and ability to make distributions to its shareholders,
dividend yield and the market price of the Common Stock. See "-- Leverage Can
Reduce Income Available for Distribution and Cause Losses" and "-- The Company
May Not be Able to Borrow Money on Favorable Terms."
The Company May Not be Able To Borrow Money on Favorable Terms. The
ability of the Company to achieve its investment objectives through leverage
will depend on the Company's ability to borrow money on favorable terms. The
Company has not entered into any borrowing arrangements at the present time, and
there can be no assurance that the Company will be able to enter into
arrangements enabling it to borrow money on favorable terms.
Adverse Changes in General Economic Conditions Can Affect Adversely the
Company's Business. The Company's success is dependent upon the general
economic conditions in the geographic areas in which a substantial number of its
investments are located. Adverse changes in national economic conditions or in
the economic conditions of the regions in which the Company conducts substantial
business likely would have an
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adverse effect on real estate values, interest rates and, accordingly, the
Company's business, income and ability to make distributions to its
shareholders. The general economic conditions in the geographic areas in which
the Company's investments are located will be beyond the control of the Company.
Significant Competition May Affect Adversely the Company's Ability to
Acquire Assets at Favorable Spreads Relative to Borrowing Costs. The Company
will engage in a business that may become increasingly competitive in the future
as more people enter the market, which may adversely affect the Company's
ability to achieve its investment objectives. In acquiring Real Estate Related
Assets, the Company will compete with CRIIMI MAE, Inc., Ocwen Asset Investment
Corporation, Goldman Sachs' Whitehall Street Real Estate Limited Partnership
Funds, Capital Trust and Allied Capital Commercial Corporation, as well as other
REITs, investment banking firms, savings and loan associations, banks, mortgage
bankers, insurance companies, mutual funds, other lenders, Fannie Mae and other
entities purchasing similar assets, many of which have established operating
histories and procedures, may have access to greater capital and other resources
and may have other advantages over the Company in conducting certain businesses
and providing certain services. There are several REITs similar to the Company
and others may be organized in the future. The effect of the existence of
additional REITs may be to increase competition for the available supply of Real
Estate Related Assets contemplated to be acquired by the Company. The Company's
net income will depend, in large part, on the Company's ability to originate and
acquire Mortgage Loans and CMBS having yields that produce favorable spreads
over the Company's borrowing costs. Increased competition for the acquisition of
Mortgage Loans and CMBS or a reduction in the available supply could result in
higher prices and thus lower yields on such Mortgage Loans and CMBS, which could
narrow (or make negative) the yield spread relative to the Company's borrowing
costs. In addition, the Company's competitors may seek to establish
relationships with the financial institutions and other firms from whom the
Company intends to acquire such assets. There can be no assurance that the
Company will be able to acquire sufficient Real Estate Related Assets at
favorable spreads relative to the Company's borrowing costs to achieve the
Company's objectives. In addition, there can be no assurance that a supply of
Real Estate Related Assets suitable for acquisition by the Company will continue
to be available, or that changes in market conditions or applicable laws will
not affect the availability of suitable Real Estate Related Assets.
Investments May Be Illiquid and Their Value May Decrease. Many of the
Company's assets are and will be relatively illiquid. In addition, certain of
the CMBS that the Company will acquire will include interests that have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
or other applicable securities laws, resulting in a prohibition against
transfer, sale, pledge or other disposition of those CMBS except in a
transaction that is exempt from the registration requirements of, or is
otherwise in accordance with, those laws. The ability of the Company to vary its
portfolio in response to changes in economic and other conditions will be
relatively limited. There can be no assurance that the fair market value of any
of the Company's assets will not decrease in the future.
LEGAL AND TAX RISKS
Adverse Consequences of Failure to Maintain REIT Status May Include the
Company Being Subject to Taxation as a Regular Corporation. The Company intends
to operate in a manner so as to qualify as a REIT for federal income tax
purposes. Although the Company does not intend to request a ruling from the
Service as to its REIT status, the Company will receive an opinion of King &
Spalding that, based on certain assumptions and representations, it has been
organized in conformity with the requirements for qualification and taxation as
a REIT under the Code, and its proposed method of operation will enable it to
meet the requirements for qualification and taxation as a REIT beginning with
its fiscal year ended December 31, 1998. Investors should be aware, however,
that opinions of counsel are not binding on the Service or any court. The REIT
qualification opinion only represents the view of counsel to the Company based
on counsel's review and analysis of existing law, which includes no controlling
precedent. In addition, both the validity of the opinion and the continued
qualification of the Company as a REIT will depend on the Company's satisfaction
of certain asset, income, organizational, distribution and shareholder ownership
requirements on a continuing basis. If the Company were to fail to qualify as a
REIT in any taxable year, the Company would be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular
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corporate rates, and distributions to shareholders would not be deductible by
the Company in computing its taxable income. Any such corporate tax liability
could be substantial and would reduce the amount of cash available for
distribution to shareholders, which in turn could have an adverse impact on the
value of, and trading prices for, the Common Stock. Unless entitled to relief
under certain Code provisions, the Company also would be disqualified from
taxation as a REIT for the four taxable years following the year during which
the Company ceased to qualify as a REIT.
The Company must distribute annually at least 95% of its taxable income
(excluding any net capital gain) in order to avoid corporate income taxation of
the earnings that it distributes. In addition, the Company will be subject to a
4% nondeductible excise tax on the amount, if any, by which certain
distributions paid by it with respect to any calendar year are less than the sum
of (i) 85% of its ordinary income for that year, (ii) 95% of its net capital
gain for that year and (iii) 100% of its undistributed taxable income from prior
years. See "Federal Income Tax Considerations."
The Company intends to make distributions to its shareholders to comply
with the 95% distribution requirement and to avoid the nondeductible excise tax.
Differences in timing between the recognition of taxable income and the actual
receipt of cash, however, may require the Company to borrow funds, issue capital
stock or sell assets on a short-term basis to meet the 95% distribution
requirement and to avoid the nondeductible excise tax. In addition, the
requirement to distribute a substantial portion of the Company's taxable income
could cause the Company (i) to sell assets in adverse market conditions, (ii) to
distribute amounts that represent a return of capital under generally accepted
accounting principles or (iii) to distribute amounts that would otherwise be
spent on future acquisitions, unanticipated capital expenditures or repayment of
debt.
To qualify as a REIT, the Company must satisfy certain requirements
concerning the nature of its assets and income, which may restrict the Company's
ability to invest in various types of assets. See "Federal Income Tax
Considerations -- Requirements for Qualification -- Asset Tests." Without
limiting the generality of the foregoing, the Company will not be able to
acquire securities (other than securities which are treated as an interest in
real property, interests in entities that are treated as partnerships for
federal income tax purposes, and the stock of wholly owned corporate
subsidiaries) of any single issuer which would represent either more than 5% of
the total value of the Company's assets or more than 10% of the voting
securities of such issuer. In addition, to satisfy the income requirements of a
REIT, the Company generally will be restricted to acquiring assets which
generate qualifying income for purposes of certain income tests. See "Federal
Income Tax Considerations -- Requirements for Qualification -- Income Tests."
These restrictions could affect adversely the Company's ability to optimize its
portfolio of assets.
Certain Investments May Generate Phantom Income. Subordinated Interests
and Mortgage Loans subject to CMO debt typically generate Phantom Income. For
example, Subordinated Interests often are issued with OID, which generally is
equal to the difference between an obligation's issue price and its redemption
price. The Company's Mezzanine Investments also may be deemed to have OID for
federal income tax purposes. OID generally will be accrued using a constant
yield methodology that does not allow credit losses to be reflected until they
are actually incurred. The Company will be required to recognize as income each
year the portion of the OID that accrues during that year, which will increase
the amount that the Company must distribute for that year in order to avoid a
corporate-level income tax, notwithstanding the fact that there may be no
corresponding contemporaneous receipt of cash by the Company. The Company also
may be required to accrue interest income form Mortgage Loans even though the
borrowers fail to pay the full amounts due, and may recognize Excess Inclusion
or other "phantom" taxable income from REMIC Residual Interests and Non-REMIC
Residual Interests. See "Federal Income Tax Considerations." In addition, the
Company may recognize taxable market discount income upon the receipt of
proceeds from the disposition of, or principal payments on, Mortgage Loans and
Subordinated Interests that are "market discount bonds" (i.e., obligations with
a stated redemption price at maturity that is greater than the Company's tax
basis in such obligations), although such proceeds often will be used to make
non-deductible principal payments on related borrowings. Finally, the Company
may recognize taxable income without receiving a corresponding cash distribution
if it forecloses on or makes a "significant modification" (as defined in
Treasury Regulations section 1.1001-3(c)) to a Mortgage Loan, to the extent that
the fair market value of the underlying property
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or the principal amount of the modified loan, as applicable, exceeds the
Company's basis in the original loan. Consequently, the Company's investments
could have the effect of requiring the Company to incur borrowings or to
liquidate a portion of its portfolio at rates or times that the Company regards
as unfavorable in order to distribute all of its taxable income and thereby
avoid corporate-level income tax.
Investment in the Common Stock of the Company by Certain Plans May Give
Rise to a Prohibited Transaction Under ERISA and the Code. The Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and section 4975
of the Code prohibit certain transactions that involve (i) certain pension,
profit-sharing or other employee benefit plans subject to Title I of ERISA (each
a "Plan") and (ii) the assets of a Plan. A "party in interest" or "disqualified
person" with respect to a Plan will be subject to (x) an initial 15% excise tax
on the amount involved in any prohibited transaction involving the assets of the
Plan for each year or part thereof during which the transaction is not corrected
and (y) an excise tax equal to 100% of the amount involved if any prohibited
transaction is not corrected. Consequently, the fiduciary of a Plan
contemplating an investment in the Common Stock should consider whether the
Company, any other person associated with the issuance of the Common Stock, or
any affiliate of the foregoing is or might become a "party in interest" or
"disqualified person" with respect to the Plan. In such a case, the acquisition
or holding of Common Stock by or on behalf of the Plan could be considered to
give rise to a prohibited transaction under ERISA and the Code. See "ERISA
Considerations -- Employee Benefit Plans, Tax Qualified Retirement Plans and
IRAs."
Ownership Limitation May Restrict Business Combination Opportunities. In
order for the Company to maintain its qualification as a REIT, not more than 50%
in value of its outstanding shares of capital stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) at any time during the last half of the taxable year (other
than its first taxable year as a REIT). For the purpose of preserving its REIT
qualification, the Charter generally prohibits direct or indirect ownership of
more than 9.8% of the number of outstanding shares of Common Stock or of any
class or series of preferred stock, except by Lend Lease so long as it is
publicly held (the "Ownership Limitation"). Lend Lease and its affiliates are
not subject to the Ownership Limitation so long as Lend Lease is publicly held.
The Ownership Limitation could have the effect of discouraging a takeover or
other transaction in which holders of some, or a majority, of the shares of
Common Stock might receive a premium for their shares of Common Stock over the
then prevailing market price or which such holders might believe to be otherwise
in their best interests. Upon consummation of this offering, Lend Lease will
beneficially own 10.0% of the outstanding Common Stock of the Company. See
"Description of Capital Stock -- Restrictions on Ownership and Transfer" and
"Federal Income Tax Considerations -- Requirements for Qualification."
Preferred Stock May Prevent Change in Control. The Charter authorizes the
Board of Directors to classify and reclassify unissued capital stock into shares
of preferred stock of one or more series and to establish the preferences and
rights of any shares of preferred stock issued. Although the Company has no
current intention to issue any series of preferred stock in the foreseeable
future, the issuance of any series of preferred stock could have the effect of
delaying or preventing a change in control of the Company even if a majority of
the holders of the Company's Common Stock (the "Common Shareholders") believed
such change of control was in their best interest. See "Description of Capital
Stock -- Preferred Stock."
Georgia Anti-Takeover Statutes May Restrict Business Combination
Opportunities. As a Georgia corporation, the Company is subject to various
provisions of Georgia law, which impose certain restrictions and require certain
procedures with respect to certain stock purchases and business combinations.
See "Certain Provisions of Georgia Law and of the Company's Articles of
Incorporation and Bylaws -- Georgia Anti-Takeover Statutes."
Board of Directors May Change Certain Policies Without Shareholder
Consent. The major policies of the Company, relating to the origination of
loans, purchase and sale of assets, financing, operations, debt and
distributions, are determined by its Board of Directors. The Board of Directors,
and in certain cases, the Independent Directors, may amend or revise these and
other policies, or approve transactions that deviate from these policies, from
time to time without a vote of the shareholders. The effect of any such changes
may be positive or negative. The Company cannot change its policy of seeking to
maintain its qualification as a
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REIT without the affirmative vote of two-thirds of all of the votes ordinarily
entitled to be cast in the election of directors, voting together as a single
class and the affirmative vote of 80% of the members of the Board of Directors.
See "Operating Policies and Objectives" and "Certain Provisions of Georgia Law
and of the Company's Articles of Incorporation and Bylaws."
Loss of Investment Company Act Exemption Would Affect the Company
Adversely. The Company believes that it will not be, and intends to conduct its
operations so as not to become, regulated as an investment company under the
Investment Company Act. The Investment Company Act exempts entities from
regulation that, directly or through majority-owned subsidiaries, are "primarily
engaged in the business of purchasing or otherwise acquiring mortgages and other
liens on and interests in real estate" ("Qualifying Interests"). Under current
interpretations by the Staff of the Securities and Exchange Commission (the
"Commission"), in order to qualify for this exemption, the Company, among other
things, must maintain at least 55% of its assets in Qualifying Interests and
also may be required to maintain an additional 25% in Qualifying Interests or
other assets related to real estate. The assets that the Company may acquire
therefore may be limited by the provisions of the Investment Company Act. In
connection with its acquisition of CMBS, the Company will seek, where
appropriate, to obtain foreclosure rights by obtaining the Special Servicing
rights with respect to the underlying mortgage loans, although there can be no
assurance that it will be able to do so on acceptable terms. If the Company does
not obtain such rights, the related CMBS generally will not constitute
Qualifying Interests (but the Company believes they would constitute other
assets related to real estate) for the purpose of the Investment Company Act. If
the Company obtains such rights, the Company believes that the related CMBS
generally will constitute Qualifying Interests for the purpose of the Investment
Company Act. The Company does not intend, however, to seek an exemptive order,
no-action letter or other form of interpretive guidance from the Commission or
its Staff on this position. If the Commission or its staff were to take a
different position with respect to whether such CMBS constitute Qualifying
Interests, the Company, among other things, could be required either (a) to
change the manner in which it conducts its operations to avoid being required to
register as an investment company under the Investment Company Act or (b) to
register as an investment company, either of which could have an adverse effect
on the Company and the market price for the Common Stock.
The Company's Responsibility to Indemnify The Manager and Officers and
Directors of the Company May Result in Liability for the Actions of the Manager
and Officers and Directors of the Company. Georgia law permits a Georgia
corporation to include in its charter a provision limiting the liability of its
directors and officers to the corporation and its shareholders for money damages
except for liability resulting from (a) actual receipt of an improper benefit or
profit in money, property or services or (b) active and deliberate dishonesty
established by a final judgment as being material to the cause of action. The
Charter contains such a provision which eliminates such liability to the maximum
extent permitted by Georgia law. See "The Company -- Directors and Executive
Officers."
The Company will indemnify the Manager and its officers and directors from
any action or claim brought or asserted by any party by reason of any allegation
that the Manager or one or more of its officers or directors is otherwise
accountable or liable for the debts or obligations of the Company or its
affiliates. In addition, the Manager and its officers and directors will not be
liable to the Company, and the Company will indemnify the Manager and its
officers and directors, for acts performed in good faith pursuant to the
Management Agreement, except for claims arising from acts constituting bad
faith, willful misconduct, gross negligence or reckless disregard of their
duties under the Management Agreement. See "Management of Operations -- Limits
of Responsibility." In addition, the Company will indemnify, hold harmless and
pay reasonable expenses in advance of final disposition of a proceeding to
present or former directors and officers and certain other parties to the
fullest extent permitted from time to time by Georgia Law. See "The Company."
OTHER RISKS
Yield on IOs May be Adversely Affected by Interest Rate Changes. The
Company may create or acquire interest only classes of MBS ("IOs"), which are
classes of MBS that are entitled to no (or only nominal) payments of principal,
but only to payments of interest. The yield to maturity of IOs is very sensitive
to changes in the weighted average life of such securities, which in turn is
dictated by the rate of prepayments on
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the underlying mortgage collateral. In periods of declining interest rates,
rates of prepayments on mortgage loans generally increase, and if the rate of
prepayments is faster than anticipated, then the yield on IOs will be affected
adversely. Inverse IOs are a class of MBS that bear interest at a floating rate
that varies inversely with (and often at a multiple of) changes in a specified
index. The Company may invest in Inverse IOs for the purpose of, among other
things, hedging its portfolio of IOs. The yield to maturity of an Inverse IO
generally is extremely sensitive to changes in the related index. The Company
also may invest in Sub IOs, a class for which interest generally is withheld and
used to make principal payments on more senior classes or to fund a reserve
account for the protection of senior classes until overcollateralization or
until the balance in the reserve account reaches a specified level. Interest on
a Sub IO generally will be paid only after the overcollateralization or the
balance in the reserve account reaches the specified level. Sub IOs provide
credit support to the senior classes, and thus bear substantial credit risk.
Moreover, because all IO classes only receive interest payments, their yields
are extremely sensitive not only to default losses but also to changes in the
weighted average life of the relevant classes, which in turn will be dictated by
the rate of prepayments on the underlying Mortgage Collateral. In addition, Sub
IOs often generate taxable income in excess of cash received, which may affect
the Company's ability to meet the distribution requirements applicable to REITs.
See "-- Legal and Tax Risks -- Adverse Consequences of Failure to Maintain REIT
Status May Include the Company Being Subject to Taxation as a Regular
Corporation."
The Failure to Develop a Market for Common Stock May Result in a Decrease
in its Market Price. Prior to this offering, there has not been a public market
for the shares of Common Stock offered hereby. The initial public offering price
will be determined by the Company and representatives of the Underwriters. There
can be no assurance that the price at which the shares of Common Stocks will
sell in the public market after the offering will not be lower than the price at
which they are sold by the Underwriters. The Company will apply to list the
Common Stock on the Nasdaq National Market. Quotation through the Nasdaq
National Market does not insure, however, that an active market will develop for
the Common Stock.
Increases in Interest Rates May Affect Adversely the Yield of the Common
Stock. The Company's earnings will be derived primarily from the expected
positive spread between the yield on the Company's Real Estate Related Assets
and the costs to the Company of its borrowings. This expected positive spread
will not necessarily be larger in high interest rate environments than in low
interest rate environments. In periods of high interest rates, however, the net
income of the Company, and therefore the dividend yield on the Common Stock, may
be less attractive compared to alternative investments of equal or lower risk,
which could impact adversely the market price of the Common Stock.
Possible Adverse Affects on Share Price Arising From Shares of Common Stock
Eligible for Future Sale. A substantial number of shares of Common Stock
currently outstanding, or issuable upon exercise of stock options, will become
eligible for future sale in the public market at prescribed times pursuant to
applicable regulations and registration rights granted to certain
securityholders. No prediction can be made as to the effect, if any, of future
sales of shares of Common Stock, or the availability of shares for future sales,
on the market price of the Common Stock.
A wholly-owned indirect subsidiary of Lend Lease, Yarmouth Lend Lease
Holdings, Inc., has agreed to purchase 1,166,567 shares of Common Stock so that
it will own 10% of the Common Stock of the Company upon the consummation of this
offering. Pursuant to the stock purchase agreement between Yarmouth Lend Lease
Holdings, Inc. and the Company, Lend Lease must retain its shares of Common
Stock of the Company until the earlier of (i) two years from the consummation of
the offering and (ii) the date, if any, that ERE Yarmouth is terminated as the
Manager.
FBR Asset Investment Corporation has agreed to purchase 700,000 shares of
Common Stock of the Company, or 6.0% of the Common Stock of the Company to be
outstanding upon consummation of this offering. The Company has agreed to enter
into a registration rights agreement with FBR Asset Investment Corporation upon
consummation of this offering. From and after the one year anniversary of the
consummation of this offering, FBR Asset Investment Corporation will have
unlimited "piggyback" registration rights, subject to certain conditions, and
may require the Company to file a shelf registration statement on Form S-3
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relating to the Common Stock. The Company may prohibit offers and sales of
securities pursuant to the shelf registration statement under certain
circumstances.
In addition, the Company has granted the Manager options to purchase
1,166,667 shares of Common Stock (1,313,667 shares if the Underwriters exercise
their over-allotment option) or, if necessary to prevent Lend Lease from
exceeding the Ownership Limitation set forth in the Charter, Units at a price
per share equal to the initial public offering price of the Common Stock. One
quarter of these options will become exercisable on each of the four
anniversaries of the consummation of this offering. Significant sales of shares
of Common Stock in the public market following the offering could adversely
affect prevailing market prices. See "Common Stock Available for Future Sale."
Future Offerings of Capital Stock May Result in Dilution of the Book Value
or Earnings Per Share of the Outstanding Common Stock. The Company may increase
its capital resources in the future by making additional offerings of its Common
Stock, securities convertible into its Common Stock or Preferred Stock. The
actual or perceived effect of such offerings may be the dilution of the book
value or earnings per share of the Common Stock outstanding, which may result in
the reduction of the market price of the Common Stock.
OPERATING POLICIES AND OBJECTIVES
The Company's investments will include several categories of commercial
mortgage and real estate related assets that will be sourced, managed and
actively serviced by ERE Yarmouth's twelve offices located throughout the United
States. The Company intends to invest throughout the real estate cycle, focusing
on opportunities with respect to which it perceives high relative value.
Initially, the Company will emphasize creating a mortgage portfolio
collateralized by institutional quality assets for the purpose of securitizing
and retaining the subordinated interests in such loans. The Company will seek to
generate cash flow primarily (i) by originating and acquiring whole loans in
order to create pools of Mortgage Loans for securitization and retain the
Subordinated Interests in those pools subject to the CMO debt and (ii) from
investments in (A) Subordinated Interests in CMBS; (B) Mezzanine Investments in
commercial and multifamily residential properties and (C) Opportunistic Real
Properties, including REO Properties. There can be no assurance that the Company
will be able to acquire such assets, that the terms or results of such
acquisitions will be beneficial to the Company, or that the Company will achieve
its objectives. See "Risk Factors."
Although the Company expects that its primary emphasis will be on the
origination and acquisition of Subordinated Interests, the Company's investment
decisions will depend on changing market factors and will include the
origination and acquisition of Mezzanine Investments, Opportunistic Real
Properties and Other Real Estate Related Assets, including Agricultural Loans,
Construction Loans, foreign real estate and Environmentally Distressed Real
Properties. The Company may decide in the future to pursue other available
acquisition opportunities it deems suitable for the Company's portfolio. Thus
the Company cannot anticipate with any certainty the percentage of the proceeds
of this offering that will be invested to any particular category of Real Estate
Related Assets, except that the Company does not expect to invest more than 25%
of its assets in Other Real Estate Related Assets. Subject to the Company's
investment Guidelines described below, the Company has a great deal of
discretion in the manner in which to invest the proceeds of this offering. The
Company will seek to maximize yield by managing credit risk through credit
underwriting, although there can be no assurance that the Company's efforts will
be successful.
The Company will have no predetermined limitations or targets for
concentration of property type or geographic location. Instead, the Company
plans to make acquisition decisions through asset and collateral analysis,
evaluating investment risks and potential rewards on a case-by-case basis. To
the extent that the Company's assets become concentrated in a few states or a
particular region, the return on an investment in the Common Stock will become
more dependent on the economy of such states or region.
To create yields commensurate with its investment objectives, the Company
intends to borrow funds through the issuance of CMOs in non-REMIC debt
securitizations or other borrowing arrangements, pledging its assets (including
Mortgage Loans and interests in MBS) as collateral security for its repayment
obligations. The Company also, in certain limited cases, may securitize Mortgage
Loans by transferring them
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to a special purpose trust or corporation which elects to be treated as a REMIC.
The special purpose entity would issue CMBS Pass-Through Certificates. The
Company intends to purchase certain non-investment grade and IO classes from the
special purpose entity. Pass-Through Certificates evidence interests in trusts,
the primary assets of which are mortgage loans. The Company intends to use the
proceeds from securitizations and borrowings to invest in additional Mortgage
Loans, CMBS and other assets and, in turn, to borrow against those newly
acquired assets, primarily through CMOs. The Company's strategy is to repeat
this process to the extent opportunities to use leverage are available and the
Manager determines and advises that using leverage is prudent and consistent
with maintaining an acceptable level of risk until the Company has significantly
leveraged its portfolio of Mortgage Loans and CMBS. There can be no assurance
that the Company will be able to acquire appropriate assets, that the terms or
results of the Company's acquisitions will be beneficial to it, or that the
Company will achieve its objectives. See "Risk Factors."
If the Company decides to acquire assets from a prospective seller or other
transferor that would realize significant gain on the sale or other disposition
of those assets, the Company will, in an attempt to make a transfer of those
assets to the Company a more attractive disposition alternative to the
prospective transferor, offer to acquire those assets in exchange for units of
limited partnership in the Operating Partnership. The Units will be redeemable
for cash or, at the option of the General Partner, shares of Common Stock of the
Company on a "one for one" basis. The number of Units to be issued to the
prospective transferor would be determined by the Manager in substantially the
same manner as if the Company were considering a purchase of those assets for
cash.
The Company may change its policies in connection with any of the foregoing
without the approval of the shareholders.
RELATIONSHIP WITH ERE YARMOUTH AND LEND LEASE
The Company will rely extensively on the experience of the Manager in
developing and managing its portfolio. ERE Yarmouth has substantial experience
in the origination and servicing of whole loans and CMBS, the acquisition and
resolution of troubled loans and the acquisition and management of diverse real
estate related assets. This experience, together with ERE Yarmouth's personnel,
office network, systems, research capabilities and operating policies, will be
made available to the Company through the Management Agreement. The Company
believes that the availability of ERE Yarmouth's resources will allow the
Company effectively to manage Mortgage Loans, Subordinated Interests,
Opportunistic Real Property, Mezzanine Investments and Other Real Estate Related
Assets.
General. The Company believes that ERE Yarmouth is one of the most
diversified real estate investment management companies in the world. Together
ERE Yarmouth and Lend Lease provide investment management, property management,
leasing and development services on five continents. According to Pensions &
Investments, an investment management journal, as of June 30, 1997, ERE Yarmouth
managed the largest portfolio in the United States of real estate assets owned
by pension plans and other tax exempt investors. As of September 30, 1997, ERE
Yarmouth had over $29.4 billion of assets under management on behalf of a wide
variety of corporate, public and union pension funds, international investors,
insurance companies and other financial institutions, including $22.2 billion of
equity investments and $7.2 billion of mortgages. ERE Yarmouth holds 657
investments in its portfolios representing 96 million square feet of retail
space, 136 million square feet of office space, 75 million square feet of
industrial space, and 13,995 hotel rooms. ERE Yarmouth represents 20 commingled
client portfolios and 313 institutional clients and has 1,200 employees. ERE
Yarmouth is headquartered in Atlanta, Georgia and has twelve offices that work
in conjunction with 240 COMPASS Management and Leasing offices, located
throughout the United States. COMPASS Management and Leasing is a wholly-owned
indirect subsidiary of Lend Lease. The firm's regional operations include
full-service offices with valuation professionals, asset managers and
origination, acquisition and disposition specialists. ERE Yarmouth's regional
operations are designed to allow it to monitor new investment opportunities
closely and act quickly on opportunities.
To support its investment activities, ERE Yarmouth tracks more than 70 U.S.
markets using both macro economic/demographic data and information derived
directly from its portfolios of office buildings, ware-
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houses, shopping centers, hotels and apartments. Additionally, ERE Yarmouth's
proprietary information systems technology directly monitors property
performance and customizes portfolio reporting. ERE Yarmouth has invested in a
computer infrastructure that includes significant capacity for expansion and
upgrade. The Company believes that ERE Yarmouth's systems and procedures have
substantial applicability to the Company's lines of business, and that the
Company's access, through the Management Agreement, to ERE Yarmouth's
information technology will be a key factor in the Company's ability to compete.
Whole Loan Originations. Through its predecessors, ERE Yarmouth has been
investing in mortgages on behalf of Equitable Life for the past 130 years. Prior
to 1993, all of ERE's mortgage investing was handled through its regional office
network, which originated $1.5 billion of commercial whole loans on behalf of
Equitable Life and other pension fund clients and refinanced in excess of $1.1
billion of mortgages. In 1993, in addition to ERE's regional office origination
business ERE and Donaldson, Lufkin & Jenrette formed a joint venture mortgage
origination and securitization company known as Column Financial, Inc. ("Column
Financial") to take advantage of the growth in the CMBS origination and
securitization markets. From 1993 through June 1997, Column Financial has
originated in excess of $1.4 billion of commercial mortgage loans and
securitized in excess of $2 billion of loans. Although Column Financial was not
included in the acquisition of ERE by Lend Lease, the Company believes that
ERE's experience with Column Financial will enable the Manager to better
originate, underwrite and close Mortgage Loans for securitization for the
Company.
Opportunistic Investing. ERE Yarmouth, through its regional office
network, has invested significant capital on behalf of its institutional client
base. Since 1995, ERE Yarmouth has acquired $2.8 billion of equity real estate
for clients, of which over $225 million was in small equity real estate and
distressed loans, which were diversified by property type and location. The
Company believes that this experience will enable the Manager to appropriately
identify, underwrite and close investments in Opportunistic Real Property on
behalf of the Company.
CMBS Investment and Management. ERE Yarmouth, along with ERE Hyperion, has
significant experience in the acquisition and management of CMBS, including, at
September 30, 1997 over $375 million of commercial mortgage backed securities of
which $202 million were subordinated securities. The Company believes that this
experience will enable the Manager to appropriately identify, evaluate, price
and manage Subordinated Interests and other classes of CMBS for the Company. For
a description of the operations and prior performance data of ERE Hyperion, see
Appendix A.
Mortgage Servicing. One of ERE's primary functions when it was established
in 1984 as an independent subsidiary of Equitable Life was to act as Equitable
Life's mortgage loan servicing unit. EQ Services, Inc. ("EQ Services") was
incorporated in May 1992 as a separate affiliate of ERE to provide servicing for
commercial mortgage backed securities and third party client portfolios in
addition to Equitable Life's own General Account. Within three years, EQ
Services grew into one of the largest servicers of CMBS. In late 1995, as
pricing and other market conditions changed, Equitable Life exited the
securitized servicing business. EQ Services was sold and the mortgage servicing
function was transferred back to ERE. ERE itself, and through EQ Services, has
acted as master or Special Servicer on various loan pools. As of October 31,
1997, ERE Yarmouth serviced a $5 billion commercial mortgage portfolio and in
excess of a $2 billion agricultural mortgage portfolio.
THE COMPANY'S GUIDELINES
General. The following is a summary of the guidelines setting forth the
general parameters for the Company's investments, borrowings and operations (the
"Guidelines"). The Guidelines will be approved by the Board of Directors
(including a majority of the Independent Directors) and may be changed by the
Board of Directors without a vote of the shareholders. The Manager is empowered
to make the day-to-day investment decisions of the Company based on the
Guidelines. Such investment decisions will include decisions to issue
commitments on behalf of the Company to purchase Mortgage Loans, CMBS and other
assets meeting the investment criteria of the Company. The Independent Directors
will review transactions of the Company in the quarter following completion to
ensure compliance with the Guidelines.
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The Company intends to invest primarily in Real Estate Related Assets with
a view to maximizing income for distribution to shareholders, consistent with
levels of risk that are perceived by the Company to be acceptable. Pending
investment of its funds in longer term investments as provided for in the
Guidelines, the Company intends to invest those funds in readily marketable
securities or interest-bearing deposit accounts, consistent in each case with
maintaining the Company's status as a REIT. The Company is permitted to take an
opportunistic approach to its investments, and may acquire any of the types of
assets described in the Guidelines if the Company and the Manager determine that
such investments would be in the Company's best interests.
The Company, in consultation with the Manager, may establish underwriting
criteria for evaluating potential investments and, if such underwriting criteria
are established, the Company, in consultation with the Manager, may modify such
underwriting criteria at any time and from time to time. The Company's policy
generally is to offer a price for each asset that it contemplates acquiring that
is not greater than the price that the Manager estimates to be sufficient to
generate an acceptable risk-adjusted return to the Company from the acquisition
of that asset.
Purchase From the Manager and Its Affiliates. The Company may (although it
does not intend to) purchase assets from the Manager and its affiliates from
time to time. The price at which the Company will purchase Mortgage Loans and
other assets from third parties (including the Manager and its affiliates) will
be determined in accordance with the Guidelines, as amended from time to time.
The Manager will determine the transfer price for the Company's acquisitions of
assets from Lend Lease and its affiliates based on pricing guidelines approved
by the Independent Directors. The Independent Directors will approve those
transactions to ensure compliance with the Company's pricing guidelines.
In deciding whether to approve an acquisition of any assets, including
acquisitions of Mortgage Loans and other assets from Lend Lease or its
affiliates, the Manager may consider such information as it deems appropriate to
determine whether the acquisition is consistent with the Guidelines, such as
whether the price is fair and the investment otherwise is suitable and in the
best interests of the Company. In addition, the Manager may consider, among
other factors, whether the acquisition of that asset will enhance the Company's
ability to achieve or exceed the Company's risk adjusted target rate of return,
if any, established for the relevant time period by the Board of Directors,
whether the asset otherwise is well-suited for the Company and whether the
Company financially is able to take advantage of the investment opportunity
presented thereby. To determine whether the price of an investment is fair, the
Manager may consider a number of other factors, which may include an appraisal
by an appraiser who is certified or licensed in the state and whose compensation
is not dependent on the transaction. The Independent Directors are likely to
rely substantially on information and analysis provided by the Manager to
evaluate the Company's Guidelines, compliance therewith and other matters
relating to the Company's investments.
Where possible, the price that the Company will pay for Mortgage Loans,
CMBS and other assets acquired from the Manager or its affiliates will be
determined by reference to the prices most recently paid to the Manager or its
affiliates for similar assets, adjusted for differences in the terms of such
transactions and for changes in market conditions between the dates of the
relevant transactions. If no previous sales of similar assets have occurred, the
Company will attempt to determine a market price for the asset by an alternative
method, such as obtaining a broker's price opinion or an appraisal, if it can do
so at a reasonable cost. Investors should understand, however, that such
determinations are estimates and are not bona fide third party offers to buy or
sell.
It is the intention of the Company that the agreements and transactions,
including the sale of Mortgage Loans, CMBS and Real Property, taken as a whole,
between the Company on the one hand and Lend Lease and its affiliates on the
other hand are fair to both parties. However, there can be no assurance that
each of such agreements and transactions will be on terms at least as favorable
to the Company as it could have obtained from unaffiliated third parties.
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THE COMPANY'S ASSETS
The discussion below describes the principal categories of assets that the
Company intends to originate or acquire.
Subordinated Interests. The Company will originate commercial whole loans
for the purpose of securitizing such pools of such loans and retaining the
Subordinated Interests. MBS typically are divided into two or more classes,
sometimes called "tranches." The senior classes are higher "rated" securities,
which would be rated by independent agencies from low investment grade "BBB" to
higher investment grade "AA" or "AAA." The junior, subordinated classes
typically would include a lower rated, non-investment grade "BB" and "B" class,
and an unrated, higher-yielding, credit support class (the "Subordinated
Interest," which generally is required to absorb the first losses on the
underlying mortgage loans).
MBS generally are issued either as CMOs or Pass-Through Certificates. CMOs
are debt obligations of special purpose corporations, owner trusts or other
special purpose entities secured by commercial mortgage loans or MBS. CMOs and
Pass-Through Certificates may be issued or sponsored by private originators of,
or investors in, mortgage loans, including savings and loan associations,
mortgage bankers, commercial banks, investment banks and other entities. MBS are
not guaranteed by an entity having the credit status of a governmental agency or
instrumentality and generally are structured with one or more of the types of
credit enhancement described below. In addition, MBS may be illiquid. See "Risk
Factors -- Economic and Business Risks -- Investments May be Illiquid and Their
Value May Decrease."
In most mortgage loan securitizations, a series of MBS is issued in
multiple classes in order to obtain investment-grade ratings for the senior
classes and thus increase their marketability. Each class of MBS may be issued
with a specific fixed or variable coupon rate and has a stated maturity or final
scheduled distribution date. Principal prepayments on the mortgage loans
comprising the Mortgage Collateral may cause the MBS to be retired substantially
earlier than their stated maturities or final scheduled distribution dates
although, with respect to commercial mortgage loans, there generally are
penalties for or limitations on the ability of the borrower to prepay the loan.
Interest is paid or accrued on MBS on a periodic basis, typically monthly.
The credit quality of MBS depends on the credit quality of the underlying
Mortgage Collateral. Among the factors determining the credit quality of the
underlying mortgage loans will be the ratio of the mortgage loan balances to the
value of the properties securing the mortgage loans, the purpose of the mortgage
loans (e.g., refinancing or new purchase), the amount and terms of the mortgage
loans, the geographic diversification of the location of the properties and, in
the case of commercial mortgage loans, the credit-worthiness of tenants.
Moreover, the principal of and interest on the underlying mortgage loans
may be allocated among the several classes of a MBS in many ways, and the credit
quality of a particular class results primarily from the order and timing of the
receipt of cash flow generated from the underlying mortgage loans. Subordinated
Interests carry significant credit risks. Typically, in a "senior-subordinated"
structure, the Subordinated Interests provide credit protection to the senior
classes by absorbing losses from loan defaults or foreclosures before such
losses are allocated to senior classes. Moreover, typically, as long as the more
senior tranches of securities are outstanding, all prepayments on the mortgage
loans generally are paid to those senior tranches. In some instances,
particularly with respect to Subordinated Interests in commercial
securitizations, the holders of Subordinated Interests are not entitled to
receive scheduled payments of principal until the more senior tranches are paid
in full. Because of this structuring, Subordinated Interests in a typical
securitization are subject to a substantially greater risk of non-payment than
are those more senior tranches. Accordingly, the Subordinated Interests are
assigned lower credit ratings, or no ratings at all. Neither the Subordinated
Interests nor the underlying mortgage loans are guaranteed by agencies or
instrumentalities of the U.S. government or by other governmental entities and,
accordingly, are subject to credit risks. See "Risk Factors -- Risks Related to
Investments in Subordinated MBS -- Subordinated MBS are Subject to Greater
Credit Risks than More Senior Classes."
As a result of the typical "senior-subordinated" structure, the
Subordinated Interest will be extremely sensitive to losses on the underlying
mortgage loans. For example, if the Company owns a $10 million
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Subordinated Interest in an MBS consisting of $100 million of underlying
mortgage loans, a 7% loss on the underlying mortgage loans will result in a 70%
loss on the Subordinated Interest. Accordingly, the holder of the Subordinated
Interest is particularly interested in minimizing the loss frequency (the
percentage of the loan balances that default over the life of the Mortgage
Collateral) and the loss severity (the amount of loss on a defaulted mortgage
loans, i.e., the principal amount of the mortgage loan unrecovered after
applying any recovery to the expenses of foreclosure and accrued interest) on
the underlying mortgage loans.
The loss frequency on a pool of mortgage loans will depend upon a number of
factors, most of which will be beyond the control of the Company or the
applicable servicer. Among other things, the default frequency will reflect
broad conditions in the economy generally and real estate particularly, economic
conditions in the local area in which the underlying Mortgage Property is
located, the loan-to-value ratio of the mortgage loan, the purpose of the loan,
and the debt service coverage ratio. The loss severity will depend upon many of
the same factors described above, and will also be influenced by the servicer's
ability to foreclose on the defaulted mortgage loan and sell the underlying
Mortgaged Property. For a discussion of certain legal issues affecting the
servicer's ability to foreclose on a mortgage loan, and the legal impediments to
the sale of the underlying Mortgaged Property, see "Certain Legal Aspects of
Mortgage Loans and Real Property Investments." These legal issues may extend the
time of foreclosure proceedings or may require the expenditure of additional
sums to sell the underlying Mortgaged Property, in either case increasing the
amount of loss with respect to the loan.
Before originating or acquiring Subordinated Interests, the Company intends
to perform certain credit underwriting and stress testing to attempt to evaluate
future performance of the Mortgage Collateral supporting such MBS, which may
include (i) a review of the underwriting criteria used in making mortgage loans
comprising the Mortgage Collateral for MBS, (ii) a review of the relative
principal amounts of the loans, their loan-to-value ratios as well as the
mortgage loans' purpose and documentation, (iii) where available, a review of
the historical performance of the loans originated by the particular originator
and (iv) in the case of CMBS, some level of re-underwriting the underlying
mortgage loans, as well as selected site visits.
The Manager is a primary servicer of originated loan pools and intends to
become a rated Special Servicer. The Company intends in many instances to
acquire Special Servicing rights with respect to the mortgage loans underlying
MBS in which the Company owns a Subordinated Interest. The Manager would service
such loans on behalf of the Company. Such Special Servicing rights will give the
Company, among other things, some control over the timing of foreclosures on
such mortgage loans and, thus, may enable the Company to reduce losses on such
mortgage loans. There can be no assurance, however, that the Manager will become
a rated Special Servicer, that the Company will be able to acquire such Special
Servicing rights or that losses on the mortgage loans will not exceed the
Company's expectations. Although the Company's strategy is to purchase
Subordinated Interests at a price designed to return the Company's investment
and generate a profit thereon, there can be no assurance that such goal will be
met or, indeed, that the Company's investment in a Subordinated Interest will be
returned in full or at all. See "Risk Factors -- Risks Related to Investments in
Subordinated MBS," "Risk Factors -- Economic and Business Risks" and "Portfolio
Management -- Asset Management."
Moreover, many of the Subordinated Interests to be acquired by the Company
will not have been registered under the Securities Act, but instead will
initially have been sold in private placements. Because Subordinated Interests
acquired in private placements have not been registered under the Securities
Act, they will be subject to certain restrictions on resale and, accordingly,
will have more limited marketability and liquidity.
Although there are some exceptions, most issuers of multi-class MBS elect
to be treated, for federal income tax purposes, as REMICs. The Company may
acquire not only Subordinated Interests that are treated as regular interests in
REMICs, but also those that are designated as REMIC Residual Interests. Unlike
regular interests in REMICs, REMIC Residual Interests typically generate Excess
Inclusion or other forms of "phantom income" that bear no relationship to the
actual economic income that is generated by a REMIC. Consequently, if a
Subordinated Interest that is designated as a REMIC Residual Interest generates
a significant amount of phantom income in any taxable year, the Company could be
required to borrow funds or
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to liquidate assets in order to distribute all of its taxable income and thereby
avoid corporate income tax for such taxable year.
In securitizing the Mortgage Loans that it originates, the Company
generally will issue non-REMIC CMOs to avoid having to treat the securitization
as a sale of the Mortgage Loans for federal income tax purposes. Any gain from
such a sale of the Mortgage Loans potentially could be subject to a 100% penalty
tax.
Subordinated Interests (other than REMIC Residual Interests and Sub IOs)
generally are issued at a significant discount to their outstanding principal
balance, which gives rise to original issue discount ("OID") for federal income
tax purposes. The Company will be required to accrue the OID as taxable income
over the life of the related Subordinated Interest on a level-yield method in
advance of the receipt of the related cash flow. The OID income attributable to
a Subordinated Interest generally will increase the amount that the Company must
distribute in order to avoid corporate income tax in the early years of the
Company's ownership of the Subordinated Interest even though the Company may not
receive the related cash flow from the Subordinated Interest until a later
taxable year. As a result, the Company could be required to borrow funds or to
liquidate assets in order to distribute all of its taxable income and thereby
avoid corporate income tax for any taxable year. See "Risk Factors -- Legal and
Tax Risks." There can be no assurance that the Company's strategy for investing
in Subordinated Interests will be successful.
Commercial Mortgage-Backed Securities. It is expected that many of the
Subordinated Interests originated or acquired by the Company will be
Subordinated Interests in CMBS. If the Subordinated Interest is originated by
the Company, that interest will generally incorporate the characteristics of an
IO. The Mortgage Collateral supporting CMBS may be mortgage pass-through
securities (discussed below) or pools of whole loans. Of the interests in CMBS
that the Company originates or acquires, most will be Subordinated Interests,
but the Company also may purchase more senior tranches or combined tranches of
first-loss and more senior CMBS.
CMBS are backed generally by a more limited number of commercial or
multifamily residential mortgage loans with larger principal balances than those
of single family residential mortgage loans. As a result, a loss on a single
mortgage loan underlying a CMBS will have a greater negative effect on the yield
of such CMBS, especially the Subordinated Interests in such CMBS.
The Company believes that there will be opportunities to create and invest
in Subordinated Interests in CMBS. Increasingly, owners of commercial mortgage
loans are choosing to securitize their portfolios. However, there can be no
assurance that appropriate opportunities for investment in CMBS will continue to
be available.
ERE Yarmouth intends to utilize ERE Hyperion to locate certain of its CMBS
investments. The Manager will execute an agreement with ERE Hyperion, giving it
the right to manage the Company's CMBS investments. See "Operating Policies and
Objectives -- Relationship with ERE Yarmouth and Lend Lease -- CMBS Investment
and Management."
Opportunistic Real Properties. The Company believes that under appropriate
circumstances the acquisition of REO Properties and other Opportunistic Real
Properties offers significant opportunities to the Company. The Company's policy
will be to conduct an investigation and evaluation of the Opportunistic Real
Property before purchasing such property. Evaluations of potential properties
will be conducted primarily by the Manager's employees who specialize in the
analysis of underperforming or distressed assets, often with further
specialization based on geographic or collateral-specific factors. It is
expected that the Manager's employees will use third parties, such as brokers
who are familiar with the property's type and location, to assist them in
conducting an evaluation of the value of the property, and depending on the
circumstances, may use subcontractors, such as local counsel and engineering and
environmental experts, to assist in the evaluation and verification of
information and the gathering of other information not previously made available
by the potential seller. The amount offered by the Company generally will be the
price that the Manager estimates is sufficient to generate an acceptable
risk-adjusted return on the Company's investment. The Company's goal will be to
purchase Opportunistic Real Property at a favorably low price, to reposition or
convert the use of the
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property, if required, to improve its cash flow by proper management and
refinancing and to enjoy the increased cash flow and long term appreciation of
the asset.
Although the Company believes that a permanent market for the acquisition
of Opportunistic Real Property has emerged in recent years within the private
sector, there can be no assurance that the Company will be able to acquire the
desired amount and type of Opportunistic Real Property in future periods or that
there will not be significant inter-period variations in the amount of such
acquisitions. See "Risk Factors -- Risks Related to Investments in Real
Property." Moreover, there can be no assurance that the Company will be
effective in making any asset acquired more valuable than the price paid to
acquire it.
Mezzanine Investments. The Company may make investments that are
subordinated to first lien mortgage loans on commercial and multifamily real
estate. For example, on a commercial property subject to a first lien mortgage
loan with a principal balance equal to 70% of the value of the property, the
Company could lend the owner of the property (typically a partnership) an
additional 15% to 20% of the value of the property. Typically the loan would be
secured, either by the property subject to the first lien (giving the Company a
second lien position) or a partnership interest in the owner. If a partnership
interest is pledged, the Company would be in a position to takeover the
operation of the property in the event of a default on the loan. These Mezzanine
Investments generally would provide the Company with the right to receive a
stated interest rate on the loan balance and may also include a percentage of
gross revenues from the property, payable to the Company on an ongoing basis,
and/or a percentage of any increase in value of the property, payable upon
maturity or refinancing of the loan, or otherwise would allow the Company to
charge an interest rate that would provide an attractive risk-adjusted return.
Mezzanine Investments may also take the form of preferred equity, which will
have a claim against both the operating cash flow and liquidation proceeds from
the specific real estate assets.
Other Real Estate Related Assets. The Company also may invest in certain
Other Real Estate Related Assets. The Company intends to limit its investment in
such assets to no more than 25% of the Company's portfolio. Other Real Estate
Related Assets may include the following:
Construction Loans. The Company may take advantage of opportunities
to provide Construction Loans on commercial property, taking a first lien
mortgage to secure the debt.
Agricultural Loans. The Company may originate or acquire Agricultural
Loans for use in securitization pools and may acquire agricultural
underperforming real estate assets. Agricultural Loans are secured by first
liens on a parcel or parcels of land, which may be improved by buildings,
fixtures, and equipment or other structures permanently affixed to the
parcel or parcels, that are used for the production of one or more
agricultural commodities or products. Loans are secured by a first lien
mortgage with principal amortization based upon the nature of depreciable
assets and commodity types. Lower percentage (longer duration)
amortizations are associated with productive agricultural real estate with
limited or no depreciable buildings or structures. Typically, as the value
of depreciable structures becomes a larger percentage of the security, the
amortization percentage is higher (shorter duration). Agricultural real
estate may also be improved with permanent plantings (orange groves,
vineyards, etc.) which produce crops for multiple years and the loan
amortizations are structured to reflect the economic life of the productive
assets. The loans are payable monthly, quarterly or semi-annually depending
upon the nature of the commodity produced.
Foreign Real Properties. In addition to purchasing Opportunistic Real
Properties, the Company may originate or acquire Mortgage Loans secured by
real estate located outside the United States or purchase such real estate.
Investing in real estate located in foreign countries creates risks
associated with the uncertainty of foreign laws and markets and risks
related to currency conversion. Although the Manager has no experience in
investing in foreign real estate, its ultimate parent company, Lend Lease,
has 15 offices located outside the United States, primarily in Australia,
Asia and Europe. The Company believes that the Manager's experience in
managing distressed assets generally will be helpful to the management of
such assets. The Company may be subject to foreign income tax with respect
to its investments in foreign real estate. However, any foreign tax credit
that otherwise would be available to
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<PAGE> 40
the Company for U.S. federal income tax purposes will not flow through to
the Company's shareholders due to the Company's status as a REIT.
Real Property With Known Environmental Problems. The Company may
originate or acquire mortgage loans secured by real estate with known
environmental problems that materially impair the value of the property, or
purchase such real estate. If so, the Company will take certain steps to
limit its liability for such environmental problems, but there are risks
associated with such an investment. The Manager has limited experience in
investing in real estate with known environmental risks.
Other MBS. The Company may create or acquire IOs that have
characteristics of Subordinated Interests, known as Sub IOs. A Sub IO is
entitled to no payments of principal; moreover, interest on a Sub IO often
is withheld in a reserve fund or spread account and is used to fund
required payments of principal and interest on the more senior tranches.
Once the balance in the spread account reaches a certain level, interest on
the Sub IO is paid to the holders of the Sub IO. These Sub IOs provide
credit support to the senior classes, and thus bear substantial credit
risk. Moreover, because a Sub IO receives only interest payments, its yield
is extremely sensitive to changes in the weighted average life of the
class, which in turn is dictated by the rate of prepayments (including as a
result of defaults) on the underlying loans. Some Sub IOs are designated as
REMIC Residual Interests, which typically generate Excess Inclusion or
other forms of "phantom income." The Company may invest not only in classes
of Subordinated Interests but also in other classes of MBS, such as IOs and
Inverse IOs. Although the Manager has limited experience in investing in
these categories of MBS, ERE Hyperion regularly invests in such assets. See
"Risk Factors -- Risks Related to Investments in Subordinated CMBS."
Real Estate Companies. As public market ownership and consolidation
continues in the real estate industry, the Company expects to target
investments in real estate companies. Opportunities in this target area
include public and private companies, regardless of form, whether
corporate, partnership, limited liability company or otherwise. The Company
intends to invest in private placements of common stock or other securities
convertible into common stock. When the Company identifies strong
management teams and growth prospects, it may provide growth capital for
build-ups of companies with otherwise limited access to equity capital and
may recapitalize over-leveraged or other poorly capitalized companies. The
Company expects to take advantage of the arbitrage between private and
public market pricing of real estate with its investments in this area.
Conversely, when an entity can be acquired for less than the value of its
assets, the Company may acquire control of such entity, whether directly
(through the acquisition of a controlling equity interest) or indirectly
(through the acquisition of debt).
PORTFOLIO MANAGEMENT
The following describes some of the investment management practices that
the Company may employ from time to time to earn income, facilitate portfolio
management (including managing the effect of maturity or interest rate
sensitivity) and mitigate risk (such as the risk of changes in interest rates).
There can be no assurance that the Company will not amend or deviate from these
policies or adopt other policies in the future.
Leverage and Borrowing. The Company intends to leverage its assets through
the issuance of CMOs, reverse repurchase agreements, warehouse lines of credit,
bank credit facilities, mortgage loans on real estate and other borrowings, when
there is an expectation that such leverage will benefit the Company. However,
the Company does not intend to borrow funds from the Manager or its affiliates.
If changes in market conditions cause the cost of such financing to increase
relative to the income that can be derived from securities purchased with the
proceeds thereof, the Company may reduce the amount of leverage it utilizes.
Leverage creates an opportunity for increased income but, at the same time,
creates special risks. For example, leverage magnifies changes in the net worth
of the Company and affects the amounts available for distribution to
shareholders. Although the amount owed will be fixed, the Company's assets may
change in value during the time the debt is outstanding. Leverage will create
interest expenses for the Company which can exceed the revenues from the assets
retained.
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<PAGE> 41
To the extent the revenues derived from assets acquired with borrowed funds
exceed the interest expense the Company will have to pay, the Company's net
income may be greater than if borrowing had not been used. Conversely, if the
revenues from the assets acquired with borrowed funds are not sufficient to
cover the cost of borrowing, the net income of the Company will be less than if
borrowing had not been used, and therefore the amount available for distribution
to shareholders will be reduced. See "Risk Factors -- Economic and Business
Risks -- Leverage Can Reduce Income Available for Distribution and Cause
Losses."
Under certain circumstances, and notwithstanding adverse interest rate or
market conditions, the Company may use leverage to obtain sufficient cash to
make required distributions of dividends or to fund share repurchases and tender
offers when such leveraging is deemed to be in the best interests of
shareholders. Such situations may arise if the Company's status as a REIT or its
ability to maintain minimum liquidity levels is endangered.
CMOs and Warehouse Lines of Credit. The Company intends to originate or
purchase Mortgage Loans and to issue non-REMIC CMOs collateralized by such
loans. During the period in which the Company is acquiring mortgage loans for
securitization, the Company is likely to borrow funds secured by such loans
pursuant to warehouse lines of credit. The Company has not yet established any
such credit lines. The collateral (whether whole mortgage loans or CMBS) will be
transferred into a qualified REIT subsidiary, and that entity will issue
non-REMIC CMOs. The transaction will be structured as debt, with the issuer
retaining an equity interest in the collateral. In a debt transaction, the
principal balance of the collateral (whether whole loans or MBS) will exceed the
principal balance of the CMOs. Thus, once the CMOs are paid in full, the issuer
will own the collateral free of the lien of the CMO debt. Moreover, the Company
may issue CMOs collateralized by previously issued CMOs or CMBS in transactions
known as "resecuritizations." The Company will structure a resecuritization in
the same manner as a securitization.
Reverse Repurchase Agreements. The Company intends to enter into reverse
repurchase agreements, which are agreements under which the Company would sell
assets to a third party with the commitment that the Company repurchase such
assets from the purchaser at a fixed price on an agreed date. Reverse repurchase
agreements may be characterized as loans to the Company from the other party
that are secured by the underlying assets. The repurchase price reflects the
purchase price plus an agreed market rate of interest.
Bank Credit Facilities. The Company intends to borrow money through
various bank credit facilities, which will have varying fixed or adjustable
interest rates and varying maturities. The Company has not yet established any
such bank credit facilities.
Mortgage Loans on Real Estate Owned by the Company. The Company expects to
borrow funds secured by mortgages on the Company's real estate, including any
Opportunistic Real Properties owned by the Company.
Interest Rate Management Techniques. The Company may engage in a variety
of interest rate management techniques for the purpose of managing the effective
maturity or interest rate of its assets or liabilities. These techniques also
may be used to attempt to protect against declines in the market value of the
Company's assets resulting from general trends in debt markets or to change the
duration of or interest rate risk associated with the Company's borrowings. Any
such transaction is subject to risks, and may limit the potential earnings on
the Company's investment in real estate related assets. Such techniques may
include puts and calls on securities or indices of securities, Eurodollar
futures contracts and options on such contracts, interest rate swaps or other
such transactions. Applicable REIT qualification rules may limit the Company's
ability to use these techniques. See "Federal Income Tax
Considerations -- Requirements for Qualification -- Income Tests."
Hedging. The Guidelines permit the Company to enter into hedging
transactions in certain circumstances. The Company may at times be hedged
against variable-rate indebtedness incurred by the Company to finance its
acquisition and origination of Mortgage Loans and CMBS to attempt to provide
protection from interest rate fluctuations or other market movements. The
Company's Guidelines expressly state that the Company's policy is to use hedging
techniques to mitigate potential risks, and not for speculative purposes, e.g.,
with respect to indebtedness, to limit, fix or cap the interest rate on variable
interest rate indebtedness.
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<PAGE> 42
The Manager will implement the hedging directives of the Company consistent with
the Guidelines, subject to quarterly review by the Board of Directors.
The Company may hedge against interest rate risks on its variable-rate
indebtedness by purchasing Qualified Hedges. A "Qualified Hedge" for this
purpose is limited to an interest rate swap or cap agreement, option, futures
contract, forward rate agreement or any similar financial instrument, entered
into by the Company in a transaction to reduce the interest rate risks with
respect to any indebtedness incurred or to be incurred by the Company to acquire
or carry any real estate assets. The provisions of the Code regarding the
qualification of an entity as a REIT may restrict the Company's ability to enter
into hedging transactions. See "Federal Income Tax
Considerations -- Requirements for Qualification -- Asset Tests" and "-- Income
Tests."
The Company does not expect to borrow significant amounts of cash until it
has invested a substantial portion of the net proceeds of this offering. At or
prior to the time the Company begins borrowing funds and leveraging its
investments, the Manager intends to utilize hedging expertise to monitor and
manage risks associated with derivative financial investments.
ASSET MANAGEMENT
The Company intends to acquire Special Servicing rights with respect to the
mortgage loans underlying Subordinated Interests it purchases. Acquiring these
rights will give the Company control of the underlying mortgage loans within
certain parameters.
The terms of Special Servicing agreements vary considerably and the Company
cannot predict with certainty the precise terms of the Special Servicing
agreements into which it will enter. In general, however, the Company will
attempt to negotiate Special Servicing agreements that will permit the Company
to service, or to direct the servicing of, mortgage loans that are more than
90-days delinquent. At that point, the Company would have the right (and the
obligation) to decide whether to begin foreclosure proceedings or to seek
alternatives to foreclosure, such as forbearance agreements, partial payment
forgiveness, repayment plans, loan modification plans, loan sales and loan
assumption plans. Thus, the Company would have within its control, subject to
obligations to the related senior classes, greater ability to minimize losses on
mortgage loans underlying Subordinated Interests owned by the Company.
The Manager currently intends to become a rated Special Servicer and the
Company intends to assign to the Manager all of its Special Servicing rights and
obligations (other than the right to direct foreclosure). It is expected that
all of the Special Servicing compensation will be paid to the Manager and, as a
result, the Company will benefit from the Special Servicing rights primarily
from enhanced value of the related Subordinated Interests due to greater control
of Special Servicing of the loans, and not from receipt of Special Servicing
fees.
The Manager has considerable experience in servicing distressed loans
through management of an existing $7.2 billion mortgage portfolio as well as
through its prior ownership with EQ Services, which was an "Above Average" rated
master and special servicer. The Manager provides both primary servicing and
Special Servicing capabilities. The primary servicing group manages the mortgage
payment process, is centrally coordinated and includes such functions as funding
the loans, processing payments, reporting delinquencies to Special Servicing,
maintaining escrows, accounting services and other various monitoring functions,
i.e. taxes, insurance and UCC filings. Special Servicing utilizes the Manager's
regional operations specialist to provide hands-on real estate analysis through
a mortgage reinspection program to identify early warning signs of problem
loans. The reinspection program provides ongoing physical inspections and
valuation of the collateral. Other asset management functions of Special
Servicing include accumulation of property financial information such as rent
rolls, budgets and income and expense statements, monitoring monthly delinquency
reports for any late payments, analyzing the financial and physical condition of
the security, handling any loan defaults, bankruptcy or transfer of title or
other property specific issues. Through the Manager's research area, the Special
Servicer asset manager is able to combine macro-level data with property
specific information to draw conclusions for managing the mortgage assets within
a pool. The Manager is currently in the process of seeking a rating as a Special
Servicer of commercial loans from certain rating agencies.
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<PAGE> 43
The legal aspects of the mortgage loans that underlie the Subordinated
Interests to be acquired by the Company will affect the value of those assets.
For a discussion of certain legal aspects of mortgage loans, see "Certain Legal
Aspects of Mortgage Loans and Real Property."
The Manager also has experience in managing Opportunistic Real Property
through a full asset management staff, which oversees all aspects of managing
equity real estate. Asset managers are responsible for focusing on a property's
investment potential and are responsible for annual budgets and asset management
plans, multi-year business plans, capital recommendations and hold/sell
recommendations. Because asset management and servicing is one of the Manager's
business focuses, it has an established network of real estate professionals
through the United States to assist its asset management activities. The Manager
maintains working relationships with approved engineers, environmental
consultants, appraisers and real estate brokers nationwide, and calls upon these
local advisors for assistance when appropriate.
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<PAGE> 44
MANAGEMENT OF OPERATIONS
LEND LEASE
In June 1997, Lend Lease Corporation Limited, a corporation incorporated in
the state of New South Wales, Australia ("Lend Lease") acquired Equitable Real
Estate Investment Management, Inc. ("ERE") from The Equitable Companies
Incorporated ("Equitable Companies") (the "ERE Acquisition"). Prior to
consummation of this offering, Yarmouth will be combined with ERE, and the
combined entity will change its name. Pending such combination and name change,
ERE and Yarmouth are operated jointly under the name "ERE Yarmouth".
Lend Lease, a large Australian public real estate and financial services
company, with substantial global interests, operates in the United States,
Australia and New Zealand, Asia, South America and Europe. Established in 1958,
Lend Lease has over 6,700 employees, 33,000 shareholders and a market
capitalization exceeding $5.4 billion as of September 30, 1997. Lend Lease has
maintained an AA rating from Standard & Poor's since 1992. ERE Yarmouth believes
that the acquisition of ERE made Lend Lease's global real estate investment
management business one of the largest in the world, with approximately $32.5
billion in real estate assets under management on five continents.
Lend Lease's operations are diversified across a broad array of real estate
related activities, including property development and project management,
property and infrastructure funds management, and information and technology.
Lend Lease has been creating and managing real estate portfolios to facilitate
institutional and individual investment into real estate since 1971. Lend
Lease's experience in managing real estate funds includes public real estate
investment trusts, major commingled funds and separate account management for
pension fund clients.
Lend Lease has had a presence in the United States since the 1980s. In
1993, Lend Lease significantly increased its presence in the United States with
the purchase of Yarmouth, a real estate investment management operation
headquartered in New York. Since the acquisition of Yarmouth, Lend Lease has
invested in commingled funds, underwritten portfolio restructurings and directly
purchased property interests. In addition, Lend Lease is currently developing
the largest shopping center in Europe and operates a property investment
management business in Asia. Lend Lease recently relocated its global real
estate investment management headquarters to New York.
THE MANAGER
ERE Yarmouth is a wholly-owned indirect subsidiary of Lend Lease and, prior
to the consummation of the ERE Acquisition, ERE was a wholly-owned, indirect
subsidiary of The Equitable Life Assurance Society of the United States
("Equitable Life"), which is wholly-owned by The Equitable Companies. ERE
Yarmouth provides real estate investment advisory services to its clients.
Through special purpose subsidiaries or affiliates, including ERE Hyperion, ERE
Yarmouth provides additional services to its clients and to other third parties.
ERE Yarmouth is a full-service real estate investment advisor with
experience in investing and managing commercial real estate assets of
institutional lenders and owners. ERE Yarmouth manages in excess of $29 billion
in assets on behalf of a wide variety of corporate, public and union pension
funds, international investors, insurance companies and other financial
institutions.
ERE Yarmouth is based in Atlanta, Georgia and has twelve offices that work
in conjunction with 240 COMPASS Management and Leasing Offices throughout the
United States. COMPASS Management and Leasing is a wholly-owned indirect
subsidiary of Lend Lease. The firm's regional operations include full-service
offices with valuation professionals, asset managers, origination acquisition
and disposition specialists. ERE Yarmouth's regional operations are designed to
allow it to monitor new investment opportunities closely and act quickly on such
opportunities.
ERE Yarmouth has been registered as an investment advisor under the
Investment Advisers Act of 1940, as amended (the "Advisers Act") since 1986.
Prior to 1986, ERE operated under the registration of its parent
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company, Equitable Life, in its capacity as investment advisor. ERE Yarmouth
acts as a fiduciary to both corporate and public pension plan assets.
The following tables set forth certain information about the Board of
Directors of the Manager. The Manager began operating under the name ERE
Yarmouth in June 1997 and prior thereto, operated as ERE.
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ---- --- -------------
<S> <C> <C>
George R. Puskar.................. 54 Chairman of the Board
Matthew Banks..................... 36 Chief Executive Officer
James Quille...................... 46 Chief Operating Officer
Douglas A. Tibbetts............... 52 President
Amber Degnan...................... 49 Senior Executive Vice President and Chief Financial Officer
Samuel F. Hatcher................. 51 Senior Executive Vice President and General Counsel
</TABLE>
The principal occupation for the last five years of each member of the
Board of Directors and certain other information is set forth below.
George R. Puskar has been Chairman of ERE Yarmouth since June 1997. Prior
thereto he was Chairman of the Board and Chief Executive Officer of ERE since
1988. Mr. Puskar has been active in many real estate organizations serving on
the boards of the Urban Land Institute, the International Council of Shopping
Centers, National Council of Real Estate Investment Fiduciaries and the National
Realty Committee. Mr. Puskar has also served as chairman of the fundraising
drive to endow a real estate chair at Clark Atlanta University/Morehouse College
and is a board member of Georgia State University (advisory), the Wharton
School's Real Estate Center in Philadelphia (advisory), and the NYSE-listed Carr
Real Estate Investment Trust. Mr. Puskar has been with ERE since his graduation
from Duquesne University with a BEA in Economics and Political Science.
Matthew Banks has been Chief Executive Officer of ERE Yarmouth since June
1997, responsible for its overall management as well as Lend Lease's worldwide
real estate investment management and advisory business. Since 1995, he has
served as Chief Executive Officer of Lend Lease Property Investment Services
Group in Australia. From 1992 to 1995, he served in various positions within
Lend Lease, including Senior Project Manager, Branch Manager, Development
Manager, and General Manager. Mr. Banks holds an Architectural Degree from the
University of Melbourne.
James Quille has been Chief Operating Officer of ERE Yarmouth since June
1997, responsible for its day-to-day operations. Mr. Quille has over 20 years
experience in the property sector, serving the past 13 years with Lend Lease in
senior management roles and board positions in the development, project, asset,
and fund management divisions. From 1994 to 1997, Mr. Quille was Director Asia
where he was responsible for the establishment of Lend Lease Funds Management
Operations in Asia and launching the Asia Pacific Investment Company. From 1992
to 1994, Mr. Quille was Director New Business Development Lend Lease Property
Investment Services ("LLPISG") where he was responsible for originating new
products and planning strategy for expansion of LLPISG activities in new markets
and sectors. From 1989 to 1992, Mr. Quille was Director Asset Management LLPISG
where he oversaw the Asset Management activities of General Property Trust, the
largest public real estate investment trust listed on the Sydney Stock Exchange.
He has been active in the strategy creation of Lend Lease Global Property Funds
Management operations. Mr. Quille is a Fellow of the Faculty of Building &
Associate of the Australian Institute of Building.
Douglas A. Tibbetts has been President of ERE Yarmouth since June 1997,
where he oversees its institutional public/private debt and equity business,
marketing and client relationships. From 1989 to June 1997, Mr. Tibbetts was
President of ERE where he directed the formation of the COMPASS subsidiaries in
1991, EQ Services in 1992, Column Financial in 1994, ERE Hyperion in 1995,
ERE/Rosen Real Estate Securities, LLC in 1997 and currently heads ERE Yarmouth's
Prime Property Fund Strategic Investment Committee. He holds a BS from Stetson
University.
Amber Degnan has been Senior Executive Vice President and Chief Financial
Officer of ERE Yarmouth since June 1997, and was formerly a Yarmouth principal
with overall responsibility for Investor Reporting
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<PAGE> 46
Services, including accounting, tax, financial and performance reporting and
corporate governance. Prior to joining Yarmouth in 1990, Ms. Degnan was a
Partner with Deloitte & Touche, serving as head of the Southeast Real Estate
Group. Ms. Degnan holds a BSM from Syracuse University.
Samuel F. Hatcher has been Senior Executive Vice President and General
Counsel for ERE Yarmouth since June 1997 and, prior thereto, was Executive Vice
President and General Counsel of ERE since 1989. Prior to joining ERE, he was a
partner in an Atlanta law firm. Mr. Hatcher is also a member of the American
College of Real Estate Lawyers. Mr. Hatcher has more than 26 years of legal
experience and holds an AB from Davidson College and a JD from Yale Law School.
Officers, directors and other personnel of the Manager have significant
experience in mortgage finance and the operation of commercial real estate,
including all of the asset types in which the Company intends to invest;
however, they have only limited experience in managing a REIT. See "Risk
Factors -- The Company is Newly Formed and Currently Holds No
Assets -- Uncertainty as to The Company's Ability Successfully to Implement its
Operating Policies and Strategies Resulting From its Lack of Operating History."
THE MANAGEMENT AGREEMENT
The Company will enter into the Management Agreement with the Manager for
an initial term expiring two years from the date of the agreement. Thereafter,
successive extensions, each for a period not to exceed twenty-four months, may
be made by agreement between the Company and the Manager, subject to the
affirmative vote of a majority of the Independent Directors. The Company may
terminate, or decline to extend the term of, the Management Agreement without
cause at any time after the initial term upon 60 days written notice by a
majority vote of the Independent Directors; provided that the Company shall pay
the Manager a termination fee equal to the sum of the base management fee and
incentive management fee, if any, earned with respect to the immediately
preceding four fiscal quarters. This requirement may adversely affect the
Company's ability to terminate the Manager without cause. In addition, the
Company has the right to terminate the Management Agreement upon the occurrence
of certain specified events, including a material breach by the Manager of any
provision contained in the Management Agreement, without the payment of any
termination fee. If the Management Agreement is terminated for any reason, Lend
Lease will have certain registration rights with respect to its Common Stock.
The Manager at all times will be subject to the supervision of the
Company's Board of Directors and will have only such functions and authority as
the Company may delegate to it. The Company will rely on the Manager's expertise
in four principal areas, as described more fully below: (i) portfolio
management; (ii) equity acquisition and loan origination; (iii) equity asset
management and (iv) Special Servicing. The Manager will be responsible for the
day-to-day operations of the Company and will perform (or cause to be performed)
such services and activities relating to the assets and operations of the
Company as may be appropriate, including:
Portfolio Management. The Manager will perform portfolio management
services on behalf of the Company and the Operating Partnership pursuant to the
Management Agreement with respect to the Company's investments. Such services
will include, but not be limited to, consulting with the Company on mortgage
originations, purchase, sale and leasing opportunities, collection of
information and submission of reports pertaining to the Company's assets,
interest rates, and general economic conditions, periodic review and evaluation
of the performance of the Company's portfolio of assets, acting as liaison
between the Company and banking, mortgage banking, investment banking and other
parties with respect to the purchase and disposition of assets, and other
customary functions related to portfolio management. The Manager may enter into
subcontracts with other parties, including its affiliates, to provide any such
services to the Company. In addition, the Manager will be responsible for:
(i) serving as the Company's consultant with respect to formulation of
investment criteria and preparation of policy Guidelines by the Board of
Directors;
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<PAGE> 47
(ii) advising the Company regarding, and arranging for, (A) the
issuance of CMOs collateralized by the Company's Mortgage Loans, (B)
reverse repurchase agreements on the Company's MBS and (C) other
borrowings, as appropriate;
(iii) furnishing reports and statistical and economic research to the
Company regarding the Company's activities and the services performed for
the Company by the Manager;
(iv) monitoring and providing to the Board of Directors on an ongoing
basis price information and other data obtained from certain nationally
recognized dealers that maintain markets in assets identified by the Board
of Directors from time to time, and providing data and advice to the Board
of Directors in connection with the identification of such dealers;
(v) providing executive and administrative personnel with office space
and office services required in rendering services to the Company;
(vi) administering the day-to-day operations of the Company and
performing and supervising the performance of such other administrative
functions necessary in the management of the Company as may be agreed upon
by the Manager and the Board of Directors, including the collection of
revenues and the payment of the Company's debts and obligations and
maintenance of appropriate computer services to perform such administrative
functions;
(vii) communicating on behalf of the Company with the holders of any
equity or debt securities of the Company as required to satisfy the
reporting and other requirements of any governmental bodies or agencies or
trading markets and to maintain effective relations with such holders;
(viii) to the extent not otherwise subject to an agreement executed by
the Company, designating a servicer for mortgage loans sold to the Company
and arranging for the monitoring and administering of such servicers;
(ix) counseling the Company in connection with policy decisions to be
made by the Board of Directors;
(x) engaging in hedging activities on behalf of the Company,
consistent with the Company's status as a REIT and with the Guidelines;
(xi) upon request by and in accordance with the directions of the
Board of Directors, investing or reinvesting any money of the Company;
(xii) providing, arranging and reviewing legal, accounting and tax
services for the Company;
(xiii) counseling the Company regarding the maintenance of an
exemption from investment company status under the Investment Company Act
of 1940; and
(xiv) counseling the Company regarding the maintenance of its status
as a REIT and monitoring compliance with the various REIT qualification
tests and other rules set out in the Code and Treasury Regulations
thereunder.
Equity Acquisition and Loan Origination. The Manager will acquire
Opportunistic Real Property, Subordinated Interests and Mezzanine Investments
and will originate commercial Mortgage Loans on behalf of the Company. Such
purchase and sale agreements services will include developing and maintaining a
transaction pipeline report(s) for review of potential acquisitions and loans,
preparing investment submissions, negotiating and completing purchase and sale
agreements, loan applications/commitments, preparing and maintaining competitive
pricing information, preparing closing papers, and performing all services
necessary or appropriate in conjunction with the transaction activities of the
Company.
Equity Asset Management. The Manager will perform the full range of asset
management services on behalf of the Company pursuant to the Management
Agreement with respect to the Company's portfolio of Opportunistic Real Property
and Mezzanine Investments with equity characteristics. These responsibilities
include but are not limited to budgeting, oversight of capital improvement
programs, selection of property
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<PAGE> 48
managers and leasing agents, oversight of property management and leasing
activities, liaison with key tenants and joint venture partners and reporting.
Special Servicing. The Manager will perform monitoring services on behalf
of the Company pursuant to the Management Agreement with respect to the
Company's portfolio of Special Servicing rights. Such monitoring services will
include, but not be limited to, the following activities: negotiating Special
Servicing agreements; serving as the Company's consultant with respect to the
Special Servicing of mortgage loans; collection of information and submission of
reports pertaining to the mortgage loans and to moneys remitted to the Manager
or the Company; acting as a liaison between the servicers of the mortgage loans
and the Company and working with servicers to the extent necessary to improve
their servicing performance; with respect to mortgage loans for which the
Company is Special Servicer, periodic review and evaluation of the performance
of each servicer to determine its compliance with the terms and conditions of
the related servicing agreement; review of and recommendations as to fire
losses, easement problems and condemnation, delinquency and foreclosure
procedures with regard to mortgage loans; review of servicers' delinquency,
foreclosures and other reports on mortgage loans; supervising claims filed under
any mortgage insurance policies; and enforcing the obligation of any servicer to
repurchase mortgage loans. The Manager may enter into subcontracts with other
parties, including its affiliates, to provide any such services for the Manager.
MANAGEMENT FEES
The following table presents all compensation, fees and other benefits
(including reimbursement of certain out-of-pocket expenses) that the Manager may
earn or receive under the terms of the Management Agreement:
<TABLE>
<CAPTION>
AMOUNT RECIPIENT PAYOR
- ------ --------- -----
<S> <C> <C> <C>
Quarterly base management fee equal to the following(1):
For the first four
fiscal quarters...... 1.00% per annum of the Average
Invested Assets(2) of the
Company
During each fiscal
quarter thereafter... 0.85% per annum of the Average
Invested Assets up to $1
billion
0.75% per annum of the Average
Invested Assets from $1 billion
to $1.25 billion
0.50% per annum of the Average
Invested Assets in excess of
$1.25 billion.................. Manager(3) Company
Quarterly incentive management fee based on the amount, if
any, by which the Company's Funds From Operations(4) and
certain net gains exceed a hurdle rate(5).................. Manager Company
Termination fee equal to the sum of the base management fee
and incentive management fee, if any, earned during the
immediately preceding four fiscal quarters................. Manager Company
Reimbursement of out-of-pocket expenses of the Manager paid
to third parties........................................... Manager Company
</TABLE>
- ---------------
(1) Intended to cover the Manager's costs in providing management services to
the Company. In connection with renewal of the Management Agreement, the
Board of Directors of the Company may adjust the base management fee in the
future to align it more closely with the actual costs of such services.
(2) The term "Average Invested Assets" for any period means the average of the
aggregate book value of the assets of the Company, including a proportionate
amount of the assets of all of its direct and indirect subsidiaries, before
reserves for depreciation or bad debts or other similar noncash reserves
less
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<PAGE> 49
(i) uninvested cash balances and (ii) the book value of the Company's CMO
liabilities, computed by taking the daily average of such values during such
period.
(3) The Manager is a wholly-owned indirect subsidiary of Lend Lease.
(4) The term "Funds From Operations" as defined by the National Association of
Real Estate Investment Trusts ("NAREIT") means net income (computed in
accordance with generally accepted accounting principles ("GAAP")) excluding
gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization on real estate assets, and after deduction of
preferred stock dividends, if any, and adjustments for unconsolidated
partnerships and joint ventures. Funds From Operations does not represent
cash generated from operating activities in accordance with GAAP and should
not be considered as an alternative to net income as an indication of the
Company's performance or to cash flows as a measure of liquidity or ability
to make distributions.
(5) The incentive management fee is equal to the product of (A) 25% of the
dollar amount by which (1) (a) Funds From Operations (before the incentive
fee) of the Company for the applicable quarter per weighted average number
of shares of Common Stock outstanding plus (b) gains (or minus losses) from
debt restructuring or sales of assets not included in Funds From Operations
of the Company for such quarter per weighted average number of shares of
Common Stock outstanding, exceed (2) an amount equal to (a) the weighted
average of the price per share at initial offering and the prices per share
at any secondary offerings by the Company multiplied by (b) 25% of the sum
of the Ten-Year U.S. Treasury Rate plus four percent, and (B) the weighted
average number of shares of Common Stock outstanding. As used in calculating
the Manager's compensation, the term "Ten-Year U.S. Treasury Rate" means the
arithmetic average of the weekly average yield to maturity for actively
traded current coupon U.S. Treasury fixed interest rate securities (adjusted
to constant maturities of ten years) published by the Federal Reserve Board
during a quarter, or, if such rate is not published by the Federal Reserve
Board, any Federal Reserve Bank or agency or department of the federal
government selected by the Company. If the Company determines in good faith
that the Ten-Year U.S. Treasury Rate cannot be calculated as provided above,
then the rate shall be the arithmetic average of the per annum average
yields to maturities, based upon closing asked prices on each business day
during a quarter, for each actively traded marketable U.S. Treasury fixed
interest rate security with a final maturity date not less than eight nor
more than twelve years from the date of the closing asked prices as chosen
and quoted for each business day in each such quarter in New York City by at
least three recognized dealers in U.S. government securities selected by the
Company.
The ability of the Company to generate Funds from Operations in excess of
the Ten-Year U.S. Treasury Rate, and of the Manager to earn the incentive
compensation described in the above table, is dependent upon the level and
volatility of interest rates, the Company's ability to react to changes in
interest rates and to utilize successfully the operating strategies described
herein, and other factors, many of which are not within the Company's control.
The Manager will be reimbursed for (or charge the Company directly for)
out-of-pocket expenses paid to third parties.
The management fees are payable in arrears. The Manager's base and
incentive fees will be calculated by the Manager within 45 days after the end of
each quarter, and such calculation will be promptly delivered to the Company.
The Company is obligated to pay such fees and expenses within 60 days after the
end of each fiscal quarter.
The Manager is expected to use the proceeds from its base management fee
and incentive compensation in part to pay compensation to its officers who,
notwithstanding that they also are officers of the Company, will receive no cash
compensation directly from the Company.
STOCK OPTIONS
The Company intends to adopt an incentive option plan (the "Option Plan"),
under which the Compensation Committee of the Board of Directors or, if none,
the Board of Directors (the "Compensation Committee") will be authorized to
grant options to purchase shares of Common Stock ("Options") (or, if
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<PAGE> 50
necessary to prevent the recipient from exceeding the Ownership Limitation set
forth in the Charter, Units in the Operating Partnership that may be redeemed
for cash or, at the election of the General Partner, shares of Common Stock on a
one-for-one basis). See "Operating Partnership Agreement -- Redemption Rights."
The maximum aggregate number of shares of Common Stock that may be issued
pursuant to options granted under the Option Plan will be . The
purpose of the Option Plan is to provide a means of performance-based
compensation in order to provide incentive for the Manager to enhance the value
of the Company's stock.
To provide an incentive for the Manager to enhance the value of the Common
Stock, the Company will grant the Manager options to purchase 1,166,667 shares
of Common Stock (1,313,667 shares if the Underwriters exercise their
over-allotment option) or, if necessary to prevent Lend Lease from exceeding the
Ownership Limitation set forth in the Charter, Units at a price per share equal
to the initial public offering price of the Common Stock. One quarter of these
options will become exercisable on each of the four anniversaries of the
consummation of this offering.
Eligibility and Awards. All employees (including officers), directors and
others providing services to the Company, as well as the Manager and employees
(including officers) and directors of the Manager (collectively, the "Eligible
Recipients"), will be eligible to receive Options at the discretion of the
Compensation Committee. The Compensation Committee will be authorized to
determine which Eligible Recipients shall receive Options, and the terms and
conditions on which Options shall be granted. The Compensation Committee may
grant Options to employees of the Manager, subject to certain limits described
in the Option Plan. Options granted pursuant to the Option Plan may be either
nonqualified stock options or incentive stock options at the discretion of the
Compensation Committee. Options granted pursuant to the Option Plan generally
are not transferable except that, to the extent permitted by the Compensation
Committee, a grantee may transfer Options to members of his immediate family
(including spouse, parents, children and siblings) and the Manager may transfer
its Options to any other Eligible Recipient. Grants of Options under the Option
Plan to persons or entities other than employees and directors of the Company
may result in a charge against the Company's earnings for financial reporting
purposes under GAAP. Any such charge to earnings will be recognized over the
period during which such Options become exercisable.
Exercise Price and Exercisability. The exercise price of all Options will
be not less than 100% of the fair market value of the Common Stock subject to
the Options on the date of grant. All Options will become exercisable as
determined by the Compensation Committee at the time of the award. Options
granted under the Plan generally will be exercisable in five equal installments
on the date of grant and each of the four anniversaries of the date of grant.
The exercise price of an Option may be paid by any one or more of the following:
(i) cash or its equivalent, (ii) shares of Common Stock held more than six
months, (iii) cancellation of any indebtedness owed by the Company, (iv) a
full-recourse promissory note, if approved by the Committee or (v) a "cashless"
exercise pursuant to a sale through a broker of all or a portion of the shares
covered by the Option.
Termination of Employment. If an Eligible Recipient's affiliation with the
Company is terminated for cause or if such Eligible Recipient terminates his
affiliation voluntarily, all of such Eligible Recipient's unexercised Options
will terminate immediately upon such termination. Except as otherwise determined
by the Compensation Committee, if an Eligible Recipient has a termination of
affiliation because of death or permanent disability or for any other reason
(other than a voluntary termination or a termination for cause), all of such
Eligible Recipient's unexercised Options may be exercised by the Eligible
Recipient or his beneficiary or legal representative to the extent such Options
are or become exercisable in accordance with their terms for up to one year
after the later of (i) the date of such Eligible Recipient's termination of
affiliation or (ii) the date the Options first become exercisable, but in no
event later than the expiration of the Option term.
Amendment and Termination. The Board of Directors generally may amend the
Option Plan at any time, except that approval by the Company's shareholders will
be required for any amendment that increases the aggregate number of shares of
Common Stock that may be issued pursuant to the Option Plan, that materially
changes the class of persons eligible to receive such Options, that extends the
maximum Option
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<PAGE> 51
term or that decreases the exercise price of any Option to less than the fair
market value of the Common Stock on the date of grant. Shares of Common Stock
subject to Options that expire, are terminated or otherwise are surrendered to
the Company will be available for issuance in connection with future awards
under the Option Plan. No Option term may exceed ten years from the date of
grant, and no Option grant may be made under the Option Plan after the tenth
anniversary of the date the Option Plan was adopted by the Board of Directors.
LIMITS OF RESPONSIBILITY
Pursuant to the Management Agreement, the Manager will not assume any
responsibility other than to render the services called for thereunder and will
not be responsible for any action of the Company's Board of Directors in
following or declining to follow its advice or recommendations. The Manager, its
directors and its officers will not be liable to the Company, any subsidiary of
the Company, the Independent Directors, the Company's shareholders or any
subsidiary's shareholders for acts performed in accordance with and pursuant to
the Management Agreement, except by reason of acts constituting bad faith,
willful misconduct, gross negligence or reckless disregard of their duties under
the Management Agreement. The Company has agreed to indemnify the Manager, its
directors and its officers with respect to all expenses, losses, damages,
liabilities, demands, charges and claims arising from acts of the Manager not
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of duties, performed in good faith in accordance with and pursuant to
the Management Agreement.
The Management Agreement does not limit or restrict the right of the
Manager or any of its officers, directors, employees or affiliates from engaging
in any business or rendering services of any kind to any other person, including
the purchase of, or rendering advice to others purchasing, assets that meet the
Company's policies and criteria. See "Risk Factors -- Conflicts of Interest in
the Business of the Company May Result in Decisions of the Company that Do Not
Fully Reflect the Interests of the Shareholders of the Company."
CERTAIN RELATIONSHIPS; CONFLICTS OF INTEREST
ERE Yarmouth will serve as Manager pursuant to the terms of the Management
Agreement and will have broad discretionary authority with respect to the
management and operations of the Company. The Manager may engage in transactions
on behalf of the Company with affiliates of the Manager. For example, affiliates
of the Manager may provide management and leasing services for certain of the
Company's properties and subsidiaries. Given the relationships between Lend
Lease, the Manager and the Company, there are inherent conflicts of interest in
connection with the operation of the Company and its subsidiaries and other
matters involving the Company and affiliates of the Manager.
The Company, on the one hand, and the Manager and its affiliates, on the
other, will enter into a number of relationships other than those governed by
the Management Agreement, some of which may give rise to conflicts of interest.
Moreover, two of the members of the Board of Directors of the Company and all of
its officers are also employed by Lend Lease, the Manager or their affiliates.
The relationships between the Company, on the one hand, and the Manager and
its affiliates, on the other, will be governed by policy Guidelines that will be
approved by a majority of the Independent Directors. The Guidelines establish
certain parameters for the operations of the Company, including quantitative and
qualitative limitations on the Company's assets that may be acquired. The
Guidelines are intended to assist and instruct the Manager and to establish
restrictions applicable to transactions with affiliates of the Manager.
Transactions with affiliates of the Manager must be approved by a majority of
the Independent Directors. The Independent Directors will, however, review the
Company's transactions on a quarterly basis to ensure compliance with the
Guidelines.
Although the Independent Directors will review the Guidelines periodically
and will monitor compliance with those Guidelines, investors should be aware
that, in conducting this review, the Independent Directors will rely primarily
on information provided to them by the Manager. The Manager will obtain fairness
opinions from third parties concerning the price for Subordinated Interests and
appraisals for any Opportunistic Real Properties purchased from the Manager or
its affiliates in the future, but the Independent Directors are likely
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<PAGE> 52
to rely substantially on information and analysis provided by the Manager to
evaluate the Company's Guidelines, compliance therewith and other matters
relating to the Company's investments. The terms of a particular transaction,
however, will not be approved in advance by the Company's Board of Directors.
The Independent Directors will review any such transactions in the quarter
following completion to ensure compliance with the Guidelines, but in doing so,
they, by necessity, will rely primarily on information and analysis provided to
them by the Manager. Moreover, fairness opinions from third parties and
appraisals are not always reliable indicators of the value of assets. In
particular, fairness opinions from third parties generally are obtained from the
underwriter or placement agent of the CMBS, who may have an incentive to
overstate the value of the CMBS. Moreover, the market for unregistered CMBS is
illiquid, and therefore accurate prices are difficult to estimate. See "Risk
Factors."
If the Independent Directors determine in their periodic review of
transactions that a particular transaction does not comply with the Guidelines,
then the Independent Directors will consider what corrective action, if any, can
be taken. Moreover, if transactions are consummated that deviate from the
Guidelines, then the Independent Directors will have the option, under the terms
of the Management Agreement, to terminate the Manager.
The Management Agreement will not prohibit the Manager or its affiliates
from acting as advisors for other entities (including subsidiaries) or
performing investment, corporate management or other services for any other
entity (including subsidiaries). The Manager will, however, devote such time as
is necessary to perform its obligations under the Management Agreement.
The Manager and its affiliates have long-term relationships with a
significant number of developers, institutions and corporations and their senior
managers. In determining whether the Company should invest in a particular
transaction, the Manager will consider these relationships in its management of
the Company. There may be certain transactions that will not be undertaken on
behalf of the Company in view of such relationships. Moreover, in providing
services to its other clients, the Manager may recommend activities that would
compete with or otherwise adversely affect the Company and one or more of its
subsidiaries.
In addition, the Management Agreement will not prohibit the Manager or any
of its affiliates from conducting any other business venture, making investments
for its own account or the accounts of any other entity, including, for example,
owning any interest in any other business venture of any nature in the vicinity
of any of the Company's properties or any other location. The Manager may have
interests, therefore, in properties which compete with properties owned by the
Company. The Manager also may have conflicting interests with respect to
property investment opportunities for the Company.
There may be circumstances where investments are suitable for other funds
or clients of the Manager and the Company. ERE Yarmouth utilizes an Allocation
Process for every real estate investment, which is intended to ensure that all
clients, including the Company, will have fair access to new opportunities
without preference being accorded to any particular client. Each client is
assigned a portfolio manager who develops an annual plan detailing the client's
desired investment volume, deal structure and, by property type, the desired
physical characteristics, pricing, leasing risk and target markets. When ERE
Yarmouth has investment opportunities, the opportunity is prioritized among its
respective clients. Each portfolio manager will give the reasoning for the
acquisition of a deal on behalf of its client. The ultimate allocation decision
will be approved by an Allocation Committee of the Manager in accordance with a
fair and impartial process, taking into account the investment criteria of each
client. See "The Management of Operations -- The Manager."
The Manager may retain one or more of its affiliates to provide services on
behalf of the Company or its subsidiaries, enter into other transactions on
behalf of the Company or its subsidiaries and enter into other transactions on
behalf of the Company or its subsidiaries with one or more of its affiliates.
The Management Agreement provides that any arrangement relating to the provision
of services to the Company or its subsidiaries by any ERE Yarmouth affiliate
must be on terms and conditions no less favorable to the Company than the terms
and conditions under which similarly qualified third parties perform similar
services. Any such arrangement would be approved by the Independent Directors.
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<PAGE> 53
Various other potential conflicts of interest may exist or arise in
additional contexts. The Company intends to implement additional policies as
necessary or appropriate to deal with such potential conflicts in the future.
A wholly-owned indirect subsidiary of Lend Lease will purchase 1,166,667
shares of Common Stock upon consummation of this offering at a price equal to
the public offering price less underwriting discounts and commissions. This
purchase will result in Lend Lease's beneficial ownership of approximately 10.0%
of the total shares offered hereby, exclusive of the Underwriters'
over-allotment option. The Manager also will receive stock options pursuant to
the Company's Option Plan upon consummation of the Offering. See "Management of
Operations -- Stock Options."
Lend Lease must retain its shares of the Company until the earlier of (i)
two years from the Company's initial public offering of shares of Common Stock
and (ii) the date, if any, that ERE Yarmouth is terminated as the Manager, but
may dispose of its shares any time thereafter in accordance with the provisions
of Rule 144 of the Securities Act. Notwithstanding the foregoing, if the Company
terminates the Management Agreement, Lend Lease may require the Company to
register the Manager's shares of Common Stock with the Commission (and under
applicable state law).
The market in which the Company expects to purchase assets is characterized
by rapid evolution of products and services and, as a result, there may in the
future be relationships between the Company, the Manager, and affiliates of the
Manager in addition to those described herein.
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<PAGE> 54
THE COMPANY
Chastain Capital Corporation (the "Company") was incorporated in the State
of Georgia on December 16, 1997 and will elect to be taxed as a REIT under the
Code. The principal executive offices of the Company are located at 3424
Peachtree Road, N.E., Suite 800, Atlanta, Georgia 30326-1113. The Company's
telephone number is (404) 848-8600.
DIRECTORS AND EXECUTIVE OFFICERS
The following tables set forth certain information about the directors and
executive officers of the Company.
DIRECTORS OF THE COMPANY:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
- ---- --- ----------------
<S> <C> <C>
Matthew Banks........................................ 36 Chairman of the Board
Kurt L. Wright....................................... 38 Chief Executive Officer and Director
[to be determined](1)................................ Director
[to be determined](1)................................ Director
[to be determined](1)................................ Director
</TABLE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
- ---- --- ----------------
<S> <C> <C>
Rufus A. Chambers, Jr. .............................. 36 President
D. Michael Jett...................................... 48 Chief Operating Officer
Steven G. Grubenhoff................................. 34 Chief Financial Officer
Samuel F. Hatcher.................................... 51 Secretary
</TABLE>
- ---------------
(1) To be elected upon consummation of this offering.
The Board of Directors has appointed and to the Audit
Committee and and to the Compensation Committee.
will serve as the initial chairman of the Audit Committee and will
serve as the initial chairman of the Compensation Committee. The Audit Committee
will be responsible for recommending to the Board of Directors the firm to be
employed as independent auditors of the Company, reviewing with the independent
auditor the Company's financial statements and internal accounting controls and
the plans and results of the audit engagement, approving the professional
services provided by the independent auditor, reviewing the independence of the
independent auditor, considering the range of audit and non-audit fees and
reviewing the adequacy of the Company's internal accounting controls. The
Compensation Committee will be responsible for making recommendations, at least
annually, to the Board of Directors regarding the policies of the Company
relating to, and the amounts and terms of, all compensation of executive
officers of the Company and administering and discharging in full the authority
of the Board of Directors with respect to the Option Plan.
The Company does not expect to employ full-time personnel. Instead, it
expects to rely on the facilities, personnel and resources of the Manager to
conduct its operations. For biographical information on Messrs. Banks and
Hatcher, who are also members of the Board of Directors of the Manager, see
"Management of Operations -- The Manager."
Kurt L. Wright has served as Chief Executive Officer of the Company since
its inception. Mr. Wright has been Executive Vice President of ERE Yarmouth
since April 1997 and currently heads ERE Yarmouth's Mortgage Debt and Public
Markets Group, which is responsible for all CMBS and REIT share management, loan
originations and securitization and high-yield investing. From 1995 to 1997, he
was Senior Vice President responsible for portfolio management for the Buckhead
Strategic Fund series and ERE Hyperion Capital Advisors. From 1993 to 1995, Mr.
Wright was a Vice President responsible for mortgage research, product
development and marketing activities within the Mortgage Investors Group. From
1990 to 1993, he performed
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<PAGE> 55
real estate market analyses and ad hoc review of client portfolios while a
member of ERE's Investment Research Department, Mr. Wright was the founder and
Co-Chief Investment Officer of ERE Hyperion, a CMBS manager with over $300
million of assets under management and is a member of the Investment Committee
of ERE Rosen, LLC, a REIT securities manager with $500 million of assets under
management. From 1988 to 1990, he was a Senior Analyst for the Prudential Realty
Group, from 1985 to 1987 he was Treasurer and Controller of Morgan Stanley Real
Estate Inc. and from 1981 to 1984 he was an accountant for Deloitte, Haskins &
Sells specializing in real estate. Mr. Wright is a Chartered Financial Analyst
and a Certified Public Accountant, and is a member of the Editorial Board of
Real Estate Capital Markets Report and the Research Committee of the National
Council of Real Estate Investment Fiduciaries. Mr. Wright has a BA from Colgate
University, an MS from New York University and an MBA from Columbia University.
[INSERT BIOGRAPHIES OF INDEPENDENT DIRECTORS]
Rufus A. Chambers, Jr. has served as President of the Company since its
inception. Mr. Chambers has been Senior Vice President of ERE Yarmouth since
July 1996. Mr. Chambers has been responsible for new mortgage business for the
Atlanta region, was the portfolio manager of a large loan securitization program
and oversaw capital markets activities for ERE's pension fund clients. From 1992
to 1995 he was responsible for new mortgage business underwriting and was
portfolio manager for a major corporate pension account, from 1989 to 1991 he
worked in the Atlanta Regional Office, from 1987 to 1989 he was a member of
ERE's International Group, from 1986 to 1987 he was an appraiser in the Dallas
regional office and from 1984 to 1986 he was in the sales area at ERE. Mr.
Chambers is Chairman of the Income Property Group of the Mortgage Bankers
Association of Georgia and was formerly the President of the Real Estate Group
of Atlanta. Mr. Chambers has a BBA from the University of Georgia.
D. Michael Jett has served as Chief Operating Officer of the Company since
its inception. He has been Senior Vice President of ERE Yarmouth since 1992.
Since 1995, Mr. Jett has been responsible for coordinating new equity
acquisitions for three ERE Yarmouth division offices. Mr. Jett previously headed
asset management and value recovery functions, overseeing a team of 95 real
estate professionals at EQ Services, ERE's former mortgage servicing affiliate.
From 1990 to 1994, Mr. Jett coordinated the national valuation process for the
Equitable General Account and the Prime Property Fund. From 1986 to 1990, he was
regional manager of valuation services for the Federal Asset Disposition
Association, the predecessor to the Resolution Trust Corporation and from 1982
to 1986, he was a senior analyst at Metric Partners (formerly Fox & Carskadon),
responsible for sourcing and underwriting apartment acquisitions. Mr. Jett holds
the MAI and CRE designations and a BBA in real estate from Georgia State
University. He has previously been president of the Counselors of Real Estate,
Georgia chapter and a member of the Appraisal Institute's Admissions and Credit
Committee.
Steven G. Grubenhoff has served as Chief Financial Officer of the Company
since its inception. He has been a Vice President of ERE Yarmouth since 1995.
Mr. Grubenhoff has served as chief financial officer for two commingled
opportunistic real estate limited partnerships since 1995. Mr. Grubenhoff's
responsibilities have included all financial reporting requirements, developing
portfolio financial strategies, ensuring that optimum tax and legal structures
are being utilized; performing financial due diligence on new investments and
managing interest rate exposures. From 1989 to 1994, he was Vice President of
Finance, Controller and Tax Manager for Laing Properties, Inc., a full service
real estate company based in Atlanta, Georgia. From 1986 to 1988, he was an
Auditor and Tax Senior concentrating in real estate with KPMG Peat Marwick. Mr.
Grubenhoff is a Certified Public Accountant and has a BSBA from Ohio State
University.
All Directors will be elected at each annual meeting of the Company's
shareholders for a term of one year, and hold office until their successors are
elected and qualified. All officers serve at the discretion of the Board of
Directors. Although the Company may have salaried employees, it currently does
not have employees and does not expect to employ anyone as long as the
Management Agreement is in force. The Company will pay an annual director's fee
to each Independent Director equal to $30,000 per annum, consisting of $15,000
in cash and $15,000 in shares of Common Stock. The number of shares of Common
Stock to be awarded to each Independent Director will be determined quarterly in
arrears by dividing $3,750 by the average closing price of the Common Stock for
a specified period in the preceding month. The shares of
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<PAGE> 56
Common Stock will be vested when issued. Each Independent Director will be paid
a fee of $1,000 for each meeting of the Board of Directors over four attended in
person by such Independent Director. All Directors will be reimbursed for their
costs and expenses in attending all meetings of the Board of Directors.
Affiliated directors will not be separately compensated by the Company.
Directors and executive officers of the Company will be required to devote
only so much of their time to the Company's affairs as is necessary or required
for the effective conduct and operation of the Company's business. Because the
Management Agreement provides that the Manager will assume principal
responsibility for managing the affairs of the Company, the officers of the
Company, in their capacities as such, are not expected to devote substantial
portions of their time to the affairs of the Company. However, in their
capacities as officers or employees of the Manager, or its affiliates, they will
devote such portion of their time to the affairs of the Manager as is required
for the performance of the duties of the Manager under the Management Agreement.
The Charter of the Company provides that, except in the case of a vacancy,
the majority of the members of the Board of Directors will at all times after
the issuance of the shares offered hereby be Independent Directors. Vacancies
occurring on the Board of Directors among the Independent Directors will be
filled by the vote of a majority of the remaining Directors, including a
majority of the remaining Independent Directors.
The Charter provides for the indemnification of the Directors and officers
of the Company to the fullest extent permitted by Georgia law. Georgia law
generally permits indemnification of directors and officers against certain
costs, liabilities and expenses that any such person may incur by reason of
serving in such positions as long as such person acts in good faith and in a
manner reasonably believed by him (i) to be in the best interests of the
Company, when acting in his official capacity and (ii) not opposed to the best
interests of the Company in all other cases. Moreover, in the case of any
criminal proceedings, such person must have had no reasonable cause to believe
the conduct was unlawful. Georgia law also generally permits a corporation to
limit or eliminate the damages that may be assessed against a director or
officer of a Georgia corporation in an action by, or in the right of, the
corporation or its shareholders. The Company has included provisions in its
Charter that eliminate the liabilities of Directors and officers in certain
actions brought by or on behalf of shareholders. See "Description of Certain
Provisions of Georgia Law and the Company's Articles of Incorporation and
Bylaws." Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to Directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
DISTRIBUTION POLICY
In order to avoid corporate income taxation of its earnings, the Company
must distribute to its shareholders an amount at least equal to (i) 95% of its
"REIT taxable income" (determined before the deduction for dividends paid and
excluding any net capital gain) plus (ii) 95% of the excess of its net income
from foreclosure property over the tax imposed on such income by the Code less
(iii) any excess noncash income (as determined under the Code). See "Federal
Income Tax Considerations." The actual amount and timing of distributions,
however, will be at the discretion of the Board of Directors and will depend
upon the financial condition of the Company in addition to the requirements of
the Code. It is anticipated that the first distribution will be made after the
first full fiscal quarter following the completion of this offering.
Subject to the distribution requirements referred to in the immediately
preceding paragraph, the Company intends, to the extent practicable, to invest
substantially all of the principal from repayments, sales and refinancings of
the Company's assets in Mortgage Loans, Subordinated Interests, Mezzanine
Investments, Opportunistic Real Property and Other Real Estate Related Assets.
The Company may, however, under certain circumstances, make a distribution of
principal. Such distributions, if any, will be made at the discretion of the
Company's Board of Directors.
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It is anticipated that distributions generally will be taxable as ordinary
income to non-exempt shareholders of the Company, although a portion of such
distributions may be designated by the Company as capital gain dividends or may
constitute a return of capital. The Company will furnish annually to each of its
shareholders a statement setting forth distributions paid during the preceding
year and their federal income tax status. For a discussion of the federal income
tax treatment of distributions by the Company, see "Federal Income Tax
Considerations -- Taxation of the Company" and "-- Taxation of Taxable U.S.
Shareholders."
YIELD CONSIDERATIONS RELATED TO THE COMPANY'S INVESTMENTS
Before purchasing any Real Estate Related Asset, the Company, with the
assistance of the Manager, will consider the expected yield of the asset and the
factors that may influence the yield actually obtained on such asset. "Yield" or
"yield to maturity" is the interest rate that will make the present value of the
future cash flow from an investment equal to its price. These considerations
will affect the Company's decision whether to purchase such asset and the price
offered for such asset. Despite the Manager's substantial experience in
evaluating potential yields on Real Estate Related Assets, there can be no
assurance that the Company can make an accurate assessment of the yield to be
produced by an asset. Many factors, most of which are beyond the control of the
Company, are likely to influence the yield on the Company's investments.
SUBORDINATED INTERESTS
The yield to maturity on any class of Subordinated Interests will depend
upon, among other things, the price at which such class is purchased, the
interest rate for such class and the timing and aggregate amount of
distributions on the securities of such class, which in turn will depend
primarily on (i) whether there are any losses on the underlying loans allocated
to such class and (ii) whether and when there are any prepayments of the related
Mortgage Loans (which include both voluntary prepayments by the obligors on the
Mortgage Loans and prepayments resulting from liquidations due to defaults and
foreclosures).
The yield on the Subordinated Interests originated and acquired by the
Company will be extremely sensitive to defaults on the mortgage loans comprising
the Mortgage Collateral for such securities and the severity of losses resulting
from such defaults, as well as the timing of such defaults and actual losses.
The Company's right as a holder of Subordinated Interests to distributions of
principal and interest will be subordinated to all of the more senior classes of
securities. Actual losses on the Mortgage Collateral (after default, where the
proceeds from the foreclosure sale of the real estate securing the loan are less
than the unpaid balance of the mortgage loan plus interest thereon and
disposition costs) will be allocated first to the Subordinated Interests and
then to the more senior securities. The Subordinated Interests the Company
intends to originate and acquire with the proceeds from this offering are
subject to special risks, including a substantially greater risk of loss of
principal and non-payment of interest than the more senior securities of such
series.
If the Company originates and acquires Subordinated Interests with an
anticipated yield as of the acquisition date based on an assumed rate of default
and severity of loss on the mortgage loans comprising the Mortgage Collateral
that is lower than the actual default rate and severity of loss, its yield will
be lower than the Company initially anticipated. In the event of substantial
losses, the Company may not recover the full amount (or, indeed, any) of its
acquisition cost. The timing of actual losses also will affect the Company's
yield, even if the rate of default and severity of loss are consistent with the
Company's anticipation. In general, the earlier a loss occurs, the greater the
adverse effect on the Company's yield. Additionally, the yield on CMBS
collateralized by adjustable rate mortgage loans will vary depending on the
amount of and caps on the adjustments to the interest rates of such mortgage
loans. There can be no assurance as to the rate of delinquency, severity of loss
or the timing of any such losses on mortgage loans underlying Subordinated
Interests and thus as to the actual yield received by the Company.
The aggregate amount of distributions on the Company's Subordinated
Interests and their yield also will be affected by the amount and timing of
principal prepayments on the mortgage loans comprising the Mortgage Collateral.
To the extent that more senior tranches of Subordinated Interests are
outstanding, all prepayments of principal on the underlying mortgage loans
typically will be paid to the holders of more senior
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classes. This subordination of the Subordinated Interests to more senior classes
may affect adversely the yield on the Subordinated Interests originated and
acquired by the Company. Even if there are no actual losses on the mortgage
loans, interest and principal payments are made on the more senior classes
before interest and principal are paid with respect to the Subordinated
Interests. Typically, interest deferred on Subordinated Interests is payable on
subsequent payment dates to the extent funds are available, but such deferral
does not itself bear interest. Such deferral of interest will reduce the actual
yield on the Company's Subordinated Interests.
Because the Company will originate and acquire Subordinated Interests at a
significant discount from their outstanding principal balance, if the Company
estimates the yield on a security based on a faster rate of payment of principal
than actually occurs, the Company's yield on that security will be lower than
the Company anticipated. Whether and when there are any principal prepayments on
the Mortgage Loans will be affected by a variety of factors, including, without
limitation, the terms of the Mortgage Loans, the level of prevailing interest
rates, the availability of mortgage credit and economic, tax, legal and other
factors. Principal prepayments on Mortgage Loans secured by multifamily
residential and commercial properties are likely to be affected by prepayment
premium provisions applicable to each of the Mortgage Loans, and by the extent
to which the Servicer is able to enforce such prepayment premium provisions.
Moreover, the yield to maturity on such Subordinated Interests may also be
affected by any extension of the scheduled maturity dates of the Mortgage Loans
as a result of modifications of the Mortgage Loans by the Servicer, if
permitted.
The timing of any prepayments on the mortgage loans underlying CMBS owned
by the Company may significantly affect the Company's yield to maturity, even if
the average rate of principal payments is consistent with the Company's
expectation. In general, the earlier a prepayment of principal of the mortgage
loans, the greater the effect on an investor's yield. The effect on the
Company's yield of principal payments occurring at a rate higher (or lower) than
the rate anticipated by the Company during any particular period may not be
fully offset by a subsequent like decrease (or increase) in the rate of
principal payments.
Because the rate and timing of principal payments on the underlying
mortgage loans will depend on future events and on a variety of factors, there
can be no assurance as to such rate or the timing of principal payments on the
Subordinated Interests the Company owns or acquires.
OPPORTUNISTIC REAL PROPERTIES
The yield on the Company's investments in Real Properties, including
Opportunistic Real Properties, will depend upon the price that the Company pays
for such investments, the costs of capital improvements and other costs of
managing the properties, the level of rents and other income generated by the
properties, the length of time between acquisition and disposition and the price
at which the Company ultimately disposes of such properties. Although the
Manager's skills in managing an Opportunistic Real Property may have a strong
impact on the yield of such an investment, the yield of such an investment may
be adversely affected by factors beyond the Company's control, such as adverse
changes in economic conditions, neighborhood characteristics and competition
from other properties offering the same or similar services. See "Risk
Factors -- Risks Related to Investments in Real Property."
MEZZANINE INVESTMENTS
The yield to maturity on the Company's investment in Mezzanine Investments
will depend, among other things, upon (i) whether there are any losses on such
Mezzanine Investments, (ii) whether and when there are any prepayments of such
Mezzanine Investments, (iii) the interest rates on such Mezzanine Investments
and (iv) the purchase price of such Mezzanine Investments.
The yield to maturity on all Mezzanine Investments will be sensitive to
defaults by the borrower and the severity of the losses that might result from
such defaults because they generally have higher loan-to-value ratios than
traditional mortgage loans. The borrower generally will have an equity
investment of 10% to 15% of total project costs, but if the borrower defaults
there can be no assurance that losses will not exceed such amount. Because the
borrower's equity may not be adequate to protect the Company's investment, the
Company's yield on such loans is particularly sensitive to defaults.
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If the Company acquires a Mezzanine Investment at a significant discount
from its outstanding principal balance and the Company estimates the yield on
the Mezzanine Investment based on a faster rate of payment of principal than
actually occurs, the Company's yield on that Mezzanine Investment will be lower
than the Company anticipated. Conversely, if the Company acquires a Mezzanine
Investment at a significant premium to its outstanding principal balance,
estimating the yield on such Mezzanine Investment based on a slower rate of
payment of principal than actually occurs, the Company's yield on that Mezzanine
Investment will be lower than anticipated.
Whether and when there are any principal prepayments on the Mezzanine
Investments will be affected by a variety of factors, including, without
limitation, the terms of the Mezzanine Investments, the level of prevailing
interest rates, the availability of mortgage credit, and economic, tax, legal
and other factors. Principal prepayments on Mezzanine Investments secured by
multifamily residential and commercial properties are likely to be affected by
prepayment premium provisions applicable to each of the Mezzanine Investments,
and by the extent to which the Servicer is able to enforce such prepayment
premium provisions. Moreover, the yield to maturity on Mezzanine Investments may
also be affected by any extension of the scheduled maturity dates of the
Mezzanine Investments as a result of modifications of the Mezzanine Investments
by the servicer, if permitted.
OTHER REAL ESTATE RELATED ASSETS
Construction Loans. The yield on the Company's investments in Construction
Loans will depend, among other things, upon (i) whether there are any losses on
such Construction Loans, (ii) the ability of owners to lease the properties,
(iii) the interest rate on such Construction Loans and (iv) the ability of the
borrower to refinance the Construction Loans with permanent financing.
The yield to maturity on all Construction Loans will be sensitive to
defaults by the borrowers and the severity of the losses that might result from
such defaults because such loans generally have higher loan-to-value ratios than
traditional mortgage loans. The borrowers generally will have equity investments
of 10% to 15% of total project costs, but if the borrower defaults there can be
no assurance that losses will not exceed such amounts. Because the borrower's
equity may not be adequate to protect the Company's investment in a Construction
Loan, the Company's yield on such loans is particularly sensitive to defaults.
Yield to maturity on Construction Loans can be reduced by prepayments.
Whether and when there are any principal prepayments on the Construction Loans
will be affected by a variety of factors, including, without limitation, the
terms of the Construction Loans, the level of prevailing interest rates, the
availability of mortgage credit, and economic, tax, legal and other factors.
Principal prepayments on Construction Loans secured by multifamily residential
and commercial properties are likely to be affected by prepayment premium
provisions applicable to each of the Construction Loans, and by the extent to
which the Special Servicer is able to enforce such prepayment premium
provisions. Moreover, the yield to maturity on Construction Loans may also be
affected by any extension of the scheduled maturity dates of the Construction
Loans as a result of modifications of the Construction Loans by the servicer, if
permitted.
Agricultural Loans. The yield on the Company's investments in Agricultural
Loans will depend, among other things, upon (i) the interest rate, (ii) the rate
of payments of principal, (iii) whether there are any losses on such
Agricultural Loans, (iv) social, economic, geographic, climatic, demographic,
legal and other factors.
Yield to maturity on Agricultural Loans can be reduced by prepayments. A
number of social, economic, geographic, climatic, demographic, legal and other
factors may influence prepayments, including the age of the Agricultural Loans,
the geographic distribution of the mortgaged properties, the payment terms of
the Agricultural Loans, the characteristics of the borrowers, weather, economic
conditions generally and in the geographic area in which the Mortgaged
Properties are located, enforceability of due-on-sale clauses, servicing
decisions, the availability of mortgage funds, the extent of the borrowers' net
equity in the mortgaged properties and mortgage market interest rates in
relation to the effective interest rates on the Agricultural Loans. In general,
if prevailing interest rates fall significantly below the interest rates on the
Agricultural Loans, the Agricultural Loans are likely to be subject to higher
prepayments than if prevailing rates remain at or above the interest rates on
such Agricultural Loans. Conversely, if prevailing interest rates rise above the
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interest rates on the Agricultural Loans, the rate of prepayment would be
expected to decrease. There can be no certainty as to the rate of prepayments on
the Agricultural Loans during any period or over the life of the Guaranteed
Certificates. The rate of default on the Agricultural Loans will also affect the
rate of payment of principal on the Agricultural Loans. Prepayments,
liquidations and repurchases of the Agricultural Loans will result in
distributions to holders of amounts which would otherwise be distributed over
the remaining terms of the Agricultural Loans.
IOs and Inverse IOs. The Company's earnings resulting from its investments
in IOs and Inverse IOs will be extremely sensitive to changes in the prepayment
rates on the underlying mortgage loans, and investments in Inverse IOs will be
very sensitive to changes in the index used to calculate the interest on such
classes.
The yield on IOs declines as prepayments on the underlying mortgage loans
increase. As market interest rates decline, prepayments on the underlying loans
typically increase as borrowers refinance their mortgage loans, although
commercial and multifamily loans typically have provisions that prohibit or
provide disincentives for prepayments for specified periods. Prepayment rates on
mortgage loans on which there is no prepayment penalty or prepayment "lock out"
period (as is typical for single-family residential loans) may be particularly
sensitive to changes in interest rates and, therefore, quite volatile. Faster
than anticipated prepayment rates can result in a loss of part or all of the
purchase price for the IO.
The Company intends to invest in Inverse IOs solely for the purpose of
hedging the Company's portfolio of IOs. In general, interest on an Inverse IO is
payable at a floating rate that varies inversely with (and often at a multiple
of) a specified index, such as the prime rate, one-month, three-month or
six-month LIBOR, or a U.S. Treasury rate. Generally, if the index exceeds a
certain level, the Inverse IO receives no payments. Moreover, Inverse IOs
generally have a cap on the interest rate payable on such class.
Investors in Inverse IOs are subject to the risk that higher than
anticipated levels of the index could result in actual yields to investors that
are significantly lower than the anticipated yields, and that the interest rate
on the class will be 0% at or above specified levels of the index. In addition,
the interest rate on an Inverse IO cannot exceed its specified maximum rate,
regardless of the level of the index. Further, high levels of the index
(especially in combination with fast prepayment rates on the Mortgage Loans) may
result in the failure of the Company to recover fully its investments in Inverse
IOs. For example, the holder of an Inverse IO with a per annum interest rate
equal to 8.5% minus one-month LIBOR, subject to a maximum rate of 8.5%, would
receive no interest if one-month LIBOR were to equal or exceed 8.5%. Moreover,
under no circumstance will such Inverse IO accrue interest at a rate greater
than 8.5% per annum.
Changes in the index may not correlate with changes in mortgage interest
rates. It is possible that lower prevailing mortgage interest rates (which would
be expected to result in faster prepayments) could occur concurrently with a
higher level of the index, thereby compounding the negative effects of each
separate factor on the yields to investors in the Inverse IOs. Conversely,
higher prevailing mortgage interest rates (which would be expected to result in
slower prepayments) could occur concurrently with a lower level of the index.
It is highly unlikely that the index will remain constant at any level. The
timing of changes in the level of the index may affect the actual yield to the
Company, even if the average level is consistent with the Company's expectation.
In general, the earlier a change in the level of the index, the greater the
effect on the Company's yield. As a result, the effect on the Company's yield of
the index level that is higher (or lower) than the rate anticipated by the
Company during earlier periods is not likely to be offset by a later equivalent
reduction (or increase).
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CAPITALIZATION
The capitalization of the Company, as of December 16, 1997, and as adjusted
to reflect the sale of the shares of Common Stock offered hereby (assuming an
initial public offering price of $15 per share), is as follows:
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED(1)
-------- --------------
<S> <C> <C>
Preferred Stock, par value $.01............................. $ 0 $ 0
Common Stock, par value $.01................................ 1 116,667
Authorized -- 200,000,000 shares
Issued and outstanding -- 100 shares, 11,666,667 shares,
as adjusted
Additional Paid-In Capital.................................. 999 161,882,943
-------- ------------
Total............................................. 1,000 161,999,610
======== ============
</TABLE>
- ---------------
(1) Includes 1,166,567 shares of Common Stock to be purchased by an affiliate of
Lend Lease and 700,000 shares to be purchased by FBR Asset Investment
Corporation, after deducting expenses of this offering estimated to be
$750,000 payable by the Company. Excludes shares issuable upon the exercise
of options to be outstanding upon consummation of this offering.
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<PAGE> 62
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF LIQUIDITY AND CAPITAL RESOURCES
The Company has been organized and will elect to qualify as a REIT under
the Code and, as such, anticipates distributing annually at least 95% of its
"REIT taxable income," subject to certain adjustments. Cash for such
distributions is expected to be generated from the Company's operations,
although the Company also may borrow funds to make distributions. The Company's
revenues will be derived from (i) ownership of Subordinated Interests; (ii)
ownership of Mezzanine Investments; (iii) ownership of Opportunistic Real
Properties; (iv) ownership of Other Real Estate Related Assets and (v) interest
and revenues from other (generally short-term) investments. See "Distribution
Policy" and "Federal Income Tax Considerations."
The Company currently has only nominal assets. The principal sources of the
Company's funds will be the proceeds of this offering, borrowings under lines of
credit to be arranged on behalf of the Company, additional bank borrowings,
commercial paper borrowings, mortgage loans on the Company's real estate and
future equity offerings. Management believes that the net proceeds of this
offering, combined with the cash flow from operations and borrowings, will be
sufficient to enable the Company to meet its anticipated liquidity and capital
requirements. See "Operating Policies and Objectives" and "Use of Proceeds."
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Charter provides that the Company may issue up to 225,000,000 shares of
capital stock, consisting of 200,000,000 shares of Common Stock, $0.01 par value
per share, and 25,000,000 shares of preferred stock, $0.01 par value per share
("Preferred Stock"). Upon consummation of this offering, 11,666,667 shares of
Common Stock will be issued and outstanding, shares of Common Stock
will be reserved for issuance upon exercise of options, and no Preferred Stock
will be issued and outstanding.
COMMON STOCK
All outstanding shares of Common Stock will be duly authorized, fully paid
and nonassessable upon consummation of this offering. Subject to the
preferential rights of any other shares or series of shares of capital stock,
holders of Common Stock are entitled to receive dividends if and when authorized
and declared by the Board of Directors of the Company out of assets legally
available therefor and to share ratably in the assets of the Company legally
available for distribution to its shareholders in the event of its liquidation,
dissolution or winding-up after payment of, or adequate provision for, all known
debts and liabilities of the Company. The Company intends to pay four regular
quarterly dividends. To the extent necessary to maintain its REIT qualification
or to avoid a corporate level tax in any particular year, the Company will
declare a fifth, special dividend.
Each outstanding share of Common Stock entitles the holder to one vote on
all matters submitted to a vote of shareholders, including the election of
directors, and, except as otherwise required by law or except as provided with
respect to any other class or series of shares of capital stock, the holders of
Common Stock will possess the exclusive voting power. Because there is no
cumulative voting in the election of directors, each holder of Common Stock has
the right to cast one vote for each share of stock for each candidate. For a
discussion of the voting rights of holders of the Common Stock, including the
provisions specifying the vote required by security holders to take action, see
"Certain Provisions of Georgia Law and of the Company's Articles of
Incorporation and Bylaws."
No holder of any Common Stock shall have any preemptive right to subscribe
for a purchase of any stock or other securities of the Company other than such,
if any, as the Board of Directors, in its sole discretion, may determine.
Certain provisions of the Charter and Bylaws and certain provisions of
Georgia law could have the effect of delaying, deferring or preventing a change
in control of the Company. See "Certain Provisions of Georgia Law and of the
Company's Articles of Incorporation and Bylaws."
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PREFERRED STOCK
Preferred Stock may be issued from time to time, in one or more series, as
authorized by the Board of Directors. Because the Board of Directors has the
power to establish the preferences and rights of each class or series of
Preferred Stock, the Board of Directors may afford the holders of any series or
class of Preferred Stock preferences, powers and rights, voting or otherwise,
senior to the rights of the holders of Common Stock. The Board could authorize
the issuance of Preferred Stock with terms and conditions which could have the
effect of discouraging a takeover or other transaction which holders of some, or
a majority, of the shares of Common Stock might believe to be in their best
interests or in which holders of some, or a majority, of the shares of Common
Stock might receive a premium for their shares of Common Stock over the then
market price of such shares of Common Stock. As of the date hereof, no shares of
Preferred Stock are outstanding.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
The Charter contains certain restrictions on the number of shares of Common
Stock that shareholders may own. For the Company to qualify as a REIT under the
Code, no more than 50% in value of its outstanding shares of capital stock may
be owned, directly or indirectly, by five or fewer individuals (as defined in
the Code to include certain entities) during the last half of a taxable year
(other than its first year as a REIT). The capital stock must also be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year (other than its first year as a REIT) or during a proportionate part of a
shorter taxable year. Because the Company expects to qualify as a REIT, the
Charter contains restrictions on the ownership and transfer of capital stock
intended to ensure compliance with these requirements. See "Federal Income Tax
Considerations -- Requirements for Qualifications."
The Ownership Limitation provides that, subject to certain exceptions
specified in the charter, no person may own, actually and constructively under
the applicable attribution provisions of the Code, more than 9.8% of the total
number outstanding shares of any class of capital stock of the Company (except
for Lend Lease and its affiliates so long as Lend Lease is publicly held).
The Board of Directors may (but in no event will be required to) waive the
Ownership Limitation with respect to a holder if it determines that such
holder's ownership will not then or in the future jeopardize the Company's
status as a REIT.
If any purported transfer of capital stock of the Company or any other
event would result in any person or entity holding shares of capital stock of
the Company in excess of the applicable Ownership Limitation, then any such
purported transfer will be null and void as to that number of shares in excess
of such Ownership Limitation and the purported transferee (the "Prohibited
Transferee") shall acquire no right or interest (or, in the case of any event
other than a purported transfer, the person or entity holding record title to
any such shares in excess of the Ownership Limitation (the "Prohibited Owner")
shall cease to own any right or interest) in such excess shares. In addition, if
any purported transfer of capital stock or any other event would cause (i) the
Company to be "closely held" under Section 856(h) of the Code, or (ii) the
Company's capital stock to be owned by fewer than 100 persons, then any such
purported transfer will be null and void as to that number of shares in excess
of the number that could have been transferred without such result, and the
Prohibited Transferee shall acquire no right or interest (or, in the case of any
event other than a transfer, the Prohibited Owner shall cease to own any right
or interest) in such excess shares.
Any such excess shares described above (other than shares the transfer of
which would cause the Company's capital stock to be owned by fewer than 100
persons) will be transferred automatically, by operation of law, to a Trust, the
beneficiary of which will be a qualified charitable organization selected by the
Company (the "Beneficiary"). The Trustee of the Trust will be empowered to sell
such excess shares to a qualified person or entity and distribute to a
Prohibited Transferee an amount equal to the lesser of the price paid by the
Prohibited Transferee for such excess shares or the sales proceeds received by
the trust for such excess shares. In the case of any excess shares resulting
from any event other than a transfer, or from a transfer for no consideration,
the trustee will be empowered to sell such excess to the lesser of the fair
market value of such excess shares of the date of such event or the sales
proceeds received by the trust for such excess shares. Prior to a sale of any
such excess shares by the trust, the trustee will be entitled to receive, in
trust for the
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benefit of the beneficiary, all dividends and other distributions paid by the
Company with respect to such excess shares, and also will be entitled to
exercise all voting rights with respect to such excess shares.
All certificates representing shares of capital stock will bear a legend
referring to the restrictions described above.
Every owner of more than 1% (or such lower percentage as may be required by
the Code or Treasury Regulations) of the outstanding shares of capital stock of
the Company must file a written notice with the Company containing the
information specified in the Charter no later than January 30 of each year. In
addition, each shareholder shall upon demand be required to disclose to the
Company in writing such information as the Company may request in order to
determine the effect, if any, of such shareholder's actual and constructive
ownership on the Company's status as a REIT and to ensure compliance with the
Ownership Limitation.
The Ownership Limitation could have the effect of discouraging a takeover
or other transaction in which holders of some, or a majority, of shares of
Common Stock might receive a premium for their shares of Common Stock over the
then prevailing market price or which such holders might believe to be otherwise
in their best interest.
REGISTRATION RIGHTS
In connection with the sale of shares of Common Stock to FBR Asset
Investment Corporation, the Company has agreed to enter into a registration
rights agreement (the "FBR Registration Rights Agreement") granting FBR Asset
Investment Corporation certain registration rights with respect to the shares of
Common Stock. The FBR Registration Rights Agreement provides that from and after
the one year anniversary of the consummation of this offering, FBR Asset
Investment Corporation will have unlimited piggyback registration rights,
subject to certain conditions, and may require the Company to file a shelf
registration statement on Form S-3 relating to the Common Stock. The Company may
prohibit offers and sales of securities pursuant to the shelf registration
statement under certain circumstances. The Company has also agreed to pay the
costs and expenses of each such registration effected under the FBR Registration
Rights Agreement, other than underwriting discounts and commissions.
DIVIDEND REINVESTMENT PLAN
The Company may implement a dividend reinvestment plan whereby shareholders
may automatically reinvest their dividends in the Company's Common Stock.
Details about any such plan would be sent to the Company's shareholders
following adoption thereof by the Board of Directors.
REPORTS TO SHAREHOLDERS
The Company will furnish its shareholders with annual reports containing
information regarding the business and performance of the Company, including
audited financial statements certified by independent public accountants, and
will distribute quarterly reports containing unaudited financial information for
each of the first three quarters of the year.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is [to be
determined].
LISTING OF THE COMMON STOCK
The Company will apply to list the Common Stock on the Nasdaq National
Market.
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CERTAIN PROVISIONS OF GEORGIA LAW AND
OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
The Company believes that the following is a summary of the material terms
of provisions of Georgia law and of the Charter and Bylaws of the Company. Such
summary does not purport to be complete and is subject to and qualified in its
entirety by reference to Georgia law and the Charter and Bylaws of the Company.
Certain provisions of Georgia law and the Charter and Bylaws are described
elsewhere in this Prospectus. The Charter and Bylaws became effective on
December 16, 1997.
BOARD OF DIRECTORS
The Bylaws provide that the number of Directors of the Company may be
established by the Board of Directors and shall initially consist of five
persons. Any vacancy will be filled, at any regular meeting or at any special
meeting called for that purpose, by a majority of the remaining Directors.
The Company's Bylaws also provide that a Director may be removed with or
without cause with the affirmative vote of at least a majority of the votes
entitled to be cast in the election of Directors. This provision, when coupled
with the provisions of the Bylaws authorizing the Board of Directors to fill
vacant directorships, as a practical matter precludes the Company's shareholders
from removing incumbent directors and filling the vacancies created by such
removal with their own nominees.
AMENDMENT
The Charter may be amended by the affirmative vote of the holders of at
least a majority of the outstanding shares of Common Stock (and majority of the
outstanding shares of Preferred Stock, if any, to the extent that such amendment
would materially adversely affect the holders of the Preferred Stock), with the
shareholders voting as a class with one vote per share; provided, that the
Charter provision relating to the Company's election to be taxed as a REIT shall
not be amended, altered, changed or repealed without the affirmative vote of at
least 80% of the members of the Board of Directors and the affirmative vote of
holders of two-thirds of the outstanding shares of Common Stock and any other
shares of capital stock entitled to vote generally in the election of directors
voting as a class. The Company's Bylaws may be amended by the Board of Directors
or by vote of the holders of a majority of the outstanding shares of Common
Stock, however, the shareholders may prescribe that any bylaw or bylaws adopted
by them shall not be altered, amended or repealed by the Board of Directors.
GEORGIA ANTI-TAKEOVER STATUTES
The Georgia Business Corporation Code ("GBCC") restricts certain business
combinations with interested shareholders and contains fair price requirements
applicable to certain mergers with certain "interested shareholders" that are
summarized below. In accordance with the provisions of these statutes, the
Company must elect to be covered by the restrictions imposed by these statutes.
The Company has not elected to be covered by such restrictions.
Sections 14-2-1131 to 14-2-1133 of the GBCC (the "Business Combination
Statute") regulates business combinations such as mergers, consolidations, share
exchanges and asset purchases where the acquired business has at least 100
shareholders residing in Georgia and has its principal office in Georgia, as the
Company does, and where the acquiror became an "interested shareholder" of the
corporation, unless either (i) the transaction resulting in such acquiror
becoming an "interested shareholder" or the business combination received the
approval of the corporation's board of directors prior to the date on which the
acquiror became an interested shareholder, or (ii) the acquiror became the owner
of at least 90% of the outstanding voting stock of the corporation (excluding
shares held by directors, officers and affiliates of the corporation and shares
held by certain other persons) in the same transaction in which the acquiror
became an interested shareholder. For purposes of this statute, an "interested
shareholder" generally is any person who directly or indirectly, alone or in the
concert with others, beneficially owns or controls 10% or more of the voting
power of the outstanding voting shares of the corporation. The law prohibits
business combinations with an unapproved interested shareholder for a period of
five years after the date on which such person became an
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interested shareholder. The law restricting business combinations is broad in
its scope and is designed to inhibit unfriendly acquisitions.
Sections 14-2-1110 to 14-2-1113 of the GBCC (the "Fair Price Statute")
prohibits certain business combinations between a Georgia business corporation
and an interested shareholder. The Fair Price Statute would permit the business
combination to be effected if (i) certain "fair price" criteria are satisfied,
(ii) the business combination is unanimously approved by the continuing
directors, (iii) the business combination is recommended by at least two-thirds
of the continuing directors and approved by a majority of the votes entitled to
be cast by holders of voting shares, other than voting shares beneficially owned
by the interested shareholder, or (iv) the interested shareholder has been such
for at least three years and has not increased his ownership position in such
three-year period by more than one percent in a twelve-month period. The Fair
Price Statute is designed to inhibit unfriendly acquisitions that do not satisfy
the specified "fair price" requirements.
The anti-takeover statutes of the GBCC, the provisions of the Charter on
removal of directors and the advance notice provisions of the Bylaws could
delay, defer or prevent a change in control of the Company or other transaction
that might involve a premium price for holders of Common Stock or otherwise be
in their best interest.
OPERATIONS
The Company is generally prohibited from engaging in certain activities and
acquiring or holding property or engaging in any activity that would cause the
Company to fail to qualify as a REIT.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws of the Company provide (a) with respect to an annual meeting of
shareholders, nominations of persons for election to the Board of Directors and
the proposal of business to be considered by such shareholders may be made only
(i) pursuant to the Company's notice of the meeting, (ii) by the Board of
Directors or (iii) by a shareholder who is entitled to vote at the meeting and
has complied with the advance notice procedures set forth in the Bylaws and (b)
with respect to special meetings of shareholders, nominations of persons for
election to the Board of Directors may be made only (i) pursuant to the
Company's notice of meeting, (ii) by the Board of Directors or (iii) provided
that the Board of Directors has determined that directors shall be elected at
such meeting, by a shareholder who is entitled to vote at the meeting and has
complied with the advance notice provisions set forth in the Bylaws.
COMMON STOCK AVAILABLE FOR FUTURE SALE
Upon consummation of this offering, the Company will have outstanding
(including shares reserved for issuance upon exercise of outstanding options)
11,666,667 shares of Common Stock. The 9,800,000 shares of Common Stock issued
in this offering will be freely tradeable by persons other than "affiliates" of
the Company without restriction under the Securities Act, subject to certain
limitations on ownership set forth in the Charter. See "Description of Capital
Stock -- Restrictions on Ownership and Transfer."
Shares of Common Stock issued to holders of Units upon exercise of the
Redemption Rights (as hereinafter defined) will be "restricted" securities under
the meaning of Rule 144 and may not be sold in the absence of registration under
the Securities Act unless an exemption from registration is available. See
"Operating Partnership Agreement -- Redemption Rights." The Company has granted
certain holders registration rights with respect to 1,866,667 Shares of Common
Stock. See "Risk Factors -- Other Risks -- Possible Adverse Effects on Share
Price Arising from Shares of Common Stock Eligible for Future Sale" and
"Description of Capital Stock -- Registration Rights."
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of restricted shares from the Company
or any "affiliate" of the Company, as that term is defined under the Securities
Act, the acquiror or subsequent holder thereof is entitled to sell within any
three-month period a number of shares that does not exceed the greater of 1% of
the then outstanding Common Stock or
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the average weekly trading volume of the Common Stock during the four calendar
weeks preceding the date on which notice of the sale is filed with the
Commission. Sales under Rule 144 also are subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. If two years have elapsed since the date of
acquisition of restricted shares from the Company or from any Affiliate of the
Company, and the acquiror or subsequent holder thereof is deemed not to have
been an Affiliate of the Company at any time during the three months preceding a
sale, such person would be entitled to sell such shares in the public market
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements.
Additionally, upon the closing of this offering, there will be outstanding
stock options that will be granted at the initial public offering price, to the
Manager, none of which will be exercisable until one year from the date of
grant. The number of shares to be subject to such stock options will be 10.0% of
the number of shares to be outstanding following consummation of this offering.
Within one year of consummation of this offering, the Company intends to file a
Registration Statement on Form S-8 with the Commission with respect to shares of
Common Stock issuable pursuant to the Option Plan.
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price prevailing from time to time. Sales of substantial amounts of Common
Stock, or the perception that such sales could occur, may affect adversely
prevailing market prices of the Common Stock.
OPERATING PARTNERSHIP AGREEMENT
The Operating Partnership will be organized as a Georgia limited
partnership, the general partner of which will be Chastain GP Holdings, Inc., a
wholly-owned subsidiary of the Company (the "General Partner"), and the initial
limited partner of which will be Chastain LP Holdings, Inc., a wholly-owned
subsidiary of the Company (the "Initial Limited Partner"). Because the Company
indirectly will own 100% of the partnership interests in the Operating
Partnership, the Operating Partnership will be disregarded as a separate entity
from the Company for federal income tax purposes until a third party is admitted
as a partner of the Operating Partnership. The Company will organize the
Operating Partnership in order to provide potential sellers of assets with the
opportunity to transfer those assets to the Company in a tax-deferred exchange.
The Operating Partnership Agreement currently does not contain the provisions
described below. Instead, the following summary of the Operating Partnership
Agreement, and the descriptions of certain provisions thereof set forth
elsewhere in this Prospectus, describe certain provisions that likely will
appear in the Operating Partnership Agreement when the Manager or third-party
potential sellers of assets who wish to achieve tax deferral are admitted as
partners of the Operating Partnership. The provisions described in this summary,
however, may not appear in the Operating Partnership Agreement that ultimately
is executed.
GENERAL
Pursuant to the Operating Partnership Agreement, the General Partner, as
the sole general partner of the Operating Partnership, will have full, exclusive
and complete responsibility and discretion in the management and control of the
Operating Partnership. The limited partners of the operating partnership (the
"Limited Partners") will have no authority in their capacity as Limited Partners
to transact business for, or participate in the management activities or
decisions of, the Operating Partnership except as required by applicable law.
Consequently, the Company, by virtue of its ownership of the General Partner,
will control the assets and business of the Operating Partnership. However, it
is anticipated that any amendment to the Operating Partnership Agreement that
would (i) affect the Redemption Rights, (ii) adversely affect the Limited
Partners' rights to receive cash distributions, (iii) alter the Operating
Partnership's allocations of income or loss, or (iv) impose on the Limited
Partners any obligations to make additional contributions to the capital of the
Operating Partnership, will require the consent of Limited Partners (other than
the Initial Limited Partner) holding more than two-thirds of the Units held by
such partners.
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GENERAL PARTNER NOT TO WITHDRAW
It is anticipated that the General Partner will not be able to voluntarily
withdraw from the Operating Partnership or transfer or assign its interest in
the Operating Partnership unless the transaction in which such withdrawal or
transfer occurs results in the Limited Partners receiving property in an amount
equal to the amount they would have received had they exercised the Redemption
Rights immediately prior to such transaction, or unless the successor to the
General Partner contributes substantially all of its assets to the Operating
Partnership in return for an interest in the Operating Partnership.
CAPITAL CONTRIBUTION
The General Partner will hold a 1% general partnership interest in the
Operating Partnership, and the Initial Limited Partner will hold a 99% limited
partnership interest in the Operating Partnership. After the completion of this
offering, the Company will have a total of 11,666,667 shares of Common Stock
outstanding and will own, through the General Partner and the Initial Limited
Partner, 100% of the Units in the Operating Partnership.
It is anticipated that the Operating Partnership Agreement will provide
that if the Operating Partnership requires additional funds at any time or from
time to time in excess of funds available to the Operating Partnership from
borrowing or capital contributions, the General Partner may borrow such funds
from a financial institution or other lender and lend such funds to the
Operating Partnership on the same terms and conditions as are applicable to the
General Partner's borrowing of such funds. Moreover, it is anticipated that the
General Partner will be authorized to cause the Operating Partnership to issue
Units for less than fair market value if the Company (i) has concluded in good
faith that such issuance is in the best interest of the Company and the
Operating Partnership and (ii) the General Partner makes a capital contribution
in an amount equal to the proceeds of such issuance. Under the Operating
Partnership Agreement, each of the General Partner and the Initial Limited
Partner is obligated to contribute the net proceeds of any future share offering
by the Company as additional capital to the Operating Partnership in exchange
for an additional partnership interest. Upon such contribution, the General
Partner's and the Initial Limited Partner's percentage interests in the
Operating Partnership would be increased on a proportionate basis based upon the
amount of such additional capital contributions. The percentage interests of the
Limited Partners (other than the Initial Limited Partner) would be decreased on
a proportionate basis in the event of additional capital contributions by the
General Partner and the Initial Limited Partner. In addition, if the General
Partner and the Initial Limited Partner were to contribute additional capital to
the Operating Partnership, the General Partner would revalue the property of the
Operating Partnership to its fair market value (as determined by the General
Partner) and the capital accounts of the partners would be adjusted to reflect
the manner in which the unrealized gain or loss inherent in such property (that
has not been reflected in the capital accounts previously) would be allocated
among the partners under the terms of the Operating Partnership Agreement as if
there were a taxable disposition of such property for such fair market value on
the date of the revaluation.
REDEMPTION RIGHTS
It is anticipated that pursuant to the Operating Partnership Agreement, the
Limited Partners (other than the Initial Limited Partner) will have the right
(the "Redemption Rights") to cause the Operating Partnership to redeem their
Units for cash or, at the election of the General Partner, shares of Common
Stock on a one-for-one basis. The redemption price will be paid in cash at the
discretion of the Company or in the event that the issuance of shares of Common
Stock to the redeeming Limited Partner would (i) result in any person owning,
directly or indirectly, shares of stock in excess of the Ownership Limitation,
(ii) result in shares of capital stock of the Company being owned by fewer than
100 persons (determined without reference to any rules of attribution), (iii)
result in the Company being "closely held" within the meaning of section 856(h)
of the Code or (iv) cause the acquisition of shares of Common Stock by such
redeeming Limited Partner to be "integrated" with any other distribution of
shares of Common Stock for purposes of complying with the Securities Act. The
Manager holds options to acquire shares of Common Stock (or Units, if necessary
to prevent Lend Lease from exceeding the Ownership Limitation set forth in the
Charter), none
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of which are exercisable until the first anniversary of the date on which this
offering is consummated. Upon an acquisition of Units, the Manager may
immediately exercise its Redemption Rights.
OPERATIONS
The Operating Partnership Agreement requires that the Operating Partnership
be operated in a manner that will enable the Company to satisfy the requirements
for being classified as a REIT for federal tax purposes, to avoid any federal
income or excise tax liability imposed by the Code, and to ensure that the
Operating Partnership will not be classified as a "publicly traded partnership"
for purposes of section 7704 of the Code.
In addition to the administrative and operating costs and expenses incurred
by the Operating Partnership, it is anticipated that the Operating Partnership
will pay all administrative costs and expenses of the Company and the General
Partner (collectively, the "Company Expenses") and the Company Expenses will be
treated as expenses of the Operating Partnership. The Company Expenses generally
will include (i) all expenses relating to the formation and continuity of
existence of the Company and the General Partner, (ii) all expenses relating to
the public offering and registration of securities by the Company, (iii) all
expenses associated with the preparation and filing of any periodic reports by
the Company under federal, state or local laws or regulations, (iv) all expenses
associated with compliance by the Company and the General Partner with laws,
rules and regulations promulgated by any regulatory body and (v) all other
operating or administrative costs of the General Partner incurred in the
ordinary course of its business on behalf of the Operating Partnership.
DISTRIBUTIONS
It is anticipated that the Operating Partnership Agreement will provide
that the Operating Partnership shall distribute cash from operations (including
net sale or refinancing proceeds, but excluding net proceeds from the sale of
the Operating Partnership's property in connection with the liquidation of the
Operating Partnership) on a quarterly (or, at the election of the General
Partner, more frequent) basis, in amounts determined by the General Partner in
its sole discretion, to the partners in accordance with their respective
percentage interests in the Operating Partnership. Upon liquidation of the
Operating Partnership, after payment of, or adequate provision for, debts and
obligations of the Operating Partnership, including any partner loans, it is
anticipated that any remaining assets of the Operating Partnership will be
distributed to all partners with positive capital accounts in accordance with
their respective positive capital account balances. If the General Partner has a
negative balance in its capital account following a liquidation of the Operating
Partnership, it will be obligated to contribute cash to the Operating
Partnership equal to the negative balance in its capital account.
ALLOCATIONS
It is anticipated that income, gain and loss of the Operating Partnership
for each fiscal year generally will be allocated among the partners in
accordance with their respective interests in the Operating Partnership, subject
to compliance with the provisions of Code sections 704(b) and 704(c) and
Treasury Regulations promulgated thereunder.
TERM
The Operating Partnership will continue until December 31, 2050, or until
sooner terminated as provided in the Operating Partnership Agreement or by
operation of law. The General Partner will have the right to extend the term of
the Operating Partnership Agreement without the consent of the limited partners.
TAX MATTERS
Pursuant to the Operating Partnership Agreement, the General Partner is the
tax matters partner of the Operating Partnership and, as such, has authority to
handle tax audits and to make tax elections under the Code on behalf of the
Operating Partnership.
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FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax considerations
that may be relevant to a prospective holder of Common Stock in the Company.
King & Spalding, counsel to the Company, has reviewed this summary and has
rendered an opinion that the descriptions of the law and the legal conclusions
contained herein are correct in all material respects, and the discussions
hereunder fairly summarize the federal income tax considerations that are likely
to be material to the Company and a holder of the Common Stock. The discussion
contained herein does not address all aspects of taxation that may be relevant
to particular shareholders in light of their personal investment or tax
circumstances, or to certain types of shareholders (including insurance
companies, tax-exempt organizations and financial institutions or broker-dealers
subject to special treatment under the federal income tax laws). As used in this
section the term "Company" refers solely to Chastain Capital Corporation.
The statements in this discussion and the opinion of King & Spalding are
based on current provisions of the Code, existing, temporary, and currently
proposed Treasury Regulations promulgated under the Code, the legislative
history of the Code, existing administrative rulings and practices of the
Service, and judicial decisions. There can be no assurance that future
legislative, judicial, or administrative actions or decisions, which may be
retroactive in effect, will not affect the accuracy of any statements in this
Prospectus with respect to the transactions entered into or contemplated prior
to the effective date of such changes.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS OWN TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND SALE OF THE
COMMON STOCK AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT, INCLUDING THE
FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE,
OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
The Company plans to make an election to be taxed as a REIT under sections
856 through 860 of the Code, commencing with its first REIT taxable year ending
on December 31, 1998.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retroactively.
King & Spalding has acted as counsel to the Company in connection with this
offering and the Company's election to be taxed as a REIT. In the opinion of
King & Spalding, assuming that the elections and other procedural steps
described in this discussion of "Federal Income Tax Considerations" are
completed by the Company in a timely fashion, commencing with the Company's
first REIT taxable year ending on December 31, 1998, the Company will qualify to
be taxed as a REIT pursuant to sections 856 through 860 of the Code, and the
Company's organization and proposed method of operation will enable it to
continue to meet the requirements for qualification and taxation as a REIT under
the Code. Investors should be aware, however, that opinions of counsel are not
binding upon the Service or any court. It must be emphasized that King &
Spalding's opinion is based on various assumptions and is conditioned upon
certain representations made by the Company as to factual matters, including
representations regarding the nature of the Company's properties and the future
conduct of its business. Such factual assumptions and representations are
described below in this discussion of "Federal Income Tax Considerations" and
will be incorporated into the federal income tax opinion that will be delivered
by King & Spalding upon consummation of this offering. Moreover, such
qualification and taxation as a REIT depends upon the Company's ability to meet,
on a continuing basis through actual annual operating results, distribution
levels, and stock ownership, the various qualification tests imposed under the
Code that are discussed below. King & Spalding will not review the Company's
compliance with those tests on a continuing basis. Accordingly, no assurance can
be given that the actual results of the
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Company's operations for any particular taxable year will satisfy such
requirements. For a discussion of the tax consequences of failing to qualify as
a REIT, see "Federal Income Tax Considerations -- Failure to Qualify."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income tax on its net income that is distributed
currently to its shareholders. That treatment substantially eliminates the
"double taxation" (i.e., taxation at both the corporate and shareholder levels)
that generally results from an investment in a corporation. However, the Company
will be subject to federal income tax in the following circumstances. First, the
Company will be taxed at regular corporate rates on any undistributed taxable
income, including undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the "alternative minimum tax" on
its undistributed items of tax preference, if any. Third, if the Company has (i)
net income from the sale or other disposition of "foreclosure property" that is
held primarily for sale to customers in the ordinary course of business or (ii)
other nonqualifying income from foreclosure property, it will be subject to tax
at the highest corporate rate on such income. Fourth, if the Company has net
income from prohibited transactions (which are, in general, certain sales or
other dispositions of property (other than foreclosure property) held primarily
for sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), and
nonetheless has maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the gross income
attributable to the greater of the amount by which the Company fails the 75% or
95% gross income test, multiplied by a fraction intended to reflect the
Company's profitability. Sixth, if the Company should fail to distribute during
each calendar year at least the sum of (i) 85% of its 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, the Company would be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. Seventh, if the Company acquires any asset from a
C corporation (i.e., a corporation generally subject to full corporate-level
tax) in a merger or other transaction in which the basis of the asset in the
Company's hands is determined by reference to the basis of the asset (or any
other asset) in the hands of the C corporation and the Company recognizes gain
on the disposition of such asset during the 10-year period beginning on the date
on which it acquired such asset, then to the extent of such asset's
"built-in-gain" (i.e., the excess of the fair market value of such asset at the
time of acquisition by the Company over the adjusted basis in such asset at such
time), the Company will be subject to tax at the highest regular corporate rate
applicable (as provided in Treasury Regulations that have been announced but
have not yet been promulgated). The results described above with respect to the
tax on "built-in-gain" assume that the Company will elect pursuant to IRS Notice
88-19 to be subject to the rules described in the preceding sentence if it were
to make any such acquisition. Finally, the Company will be subject to tax at the
highest marginal corporate rate on the portion of any Excess Inclusion derived
by the Company from REMIC Residual Interests equal to the percentage of the
stock of the Company held by the United States, any state or political
subdivision thereof, any foreign government, any international organization, any
agency or instrumentality of any of the foregoing, any other tax-exempt
organization (other than a farmer's cooperative described in section 521 of the
Code) that is exempt from taxation under the unrelated business taxable income
provisions of the Code, or any rural electrical or telephone cooperative (each,
a "Disqualified Organization"). Any such tax on the portion of any Excess
Inclusion allocable to stock of the Company held by a Disqualified Organization
will reduce the cash available for distribution from the Company to all
shareholders.
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust, or association (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi) not
more than 50% in value of the outstanding shares of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year (the "5/50 Rule");
(vii) that makes an election to be a REIT (or has made such election for a
previous taxable year) and satisfies all relevant filing and other
administrative requirements established by the Service
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that must be met in order to elect and maintain REIT status; (viii) that uses a
calendar year for federal income tax purposes and complies with the
recordkeeping requirements of the Code and Treasury Regulations promulgated
thereunder; and (ix) that meets certain other tests, described below, regarding
the nature of its income and assets. The Code provides that conditions (i) to
(iv), inclusive, must be met during the entire taxable year and that condition
(v) must be met during at least 335 days of a taxable year of 12 months, or
during a proportionate part of a taxable year of less than 12 months. Conditions
(v) and (vi) will not apply until after the first taxable year for which an
election is made by the Company to be taxed as a REIT. For purposes of
determining stock ownership under the 5/50 Rule, a supplemental unemployment
compensation benefits plan, a private foundation, or a portion of a trust
permanently set aside or used exclusively for charitable purposes generally is
considered an individual. A trust that is a qualified trust under Code section
401(a), however, generally is not considered an individual, and beneficiaries of
such trust are treated as holding shares of a REIT in proportion to their
actuarial interests in such trust for purposes of the 5/50 Rule. The Company
will be treated as having satisfied the 5/50 Rule if it has complied with
certain Treasury regulations for ascertaining the ownership of its stock for the
relevant taxable year and if it did not know (or after the exercise of
reasonable diligence would not have known) that its stock was sufficiently
closely held during such year to cause it to fail the 5/50 Rule.
Prior to the consummation of this offering, the Company did not satisfy
conditions (v) and (vi) in the preceding paragraph. However, the Company
anticipates issuing sufficient Common Stock with sufficient diversity of
ownership pursuant to this offering to allow it to satisfy requirements (v) and
(vi). In addition, the Charter imposes restrictions on the transfer of the
Common Stock that are intended to assist the Company in continuing to satisfy
the share ownership requirements described in clauses (v) and (vi) above. Such
transfer restrictions are described in "Description of Capital
Stock -- Restrictions on Ownership and Transfer."
The Company currently has two wholly owned corporate subsidiaries (the
General Partner and the Initial Limited Partner), and it may acquire or create
additional wholly owned corporate subsidiaries in the future. Section 856(i) of
the Code provides that a corporation that is a "qualified REIT subsidiary" will
not be treated as a separate corporation for tax purposes, and all assets,
liabilities and items of income, deduction and credit of a "qualified REIT
subsidiary" will be treated as assets, liabilities and items of income,
deduction and credit of the REIT. A "qualified REIT subsidiary" is any
wholly-owned corporate subsidiary of a REIT. Because the General Partner and the
Initial Limited Partner are wholly owned subsidiaries of the Company, such
corporations will constitute "qualified REIT subsidiaries." Accordingly, in
applying the income and asset tests described below, the General Partner and the
Initial Limited Partner will be ignored for federal income tax purposes, and all
assets, liabilities and items of income, deduction and credit of such
subsidiaries will be treated as assets, liabilities and items of income,
deduction, and credit of the Company. Neither the General Partner nor the
Initial Limited Partner will be subject to federal corporate income taxation,
although each may be subject to state and local taxation.
Pursuant to Treasury Regulations effective January 1, 1997 relating to
entity classification (the "Check-the-Box Regulations"), an unincorporated
entity that has a single owner is disregarded as an entity separate from its
owner for federal income tax purposes. Because of the rules described above
applicable to a "qualified REIT subsidiary," the Company will be deemed to own
100% of the partnership interests in the Operating Partnership for federal
income tax purposes. As a result, the Operating Partnership will be disregarded
as an entity separate from the Company under the Check-the-Box Regulations.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership (based upon the REIT's capital interest in the
partnership) and will be deemed to be entitled to the gross income of the
partnership attributable to such share. In addition, the assets and gross income
of the partnership will retain the same character in the hands of the REIT for
purposes of section 856 of the Code, including satisfying the gross income and
asset tests described below. If and when the Operating Partnership admits a
partner other than the Company or a qualified REIT subsidiary of the Company,
the Company's proportionate share of the assets and gross income of the
Operating Partnership will be treated as assets and gross income of the Company
for purposes of applying the requirements described herein.
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Income Tests. In order for the Company to qualify and to maintain its
qualification as a REIT, two requirements relating to the Company's gross income
must be satisfied annually. First, at least 75% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
consist of defined types of income derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property" and interest on obligations secured by mortgages on
real property or on interests in real property) or temporary investment income.
Second, at least 95% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from such real
property, mortgages on real property, or temporary investments, and from
dividends, other types of interest, and gain from the sale or disposition of
stock or securities, or from any combination of the foregoing. The specific
application to the Company of the 75% and 95% tests is discussed below.
The term "interest," as defined for purposes of the 75% and 95% gross
income tests, generally does not include any amount received or accrued
(directly or indirectly) if the determination of such amount depends in whole or
in part on the income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term "interest" solely by reason
of being based on a fixed percentage or percentages of receipts or sales. In
addition, an amount received or accrued with respect to an obligation secured by
a mortgage on real property or an interest in real property generally will not
be excluded from the term "interest" solely by reason of being based on the
income or profits of a debtor if the debtor derives substantially all of its
gross income from such property through the leasing of substantially all of its
interests in the property, to the extent the amounts received by the REIT are
attributable to rents that would be characterized as "rents from real property"
if received by a REIT. Furthermore, to the extent that interest from a loan that
is based on the cash proceeds from the sale of the property securing the loan
constitutes a "shared appreciation provision" (as defined in the Code), income
attributable to such participation feature will be treated as gain from the sale
of the secured property, which generally is qualifying income for purposes of
the 75% and 95% gross income tests.
Interest on obligations secured by mortgages on real property or on
interests in real property is qualifying income for purposes of the 75% gross
income test. Any amount includible in gross income with respect to a regular or
residual interest in a REMIC generally is treated as interest on an obligation
secured by a mortgage on real property. If, however, less than 95% of the assets
of a REMIC consists of real estate assets (determined as if the Company held
such assets), the Company will be treated as having received directly its
proportionate share of the income of the REMIC. In addition, the Company could
be required in certain circumstances to apportion interest income between real
and personal property when the income is received with respect to a mortgage
loan that is secured by both real property and other property. Such an
apportionment could cause the Company to recognize income that is not qualifying
income for purposes of the 75% gross income test.
The interest, original issue discount, and market discount income that the
Company derives from its investments in Mortgage Loans, Subordinated Interests,
IOs, and Inverse IOs generally will be qualifying interest income for purposes
of both the 75% and the 95% gross income tests, except to the extent that less
than 95% of the assets of a REMIC in which the Company holds an interest
consists of real estate assets (determined as if the Company held such assets),
and the Company's proportionate share of the income of the REMIC includes income
that is not qualifying income for purposes of the 75% or 95% gross income test.
In addition, in some cases, however, the loan amount of a Mortgage Loan may
exceed the value of the real property securing the loan, which will result in a
portion of the income from the loan being classified as qualifying income for
purposes of the 95% gross income test, but not for purposes of the 75% gross
income test. It is also possible that, in some instances, the interest income
from a Distressed Mortgage Loan may be based in part on the borrower's profits
or net income, which generally will disqualify the income from the loan for
purposes of both the 75% and the 95% gross income tests.
The Company may receive income not described above that is not qualifying
income for purposes of the 75% and 95% gross income tests. The Company will
monitor the amount of nonqualifying income produced by its assets and has
represented that it will manage its portfolio in order to comply at all times
with the gross income tests.
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The rent received by the Company from the tenants of its Real Property
("Rent") will qualify as "rents from real property" in satisfying the gross
income tests for a REIT described above only if several conditions are met.
First, the amount of Rent must not be based, in whole or in part, on the income
or profits of any person. However, an amount received or accrued generally will
not be excluded from the term "rents from real property" solely by reason of
being based on a fixed percentage or percentages of receipts or sales. Second,
the Code provides that the Rent received from a tenant will not qualify as
"rents from real property" in satisfying the gross income tests if the Company,
or a direct or indirect owner of 10% or more of the Company, owns 10% or more of
such tenant, taking into account both direct and constructive ownership (a
"Related Party Tenant"). Third, if Rent attributable to personal property,
leased in connection with a lease of Real Property, is greater than 15% of the
total Rent received under the lease, then the portion of Rent attributable to
such personal property will not qualify as "rents from real property." Finally,
for the Rent to qualify as "rents from real property," the Company generally
must not operate or manage the Real Property or furnish or render services to
the tenants of such Real Property, other than through an "independent
contractor" who is adequately compensated and from whom the Company derives no
revenue. The "independent contractor" requirement, however, does not apply to
the extent the services provided by the Company 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, the "independent
contractor" requirement does not apply to noncustomary services provided by the
Company, the value of which does not exceed 1% of the gross income derived in
the taxable year from the property with respect to which the services are
provided (the "1% de minimis exception"). For this purpose, such services may
not be valued at less than 150% of the Company's direct cost of providing the
services.
The Company has represented that it will not charge Rent for any portion of
any Real Property that is based, in whole or in part, on the income or profits
of any person (except by reason of being based on a fixed percentage or
percentages of receipts of sales, as described above) to the extent that the
receipt of such Rent would jeopardize the Company's status as a REIT. In
addition, the Company has represented that, to the extent that it receives Rent
from a Related Party Tenant, such Rent will not cause the Company to fail to
satisfy either the 75% or 95% gross income test. The Company also has
represented that it will not allow the Rent attributable to personal property
leased in connection with any lease of Real Property to exceed 15% of the total
Rent received under the lease, if the receipt of such Rent would cause the
Company to fail to satisfy either the 75% or 95% gross income test. Finally, the
Company has represented that, subject to the 1% de minimis exception, it will
not operate or manage its Real Property or furnish or render noncustomary
services to the tenants of its Real Property other than through an "independent
contractor," to the extent that such operation or the provision of such services
would jeopardize the Company's status as a REIT.
REITs generally are subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualifying
income for purposes of the 75% gross income test), less expenses directly
connected with the production of such income. "Foreclosure property" is defined
as any real property (including interests in real property) and any personal
property incident to such real property (i) that is acquired by a REIT as the
result of such REIT having bid on such property at foreclosure, or having
otherwise reduced such property to ownership or possession by agreement or
process of law, after there was a default (or default was imminent) on a lease
of such property or on an indebtedness owed to the REIT that such property
secured, (ii) for which the related loan was acquired by the REIT at a time when
default was not imminent or anticipated, and (iii) for which such REIT makes a
proper election to treat such property as foreclosure property. The Company does
not anticipate that it will receive any income from foreclosure property that is
not qualifying income for purposes of the 75% gross income test, but, if the
Company does receive any such income, the Company will make an election to treat
the related property as foreclosure property.
If property is not eligible for the election to be treated as foreclosure
property ("Ineligible Property") because the related loan was acquired by the
REIT at a time when default was imminent or anticipated, income received with
respect to such Ineligible Property may not be qualifying income for purposes of
the 75% or 95% gross income test. The Company anticipates, however, that any
income it receives with respect to Ineligible Property will be qualifying income
for purposes of the 75% and 95% gross income tests.
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Net income derived by a REIT from a "prohibited transaction" is subject to
a 100% tax. The term "prohibited transaction" generally includes a sale or other
disposition of property (other than foreclosure property) that is held primarily
for sale to customers in the ordinary course of a trade or business. The Company
believes that no asset owned by the Company or the Operating Partnership will be
held for sale to customers and that a sale of any such asset will not be in the
ordinary course of the Company's or the Operating Partnership's business.
Whether property is held "primarily for sale to customers in the ordinary course
of a trade or business" depends, however, on the facts and circumstances in
effect from time to time, including those related to a particular property.
Nevertheless, the Company will attempt to comply with the terms of safe-harbor
provisions in the Code prescribing when asset sales will not be characterized as
prohibited transactions. Complete assurance cannot be given, however, that the
Company can comply with the safe-harbor provisions of the Code or avoid owning
property that may be characterized as property held "primarily for sale to
customers in the ordinary course of a trade or business."
It is possible that, from time to time, the Company will enter into hedging
transactions with respect to one or more of its assets or liabilities. Any
payment to a REIT under an interest rate swap or cap agreement, option, futures
contract, forward rate agreement, or any similar financial instrument, which is
entered into by the REIT in a transaction to reduce the interest rate risks with
respect to any indebtedness incurred or to be incurred by the REIT to acquire or
carry any real estate assets, is treated as qualifying income for purposes of
the 95% gross income test, but not the 75% gross income test. To the extent that
the Company hedges with other types of financial instruments or in other
situations, it may not be entirely clear how the income from those transactions
will be treated for purposes of the various income tests that apply to REITs
under the Code. The Company intends to structure any hedging transactions in a
manner that does not jeopardize its status as a REIT. Accordingly, the Company
may conduct some or all of its hedging activities through a corporate subsidiary
that is fully subject to federal corporate income tax.
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 is entitled to 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 return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of these relief provisions. As
discussed above in "Federal Income Tax Considerations -- Taxation of the
Company," even if those relief provisions apply, a 100% tax would be imposed on
the gross income attributable to the greater of the amount by which the Company
fails the 75% or 95% gross income test, multiplied by a fraction intended to
reflect the Company's profitability.
Asset Tests. The Company, at the close of each quarter of each taxable
year, also must satisfy three tests relating to the nature of its assets. First,
at least 75% of the value of the Company's total assets must be represented by
cash or cash items (including certain receivables), government securities, "real
estate assets," or, in cases where the Company raises new capital through stock
or long-term (at least five-year) debt offerings, temporary investments in stock
or debt instruments during the one-year period following the Company's receipt
of such capital. The term "real estate assets" includes interests in real
property, interests in mortgages on real property to the extent the principal
balance of a mortgage does not exceed the fair market value of the associated
real property, regular or residual interests in a REMIC (except that, if less
than 95% of the assets of a REMIC consists of "real estate assets" (determined
as if the Company held such assets), the Company will be treated as holding
directly its proportionate share of the assets of such REMIC), and shares of
other REITs. For purposes of the 75% asset test, the term "interest in real
property" includes an interest in mortgage loans or land and improvements
thereon, such as buildings or other inherently permanent structures (including
items that are structural components of such buildings or structures), a
leasehold of real property, and an option to acquire real property (or a
leasehold of real property). An "interest" in real property also generally
includes an interest in mortgage loans secured by controlling equity interests
in entities treated as partnerships for federal income tax purposes that own
real property, to the extent that the principal balance of the mortgage does not
exceed the fair market value of the real property that is allocable to the
equity interest. Second, not more than 25% of the Company's total assets may be
represented by securities other than those in
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the 75% asset class (which test will of necessity be satisfied if the 75% asset
test is satisfied). Third, of the investments included in the 25% asset class,
the value of any one issuer's debt and equity securities owned by the Company
may not exceed 5% of the value of the Company's total assets, and the Company
may not own more than 10% of any one issuer's outstanding voting securities
(except for interests in any entity treated as a partnership for federal income
tax purposes and the Company's interests in the General Partner, the Initial
Limited Partner and any other qualified REIT subsidiary).
The Company expects that any Underperforming Real Properties, Subordinated
Interests, IOs, Inverse IOs, and temporary investments that it acquires
generally will be qualifying assets for purposes of the 75% asset test, except
to the extent that less than 95% of the assets of a REMIC in which the Company
owns an interest consists of "real estate assets" and the Company's
proportionate share of those assets includes assets that are nonqualifying
assets for purposes of the 75% asset test. Distressed Mortgage Loans, Performing
Mortgage Loans, Construction Loans and Mezzanine Investments also will be
qualifying assets for purposes of the 75% asset test to the extent that the
principal balance of each mortgage loan does not exceed the value of the
associated real property. The Company will monitor the status of the assets that
it acquires for purposes of the various asset tests and has represented that it
will manage its portfolio in order to comply at all times with such tests.
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied the asset tests at the close of the preceding calendar quarter
and (ii) the discrepancy between the value of the Company's assets and the asset
test requirements arose from changes in the market values of its assets and was
not wholly or partly caused by the acquisition of one or more non-qualifying
assets. If the condition described in clause (ii) of the preceding sentence were
not satisfied, the Company still could avoid disqualification by eliminating any
discrepancy within 30 days after the close of the calendar quarter in which it
arose.
Distribution Requirements. The Company, in order to avoid corporate income
taxation on its earnings, is required to distribute with respect to each taxable
year dividends (other than capital gain dividends) to its shareholders in an
aggregate amount at least equal to (i) the sum of (A) 95% of its "REIT taxable
income" (computed without regard to the dividends paid deduction and its net
capital gain) and (B) 95% of the net income (after tax), if any, from
foreclosure property, minus (ii) the sum of certain items of noncash income
(including OID and Excess Inclusion). Such distributions must be paid in the
taxable year to which they relate, or in the following taxable year if declared
before the Company timely files its federal income tax return for such year and
if paid on or before the first regular dividend payment date after such
declaration. To the extent that the Company does not distribute all of its net
capital gain or distributes at least 95%, but less than 100%, of its taxable
income, as adjusted, it will be subject to tax thereon at regular ordinary and
capital gains corporate tax rates. Furthermore, if the Company should fail to
distribute during each calendar year (or, in the case of distributions with
declaration and record dates falling in the last three months of the calendar
year, by the end of the January immediately following such year) at least the
sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain income for such year, and (iii) any undistributed taxable income
from prior periods, the Company would be subject to a 4% nondeductible excise
tax on the excess of such required distribution over the amounts actually
distributed. The Company intends 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 (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at its taxable income. For example, the Company will
recognize taxable income in excess of its cash receipts when, as generally
happens, OID accrues with respect to its Subordinated Interests. Furthermore,
some Mortgage Loans, IOs and Inverse IOs may be deemed to have OID, in which
case the Company may be required to recognize taxable income in advance of the
related cash flow. OID generally will be accrued using a methodology that does
not allow credit losses to be reflected until they are actually incurred. In
addition, the Company may recognize taxable market discount income upon the
receipt of proceeds from the disposition of, or principal payments on,
Subordinated Interests and Distressed Mortgage Loans that are "market discount
bonds" (i.e., obligations with a stated redemption price at maturity that is
greater than the Company's tax basis in such obligations), although such
proceeds often will be used to make
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non-deductible principal payments on related borrowings. The Company also may
recognize Excess Inclusion or other "phantom" taxable income from REMIC Residual
Interests. It also is possible that, from time to time, the Company may
recognize net capital gain attributable to the sale of depreciated property that
exceeds its cash receipts from the sale. In addition, pursuant to certain
Treasury Regulations, the Company may be required to recognize the amount of any
payment to be made pursuant to a shared appreciation provision over the term of
the related loan using the constant yield method. Finally, the Company may
recognize taxable income without receiving a corresponding cash distribution if
it forecloses on or makes a "significant modification" (as defined in
Regulations section 1.1001-3(e)) to a loan, to the extent that the fair market
value of the underlying property or the issue price of the modified loan, as
applicable, exceeds the Company's basis in the original loan. Therefore, the
Company may have less cash than is necessary to meet its annual 95% distribution
requirement or to avoid corporate income tax or the excise tax imposed on
certain undistributed income. In such a situation, the Company may find it
necessary to arrange for short-term (or possibly long-term) borrowings or to
raise funds through the issuance of Preferred Stock or additional Common Stock.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirements for a year by paying "deficiency
dividends" to its shareholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Although the
Company may be able to avoid being taxed on amounts distributed as deficiency
dividends, it will be required to pay to the Service interest based upon the
amount of any deduction taken for deficiency dividends.
Recordkeeping Requirements. Pursuant to applicable Treasury Regulations,
the Company must maintain certain records and request on an annual basis certain
information from its shareholders designed to disclose the actual ownership of
its outstanding stock. The Company intends to comply with such requirements.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to the Company's shareholders in any year
in which the Company fails to qualify will not be deductible by the Company nor
will they be required to be made. In such event, to the extent of the Company's
current and accumulated earnings and profits, all distributions to shareholders
will be taxable as ordinary income and, subject to certain limitations of the
Code, corporate distributees may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions, the
Company also will be disqualified from taxation as a REIT for the four taxable
years following the year during which the Company ceased to qualify as a REIT.
It is not possible to state whether in all circumstances the Company would be
entitled to such statutory relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. shareholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such U.S. shareholders as ordinary income and will not be eligible
for the dividends received deduction generally available to corporations. As
used herein, the term "U.S. shareholder" means a holder of Common Stock that for
U.S. federal income tax purposes is (i) a citizen or resident of the U.S., (ii)
a corporation, partnership, or other entity created or organized in or under the
laws of the U.S. or of any political subdivision thereof, (iii) an estate whose
income from sources without the United States is includible in gross income for
U.S. federal income tax purposes regardless of its connection with the conduct
of a trade or business within the United States, or (iv) any trust with respect
to which (A) a U.S. court is able to exercise primary supervision over the
administration of such trust and (B) one or more U.S. persons have the authority
to control all substantial decisions of the trust. Distributions that are
designated as capital gain dividends will be taxed to the Company's shareholders
as a capital gain (to the extent such distributions do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which the shareholder has held his Common Stock. The tax rate applicable to such
gain is described under "--Capital Gains and Losses" below. However, corporate
shareholders may be required to treat up to 20% of certain
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capital gain dividends as ordinary income. Distributions in excess of current
and accumulated earnings and profits will not be taxable to a shareholder to the
extent that they do not exceed the adjusted basis of the shareholder's Common
Stock, but rather will reduce the adjusted basis of such stock. To the extent
that such distributions in excess of current and accumulated earnings and
profits exceed the adjusted basis of a shareholder's Common Stock, such
distributions will be included in income as capital gain, assuming the Common
Stock is a capital asset in the hands of the shareholder. In addition, any
distribution declared by the Company in October, November, or December of any
year and payable to a shareholder of record on a specified date in any such
month shall be treated as both paid by the Company and received by the
shareholder on December 31 of such year, provided that the distribution is
actually paid by the Company during January of the following calendar year. The
Company will notify shareholders after the close of the Company's taxable year
as to the portions of the distributions attributable to that year that
constitute ordinary income, return of capital or capital gain.
The Company may elect to treat all or a part of its undistributed net
capital gain as if it had been distributed to the Company's shareholders
(including for purposes of the 4% exercise tax discussed below). If the Company
should make such an election, the Company's shareholders would be required to
include in their income as long-term capital gain their proportionate share of
the Company's undistributed net capital gain, as designated by the Company. Each
such shareholder would be deemed to have paid his proportionate share of the
income tax imposed on the Company with respect to such undistributed net capital
gain, and this amount would be credited or refunded to the shareholder. In
addition, the tax basis of the shareholder's stock would be increased by his
proportionate share of undistributed net capital gains included in his income
less his proportionate share of the income tax imposed on the Company with
respect to such gains.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would be
carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain from the disposition of the Common Stock will not be treated as passive
activity income and, therefore, shareholders generally will not be able to apply
any "passive activity losses" (such as losses from certain types of limited
partnerships in which a shareholder is a limited partner) against such income.
In addition, taxable distributions from the Company generally will be treated as
investment income for purposes of the investment interest limitations. Capital
gains from the disposition of Common Stock (or distributions treated as such),
however, will be treated as investment income only if the shareholder so elects.
Because the Company may own some REMIC Residual Interests, it is likely
that shareholders will not be permitted to offset certain portions of the
dividend income they derive from the Company with their current deductions or
net operating loss carryovers or carrybacks. The portion of a shareholder's
dividends that will be subject to this limitation will equal such shareholder's
allocable share of any Excess Inclusion income derived by the Company with
respect to the REMIC Residual Interests. The Company's Excess Inclusion income
for any calendar quarter will equal the excess of its income from REMIC Residual
Interests over its "daily accruals" with respect to such REMIC Residual
Interests for the calendar quarter. Daily accruals for a calendar quarter are
computed by allocating to each day on which a REMIC Residual Interest is owned a
ratable portion of the product of (i) the "adjusted issue price" of the REMIC
Residual Interest at the beginning of the quarter and (ii) 120% of the long-term
federal interest rate (adjusted for quarterly compounding) on the date of
issuance of the REMIC Residual Interest. The adjusted issue price of a REMIC
Residual Interest at the beginning of a calendar quarter equals the original
issue price of the REMIC Residual Interest, increased by the amount of daily
accruals for prior quarters and decreased by all prior distributions to the
Company with respect to the REMIC Residual Interest. To the extent provided in
future Treasury regulations, the Excess Inclusion income with respect to any
REMIC Residual Interests owned by the Company that do not have significant value
will equal the entire amount of the income derived from such REMIC Residual
Interests. Furthermore, to the extent that the Company (or a qualified REIT
subsidiary) acquires or originates Mortgage Loans and issues non-REMIC CMOs
secured by such Mortgage Loans in a debt securitization (Non-REMIC
Transactions"), it is possible that, to the extent provided in future Treasury
regulations, shareholders will not be permitted to offset certain portions of
the dividend income that they derive from the Company that are attributable to
Non-REMIC Transactions with current deductions or net
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operating loss carryovers or carrybacks. Although no applicable Treasury
regulations have yet been issued, no assurance can be provided that such
regulations will not be issued in the future or that, if issued, such
regulations will not prevent the Company's shareholders from offsetting some
portion of their dividend income with deductions or losses from other sources.
TAXATION OF SHAREHOLDERS ON THE DISPOSITION OF THE COMMON STOCK
In general, any gain or loss realized upon a taxable disposition of the
Common Stock by a shareholder who is not a dealer in securities will be treated
as a capital gain or loss. Lower marginal tax rates for non-corporate taxpayers
may apply in the case of capital gains, depending on the holding period of the
shares of the Company's Common Stock that are sold. See "-- Capital Gains and
Losses" below. Any loss upon a sale or exchange of Common Stock by a shareholder
who has held such shares for six months or less (after applying certain holding
period rules) will be treated as a long-term capital loss to the extent of
distributions from the Company required to be treated by such shareholder as
long-term capital gain. All or a portion of any loss realized upon a taxable
disposition of the Common Stock may be disallowed if other shares of Common
Stock are purchased within 30 days before or after the disposition.
CAPITAL GAINS AND LOSSES
For non-corporate taxpayers, the tax rate differential between capital gain
and ordinary income may be significant. The highest marginal income tax rate
applicable to a non-corporate taxpayer's ordinary income is 39.6 percent. Any
capital gain generally will be taxed to a non-corporate taxpayer at a maximum
rate of 20 percent with respect to capital assets held for more than 18 months,
and generally will be taxed at a maximum rate of 28 percent with respect to
capital assets held for more than one year but not more than 18 months. The tax
rates applicable to ordinary income apply to gain attributable to the sale or
exchange of capital assets held for one year or less. In the case of capital
gain attributable to the sale or exchange of certain real property held for more
than 18 months, an amount of such gain equal to the amount of all prior
depreciation deductions not otherwise required to be taxed as ordinary
depreciation recapture income will be taxed at a maximum rate of 25 percent.
With respect to distributions designated by a REIT as capital gain dividends,
the REIT may also designate (subject to certain limits) whether the dividend is
taxable to shareholders as a 20 percent rate distribution, an unrecaptured
depreciation distribution taxed at a 25 percent rate, or a 28 percent rate
distribution.
The characterization of income as capital gain or ordinary income may
affect the deductibility of capital losses. Capital losses not offset by capital
gains may be deducted against non-corporate taxpayer's ordinary income only up
to a maximum annual amount of $3,000. Unused capital losses may be carried
forward indefinitely by non-corporate taxpayers. All net capital gain of a
corporate taxpayer is subject to tax at ordinary corporate rates. A corporate
taxpayer can deduct capital losses only to the extent of capital gains, with
unused losses being carried back three years and forward five years.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company will report to its U.S. shareholders and to the Service the
amount of distributions paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at the rate of 31% with respect to distributions
paid unless such holder (i) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact or (ii) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with the applicable requirements of the
backup withholding rules. A shareholder who does not provide the Company with
his correct taxpayer identification number also may be subject to penalties
imposed by the Service. Any amount paid as backup withholding will be creditable
against the 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 nonforeign status to the Company. The Treasury
Department issued final regulations in October 1997 regarding the backup
withholding rules as applied to Non-U.S. Shareholders. The new regulations will
alter the current system of backup withholding
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compliance and generally will be effective for distributions made after December
31, 1998. See "-- Taxation of Non-U.S. Shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, the Service has issued a published
ruling that dividend distributions from a REIT to an exempt employee pension
trust do not constitute UBTI, provided that the shares of the REIT are not
otherwise used in an unrelated trade or business of the exempt employee pension
trust. Based on that ruling, amounts distributed by the Company to Exempt
Organizations generally should not constitute UBTI. However, if an Exempt
Organization finances its acquisition of the Common Stock with debt, a portion
of its income from the Company will constitute UBTI pursuant to the
"debt-financed property" rules. Furthermore, social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans that are exempt from taxation under paragraphs (7),
(9), (17), and (20), respectively, of Code section 501(c) are subject to
different UBTI rules, which generally will require them to characterize
distributions from the Company as UBTI. In addition, in certain circumstances, a
pension trust that owns more than 10% of the Company's stock is required to
treat a percentage of the dividends from the Company as UBTI (the "UBTI
Percentage"). The UBTI Percentage is the gross income, less direct expenses,
derived by the Company from an unrelated trade or business (determined as if the
Company were a pension trust) divided by the gross income, less direct expenses,
of the Company for the year in which the dividends are paid. The UBTI rule
applies to a pension trust holding more than 10% of the Company's stock only if
(i) the UBTI Percentage is at least 5%, (ii)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 shares of the Company in proportion to
their actuarial interests in the pension trust, and (iii) either (A) one pension
trust owns more than 25% of the value of the Company's stock or (B) a group of
pension trusts individually holding more than 10% of the value of the Company's
stock collectively owns more than 50% of the value of the Company's stock.
Any dividends received by an Exempt Organization that are allocable to
Excess Inclusion will be treated as UBTI. In addition, the Company will be
subject to tax at the highest marginal corporate rate on the portion of any
Excess Inclusion income derived by the Company from any REMIC Residual Interest
that is allocable to stock of the Company held by Disqualified Organizations.
Any such tax would be deductible by the Company against its income other than
Excess Inclusion income with respect to the REMIC Residual Interest.
If the Company derives Excess Inclusion income from REMIC Residual
Interests, a tax similar to the tax on the Company described in the preceding
paragraph may be imposed on shareholders who are (i) pass-through entities
(i.e., partnerships, estates, trusts, regulated investment companies, REITs,
common trust funds, and certain types of cooperatives (including farmers'
cooperatives described in section 521 of the Code)) in which a Disqualified
Organization is a record holder of shares or interests and (ii) nominees who
hold Common Stock on behalf of Disqualified Organizations. Consequently, a
brokerage firm that holds shares of Common Stock in a "street name" account for
a Disqualified Organization may be subject to federal income tax on the Excess
Inclusion income derived from those shares.
The Treasury Department has been authorized to issue regulations regarding
issuances by a REIT of CMOs in Non-REMIC Transactions. If such Treasury
regulations are issued in the future preventing taxable shareholders from
offsetting some percentage of the dividends paid by the Company with deductions
or losses from other sources, that same percentage of the Company's dividends
would be treated as UBTI for shareholders that are Exempt Organizations. See
"-- Taxation of Taxable U.S. Shareholders."
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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 and no attempt
will be made herein to provide more than a summary of such rules. PROSPECTIVE
NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH REGARD TO AN
INVESTMENT IN THE COMMON STOCK, INCLUDING ANY REPORTING REQUIREMENTS.
Distributions to Non-U.S. Shareholders that are neither attributable to
gain from sales or exchanges by the Company of U.S. real property interests nor
designated by the Company as capital gain dividends or retained capital gains
will be treated as dividends of ordinary income to the extent that they are made
out of the Company's current or accumulated earnings and profits. Such
distributions ordinarily will be subject to a withholding tax equal to 30% of
the gross amount of the distribution unless an applicable tax treaty reduces or
eliminates that tax. However, if income from the investment in the Common Stock
is treated as effectively connected with the Non-U.S. Shareholder's conduct of a
U.S. trade or business, the Non-U.S. Shareholder generally will be subject to
tax at graduated rates in the same manner as U.S. shareholders are taxed with
respect to such dividends (and may also be subject to the 30% branch profits tax
if the shareholder is a foreign corporation). The Company will withhold U.S.
income tax at the rate of 30% of the gross amount of any dividends paid to a
Non-U.S. Shareholder that are not designated as capital gain dividends unless
(i) a lower treaty rate or exemption applies and the required form (if any)
evidencing eligibility for that reduced rate or exemption is filed 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 IRS issued
final regulations in October 1997 that will modify the manner in which the
Company complies with its obligations to withhold against distributions to
Non-U.S. Shareholders. The new regulations generally will be effective for
distributions made after December 31, 1998.
Any portion of the dividends paid to Non-U.S. Shareholders that is treated
as Excess Inclusion income will not be eligible for exemption from the 30%
withholding tax or for a reduced treaty rate. In addition, if Treasury
Regulations that allocate the Company's Excess Inclusion income from non-REMIC
transactions among its stockholders ultimately are issued, some percentage of
the Company's dividends paid to Non-U.S. Shareholders would not be eligible for
exemption from the 30% withholding tax or for a reduced treaty withholding tax
rate. See "-- Taxation of Taxable U.S. Shareholders."
Distributions in excess of the Company's current and accumulated earnings
and profits will not be taxable to a shareholder to the extent that they do not
exceed the adjusted basis of the shareholder's Common Stock, but will instead
reduce the adjusted basis of such shares. To the extent that such distributions
exceed the adjusted basis of a Non-U.S. Shareholder's shares, they will be
taxable if the Non-U.S. Shareholder is otherwise subject to tax on any gain
realized from the sale or disposition of his shares of Common Stock as described
below. Because it generally cannot be determined at the time a distribution is
made whether such distribution is in excess of current and accumulated earnings
and profits, the Company generally will withhold from such distributions at the
rate applicable to dividends. The Company is required to withhold 10% of any
distribution to a Non-U.S. Shareholder in excess of the Company's current and
accumulated earnings and profits to the extent such shares of Common Stock
constitute "U.S. real property interests" under section 897(c) of the Code.
Accordingly, although the Company generally intends to withhold at a rate of 30%
on the entire amount of the distribution, any portion of the distribution not
subject to withholding at a rate of 30% may be subject to withholding at a rate
of 10%. A Non-U.S. Shareholder may seek a refund of withholding tax from the IRS
to the extent that the amount withheld from a distribution was, in fact, in
excess of the U.S. income tax due with respect to such distribution.
The Company is required by currently applicable Treasury Regulations to
withhold 35% of any distribution that could be designated by the Company as a
capital gain dividend. The amount withheld may be credited against the Non-U.S.
Shareholder's U.S. federal income tax liability.
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For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of U.S. real
property interests will be taxed to a Non-U.S. Shareholder under section 897(c)
of the Code as if such gain were effectively connected with a U.S. business.
Thus, Non-U.S. Shareholders will be taxed on such distributions at the normal
capital gain rates applicable to U.S. shareholders (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals). Also, distributions that are attributable to
gain from sales or exchanges by the Company of U.S. real property interests may
be subject to a 30% branch profits tax in the hands of a corporate Non-U.S.
Shareholder that is not entitled to treaty relief or exemption.
Gain recognized by a Non-U.S. Shareholder upon the sale or exchange of
shares of Common Stock generally will not be subject to U.S. tax unless the
Common Stock constitutes a "United States real property interest" within the
meaning of section 897 of the Code. The Common Stock will not constitute a
"United States real property interest" so long as the Company qualifies as a
"domestically controlled REIT." A domestically controlled REIT is a REIT less
than 50% in value of whose stock is held, directly or indirectly, by Non-U.S.
Shareholders at all times during a specified testing period. Because the Company
will be publicly traded, there can be no assurance that it will qualify as a
domestically controlled REIT. If the Company does not qualify (or ceases to
qualify) as a domestically controlled REIT, whether gain arising from the sale
or exchange of Common Stock by a Non-U.S. Shareholder would be subject to U.S.
tax will depend upon the size of the selling Non-U.S. Shareholder's interest in
the Company. If gain on the sale or exchange of the Common Stock were subject to
tax under section 897 of the Code, then the Non-U.S. Shareholder would be
subject to regular U.S. income tax with respect to such gain in the same manner
as a U.S. shareholder (subject to any 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
foreign corporations).
Gain from the sale or exchange of Common Stock not otherwise taxable under
section 897 will be subject to U.S. tax if (i) the investment in Common Stock is
treated as effectively connected with a U.S. trade or business of the Non-U.S.
Shareholder, in which case the Non-U.S. Shareholder will be subject to the same
treatment as U.S. shareholders with respect to such gain, or (ii) the Non.-U.S.
Shareholder is a nonresident alien individual who is present in the United
States for 183 days or more during the taxable year and has a "tax home" in the
United States, in which case the individual will be subject to a 30% tax on the
individual's capital gains.
STATE AND LOCAL TAXES
The Company, the General Partner, the Initial Limited Partner, the
Operating Partnership or the Company's shareholders may be subject to state and
local tax in various states and localities, including those states and
localities in which it or they transact business, own property, or reside. The
state and local tax treatment of the Company and its shareholders in such
jurisdictions may differ from the federal income tax treatment described above.
Consequently, prospective shareholders should consult their own tax advisors
regarding the effect of state and local tax laws upon an investment in the
Common Stock.
SALE OF THE COMPANY'S PROPERTY
Any gain realized by the Company on the sale of any property held as
inventory or other property held primarily for sale to customers in the ordinary
course of its trade or business will be treated as income from a prohibited
transaction that is subject to a 100% penalty tax. Such prohibited transaction
income also may have an adverse effect upon the Company's ability to satisfy the
income tests for REIT status. See "--Requirements For Qualification -- Income
Tests" above. The Company, however, does not presently intend to acquire or hold
a material amount of property that represents inventory or other property held
primarily for sale to customers in the ordinary course of the Company's trade or
business.
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ERISA CONSIDERATIONS
The following is a summary of material considerations arising under ERISA,
and the prohibited transaction provisions of section 4975 of the Code that may
be relevant to a prospective purchaser (including, with respect to the
discussion contained in "-- Status of the Company under ERISA," to a prospective
purchaser that is not an employee benefit plan, another tax-qualified retirement
plan, or an individual retirement account ("IRA")). The discussion does not
purport to deal with all aspects of ERISA or section 4975 of the Code that may
be relevant to particular shareholders (including plans subject to Title I of
ERISA, other retirement plans and IRAs subject to the prohibited transaction
provisions of section 4975 of the Code, and governmental plans or church plans
that are exempt from ERISA and section 4975 of the Code but that may be subject
to state law requirements) in light of their particular circumstances.
The discussion is based on current provisions of ERISA and the Code,
existing and currently proposed regulations under ERISA and the Code, the
legislative history of ERISA and the Code, existing administrative rulings of
the Department of Labor ("DOL") and reported judicial decisions. No assurance
can be given that legislative, judicial, or administrative changes will not
affect the accuracy of any statements herein with respect to transactions
entered into or contemplated prior to the effective date of such changes.
A FIDUCIARY MAKING THE DECISION TO INVEST IN THE COMMON STOCK ON BEHALF OF
A PROSPECTIVE PURCHASER THAT IS AN EMPLOYEE BENEFIT PLAN, A TAX-QUALIFIED
RETIREMENT PLAN, OR AN IRA SHOULD CONSULT ITS OWN LEGAL ADVISOR REGARDING THE
SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE CODE, AND STATE
LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, OR SALE OF THE COMMON STOCK BY SUCH
PLAN OR IRA.
EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS, AND IRAS
Each fiduciary of a Plan subject to Title I of ERISA should consider
carefully whether an investment in the Common Stock is consistent with his
fiduciary responsibilities under ERISA. In particular, the fiduciary
requirements of Part 4 of Title I of ERISA require an Plan's investment to be
(i) prudent and in the best interests of the Plan, its participants, and its
beneficiaries, (ii) diversified in order to minimize the risk of large losses,
unless it is clearly prudent not to do so, and (iii) authorized under the terms
of the Plan's governing documents (provided the documents are consistent with
ERISA). In determining whether an investment in the Common Stock is prudent for
purposes of ERISA, the appropriate fiduciary of a Plan should consider all of
the facts and circumstances, including whether the investment is reasonably
designed, as a part of the Plan's portfolio for which the fiduciary has
investment responsibility, to meet the objectives of the Plan, taking into
consideration the risk of loss and opportunity for gain (or other return) from
the investment, the diversification, cash flow, and funding requirements of the
Plan's portfolio. A fiduciary also should take into account the nature of the
Company's business, the management of the Company, the length of the Company's
operating history, the fact that certain investment assets may not have been
identified yet, and the possibility of the recognition of UBTI.
The fiduciary of an IRA or of a qualified retirement plan not subject to
Title I of ERISA because it is a governmental or church plan or because it does
not cover common law employees (a "Non-ERISA Plan") should consider that such an
IRA or Non-ERISA Plan may only make investments that are authorized by the
appropriate governing documents and under applicable state law.
Fiduciaries of Plans and persons making the investment decision for an IRA
or other Non-ERISA Plan should consider the application of the prohibited
transaction provisions of ERISA and the Code in making their investment
decision. A "party in interest" or "disqualified person" with respect to an Plan
or with respect to a Plan or IRA subject to Code section 4975 is subject to (i)
an initial 15% excise tax on the amount involved in any prohibited transaction
involving the assets of the plan or IRA and (ii) an excise tax equal to 100% of
the amount involved if any prohibited transaction is not corrected. If the
disqualified person who engages in the transaction is the individual on behalf
of whom an IRA is maintained (or his beneficiary), the IRA will lose its
tax-exempt status and its assets will be deemed to have been distributed to such
individual in a taxable distribution (and no excise tax will be imposed) on
account of the prohibited transaction. In
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addition, a fiduciary who permits a Plan to engage in a transaction that the
fiduciary knows or should know is a prohibited transaction may be liable to the
Plan for any loss the Plan incurs as a result of the transaction or for any
profits earned by the fiduciary in the transaction.
STATUS OF THE COMPANY UNDER ERISA
The following section discusses certain principles that apply in
determining whether the fiduciary requirements of ERISA and the prohibited
transaction provisions of ERISA and the Code apply to an entity because one or
more investors in the equity interests in the entity is a Plan or is a Non-ERISA
Plan or IRA subject to section 4975 of the Code. A Plan fiduciary also should
consider the relevance of those principles to ERISA's prohibition on improper
delegation of control over or responsibility for "plan assets" and ERISA's
imposition of co-fiduciary liability on a fiduciary who participates in, permits
(by action or inaction) the occurrence of, or fails to remedy a known breach by
another fiduciary.
If the assets of the Company are deemed to be "plan assets" under ERISA,
(i) the prudence standards and other provisions of Part 4 of Title I of ERISA
would be applicable to any transactions involving the Company's assets, (ii)
persons who exercise any authority over the Company's assets, or who provide
investment advice to the Company, would (for purposes of the fiduciary
responsibility provisions of ERISA) be fiduciaries of each Plan that acquires
Common Stock, and transactions involving the Company's assets undertaken at
their direction or pursuant to their advice might violate their fiduciary
responsibilities under ERISA, especially with regard to conflicts of interest,
(iii) a fiduciary exercising his investment discretion over the assets of a Plan
to cause it to acquire or hold the Common Stock could be liable under Part 4 of
Title I of ERISA for transactions entered into by the Company that do not
conform to ERISA standards of prudence and fiduciary responsibility, and (iv)
certain transactions that the Company might enter into in the ordinary course of
its business and operations might constitute "prohibited transactions" under
ERISA and the Code.
Regulations of the DOL defining "plan assets" (the "Plan Asset
Regulations") generally provide that when a Plan or Non-ERISA Plan or IRA
acquires a security that is an equity interest in an entity and the security is
neither a "publicly-offered security" nor a security issued by an investment
company registered under the Investment Company Act of 1940, the Plan's or
Non-ERISA Plan's or IRA's assets include both the equity interest and an
undivided interest in each of the underlying assets of the issuer of such equity
interest, unless one or more exceptions specified in the Plan Asset Regulations
are satisfied.
The Plan Asset Regulations define a publicly-offered security as a security
that is "widely-held," "freely transferable," and either part of a class of
securities registered under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or sold pursuant to an effective registration statement under
the Securities Act (provided the securities are registered under the Exchange
Act within 120 days after the end of the fiscal year of the issuer during which
the offering occurred). The Common Stock is being sold in an offering registered
under the Securities Act and will be registered under the Exchange Act. The Plan
Asset Regulations provide that a security is "widely held" only if it is part of
a class of securities that is owned by 100 or more investors independent of the
issuer and of one another. A security will not fail to be widely held because
the number of independent investors falls below 100 subsequent to the initial
public offering as a result of events beyond the issuer's control. The Company
anticipates that upon completion of this offering, the Common Stock will be
"widely held."
The Plan Asset Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The Plan Asset Regulations further provide
that where a security is part of an offering in which the minimum investment is
$10,000 or less (as is the case with this offering), certain restrictions
ordinarily will not, alone or in combination, affect a finding that such
securities are freely transferable. The restrictions on transfer enumerated in
the Plan Asset Regulations as not affecting that finding include: (i) any
restriction on or prohibition against any transfer or assignment that would
result in the termination or reclassification of an entity for federal or state
tax purposes, or that otherwise would violate any federal or state law or court
order, (ii) any requirement that advance notice of a transfer or assignment be
given to the issuer, (iii) any administrative procedure that establishes an
effective
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date, or an event (such as completion of an offering), prior to which a transfer
or assignment will not be effective, and (iv) any limitation or restriction on
transfer or assignment that is not imposed by the issuer or a person acting on
behalf of the issuer. The Company believes that the restrictions imposed under
the Articles of Incorporation on the transfer of the Company's stock will not
result in the failure of the Common Stock to be "freely transferable." The
Company also is not aware of any other facts or circumstances limiting the
transferability of the Common Stock that are not enumerated in the Plan Asset
Regulations as those not affecting free transferability, and no assurance can be
given that the DOL or the Treasury Department will not reach a contrary
conclusion.
Assuming that the Common Stock will be "widely held" and that no other
facts and circumstances other than those referred to in the preceding paragraph
exist that restrict transferability of the Common Stock, the shares of Common
Stock should be publicly offered securities and the assets of the Company should
not be deemed to be "plan assets" of any Plan, IRA, or Non-ERISA Plan that
invests in the Common Stock.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
AND REAL PROPERTY INVESTMENTS
The Company intends primarily to acquire Subordinated Interests, Mezzanine
Loans and Opportunistic Real Property, but also may acquire Mortgage Loans and
other Real Property. Even though the Company will not own Mortgage Loans
directly in connection with its acquisition of Subordinated Interests, its
return thereon and on Opportunistic Mortgage Loans will depend upon, among other
things, the ability of the servicer of the underlying Mortgage Loans to
foreclose upon those Mortgage Loans in default and sell the underlying Real
Property. There are a number of legal considerations involved in the acquisition
of Mortgage Loans or Real Property or the foreclosure and sale of defaulted
Mortgage Loans (whether individually or as part of a series of mortgage-backed
securities). The following discussion provides general summaries of certain
legal aspects of loans secured by real property and the acquisition of real
property. Because such legal aspects are governed by applicable state law (which
laws vary from state to state), the summaries do not purport to be complete, to
reflect the laws of any particular state, or to encompass the laws of all
states. Accordingly, the summaries are qualified in their entirety by reference
to the applicable laws of the states where the property is located. The
summaries are not based upon opinions of legal counsel.
GENERAL
Each mortgage loan will be evidenced by a note or bond and secured by an
instrument granting a security interest in real property, which may be a
mortgage, deed of trust or a deed to secure debt, depending upon the prevailing
practice and law in the state in which the related Mortgaged Property is
located. Mortgages, deeds of trust and deeds to secure debt are herein
collectively referred to as "mortgages." A mortgage creates a lien upon, or
grants a title interest in, the real property covered thereby, and represents
the security for the repayment of the indebtedness customarily evidenced by a
promissory note. The priority of the lien created or interest granted will
depend on the terms of the mortgage and, in some cases, on the terms of separate
subordination agreements or intercreditor agreements with others that hold
interests in the real property, the knowledge of the parties to the mortgage
and, generally, the order of recordation of the mortgage in the appropriate
public recording office. However, the lien of a recorded mortgage will generally
be subordinate to later-arising liens for real estate taxes and assessments and
other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
There are two parties to a mortgage: a mortgagor (the borrower and usually
the owner of the subject property) and a mortgagee (the lender). In contrast, a
deed of trust is a three-party instrument, among a trustor (the equivalent of a
borrower), a trustee to whom the real property is conveyed, and a beneficiary
(the lender) for whose benefit the conveyance is made. Under a deed of trust,
the trustor grants the property, irrevocably until the debt is paid, in trust
and generally with a power of sale, to the trustee to secure repayment of the
indebtedness evidenced by the related note. A deed to secure debt typically has
two parties. The grantor
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(the borrower) conveys title to the real property to the grantee (the lender),
generally with a power of sale, until such time as the debt is repaid. The
mortgagee's authority under a mortgage, the trustee's authority under a deed of
trust and the grantee's authority under a deed to secure debt are governed by
the express provisions of the related instrument, the law of the state in which
the real property is located, certain federal laws and, in some deed of trust
transactions, the directions of the beneficiary.
LEASES AND RENTS
Mortgages that encumber income-producing property often contain an
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease and
the income derived therefrom, while (unless rents are to be paid directly to the
lender) retaining a revocable license to collect the rents for so long as there
is no default. If the borrower defaults, the license terminates and the lender
is entitled to collect the rents. Local law may require that the lender take
possession of the property and/or obtain a court-appointed receiver before
becoming entitled to collect the rents.
The potential payments from a property may be less than the periodic
payments due under the mortgage. For example, the net income that would
otherwise be generated from the property may be less than the amount that would
be needed to service the debt if the leases on the property are at below-market
rents, the market rents have fallen since the original financing, vacancies have
increased, or as a result of excessive or increased maintenance, repair or other
obligations to which a lender succeeds as landlord.
CONDEMNATION AND INSURANCE
The form of the mortgage or deed of trust used by many lenders confers on
the mortgagee or beneficiary the right both to receive all proceeds collected
under any hazard insurance policy and all awards made in connection with any
condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the mortgage or deed of trust, in such order as the
mortgage or beneficiary may determine. Thus, in the event improvements on the
property are damaged or destroyed by fire or other casualty, or in the event the
property is taken by condemnation, the mortgagee or beneficiary under the senior
mortgage or deed of trust will have the prior right to collect any insurance
proceeds payable under a hazard insurance policy and any award of damages in
connection with the condemnation and to apply the same to the indebtedness
secured by the senior mortgage or deed of trust. Proceeds in excess of the
amount of senior mortgage indebtedness will, in most cases, be applied to the
indebtedness of a junior mortgage or trust deed to the extent the junior
mortgage or deed of trust so provides. The laws of certain states may limit the
ability of mortgagees or beneficiaries to apply the proceeds of hazard insurance
and partial condemnation awards to the secured indebtedness. In such states, the
mortgagor or trustor must be allowed to use the proceeds of hazard insurance to
repair the damage unless the security of the mortgagee or beneficiary has been
impaired. Similarly, in certain states, the mortgagee or beneficiary is entitled
to the award for a partial condemnation of the real property security only to
the extent that its security is impaired.
FORECLOSURE
General. Foreclosure is a legal procedure that allows the lender to
recover its mortgage debt by enforcing its rights and available legal remedies
under the mortgage. If the borrower defaults in payment or performance of its
obligations under the note or mortgage, the lender has the right to institute
foreclosure proceedings to sell the real property at public auction to satisfy
the indebtedness.
Foreclosure procedures vary from state to state. Two primary methods of
foreclosing a mortgage are judicial foreclosure, involving court proceedings,
and non-judicial foreclosure pursuant to a power of sale granted in the mortgage
instrument. Other foreclosure procedures are available in some states, such as
strict foreclosure, but they are either infrequently used or available only in
limited circumstances.
Judicial Foreclosure. A judicial foreclosure proceeding is conducted in a
court having jurisdiction over the mortgaged property. Generally, the action is
initiated by the service of legal pleadings upon all parties having a
subordinate interest of record in the real property and all parties in
possession of the property, under
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leases or otherwise, whose interests are subordinate to the mortgage. A
foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses are raised or counterclaims are interposed, and sometimes
requires several years to complete. When the lender's right to foreclose is
contested, the legal proceedings can be time-consuming. Upon successful
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other officer to conduct a
public sale of the mortgaged property, the proceeds of which are used to satisfy
the judgment. Such sales are made in accordance with procedures that vary from
state to state.
Non-Judicial Foreclosure/Power of Sale. Foreclosure of a deed of trust is
generally accomplished by a non-judicial trustee's sale pursuant to a power of
sale typically granted in the deed of trust. A power of sale may also be
contained in any other type of mortgage instrument if applicable law so permits.
A power of sale under a deed of trust allows a non-judicial public sale to be
conducted generally following a request from the beneficiary/lender to the
trustee to sell the property upon default by the borrower and after notice of
sale is given in accordance with the terms of the mortgage and applicable state
law. The borrower or junior lienholder may then have the right, during a
reinstatement period required in some states, to cure the default by paying the
entire actual amount in arrears (without regard to the acceleration of the
indebtedness), plus the lender's expenses incurred in enforcing the obligation.
In other states, the borrower or the junior lienholder is not provided a period
to reinstate the loan, but has only the right to pay off the entire debt to
prevent the foreclosure sale. Generally, state law governs the procedure for
public sale, the parties entitled to notice, the method of giving notice and the
applicable time periods.
Equitable Limitations on Enforceability of Certain Provisions. United
States courts have traditionally imposed general equitable principles to limit
the remedies available to lenders in foreclosure actions. These principles are
generally designed to relieve borrowers from the effects of mortgage defaults
perceived as harsh or unfair. Relying on such principles, a court may alter the
specific terms of a loan to the extent it considers necessary to prevent or
remedy an injustice, undue oppression or overreaching, or may require the lender
to undertake affirmative actions to determine the cause of the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have substituted their judgment for the lender's and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from a temporary financial disability.
In other cases, courts have limited the right of the lender to foreclose in the
case of a non-monetary default, such as a failure to adequately maintain the
mortgaged property or an impermissible further encumbrance of the mortgaged
property.
Even if the lender is successful in the foreclosure action and is able to
take possession of the property, the costs of operating and maintaining a
commercial or multifamily property may be significant and may be greater than
the income derived from that property. The costs of management and operation of
those mortgaged properties which are hotels, motels, restaurants, nursing homes,
convalescent homes or hospitals may be particularly significant because of the
expertise, knowledge and with respect to nursing or convalescent homes,
regulatory compliance, required to run such operations and the effect which
foreclosure and a change in ownership may have with respect to consent
requirements and on the public's and the industry's (including franchisors')
perception of the quality of such operations. The lender also will commonly
obtain the services of a real estate broker and pay the broker's commission in
connection with the sale or lease of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property. Moreover, because of the expenses
associated with acquiring, owning and selling a mortgaged property, a lender
could realize an overall loss on a mortgage loan even if the mortgaged property
is sold at foreclosure, or resold after it is acquired through foreclosure, for
an amount equal to the full outstanding principal amount of the loan plus
accrued interest.
The holder of a junior mortgage that forecloses on a mortgaged property
does so subject to senior mortgages and any other prior liens, and may be
obliged to keep senior mortgage loans current in order to avoid foreclosure of
its interest in the property. In addition, if the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause contained in a
senior mortgage, the junior mortgagee could be required to pay the full amount
of the senior mortgage indebtedness or face foreclosure.
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Post-Sale Redemption. In a majority of states, after sale pursuant to a
deed of trust or foreclosure of a mortgage, the borrower and foreclosed junior
lienors are given a statutory period in which to redeem the property. In some
states, statutory redemption may occur only upon payment of the foreclosure sale
price. In other states, redemption may be permitted if the former borrower pays
only a portion of the sums due. In some states, the borrower retains possession
of the property during the statutory redemption period. The effect of a
statutory right of redemption is to diminish the ability of the lender to sell
the foreclosed property because the exercise of a right of redemption would
defeat the title of any purchaser through a foreclosure. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has
expired. In some states, a post-sale statutory right of redemption may exist
following a judicial foreclosure, but not following a trustee's sale under a
deed of trust.
Anti-Deficiency Legislation. Any commercial or multi-family residential
mortgage loans acquired by the Company are likely to be nonrecourse loans, as to
which recourse in the case of default will be limited to the property and such
other assets, if any, that were pledged to secure the mortgage loan. However,
even if a mortgage loan by its terms provides for recourse to the borrower's
other assets, a lender's ability to realize upon those assets may be limited by
state law. For example, in some states a lender cannot obtain a deficiency
judgment against the borrower following foreclosure or sale under a deed of
trust or by non-judicial means. Other statutes may require the lender to exhaust
the security afforded under a mortgage before bringing a personal action against
the borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of those states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and thus may be
precluded from foreclosing upon the security. Consequently, lenders in those
states where such an election of remedy provision exists may choose to proceed
first against the security. Finally, other statutory provisions, designed to
protect borrowers from exposure to large deficiency judgments that might result
from bidding at below-market values at the foreclosure sale, limit any
deficiency judgment to the excess of the outstanding debt over the fair market
value of the property at the time of the sale.
Cooperatives. Mortgage loans may be secured by a security interest on the
borrower's ownership interest in shares, and the proprietary leases appurtenant
thereto (or cooperative contract rights), allocable to cooperative dwelling
units that may be vacant or occupied by non-owner tenants. Such loans are
subject to certain risks not associated with mortgage loans secured by a lien on
the fee estate of a borrower in real property. Such a loan typically is
subordinate to the mortgage, if any, on the cooperative's building which, if
foreclosed, could extinguish the equity in the building and the proprietary
leases of the dwelling units derived from ownership of the shares of the
cooperative. Further, transfer of shares in a cooperative are subject to various
regulations as well as to restrictions (including transfer restrictions) under
the governing documents of the cooperative, and the shares may be canceled in
the event that associated maintenance charges due under the related proprietary
leases are not paid. Typically, a recognition agreement between the lender and
the cooperative provides, among other things, the lender with an opportunity to
cure a default under a proprietary lease but such recognition agreements may not
have been obtained in the case of all the mortgage loans secured by cooperative
shares (or contract rights).
Under the laws applicable in many states, "foreclosure" on cooperative
shares is accomplished by a sale in accordance with the provisions of Article 9
of the UCC and the security agreement relating to the shares. Article 9 of the
UCC requires that a sale be conducted in a "commercially reasonable" manner,
which may be dependent upon, among other things, the notice given to the debtor
and the method, manner, time, place and terms of the sale. Article 9 of the UCC
provides that the proceeds of the sale will be applied first to pay the costs
and expenses of the sale and then to satisfy the indebtedness secured by the
lender's security interest. A recognition agreement, however, generally provides
that the lender's right to reimbursement is subject to the right of the
cooperative to receive sums due under the proprietary leases.
BANKRUPTCY LAWS
Operation of the Bankruptcy Code and related state laws may interfere with
or affect the ability of a lender to realize upon collateral and/or to enforce a
deficiency judgment. For example, under the Bankruptcy Code, virtually all
actions (including foreclosure actions and deficiency judgment proceedings) to
collect a
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debt are automatically stayed upon the filing of the bankruptcy petition and,
often, no interest or principal payments are made during the course of the
bankruptcy case. The delay and the consequences thereof caused by such automatic
stay can be significant. Moreover, a junior lienholder may encourage the filing
of a bankruptcy petition, or participate in an involuntary filing, in order to
stay a senior lienholder from taking action to foreclose out such junior
lienholder's interest.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards protective of the lender are met, the amount and terms of a mortgage
loan secured by a lien on property of the debtor may be modified under certain
circumstances. For example, the outstanding amount of the loan may be reduced to
the then-current value of the property (with a corresponding partial reduction
of the amount of lender's security interest) pursuant to a confirmed plan or
lien avoidance proceeding, thus leaving the lender a general unsecured creditor
for the difference between such value and the outstanding balance of the loan.
Other modifications may include the reduction in the amount of each scheduled
payment, by means of a reduction in the rate of interest and/or an alteration of
the repayment schedule (with or without affecting the unpaid principal balance
of the loan), and/or by an extension (or shortening) of the term to maturity.
Federal bankruptcy law may also have the effect of interfering with or
affecting the ability of the secured lender to enforce the borrower's assignment
of rents and leases related to the mortgaged property. Under section 362 of the
Bankruptcy Code, the lender will be stayed from enforcing the assignment, and
the legal proceedings necessary to resolve the issue could be time-consuming,
with resulting delays in the lender's receipt of the rents. In addition, the
Bankruptcy Code has been amended to provide that a lender's perfected
pre-petition security interest in rents, fees, charges or other revenues from
hotels or other properties continues in such rents, fees, charges or other
revenues acquired after the filing of a petition in bankruptcy unless the
bankruptcy court orders to the contrary "based on the equities of the case."
In a bankruptcy or similar proceeding, action may be taken seeking the
recovery as a preferential transfer of any payments made by the mortgagor under
the related mortgage loan to the owner of such mortgage loan. Payments on
long-term debt may be protected from recovery as preferences if they are
payments in the ordinary course of business made on debts incurred in the
ordinary course of business. Whether any particular payment would be protected
depends upon the facts specific to a particular transaction.
A trustee in bankruptcy, in some cases, may be entitled to collect its
costs and expenses in preserving or selling the mortgaged property ahead of
payment to the lender. In certain circumstances, a debtor in bankruptcy may have
the power to grant liens senior to the lien of a mortgage, and analogous state
statutes and general principles of equity may also provide a mortgagor with
means to halt a foreclosure proceeding or sale and to force a restructuring of a
mortgage loan on terms a lender would not otherwise accept. Moreover, the laws
of certain states also give priority to certain tax liens over the lien of a
mortgage or deed of trust, and such priority generally will be upheld in the
event of a bankruptcy filing. Under the Bankruptcy Code, if the court finds that
actions of the mortgagee have been unreasonable, the lien of the related
mortgage may be subordinated to the claims of unsecured creditors.
The Company's acquisition of real property, particularly REO Property, may
be affected by many of the considerations applicable to mortgage loan lending.
For example, the Company's acquisition of certain property at foreclosure sale
could be affected by a borrower's post-sale right of redemption. In addition,
the Company's ability to derive income from real property will generally be
dependent on its receipt of rent payments under leases of the related property.
The ability to collect rents may be impaired by the commencement of a bankruptcy
proceeding relating to a lessee under such lease. Under the Bankruptcy Code, the
filing of a petition in bankruptcy by or on behalf of a lessee results in a stay
in bankruptcy against the commencement or continuation of any state court
proceeding for past due rent, for accelerated rent, for damages or for a summary
eviction order with respect to a default under the lease that occurred prior to
the filing of the lessee's petition. In addition, the Bankruptcy Code generally
provides that a trustee or debtor-in-possession may, subject to approval of the
court, (i) assume the lease and retain it or assign it to a third party or (ii)
reject the lease. If the lease is assumed, the trustee or debtor-in-possession
(or assignee, if applicable) must cure any defaults under the lease (except for
certain defaults unrelated to breaches of monetary obligations under the lease),
compensate the lessor for its losses and provide the lessor with "adequate
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assurance" of future performance. Such remedies may be insufficient, and any
assurances provided to the lessor may, in fact, be inadequate. If the lease is
rejected, the lessor will be treated as an unsecured creditor with respect to
its claim for damages for termination of the lease. The Bankruptcy Code also
limits a lessor's damages for lease rejection to the rent reserved by the lease
(without regard to acceleration) for the greater of one year, or 15%, not to
exceed three years, of the remaining term of the lease.
DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS
Notes and mortgages may contain provisions that obligate the borrower to
pay a late charge or additional interest if payments are not timely made, and in
some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges that a lender may collect from a borrower for
delinquent payments. Certain states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. In
addition, the enforceability of provisions that provide for prepayment fees or
penalties upon an involuntary prepayment is unclear under the laws of many
states.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
ENVIRONMENTAL RISKS
General. The Company will be subject to environmental risks when taking a
security interest in real property, as well as when it acquires any real
property. Of particular concern may be properties that are or have been used for
industrial, manufacturing, military or disposal activity. Such environmental
risks include the risk of the diminution of the value of a contaminated property
or, as discussed below, liability for the costs of compliance with environmental
regulatory requirements or the costs of clean-up or other remedial actions.
These compliance or clean-up costs could exceed the value of the property or the
amount of the lender's loan. In certain circumstances, a lender could determine
to abandon a contaminated mortgaged property as collateral for its loan rather
than foreclose and risk liability for compliance or clean-up costs.
CERCLA. The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on
present and past "owners" and "operators" of contaminated real property for the
costs of clean-up. A secured lender may be liable as an "owner" or "operator" of
a contaminated mortgaged property if agents or employees of the lender have
become sufficiently involved in the management of such mortgaged property or the
operations of the borrower. Such liability may exist even if the lender did not
cause or contribute to the contamination and regardless of whether the lender
has actually taken possession of a mortgaged property through foreclosure, deed
in lieu of foreclosure or otherwise. The magnitude of the CERCLA liability at
any given contaminated site is a function of the actions required to address
adequately the risks to human health and the environment posed by the particular
conditions at the site. As a result, such liability is not constrained by the
value of the property or the amount of the original or unamortized principal
balance of any loans secured by the property. Moreover, under
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certain circumstances, liability under CERCLA may be joint and several -- i.e.,
any liable party may be obligated to pay the entire cleanup costs regardless of
its relative contribution to the contamination.
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
(the "1996 Lender Liability Act") provides for a safe harbor for secured lenders
from CERCLA liability even though the lender forecloses and sells the real
estate securing the loan, provided the secured lender sells "at the earliest
practicable, commercially reasonable time, at commercially reasonable terms,
taking into account market conditions and legal and regulatory requirements."
Although the 1996 Lender Liability Act provides significant protection to
secured lenders, it has not been construed by the courts and there are
circumstances in which actions taken could expose a secured lender to CERCLA
liability. And, the transferee from the secured lender is not entitled to the
protections enjoyed by a secured lender. Hence, the marketability of any
contaminated real estate continues to be suspect.
Certain Other Federal and State Laws. Many states have environmental
clean-up statutes similar to CERCLA, and not all those statutes provide for a
secured creditor exemption. In addition, underground storage tanks are commonly
found on a wide variety of commercial and industrial properties. Federal and
state laws impose liability on the owners and operators of underground storage
tanks for any cleanup that may be required as a result of releases from such
tanks. These laws also impose certain compliance obligations on the tank owners
and operators, such as regular monitoring for leaks and upgrading of older
tanks. The Company may become a tank owner or operator and subject to compliance
obligations and potential cleanup liabilities, either as a result of becoming
involved in the management of a site at which a tank is located or, more
commonly, by taking title to such a property. Federal and state laws also
obligate property owners and operators to maintain and, under some
circumstances, to remove asbestos-containing building materials and lead-based
paint. As a result, the presence of these materials can increase the cost of
operating a property and thus diminish its value. In a few states, transfers of
some types of properties are conditioned upon cleanup of contamination prior to
transfer. In these cases, a lender that becomes the owner of a property through
foreclosure, deed in lieu of foreclosure or otherwise, may be required to clean
up the contamination before selling or otherwise transferring the property.
Beyond statute-based environmental liability, there exist common law causes
of action (for example, actions based on nuisance or on toxic tort resulting in
death, personal injury or damage to property) related to hazardous environmental
conditions on a property.
Superlien Laws. Under the laws of many states, contamination of a property
may give rise to a lien on the property for clean-up costs. In several states,
such a lien has priority over all existing liens, including those of existing
mortgages. In these states, the lien of a mortgage may lose its priority to such
a "superlien."
Additional Considerations. The cost of remediating environmental
contamination at a property can be substantial. To reduce the likelihood of
exposure to such losses, the Company will not acquire title to a Mortgaged
Property or take over its operation unless, based on an environmental site
assessment prepared by a qualified environmental consultant, it has made the
determination that it is appropriate to do so. The Company expects that it will
organize a special purpose subsidiary to acquire any environmentally
contaminated real property.
Environmental Site Assessments. In addition to possibly allowing a lender
to qualify for the innocent landowner defense (see discussion under
"-- Environmental Risks" and " -- CERCLA" above), environmental site assessments
can be a valuable tool in anticipating, managing and minimizing environmental
risk. They are commonly performed in many commercial real estate transactions.
Environmental site assessments vary considerably in their content and
quality. Even when adhering to good professional practices, environmental
consultants will sometimes not detect significant environmental problems because
an exhaustive environmental assessment would be far too costly and
time-consuming to be practical. Nevertheless, it is generally helpful in
assessing and addressing environmental risks in connection with commercial real
estate (including multifamily properties) to have an environmental site
assessment of a property because it enables anticipation of environmental
problems and, if agreements are structured appropriately, can allow a party to
decline to go forward with a transaction.
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APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 ("Title V") provides that state usury limitations shall not apply to
certain types of residential (including multifamily) first mortgage loans
originated by certain lenders after March 31, 1980. Title V authorized any state
to reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision that expressly rejects application of the federal law.
In addition, even where Title V is not so rejected, any state is authorized by
the law to adopt a provision limiting discount points or other charges on
mortgage loans covered by Title V. Certain states have taken action to reimpose
interest rate limits and/or to limit discount points or other charges.
AMERICANS WITH DISABILITIES ACT
Under Title III of the Americans with Disabilities Act of 1990 and rules
promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, public accommodations (such as hotels,
restaurants, shopping centers, hospitals, schools and social service center
establishments) must remove architectural and communication barriers that are
structural in nature from existing places of public accommodation to the extent
"readily achievable." In addition, under the ADA, alterations to a place of
public accommodation or a commercial facility are to be made so that, to the
maximum extent feasible, such altered portions are readily accessible to and
usable by disabled individuals. The "readily achievable" standard takes into
account, among other factors, the financial resources of the affected site,
owner, landlord or other applicable person. In addition to imposing a possible
financial burden on the borrower in its capacity as owner or landlord, the ADA
may also impose such requirements on a foreclosing lender who succeeds to the
interest of the borrower as owner or landlord. Furthermore, since the "readily
achievable" standard may vary depending on the financial condition of the owner
or landlord, a foreclosing lender who is financially more capable than the
borrower of complying with the requirements of the ADA may be subject to more
stringent requirements than those to which the borrower is subject.
USE OF PROCEEDS
The net proceeds of this offering (approximately $136.0 million) along with
approximately $26.0 million to be received by the Company in connection with
private sales of Common Stock to be consummated upon consummation of this
offering will be invested in short-term, interest-bearing securities and held in
trust by the Company until used to originate or acquire Mortgage Loans
Subordinated Interests, Opportunistic Real Properties, Mezzanine Investments and
Other Real Estate Related Assets as provided herein. See "Operating Policies and
Strategies."
The Company intends to supplement the proceeds of this offering through
bank borrowings, commercial paper borrowings and the issuance of debt securities
and additional equity securities.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to each of the underwriters named
below (the "Underwriters") and each of the Underwriters, for whom Friedman,
Billings, Ramsey & Co., Inc. and EVEREN Securities, Inc. are acting as
representatives, has severally agreed to purchase, the number of shares of
Common Stock offered hereby set forth below opposite its name.
<TABLE>
<CAPTION>
UNDERWRITER
- ----------- NUMBER OF SHARES
<S> <C>
Friedman, Billings, Ramsey & Co., Inc. .....................
EVEREN Securities, Inc......................................
----------
Total............................................. 9,800,000
==========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to purchase all the shares of Common Stock offered
hereby if any are purchased.
The Underwriters propose initially to offer the shares of Common Stock
directly to the public at the public offering price set forth on the cover page
of this Prospectus and to certain dealers at such offering price less a
concession not to exceed $ per share of Common Stock. The Underwriters
may allow and such dealers may reallow a concession not to exceed $ per
share of Common Stock to certain other dealers. After the shares of Common Stock
are released for sale to the public, the offering price and other selling terms
may be changed by the Underwriters.
At the request of the Company, the Underwriters have reserved up to
shares of Common Stock ( shares if the Underwriters'
over-allotment option is exercised) for sale to directors, officers and
employees of Lend Lease and its subsidiaries at the initial public offering
price set forth on the cover page of this Prospectus net of any underwriting
discounts or commissions, and up to shares of Common Stock (
shares if the Underwriters' over-allotment option is exercised) for sale to
certain other persons at the initial public offering price. The number of shares
of Common Stock available for sale to the general public will be reduced to the
extent such persons purchase such reserved shares. Any reserved shares which are
not so purchased will be offered by the Underwriters to the general public on
the same basis as the other shares offered hereby.
The Company has granted to the Underwriters an option exercisable during a
30-day period after the date hereof to purchase, at the initial offering price
less underwriting discounts and commissions, up to an additional 1,470,000
shares of Common Stock for the sole purpose of covering over-allotments, if any.
To the extent that the Underwriters exercise such option, each Underwriter will
be committed, subject to certain conditions, to purchase a number of the
additional shares of Common Stock proportionate to such Underwriter's initial
commitment.
FBR Asset Investment Corporation, an affiliate of Friedman, Billings,
Ramsey & Co., Inc., one of the representatives of the Underwriters has agreed to
purchase 700,000 shares of Common Stock, representing 6.0% of the shares of
Common Stock to be outstanding on the closing of this offering, at a purchase
price equal to the initial public offering price less underwriting discounts or
commissions.
The Company has agreed to indemnify the several Underwriters against
certain civil liabilities under the Securities Act, or to contribute to payments
the Underwriters may be required to make in respect thereof.
Prior to this offering, there has been no public market for the shares of
Common Stock. The initial public offering price was determined by negotiation
between the Company and the representatives of the Underwriters. Among the
factors considered in making such determination were the history of, and the
prospects for, the industry in which the Company will compete, an assessment of
the skills of the Manager and the Company's
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prospects for future earnings, the general conditions of the economy and the
securities market and the prices of offerings by similar issuers. There can,
however, be no assurance that the price at which the shares of Common Stock will
sell in the public market after this offering will not be lower than the price
at which they are sold by the Underwriters.
The representatives of the Underwriters have informed the Company that the
Underwriters do not intend to confirm sales of the shares offered hereby to any
accounts over which they exercise discretionary authority.
The Underwriters and dealers may engage in passive market making
transactions in the Common Stock in accordance with Rule 103 of Regulation M
promulgated by the Commission. In general, a passive market maker may not bid
for or purchase Common Stock at a price that exceeds the higher independent bid.
In addition, the net daily purchases made by any passive market maker generally
may not exceed 30% of its average daily trading volume in the Common Stock
during a specified two-month prior period, or 200 shares, whichever is greater.
A passive market maker must identify passive market making bids as such on the
Nasdaq electronic inter-dealer reporting system. Passive market making may
stabilize or maintain the market price of the Common Stock above independent
market levels. The Underwriters and dealers are not required to engage in
passive market making and may end passive market making activities at any time.
In connection with this offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may over-allot this Offering,
creating a syndicate short position. In addition, the Underwriters may bid for
and purchase Common Stock in the open market to cover syndicate short positions
or to stabilize the price of the Common Stock. Finally, the underwriting
syndicate may reclaim selling concessions from syndicate members if the
syndicate repurchases previously distributed Common Stock in syndicate covering
transactions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in these
activities and may end any of these activities at any time.
In general, purchases of securities for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. Reclaiming selling concessions
from syndicate members might also have an effect on the price of a security to
the extent that it were to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Company has agreed not to offer, sell or contract to sell or otherwise
dispose of any Common Stock of the Company without the prior consent of the
representatives for a period of 180 days from the date of this Prospectus. Lend
Lease has agreed not to offer, sell or contract to sell or otherwise dispose of
the Common Stock acquired upon consummation of this offering without the prior
consent of the representatives, for a period of two years from consummation of
this offering, provided that the Manager continues to serve as the manager
during such period.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by King &
Spalding, Atlanta, Georgia, and for the Underwriters by Hunton & Williams,
Richmond, Virginia.
EXPERTS
The consolidated balance sheet of Chastain Capital Corporation and its
subsidiaries included in this Prospectus has been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing herein, and is
included herein in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
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ADDITIONAL INFORMATION
THE COMPANY
The Company has filed with the Commission a Registration Statement (of
which this Prospectus forms a part) under the Securities Act, with respect to
the Common Stock offered pursuant to the Prospectus. This Prospectus contains
summaries of the material terms of the documents referred to herein and therein,
but does not contain all of the information set forth in the Registration
Statement pursuant to the rules and regulations of the Commission. For further
information, reference is made to such Registration Statement and the exhibits
thereto. Such Registration Statement and exhibits as well as reports and other
information filed by the Company can be inspected without charge and copied at
prescribed rates at the public reference facilities maintained by the Commission
at the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its Regional Offices located as follows: Chicago
Regional Office, Citicorp Center, Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661-2511; and New York Regional Office, Seven World Trade Center,
Suite 1300, New York, New York 10048. The Commission maintains a web site that
contains the Registration Statement, reports, proxy, and information statements
and other information regarding registrants that file electronically with the
Commission. The web site is located at http://www.sec.gov.
Statements contained in this Prospectus as to the contents of any contract
or other document that is filed as an exhibit to the Registration Statement are
not necessarily complete, and each such statement is qualified in its entirety
by reference to the full text of such contract or document.
The Company will be required to file reports and other information with the
Commission pursuant to the Securities Exchange Act of 1934. In addition to
applicable legal requirements, if any, holders of Common Stock will receive
annual reports containing audited financial statements with a report thereon by
the Company's independent certified public accounts, and quarterly reports
containing unaudited financial information for each of the first three quarters
of each fiscal year.
LEND LEASE
Lend Lease is an Australian publicly held corporation that files reports
and other information with the Australian Securities Commission. Additional
information about Lend Lease may be obtained from the Australian Securities
Commission, Level 16 Chifley Tower, 2 Chifley Square, Sydney NSW 2001, GPO Box
4866 or from their web site, which is located at http://www.asc.gov.au.
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GLOSSARY OF TERMS
Except as otherwise specified or as the context may otherwise require, the
following terms used herein shall have the meanings assigned to them below. All
terms in the singular shall have the same meanings when used in the plural and
vice-versa.
"1996 Lender Liability Act" shall mean the Asset Conservation, Lender
Liability and Deposit Insurance Act of 1996.
"ADA" shall mean the Americans with Disabilities Act of 1990, as amended.
"Advisors Act" shall mean the Investment Advisors Act of 1940.
"Affiliate" shall mean (i) any person directly or indirectly owning,
controlling, or holding, with power to vote ten percent or more of the
outstanding voting securities of such other person, (ii) any person ten percent
or more of whose outstanding voting securities are directly or indirectly owned,
controlled, or held, with power to vote, by such other person, (iii) any person
directly or indirectly controlling, controlled by, or under common control with
such other person, (iv) any executive officer, director, trustee or general
partner of such other person, and (v) any legal entity for which such person
acts as an executive officer, director, trustee or general partner. The term
"person" means and includes any natural person, corporation, partnership,
association, limited liability company or any other legal entity. An indirect
relationship shall include circumstances in which a person's spouse, children,
parents, siblings or mothers-, fathers-, sisters- or brothers-in-law is or has
been associated with a person.
"Agricultural Loan" shall mean a loan that is secured by agricultural
property.
"Allocation Committee" shall mean the committee that determines the
allocation of investments among the Manager's clients.
"Allocation Process" shall mean the Manager's process of allocating new
business opportunities among its various clients without preference being
accorded to any particular client.
"Average Invested Assets" shall mean the average of the aggregate book
value of the Assets of the Company (including a proportionate amount of the
Company's direct and indirect subsidiaries), before reserves for depreciation or
bad debts or other similar noncash reserves, computed by taking the daily
average of such values during such period.
"Bankruptcy Code" shall mean Title 11 of the United States Code, as
amended.
"Beneficiary" shall mean a qualified charitable organization selected by
the Company to be the beneficiary of the Trust.
"Board of Directors" shall mean the Board of Directors of the Company.
"Business Combination Statute" shall mean sections 14-2-1131 to 14-2-1133
of the GBCC.
"Bylaws" shall mean the Bylaws of the Company.
"CERCLA" shall mean the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended.
"Charter" shall mean the Articles of Incorporation of the Company.
"Chastain" shall mean Chastain Capital Corporation, a Georgia corporation.
"Closing Price" shall mean the average of the high bid and low asked prices
in the over-the-counter market, as reported by The Nasdaq Stock Market.
"CMBS" shall mean commercial, multifamily or agricultural MBS.
"CMO or CMO Bonds" shall mean collateralized mortgage obligation which are
debt obligations of special purpose corporations, owner trusts or other special
purpose entities secured by commercial mortgage loans or MBS.
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<PAGE> 97
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Column Financial" shall mean Column Financial, Inc.
"Commission" shall mean the Securities and Exchange Commission.
"Common Stock" shall mean the Common Stock, par value $0.01 per share, of
the Company.
"Company" shall mean Chastain Capital Corporation, a Georgia corporation,
together with its subsidiaries, unless the context indicates otherwise.
"Company Expenses" shall mean all administrative costs and expenses of the
Company and the General Partner.
"Compensation Committee" shall mean the Compensation Committee of the Board
of Directors or, if none, the Board of Directors who will be authorized to grant
Options pursuant to the Option Plan.
"Construction Loan" shall mean a loan the proceeds of which are to be used
to finance the costs of construction or rehabilitation of Real Property.
"Crime Control Act" shall mean the Comprehensive Crime Control Act of 1984.
"Directors" means the members of the Company's Board of Directors.
"Disqualified Organization" shall mean the United States, any state or
political subdivision thereof, any foreign government, any international
organization, any agency or instrumentality of any of the foregoing, any other
tax-exempt organization (other than a farmer's cooperative described in section
521 of the Code) that is exempt from taxation under the unrelated business
taxable income provisions of the Code, or any rural electrical or telephone
cooperative.
"Distressed Mortgage Loans" shall mean Subperforming Mortgage Loans and
Nonperforming Mortgage Loans.
"Distressed Real Property" shall mean REO Property and other
underperforming or otherwise distressed real property.
"DOL" shall mean the Department of Labor.
"Eligible Recipients" shall mean all employees (including officers),
directors and others providing services to the Company, as well as the Manager
and employees (including officers) and directors of the Manager who are eligible
to receive Options at the discretion of the Compensation Committee.
"Environmentally Distressed Real Property" shall mean Real Property or
Mortgage Loans secured by Real Property with known environmental problems that
may materially impair the value of the Real Property.
"EQ Services" shall mean EQ Services Inc., an affiliate of ERE that
provided servicing for commercial mortgage backed securities and third party
client portfolios.
"Equitable Companies" shall mean The Equitable Companies Incorporated.
"Equitable Life" shall mean The Equitable Life Assurance Society of the
United States.
"ERE" shall mean Equitable Real Estate Investment Management Co., Inc
"ERE Acquisition" shall mean Lend Lease's purchase of ERE from the
Equitable Companies Incorporated in June 1997.
"ERE Hyperion" shall mean Equitable Real Estate Hyperion Capital Advisors,
LLC.
"ERE Yarmouth" shall mean ERE and its successors.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Excess Inclusion" shall have the meaning specified in section 860E(c) of
the Code.
91
<PAGE> 98
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Exempt Organizations" shall mean tax-exempt entities, including, but not
limited to, charitable organizations, qualified employee pension and profit
sharing trusts and individual retirement accounts.
"Fair Price Statute" shall mean sections 14-2-1110 to 14-2-1113 of the
GBCC.
"Farmer Mac" shall mean Federal Agricultural Mortgage Corporation.
"FBR" shall mean Friedman, Billings, Ramsey & Co., Inc.
"FIRPTA" shall mean the Foreign Investment in Real Property Tax Act of
1980.
"Formation Transactions" shall mean transactions relating to the formation
of the Company.
"Funds From Operations" shall mean net income (computed in accordance with
GAAP), excluding gains (or losses) from debt restructuring or sales of property,
plus depreciation and amortization on real estate assets, and after adjustments
for unconsolidated partnerships and joint ventures.
"GAAP" shall mean generally accepted accounting principles applied on a
consistent basis.
"Garn Act" shall mean the Garn-St Germain Depository Institutions Act of
1982.
"General Partner" shall mean Chastain GP Holdings, Inc., as the sole
general partner of the Operating Partnership.
"GBCC" shall mean the Georgia Business Corporation Code.
"Guidelines" shall mean guidelines that set forth general parameters for
the Company's investments, borrowings and operations.
"High Yield Real Property" shall mean performing Real Property which may
present opportunities for high risk-adjusted returns.
"Hyperion" shall mean Hyperion Capital Management, Inc.
"Independent Director" shall mean a director who is not an affiliate of
Lend Lease, the Manager or the Company.
"Initial Limited Partner" shall mean Chastain LP Holdings, Inc., as limited
partner of the Operating Partnership.
"Interested Shareholder" shall mean any holder of more than 10% of any
class of outstanding voting shares of the Company.
"Inverse IO" shall mean a class of MBS that is entitled to no (or only
nominal) distributions of principal, but is entitled to interest at a floating
rate that varies inversely with a specified index.
"Investment Committee" shall mean the investment committee of the Manager.
"Investment Company Act" shall mean the Investment Company Act of 1940, as
amended.
"IO" shall mean a class of MBS that is entitled to only payments of
interest and no (or only nominal) distributions of principal.
"IRA" shall mean an individual retirement account.
"Lease" shall mean, with respect to each Mortgaged Property or Real
Property, the agreement pursuant to which the Borrower rents and leases to the
Lessee and the Lessee rents and leases from the Borrower, such Mortgaged
Property or Real Property.
"Lend Lease" shall mean Lend Lease Corporation Limited.
"LIBOR" shall mean the London Interbank Offering Rate for one-month U.S.
Dollar deposits.
92
<PAGE> 99
"Limited Partners" shall mean the Initial Limited Partner and any
additional persons admitted as limited partners of the Operating Partnership.
"Management Agreement" shall mean an agreement or agreements between the
Company and the Manager pursuant to which the Manager performs various services
for the Company.
"Manager" shall mean ERE Yarmouth.
"Market Price" shall mean the average of the Closing Price for the five
consecutive Trading Days ending on such date.
"MBS" shall mean mortgage-backed securities or collateralized mortgage
obligations.
"Mezzanine Investment" shall mean a loan secured by a lien on Real Property
that is subordinate to a lien on such Real Property securing another loan.
Mezzanine Investments may also take the form of preferred equity and will have a
claim against both the operating cash flow and liquidation proceeds from the
specific real estate assets.
"Mortgage Collateral" shall mean mortgage pass-through securities or pools
of whole loans securing or backing a series of MBS.
"Mortgage Loan" shall mean a mortgage loan underlying a series of MBS or a
Mortgage Loan held by the Company, as the context indicates.
"Mortgaged Property" shall mean the real property securing a mortgage loan.
"NAREIT" shall mean the National Association of Real Estate Investment
Trusts, Inc.
"Net income" shall mean the income of the Company as reported for federal
income tax purposes before the Manager's incentive compensation, net operating
loss deductions arising from losses in prior periods and the deduction for
dividends paid, plus the effects of adjustments, if any, necessary to record
hedging and interest transactions in accordance with generally accepted
accounting principles.
"Non-ERISA Plan" shall mean a plan that does not cover common law
employees.
"Nonperforming Mortgage Loans" shall mean commercial and multifamily
mortgage loans for which the payment of principal and interest is more than 90
days delinquent.
"Offering Price" shall mean the initial offering price per share to the
public of the Common Stock offered hereby as set forth on the cover page of the
Company's final prospectus.
"OID" shall mean original issue discount.
"Operating Partnership" shall mean Chastain Investments, L.P.
"Operating Partnership Agreement" shall mean the partnership agreement of
the Operating Partnership, as amended from time to time.
"Opportunistic Real Property" shall mean Distressed Real Property, High
Yield Real Property and Distressed Mortgage Loans.
"Options" shall mean the right to purchase shares of Common Stock or, if
necessary to prevent the recipient from exceeding the Ownership Limitation,
Units in the Operating Partnership that may be redeemed for cash or at the
election of the General Partner, shares of Common Stock on a one-for-one basis
pursuant to the Option Plan.
"Option Plan" shall mean an incentive plan which provides for options to
purchase shares of Common Stock or Units.
"Other Real Estate Related Assets" shall mean real estate related assets
other than Subordinated Interests, Mezzanine Loans and Underperforming Real
Property, including, without limitation, other classes of MBS and other
interests in real estate.
93
<PAGE> 100
"OTS" shall mean the Office of Thrift Supervision.
"Ownership Limitation" shall mean the restriction on ownership (or deemed
ownership by virtue of the attribution provisions of the Code) of more than 9.8%
of the total number outstanding shares of any class of capital stock of the
Company by any shareholder (except for Lend Lease or its affiliates so long as
Lend Lease is publicly held).
"Pass-Through Certificates" shall mean interests in trusts, the assets of
which are primarily mortgage loans.
"Phantom Income" shall mean income for federal income tax purposes
recognized in advance of cash receipts.
"Plan" shall mean certain pension, profit-sharing, employee benefit, or
retirement plans or individual retirement accounts.
"Plan Asset Regulations" shall mean regulations of the Department of Labor
that define "plan assets."
"Preferred Stock" shall mean the preferred stock of the Company.
"Prohibited Owner" shall mean the record holder of the shares of Common
Stock or Preferred Stock that are designated as Shares-in-Trust.
"Prohibited Transferee" shall mean a person or entity who would hold shares
of capital stock of the Company in excess of the applicable Ownership Limitation
as a result of a purported transfer of capital stock of the Company or any other
event.
"Qualified Hedge" shall mean an interest rate swap or cap agreement,
option, futures contract, forward rate agreement or any similar financial
instrument, entered into by the Company in a transaction to reduce the interest
rate risks with respect to any indebtedness incurred or to be incurred by the
Company to acquire or carry any real estate assets.
"Qualifying Interests" shall mean mortgages and other liens on and
interests in real estate.
"Real Estate Related Assets" shall mean Subordinated Interests and other
classes of CMBS, Mortgage Loans (including Distressed Mortgage Loans),
Opportunistic Real Property, Mezzanine Investments and other real estate related
assets.
"Real Property" shall mean commercial and multifamily real property owned
by the Company.
"Realized Losses" shall mean, generally, the aggregate amount of losses
realized on loans that are liquidated and losses on loans due to fraud,
mortgagor bankruptcy or special hazards.
"Redemption Rights" shall mean the rights that it is anticipated the
Limited Partners (other than the Initial Limited Partner) will have pursuant to
the Operating Partnership Agreement to redeem all or a portion of their
interests in the Operating Partnership for Common Stock on a one-for-one basis
or, at the option of the Company, an equivalent amount of cash.
"REIT" shall mean real estate investment trust, as defined in section 856
of the Code.
"Related Party Tenant" shall mean a tenant of the Company or the Operating
Partnership in which the Company owns 10% or more of the ownership interests,
taking into account both direct ownership and constructive ownership.
"REMIC" shall mean real estate mortgage investment conduit, as defined in
section 860D of the Code.
"REMIC Residual Interest" shall mean a class of MBS that is designated as
the residual interest in one or more REMICs.
"Rent" shall mean rent received by the Company from tenants of Real
Property owned by the Company.
"REO Property" shall mean real property acquired by a mortgage lender at
foreclosure (or by deed in lieu of foreclosure).
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<PAGE> 101
"RICO" shall mean the Racketeer Influenced and Corrupt Organizations laws,
18 U.S.C.A. Section 1961, et seq.
"Rule 144" shall mean the rule promulgated under the Securities Act that
permits holders of restricted securities as well as affiliates of an issuer of
the securities, pursuant to certain conditions and subject to certain
restrictions, to sell their securities publicly without registration under the
Securities Act.
"SAIF" shall mean the Savings Association Insurance Fund.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Service" shall mean the Internal Revenue Service.
"Shares-in-Trust" shall mean shares of Common Stock or Preferred Stock the
purported transfer of which would result in a violation of the Ownership
Limitation, result in the stock of the Company being held by fewer than 100
persons, result in the Company being "closely held," or cause the Company to own
10% or more of the ownership interests in a tenant of the Company's Real
Property.
"Special Servicer" shall mean a company that engages in Special Servicing.
"Special Servicing" shall mean servicing of defaulted mortgage loans,
including oversight and management of the resolution of such mortgage loans by
modification, foreclosure, deed in lieu of foreclosure or otherwise.
"Sub IO" shall mean an IO with characteristics of a Subordinated Interest.
"Subordinated Interests" shall mean classes of MBS that are subordinated in
right of payments of principal and interest to more senior classes and absorb
the first losses on the underlying mortgage loans.
"Sub-Performing Mortgage Loans" shall mean loans for which default is
likely or imminent.
"Ten-Year U.S. Treasury Rate" shall mean the arithmetic average of the
weekly average yield to maturity for actively traded current coupon U.S.
Treasury fixed interest rate securities (adjusted to constant maturities of ten
years) published by the Federal Reserve Board during a quarter, or, if such rate
is not published by the Federal Reserve Board, any Federal Reserve Bank or
agency or department of the federal government selected by the Company.
"Title V" shall mean Title V of the Depository Institutions Deregulation
and Monetary Control Act of 1980.
"Trading Day" shall mean any day other than a Saturday, a Sunday or a day
on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
"Treasury Regulations" shall mean the income tax regulations promulgated
under the Code.
"Trust" shall mean a trust created in the event of a purported transfer of
capital stock of the Company that would result in the Company's failure to
qualify as a REIT under the Code.
"Trustee" shall mean a trustee of the Trust.
"UBTI" shall mean unrelated business taxable income.
"UBTI Percentage" shall mean the gross income derived by the Company from
an unrelated trade or business divided by the gross income of the Company for
the year in which the dividends are paid.
"UCC" shall mean the Uniform Commercial Code.
"Unaffiliated Director" shall mean, with respect to a particular Interested
Shareholder, a member of the Company's Board of Directors who was (i) a member
on the date on which an Interested Shareholder became an Interested Shareholder
and (ii) recommended for election by, or was elected to fill a vacancy and
received the affirmative vote of, a majority of the Unaffiliated Directors then
on the Board.
95
<PAGE> 102
"Underwriters" shall mean Friedman, Billings, Ramsey & Co., Inc. and EVEREN
Securities, Inc. and each of the underwriters for whom Friedman, Billings,
Ramsey & Co., Inc. and EVEREN Securities, Inc. are acting as representatives.
"Underwriting Agreement" shall mean the agreement pursuant to which the
Underwriters will underwrite the Common Stock.
"Units" shall mean units of limited partnership interest in the Operating
Partnership.
"Yarmouth" shall mean Yarmouth Group, Inc.
96
<PAGE> 103
INDEPENDENT AUDITORS' REPORT
To the Shareholder of Chastain Capital Corporation
Atlanta, Georgia
We have audited the accompanying consolidated balance sheet of Chastain
Capital Corporation and subsidiaries as of December 16, 1997. This financial
statement is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, such consolidated balance sheet presents fairly, in all
material respects, the financial position of the Company and its subsidiaries at
December 16, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
December 17, 1997
F-1
<PAGE> 104
CHASTAIN CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 16, 1997
<TABLE>
<S> <C>
Cash........................................................ $1,000
------
Total assets...................................... $1,000
======
Shareholder's equity:
Preferred stock, $0.01 par value, authorized 25,000,000
shares, no shares issued............................... 0
Common stock, $0.01 par value, authorized 200,000,000
shares, 100 shares issued and outstanding.............. 1
Additional paid-in capital................................ 999
------
Total shareholders' equity........................ $1,000
======
</TABLE>
See accompanying notes to balance sheet.
F-2
<PAGE> 105
CHASTAIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED BALANCE SHEET
DECEMBER 16, 1997
NOTE 1 -- ORGANIZATION
Chastain Capital Corporation (the "Company") was incorporated in Georgia on
December 16, 1997 and was initially capitalized on such date through the sale of
100 shares of Common Stock for $1,000. The Company will seek to originate
commercial and multifamily Mortgage Loans for the purpose of issuing
collateralized mortgage obligations ("CMOs") collateralized by its Mortgage
Loans and retaining the Mortgage Loans subject to the CMO debt. As a result of
such transactions, the Company will retain a "first loss" subordinated equity
ownership interest in the Mortgage Loans that has economic characteristics
similar to those of subordinated interests in commercial mortgage-backed
securities ("CMBS"). The Company also intends to acquire subordinated interests
in CMBS, originate and acquire Mezzanine Investments and acquire other Real
Property.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPALS OF CONSOLIDATION
The consolidated balance sheet of the Company includes the accounts of the
Company and its wholly owned subsidiaries. All material intercompany accounts
have been eliminated in consolidation.
INCOME TAXES
The Company will elect to be taxed as a real estate investment trust under
the Internal Revenue Code. As a result, the Company will not be subject to
federal income taxation at the corporate level to the extent it distributes
annually its predistribution taxable income of at least 95% of its real estate
investment trust taxable income so distributable.
INCOME RECOGNITION
Income and expenses are to be recorded on the accrual basis of accounting.
NOTE 3 -- TRANSACTION WITH AFFILIATES
The Company intends to enter into a Management Agreement (the "Management
Agreement") with ERE Yarmouth (the "Manager"), an indirect wholly-owned
subsidiary of Lend Lease, under which the Manager will advise the Company on
various facets of its business and manage its day-to-day operations, subject to
the supervision of the Company's Board of Directors.
Pursuant to the Management Agreement, the Company will pay the Manager a
quarterly base management fee equal to the following:
<TABLE>
<S> <C>
For the first four fiscal quarters... 1.00% per annum of the Average Invested Assets of the
Company
During each fiscal quarter
thereafter......................... 0.85% per annum of the Average Invested Assets up to
$1 billion
0.75% per annum of the Average Invested Assets from
$1 billion to $1.25 billion
0.50% per annum of the Average Invested Assets in
excess of $1.25 billion
</TABLE>
The Management Agreement also provides for a quarterly incentive management
fee equal to the product of (A) 25% of the dollar amount by which (1) (a) Funds
From Operations (before the incentive fee) of the
F-3
<PAGE> 106
CHASTAIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
Company for the applicable quarter per weighted average number of shares of
Common Stock outstanding plus (b) gains (or minus losses) from debt
restructuring or sales of assets not included in Funds From Operations of the
Company for such quarter per weighted average number of shares of Common Stock
outstanding, exceed (2) an amount equal to (a) the weighted average of the price
per share at initial offering and the prices per share at any secondary
offerings by the Company multiplied by (b) 25% of the sum of the Ten-Year U.S.
Treasury Rate plus four percent, and (B) the weighted average number of shares
of Common Stock outstanding.
In addition, the Management Agreement provides for a termination fee equal
to the sum of the base management fee and incentive management fee, if any,
earned during the immediately preceding four fiscal quarters.
The Company intends to adopt a stock option plan to provide a means of
incentive compensation for the Manager, whereby the Manager will be granted an
option to purchase 1,166,667 shares of Common Stock of the Company exercisable
at the initial public offering price. One-fourth of the Manager's options will
be exercisable on each of the first four anniversaries of the Closing Date of
the initial public offering.
The Company further intends to issue 1,166,567 shares of Common Stock to
Yarmouth Lend Lease Holdings, Inc., an indirect wholly-owned subsidiary of Lend
Lease, and 700,000 shares of Common Stock to FBR Asset Investment Corporation,
an affiliate of Friedman, Billings, Ramsey & Co., Inc., concurrent with the
closing of the initial public offering, at the initial public offering price net
of any underwriting discounts and commissions.
NOTE 4 -- PUBLIC OFFERING OF COMMON STOCK
The Company is in the process of filing a Registration Statement for sale
of up to 11,270,000 shares of Common Stock. Contingent upon the consummation of
the public offering, the Company will be liable for organization and offering
expenses in connection with the sale of the shares of Common Stock offered.
F-4
<PAGE> 107
APPENDIX A
In May 1995, ERE and Hyperion established a joint venture, Equitable Real
Estate Hyperion Capital Advisors, LLC ("ERE Hyperion"), to raise third-party
funds for investment in CMBS. The intent of the joint venture is to leverage off
the real estate expertise of ERE Yarmouth and the fixed income expertise of
Hyperion to more effectively invest in and manage CMBS.
Since inception, ERE Hyperion has invested on behalf of six clients, four
of which were non-discretionary accounts and two of which were discretionary
accounts. The term discretionary means that absolute authority is afforded the
investment manager to buy and sell securities on the client's behalf, within an
agreed upon framework. Currently, ERE Hyperion invests on behalf of three
non-discretionary clients and two discretionary clients.
As of September 30, 1997 total assets under management for
non-discretionary clients are approximately $268 million and approximately $76
million for discretionary clients, for total assets under management of
approximately $334 million.
The total return for the ERE Hyperion Non-Discretionary CMBS composite
since inception in October 1995 is 11.63%, net of fees, versus 6.13% for the 5
year/10 year U.S. Treasury Index return. This return is reflective of
investments ranging from AAA rated CMBS to B rated CMBS but is largely weighted
70/30 in BB and BBB rated CMBS respectively. The total return for the ERE
Hyperion Discretionary CMBS composite since inception in April 1997 is 11.55%
net of fees, versus 7.87% for the U.S. Treasury Index return. The composites are
comprised of accounts with at least $5 million in assets. Returns are
time-weighted, include accrued income, and are calculated using asset-weighted
portfolio returns on a trade-date basis. Past performance is not indicative of
future results.
EQUITABLE REAL ESTATE HYPERION CAPITAL ADVISORS
NON-DISCRETIONARY COMMERCIAL MORTGAGE-BACKED SECURITIES COMPOSITE
<TABLE>
<CAPTION>
50%/50%
TOTAL RETURN TOTAL RETURN 5 YR/10 YR UST
GROSS OF FEES NET OF FEES INDEX RETURN
------------- ------------ --------------
<S> <C> <C> <C>
Oct.- Dec. 1995............................. 5.21% 5.10% 4.74%
Jan.- Dec. 1996............................. 6.53% 6.20% 1.28%
Jan.- Sept. 1997............................ 11.82% 11.63% 6.17%
</TABLE>
<TABLE>
<CAPTION>
TRAILING
ANNUALIZED
- ----------
<S> <C> <C> <C>
12........................................ 16.74% 16.46% 9.39%
24........................................ 11.95% 11.63% 6.13%
</TABLE>
DISCRETIONARY COMMERCIAL MORTGAGE-BACKED SECURITIES COMPOSITE
<TABLE>
<CAPTION>
50%/50%
TOTAL RETURN TOTAL RETURN 5 YR/10 YR UST
GROSS OF FEES NET OF FEES INDEX RETURN
------------- ------------ --------------
<S> <C> <C> <C>
1995........................................ N/A N/A N/A
1996........................................ N/A N/A N/A
April - Sept. 1997.......................... 11.68% 11.55% 7.87%
</TABLE>
<TABLE>
<CAPTION>
TRAILING
ANNUALIZED
- ----------
<S> <C> <C> <C>
12........................................ N/A N/A N/A
24........................................ N/A N/A N/A
</TABLE>
A-1
<PAGE> 108
======================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF
COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 1
Organization and Relationships......... 10
Risk Factors........................... 11
Operating Policies and Objectives...... 26
Management of Operations............... 38
The Company............................ 48
Distribution Policy.................... 50
Yield Considerations Related to the
Company's Investments................ 51
Capitalization......................... 55
Management's Discussion and Analysis of
Liquidity and Capital Resources...... 56
Description of Capital Stock........... 56
Certain Provisions of Georgia Law and
of the Company's Articles of
Incorporation and Bylaws............. 59
Common Stock Available for Future
Sale................................. 60
Operating Partnership Agreement........ 61
Federal Income Tax Considerations...... 64
ERISA Considerations................... 77
Certain Legal Aspects of Mortgage Loans
and Real Property Investments........ 79
Use of Proceeds........................ 86
Underwriting........................... 87
Legal Matters.......................... 88
Experts................................ 88
Additional Information................. 89
Glossary of Terms...................... 90
Financial Statements................... F-1
</TABLE>
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK
OFFERING HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
9,800,000 SHARES
[LOGO]
CHASTAIN CAPITAL CORPORATION
COMMON STOCK
--------------------
PROSPECTUS
--------------------
FRIEDMAN, BILLINGS, RAMSEY
& CO., INC.
EVEREN SECURITIES, INC.
, 1997
======================================================
<PAGE> 109
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the fees and expenses in connection with the
issuance and distribution of the securities being registered hereunder. Except
for the SEC registration fee and NASD filing fee, all amounts are estimates.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 49,870
NASD filing fee............................................. 17,405
Nasdaq National Market Listing Fee.......................... 50,000
Accounting fees and expenses................................ 40,000
Legal fees and expenses..................................... 350,000
Blue Sky fees and expenses (including counsel fees)......... 2,000
Printing and Engraving expenses............................. 150,000
Transfer Agent and Registrar fees and expenses.............. 10,000
Miscellaneous Expenses...................................... 80,725
--------
Total............................................. $750,000
========
</TABLE>
ITEM 32. SALES TO SPECIAL PARTIES
In connection with the Company's formation, on December 16, 1997, the
Company sold 100 shares of Common Stock to Yarmouth Lend Lease Holdings, Inc. at
a purchase price of $10.00 per share.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
On December 16, 1997, the Company sold 100 shares of Common Stock to
Yarmouth Lend Lease Holdings, Inc. in a private placement under Section 4(2) of
the Securities Act.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Georgia Business Corporation Code permits a corporation to eliminate or
limit the personal liability of a director to the corporation or its
shareholders for monetary damages for breach of duty of care or other duty as a
director, provided that no provisions shall eliminate or limit the liability of
a director: (A) for any appropriation, in violation of his duties, of any
business opportunity of the corporation; (B) for acts or omissions which involve
intentional misconduct or a knowing violation of law; (C) for unlawful corporate
distributions; or (D) for any transaction from which the director received an
improper personal benefit. This provision pertains only to breaches of duty by
directors in their capacity as directors (and not in any other corporate
capacity, such as officers) and limits liability only for breaches of fiduciary
duties under Georgia corporate law (and not for violation of other laws, such as
the Federal securities laws). The Company's Amended and Restated Articles of
Incorporation (the "Restated Articles") exonerate the Company's directors from
monetary liability to the extent permitted by this statutory provision.
The Company's Articles and Bylaws (the "Bylaws") also provide that the
Company shall indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (including any action
by or in the right of the Company), by reason of the fact that such person is or
was a director or officer of the Company, or is or was serving at the request of
the Company as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including reasonable
attorneys' fees), judgments, fines, and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the Company
(and with respect to any
II-1
<PAGE> 110
criminal action or proceeding, if such person had no reasonable cause to believe
such person's conduct was unlawful), to the maximum extent permitted by, and in
the manner provided by, the Georgia Business Corporation Code. In addition, the
Bylaws provide that the Company will advance to its directors or officers
reasonable expenses of any such proceeding.
Notwithstanding any provision of the Company's Articles and Bylaws to the
contrary, the Georgia Business Corporation Code provides that the Company shall
not indemnify a director or officer for any liability incurred in a proceeding
in which the director is adjudged liable to the Company or is subjected to
injunctive relief in favor of the Company: (1) for any appropriation, in
violation of his duties, of any business opportunity of the Company; (2) for
acts or omissions which involve intentional misconduct or a knowing violation of
law; (3) for unlawful corporate distributions; (4) for any transaction from
which the director or officer received an improper personal benefit.
Section of the Underwriting Agreement filed as Exhibit 1.1 hereto also
contains certain provisions pursuant to which certain officers, directors and
controlling persons of the Company may be entitled to be indemnified by the
underwriters named therein.
The Company has purchased insurance with respect to, among other things,
any liabilities that may accrue under the statutory provisions referred to
above.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED
Not Applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants.......... F-1
Balance Sheet as of December 16, 1997....................... F-2
Notes to Balance Sheet...................................... F-3
</TABLE>
(b) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NUMBER DESCRIPTION
------- ------------------
<C> <C> <S>
1.1* -- Form of Underwriting Agreement
3.1 -- Articles of Incorporation of the Company
3.2 -- Bylaws of the Company
4.1* -- Specimen Common Stock Certificate
5.1* -- Opinion of King & Spalding
8.1 -- Opinion of King & Spalding as to tax matters
10.1* -- Form of Management Agreement
10.2* -- Form of Registration Rights Agreement between the Company
and Yarmouth Lend Lease Holdings, Inc.
10.3* -- Form of Registration Rights Agreement between the Company
and FBR Asset Investment Corporation
10.4* -- Form of 1997 Stock Option Plan
21.1 -- List of Subsidiaries of the Company
23.1* -- Consent of King and Spalding (contained in Exhibit 5.1)
23.2 -- Consent of Deloitte & Touche
24.1 -- Powers of Attorney (contained on signature page)
27.1 -- Financial data schedule (for SEC filing purposes only)
</TABLE>
- ---------------
* To be filed by amendment
(b) Financial Statement Schedules.
Not Applicable
II-2
<PAGE> 111
ITEM 37. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act of 1933 (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered hereunder,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 112
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Atlanta, State of Georgia, on December 18, 1997.
CHASTAIN CAPITAL CORPORATION
By: /s/ KURT L. WRIGHT
-----------------------------------
Kurt L. Wright
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints Kurt L. Wright, Rufus A. Chambers, Jr. and Samuel
F. Hatcher, and each of them, his or her true and lawful attorney-in-fact and
agents, with full power of substitution and resubstitution, from such person and
in each person's name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to the Registration
Statement, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission and to sign
and file any other registration statement for the same offering that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933,
as amended, granting unto said attorneys-in-fact and agents, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities on December 18, 1997.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<C> <S>
/s/ KURT L. WRIGHT Chief Executive Officer and Director
- -------------------------------------------------------- (Principal Executive Officer)
Kurt L. Wright
/s/ STEVEN G. GRUBENHOFF Chief Financial Officer
- -------------------------------------------------------- (Principal Financial and Principal
Steven G. Grubenhoff Accounting Officer)
/s/ MATTHEW BANKS Chairman of the Board
- --------------------------------------------------------
Matthew Banks
</TABLE>
II-4
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
CHASTAIN CAPITAL CORPORATION
1.
The name of the Corporation is Chastain Capital Corporation.
2.
The street address and county of the Corporation's initial registered
office is 1201 Peachtree Street, N.E., Suite 1240, Atlanta, Fulton County,
Georgia 30361. The initial registered agent of the Corporation at such address
is CT Corporation.
3.
The name and address of each incorporator is Stacey A. Kipnis, King &
Spalding, 191 Peachtree Street, Atlanta, Georgia 30303.
4.
The mailing address of the initial principal office of the Corporation
is 3424 Peachtree Road, N.E., Suite 800, Atlanta, Georgia 30326.
5.
Section 5.1. Common Stock. The aggregate number of common shares
(referred to in these Articles of Incorporation as "Common Stock") that the
Corporation shall have the authority to issue is 200,000,000 with a par value of
$.01 per share. Each share of Common Stock shall have one vote on each matter
submitted to a vote of the shareholders of the Corporation. Subject to the
provisions of applicable law and the rights of the holders of the outstanding
shares of Preferred Stock, if any, the holders of shares of Common Stock shall
be entitled to receive, when and as declared by the Board of Directors of the
Corporation, out of the assets of the Corporation legally available therefor,
dividends or other distributions, whether payable in cash, property or
securities of the Corporation. The holders of shares of Common Stock shall be
entitled to receive, in proportion to the number of shares of Common Stock held,
the net assets of the Corporation upon
<PAGE> 2
dissolution after any preferential amounts required to be paid or distributed to
holders of outstanding shares of Preferred Stock, if any, are so paid or
distributed.
Section 5.2. Preferred Stock. The aggregate number of preferred shares
(referred to in these Articles of Incorporation as "Preferred Stock") that the
Corporation shall have authority to issue is 25,000,000 with a par value of $.0l
per share. The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more series. The description of shares of each
series of Preferred Stock, including any designations, preferences, conversion
and other rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption shall be as set forth in
resolutions adopted by the Board of Directors, and articles of amendment shall
be filed with the Georgia Secretary of State as required by law to be filed with
respect to issuance of such Preferred Stock, prior to the issuance of any shares
of such series.
The Board of Directors is expressly authorized, at any time, by
adopting resolutions providing for the issuance of, or providing for a change in
the number of, shares of any particular series of Preferred Stock and, if and to
the extent from time to time required by law, by filing articles of amendment
that are effective without shareholder action, to increase or decrease the
number of shares included in each series of Preferred Stock, but not below the
number of shares then issued, and to set in any one or more respects the
designations, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, or terms and
conditions of redemption relating to the shares of each such series (provided,
however, that no such issuance or designation shall result in any holder of
shares of Equity Stock being in violation of the General Ownership Limit, as may
be applicable pursuant to Section 8.2(a) hereof, or otherwise result in the
Corporation failing to qualify as a REIT). The authority of the Board of
Directors with respect to each series of Preferred Stock shall include, but not
be limited to, setting or changing the following:
(i) the dividend rate, if any, on shares of such series, the times of
payment and the date from which dividends shall be accumulated, if
dividends are to be cumulative;
(ii) whether the shares of such series shall be redeemable and, if so,
the redemption price and the terms and conditions of such redemption;
(iii) the obligation, if any, of the Corporation to redeem shares of
such series pursuant to a sinking fund or otherwise;
(iv) whether shares of such series shall be convertible into, or
exchangeable for, shares of stock of any other class, classes or series, or
any other security, and, if so, the terms and conditions of such conversion
or exchange, including the price or prices or the rate or rates of
conversion or exchange and the terms of adjustment, if any;
(v) whether the shares of such series shall have voting rights, in
addition to the voting rights provided by law, and, if so, the extent of
such voting rights;
-2-
<PAGE> 3
EXHIBIT 3.2
BYLAWS OF
CHASTAIN CAPITAL CORPORATION
ARTICLE I
SHAREHOLDERS
Section 1. Annual Meeting. The annual meeting of the
shareholders for the election of directors and for the transaction of such other
business as may properly come before the meeting shall be held at such place,
either within or without the State of Georgia, on such date, and at such time,
as the Board of Directors may by resolution provide, or if the Board of
Directors fails to provide, then such meeting shall be held at the principal
office of the Corporation at 10:00 a.m., local time, on the second Thursday in
May of each year, if not a legal holiday under the laws of the State of Georgia,
and if a legal holiday, on the next succeeding business day. The Board of
Directors may specify by resolution prior to any special meeting of shareholders
held within the year that such meeting shall be in lieu of the annual meeting.
Section 2. Special Meetings. Special meetings of the
shareholders may be called by the Board of Directors or by the Chairman of the
Board, and shall be called by the Corporation upon the written request (which
request shall set forth the purpose or purposes of the meeting) of the
shareholders of record (as established pursuant to Section 6(b) of Article I of
these Bylaws) of outstanding shares representing more than 50% of all the votes
entitled to be cast on any issue proposed to be considered at the proposed
special meeting. In the event such meeting is called by the Board of Directors
or the Chairman of the Board, such meeting may be held at such place, either
within or without the State of Georgia, as is stated in the call and notice
thereof. If such meeting is called at the request of shareholders as provided in
this Section 2, then such meeting shall be held at such place in the State of
Georgia as is stated in the notice thereof.
Section 3. Notice of Meetings. A written or printed notice
stating the place, day and hour of the meeting, and in case of a special
meeting, the purpose or purposes for which the meeting is called, shall be
delivered or mailed by the Secretary of the Corporation to each holder of record
of stock of the Corporation at the time entitled to vote, at his address as it
appears upon the records of the Corporation, not less than 10 nor more than 60
days prior to such meeting. If the Secretary fails to give such notice within 20
days after the call of a meeting, the person calling or requesting such meeting,
or any person designated by them, may give such notice. Notice of such meeting
may be waived in writing by any shareholder. Notice of any adjourned meeting of
the shareholders shall not be required if the time and place to which the
meeting is adjourned are announced at the meeting at
1
<PAGE> 4
which the adjournment is taken, unless the Board of Directors sets a new record
date for such meeting in which case notice shall be given in the manner provided
in this Section 3.
Section 4. Quorum and Shareholder Vote. A quorum for action on
any subject matter at any annual or special meeting of shareholders shall exist
when the holders of shares entitled to vote a majority of the votes entitled to
be cast on such subject matter are represented in person or by proxy at such
meeting. If a quorum is present, the affirmative vote of such number of shares
as is required by the Georgia Business Corporation Code (as in effect at the
time the vote is taken), for approval of the subject matter being voted upon,
shall be the act of the shareholders, unless a greater vote is required by the
Articles of Incorporation or these Bylaws. If a quorum is not present, a meeting
of shareholders may be adjourned from time to time by the vote of shares having
a majority of the votes of the shares represented at such meeting, until a
quorum is present. When a quorum is present at the reconvening of any adjourned
meeting, and if the requirements of Section 3 of this Article I have been
observed, then any business may be transacted at such reconvened meeting in the
same manner and to the same extent as it might have been transacted at the
meeting as originally noticed.
Section 5. Proxies. A shareholder may vote either in person or
by proxy duly executed in writing by the shareholder or created pursuant to
Article 8 of the Articles of Incorporation. Unless written notice to the
contrary is delivered to the Corporation by the shareholder, a proxy for any
meeting shall be valid for any reconvention of any adjourned meeting.
Section 6. Fixing Record Date.
(a) Except as provided in paragraph (b) of this Section 6, for
the purpose of determining shareholders entitled to notice of or to vote at any
meeting of shareholders or any adjournment thereof, or entitled to receive
payment of any dividend, or in order to make a determination of shareholders for
any other proper purpose, the Board of Directors shall have the power to fix a
date, not more than 70 days prior to the date on which the particular action
requiring a determination of shareholders is to be taken, as the record date for
any such determination of shareholders. A record date for the determination of
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof shall not be set less than 10 days prior to such
meeting; provided that the record date for the determination of shareholders
entitled to notice of or to vote at any special meeting of shareholders called
by the Corporation at the request of holders of shares pursuant to Section 2 of
Article I hereof or any adjournment thereof shall be 20 days after the
"Determination Date" (as defined in paragraph (b) of this Section 6), and
provided further that such record date shall be 70 days prior to such special
meeting. In any case where a record date is set, under any provision of this
Section 6, only shareholders of record on the said date shall be entitled to
participate in the action for which the determination of shareholders of record
is made, whether the action is payment of a dividend, allotment of any rights or
any change or conversion or exchange of capital stock or other such action, and,
if the record date is set for the determination of shareholders entitled to
notice of or to vote at a meeting of shareholders, only such shareholders of
record shall be entitled to such notice or vote, notwithstanding any transfer of
any shares on the books of the Corporation after such record date.
2
<PAGE> 5
(b) (i) In order that the Corporation may determine the
shareholders entitled to request a special meeting of the shareholders or a
special meeting in lieu of the annual meeting of the shareholders pursuant to
Section 2 of Article I hereof, the Board of Directors may fix a record date,
which record date shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors, and which date shall not
be more than 10 days after the date upon which the resolution fixing the record
date is adopted by the Board of Directors. Any shareholder of record seeking to
have the shareholders request such a special meeting shall, by written notice to
the Secretary, request the Board of Directors to fix a record date. The Board of
Directors shall, within 10 business days after the date on which such a request
is received, adopt a resolution fixing the record date. If no record date has
been fixed by the Board of Directors within 10 business days after the date on
which such a request is received, the record date for determining shareholders
entitled to request such a special meeting shall be the first day on which a
signed written request setting forth the request to fix a record date is
delivered to the Corporation by delivery to its principal place of business, or
any officer or agent of the Corporation having custody of the books in which
proceedings of meetings of shareholders are recorded.
(ii) Every written request for a special meeting shall bear
the date of signature of each shareholder who signs the request and no such
request shall be effective to request such a meeting unless, within 70 days
after the record date established in accordance with paragraph (b)(i) of this
Section, written requests signed by a sufficient number of record holders as of
such record date to request a special meeting in accordance with Section 2 of
Article I hereof are delivered to the Corporation in the manner prescribed in
paragraph (b)(i) of this Section.
(iii) In the event of the delivery, in the manner provided by
this Section, to the Corporation of the requisite written request or requests
for a special meeting and/or any related revocation or revocations, the
Corporation shall engage nationally recognized independent inspectors of
elections for the purpose of promptly performing a ministerial review of the
validity of the requests and revocations. For the purpose of permitting a prompt
ministerial review by the independent inspectors, no request by shareholders for
a special meeting shall be effective until the earlier of (i) five business days
following delivery to the Corporation of requests signed by the holders of
record (on the record date established in paragraph (b)(i) of this Section) of
the requisite minimum number of shares that would be necessary to request such a
meeting under Section 2 of Article I hereof, or (ii) such date as the
independent inspectors certify to the Corporation that the requests delivered to
the Corporation in accordance with this Article represent at least the minimum
number of shares that would be necessary to request such meeting (the earlier of
such dates being herein referred to as the "Determination Date"). Nothing
contained in this paragraph shall in any way be construed to suggest or imply
that the Board of Directors or any shareholder shall not be entitled to contest
the validity of any request or revocation thereof, whether during or after such
five business day period, or to take any other action (including, without
limitation, the commencement, prosecution or defense of any litigation with
respect thereto).
(iv) Unless the independent inspectors shall deliver, on or
before the Determination Date, a certified report to the Corporation stating
that the valid requests for a special meeting
3
<PAGE> 6
submitted pursuant to paragraph (iii) above represent less than the requisite
minimum number of shares that would be necessary to request a special meeting
under Section 2 of Article I hereof, the Board of Directors shall, within five
business days after the Determination Date, adopt a resolution calling a special
meeting of the shareholders and fixing a record date for such meeting, in
accordance with Section 6(a) of Article I of these Bylaws.
Section 7. Notice of Shareholder Business. At an annual
meeting of the shareholders, only such business shall be conducted as shall have
been brought before the meeting (a) by or at the direction of the Board of
Directors or (b) by any shareholder of the Corporation who complies with the
notice procedures set forth in this Section 7 and only to the extent that such
business is appropriate for shareholder action under the provisions of the
Georgia Business Corporation Code. For business to be properly brought before an
annual meeting by a shareholder, the shareholder must have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, a
shareholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation not later than the close of
business on the 7th day following the day on which notice of the date of the
annual meeting was mailed or delivered to such shareholder. A shareholder's
notice to the Secretary shall set forth as to each matter the shareholder
proposes to bring before the annual meeting (a) a brief description of the
business desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting, (b) the name and address, as
they appear on the Corporation's books, of the shareholder proposing such
business, (c) the class and number of shares of stock of the Corporation which
are beneficially owned by the shareholder, and (d) any material interest of the
shareholder in such business. Notwithstanding anything in the Bylaws to the
contrary, no business shall be conducted at an annual meeting except in
accordance with the procedures set forth in this Section 7. At an annual
meeting, the Chairman shall, if the facts warrant, determine and declare to the
meeting that business was not properly brought before the meeting in accordance
with the provisions of this Section 7, and if he should so determine, he shall
so declare to the meeting and any such business not properly brought before the
meeting shall not be transacted.
Section 8. Notice of Shareholder Nominees. Except for
Directors who are elected by Directors pursuant to the provisions of Section 9
of Article II of these Bylaws, only persons who are nominated in accordance with
the procedures set forth in this Section 8 shall be eligible for election as
Directors. Nominations of persons for election to the Board of Directors of the
Corporation may be made at a meeting of shareholders (a) by or at the direction
of the Board of Directors or (b) by any shareholder of the Corporation entitled
to vote for the election of Directors at the meeting who complies with the
notice procedures set forth in this Section 8. Such nominations, other than
those made by or at the direction of the Board of Directors, shall be made
pursuant to timely notice in writing to the Secretary of the Corporation. To be
timely, a shareholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation not later than the close of
business on the 7th day following the day on which notice of the date of the
meeting was mailed or delivered to such shareholder. Such shareholder's notice
shall set forth (a) as to each person whom the shareholder proposes to nominate
for election or re-election as a Director, all information relating to such
person that is required to be disclosed in solicitations of proxies for election
of Directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended; and (b) as to the
shareholder giving the notice (i) the name and address, as they appear on the
Corporation's books, of such shareholder and (ii) the class
4
<PAGE> 7
and number of shares of stock of the Corporation which are beneficially owned by
such shareholder. No person shall be eligible for election as a Director of the
Corporation unless nominated in accordance with the procedures set forth in the
Bylaws. The Chairman shall, if the facts warrant, determine and declare to the
meeting that a nomination was not made in accordance with the procedures
prescribed by the Bylaws, and if he should so determine, he shall so declare to
the meeting and the defective nomination shall be disregarded.
ARTICLE II
DIRECTORS
Section 1. Powers of Directors. The Board of Directors shall
manage the business and affairs of the Corporation and, subject to any
restrictions imposed by law, by the Articles of Incorporation, or by these
Bylaws, may exercise all the powers of the Corporation.
Section 2. Number and Term of Directors. The Board of
Directors shall consist of five natural persons. At any annual or special
meeting the shareholders may, and at any meeting of directors, the directors (by
a vote of not less than 75% of the directors then in office) may, fix a
different number of Directors who shall constitute the full board. No decrease
in the number of Directors shall shorten the term of an incumbent Director.
Section 3. Meetings of the Directors. The Board of Directors
shall meet each year immediately following the annual meeting of shareholders,
and the Board may by resolution provide for the time and place of other regular
meetings. Special meetings of the Directors may be called by the Chairman of the
Board or by any two of the Directors.
Section 4. Notice of Meetings. Notice of each meeting of the
Directors shall be given by the Secretary by mailing the same at least ten days
before the meeting or by telephone, telecopy or cablegram or in person at least
five days before the meeting, to each Director, except that no notice need be
given of regular meetings fixed by the resolution of the Board or of the meeting
of the Board held at the place of and immediately following the annual meeting
of the shareholders. Any Director may waive notice, either before or after the
meeting, and shall be deemed to have waived notice if he is present at the
meeting.
Section 5. Quorum; Vote Requirement. A majority of the number
of directors fixed in accordance with Article II, Section 2 of these Bylaws
shall constitute a quorum for the transaction of business at any meeting. When a
quorum is present, the vote of a majority of the directors present shall be the
act of the Board of Directors, unless a greater vote is required by law, by the
Articles of Incorporation, or by these bylaws.
Section 6. Action of Directors Without a Meeting. Any action
required by law to be taken at a meeting of the Board of Directors, or any
action which may be taken at a meeting of the
5
<PAGE> 8
Board of Directors, or of any committee thereof, may be taken without a meeting
if written consent, setting forth the action so taken, shall be signed by all
the Directors, or all the members of the committee, as the case may be, and be
filed with the minutes of the proceedings of the Board or the committee. Such
consent shall have the same force and effect as a unanimous vote of the Board or
the committee, as the case may be.
Section 7. Committees. The Board of Directors may, in its
discretion, appoint committees, each consisting of one or more Directors, which
shall have and may exercise such delegated powers as shall be conferred on or
authorized by the resolutions appointing them, except that no such committee
may: (1) approve or propose to shareholders action that the Georgia Business
Corporation Code requires to be approved by shareholders, (2) fill vacancies on
the Board of Directors or any of its committees, (3) amend the Articles of
Incorporation of the Corporation pursuant to Section 14-2-1002 of the Georgia
Business Corporation Code, (4) adopt, amend or repeal these Bylaws, (5) approve
a plan of merger not requiring shareholder approval or (6) appoint another
committee of the Board of Directors. A majority of any such committee may
determine its action, fix the time and place of its meetings, and determine its
rules of procedure. Each committee shall keep minutes of its proceedings and
actions and shall report regularly to the Board of Directors. The Board of
Directors shall have power at any time to fill vacancies in, change the
membership of, or discharge any such committee.
Section 8. Compensation. The Board of Directors shall have the
authority to determine from time to time the amount of compensation that shall
be paid to its members for attendance at meetings of, or service on, the Board
of Directors or any committee of the Board, except that no such compensation
shall be paid to Directors who are also employees of the Corporation or any
entity that has a management agreement with the Corporation. The Board of
Directors also shall have the power to reimburse Directors for reasonable
expenses of attendance at Directors' meetings and committee meetings.
Section 9. Removal. Subject to the rights of the holders of
any series of Preferred Stock then outstanding, any or all Directors may be
removed from office at any time, with or without cause, only by the vote of a
majority of the votes entitled to be cast.
Section 10. Vacancies. Subject to the rights of the holders of
any series of Preferred Stock then outstanding to fill director vacancies,
vacancies on the Board of Directors (including vacancies resulting from
retirement, resignation, removal from office or death) shall be filled by the
Board of Directors.
Section 11. Telephone Conference Meetings. Unless the Articles
of Incorporation otherwise provide, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board or committee by means of telephone conference or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to this
Section 10 shall constitute presence in person at such meeting.
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ARTICLE III
OFFICERS
Section 1. Officers. The officers of the Corporation shall
consist of a Chairman of the Board, a Chief Executive Officer, a President, a
Chief Operating Officer, a Secretary and a Treasurer, and such other officers or
assistant officers (including Vice Presidents) as may be elected by the Board of
Directors. Any two offices may be held by the same person.
Section 2. Chairman of the Board. The Chairman of the Board
shall be under the direction of the Board of Directors. He or she shall preside
at all meetings of the shareholders and all meetings of the Board of Directors
and shall have such other duties as the Board of Directors shall from time to
time prescribe.
Section 3. Chief Executive Officer. The Chief Executive
Officer shall be under the direction of the Board of Directors. He or she shall
have responsibility for the general direction of the business, policies and
affairs of the Corporation.
Section 4. President. The President shall, under the direction
of the Chief Executive Officer, supervise the management of the day-to-day
business of the Corporation. He or she shall have such further powers and duties
as from time to time may be conferred on him by the Board of Directors or the
Chief Executive Officer. In the absence of the Chairman of the Board, he or she
shall preside at all meetings of the shareholders and the Board of Directors.
Section 5. Chief Operating Officer. The Chief Operating
Officer shall act in the case of the absence or disability of the Chairman of
the Board, the Chief Executive Officer and the President. He or she shall, under
the direction of the Chief Executive Officer, supervise the management of the
day-to-day business of the Corporation. He or she shall have such further powers
and duties as from time to time may be conferred on him by the Board of
Directors or the Chief Executive Officer.
Section 6. Treasurer. The Treasurer shall be responsible for
the maintenance of proper financial books and records of the Corporation.
Section 7. Secretary. The Secretary shall keep the
minutes of the meetings of the shareholders and the Directors and shall have
custody of and attest the seal of the Corporation.
Section 8. Other Duties and Authorities. Each officer,
employee and agent shall have such other duties and authorities as may be
conferred on them by the Board of Directors.
Section 9. Removal. Any officer may be removed at any time by
the Board of Directors, and such vacancy may be filled by the Board of
Directors. A contract of employment for a definite term shall not prevent the
removal of any officer, but this provision shall not prevent the
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making of a contract of employment with any officer and shall have no effect
upon any cause of action which any officer may have as a result of removal in
breach of a contract of employment or upon the enforceability of any other
provision of a contract of employment.
Section 10. Compensation. The salaries of the officers shall
be fixed from time to time by the Board of Directors, subject to the provisions
of any applicable contracts of employment. No officer shall be prevented from
receiving such salary by reason of the fact that he is also a Director of the
Corporation.
ARTICLE IV
DEPOSITORIES, SIGNATURE AND SEAL
Section 1. Depositories. All funds of the Corporation shall be
deposited in the name of the Corporation in such depository or depositories as
the Board may designate and shall be drawn out on checks, drafts or other orders
signed by such officer, officers, agent or agents as the Board may from time to
time authorize.
Section 2. Contracts. All contracts and other instruments
shall be signed on behalf of the Corporation by the Chairman of the Board, the
Chief Executive Officer, the President, the Chief Operating Officer, any Vice
President or by such other officer, officers, agent or agents, as the Chairman
of the Board, the Chief Executive Officer or the President designates from time
to time or as the Board from time to time may by resolution provide.
Section 3. Seal. The seal of the Corporation shall be as
follows:
The seal may be manually affixed to any document or may be
lithographed or otherwise printed on any document with the same force and effect
as if it had been affixed manually. The signature of the Secretary or Assistant
Secretary shall attest the seal and may be a facsimile if and to the extent
permitted by law.
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ARTICLE V
STOCK TRANSFERS
Section 1. Form and Execution of Certificates. The
certificates of shares of capital stock of the Corporation shall be in such form
as may be approved by the Board of Directors and shall be signed by the Chairman
of the Board, the Vice Chairman of the Board, the President or a Vice President
and by the Secretary or any Assistant Secretary or the Treasurer or any
Assistant Treasurer, provided that any such certificate may be signed by the
facsimile signature of any of such officers imprinted thereon if the same is
countersigned by a transfer agent of the Corporation, and provided further that
certificates bearing the facsimile of the signature of such officers imprinted
thereon shall be valid in all respects as if such person or persons were still
in office, even though such officer or officers shall have died or otherwise
ceased to be officers.
Section 2. Transfers of Shares. Shares of stock in the
Corporation shall be transferable only on the books of the Corporation by proper
transfer signed by the holder of record thereof or by a person duly authorized
to sign for such holder of record. The Corporation or its transfer agent or
agents shall be authorized to refuse any transfer unless and until it is
furnished such evidence as it may reasonably require showing that the requested
transfer is proper.
Section 3. Lost, Destroyed or Stolen Certificates. Where the
holder of record of a share or shares of stock of the Corporation claims that
the certificate representing said share has been lost, destroyed or wrongfully
taken, the Board shall by resolution provide for the issuance of a certificate
to replace the original if the holder of record so requests before the
Corporation has notice that the certificate has been acquired by a bona fide
purchaser, files with the Corporation a sufficient indemnity bond, and furnishes
evidence of such loss, destruction or wrongful taking satisfactory to the
Corporation, in the reasonable exercise of its discretion. The Board may
authorize such officer or agent as it may designate to determine the sufficiency
of such an indemnity bond and to determine reasonably the sufficiency of the
evidence of loss, destruction or wrongful taking.
Section 4. Transfer Agent and Registrar. The Board may (but
shall not be required to) appoint a transfer agent or agents and a registrar or
registrars to transfers, and may require that all stock certificates bear the
signature of such transfer agent or of such transfer agent and registrar.
ARTICLE VI
INDEMNIFICATION
Section 1. Mandatory Indemnification. The Corporation shall
indemnify to the fullest extent permitted by the Georgia Business Corporation
Code, and to the extent that applicable law from time to time in effect shall
permit indemnification that is broader than provided in these Bylaws,
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then to the maximum extent authorized by law, any individual made a party to a
proceeding (as defined in the Georgia Business Corporation Code) because he or
she is or was a director or officer, against liability (as defined in the
Georgia Business Corporation Code), incurred in the proceeding, if he or she
acted in a manner he or she believed in good faith to be in or not opposed to
the best interests of the Corporation and, in the case of any criminal
proceeding, he or she had no reasonable cause to believe his or her conduct was
unlawful.
Section 2. Permissive Indemnification. The Corporation shall
have the power to indemnify to the fullest extent permitted by the Georgia
Business Corporation Code, any individual made a party to a proceeding (as
defined in the Georgia Business Corporation Code) because he or she is or was an
employee or agent of the Company, against liability (as defined in the Georgia
Business Corporation Code), incurred in the proceeding.
Section 3. Advances for Expenses. The Corporation shall pay
for or reimburse the reasonable expenses incurred by a director or officer who
is a party to a proceeding, and shall have the authority to pay for or reimburse
the reasonable expenses of an employee or agent of the Company who is a party to
a proceeding, in each case in advance of the final disposition of a proceeding
if:
(a) Such person furnishes the Corporation a written
affirmation of his good faith belief that he or she
has met the standard of conduct set forth in Section
1 or Section 2 above, as applicable; and
(b) Such person furnishes the Corporation a written
undertaking, executed personally on his behalf to
repay any advances if it is ultimately determined
that he or she is not entitled to indemnification.
The written undertaking required by paragraph (b) above must be an
unlimited general obligation of such person but need not be secured and may be
accepted without reference to financial ability to make repayment.
Section 4. Indemnification Not Exclusive. The right to
indemnification and the payment of expenses incurred in defending a proceeding
in advance of its final disposition conferred in this Article VI shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, provision of the Articles of Incorporation, provision of
these Bylaws, agreement, vote of shareholders or disinterested directors or
otherwise.
Section 5. Amendment or Repeal. Any repeal or modification of
the foregoing provisions of this Article VI shall not adversely affect any right
or protection hereunder of any person in respect of any act or omission
occurring prior to the time of such repeal or modification.
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ARTICLE VII
AMENDMENT OF BYLAWS
Section 1. Amendment. These Bylaws may be altered, amended,
repealed or new Bylaws adopted by the Board of Directors by the affirmative vote
of a majority of all directors then holding office, but any bylaws adopted by
the Board of Directors may be altered, amended, repealed, or any new bylaws
adopted, by the shareholders at an annual or special meeting of shareholders,
when notice of any such proposed alteration, amendment, repeal or addition shall
have been given in the notice of such meeting. The shareholders may prescribe
that any bylaw or bylaws adopted by them shall not be altered, amended or
repealed by the Board of Directors. Action by the shareholders with respect to
these Bylaws shall be taken by an affirmative vote of a majority of all shares
outstanding and entitled to vote generally in the election of directors, voting
as a single voting group.
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(vi) the rights of the shares of such series in the event of voluntary
or involuntary liquidation, dissolution or winding-up of the Corporation;
(vii) restrictions on transfer to preserve the status of the
Corporation as a REIT; and
(viii) any other relative rights, powers, preferences, qualifications,
limitations or restrictions thereof relating to such series.
Section 5.3. Shares Acquired by the Corporation. Shares of Common Stock
that have been acquired by the Corporation shall become treasury shares and may
be resold or otherwise disposed of by the Corporation for such consideration,
not less than the par value thereof, as shall be determined by the Board of
Directors, unless or until the Board of Directors shall by resolution provide
that any or all treasury shares so acquired shall constitute authorized, but
unissued shares.
Section 5.4. Change in REIT Status. The Corporation shall not
voluntarily elect not to be qualified as a REIT unless such action has been
approved by the affirmative vote of 80% of the members of the Board of Directors
and the affirmative vote of two-thirds of the outstanding shares of Common Stock
and any other shares of Equity Stock entitled to vote generally in the election
of directors voting as a class.
6.
No shareholder shall have any preemptive right to subscribe for or to
purchase any shares or other securities issued by the Corporation.
7.
Section 7.1. Personal Liability of Directors. No director of the
Corporation shall be personally liable to the Corporation or its shareholders
for monetary damages for any action taken, or for failure to take action, as a
director, except liability (i) for any appropriation, in violation of the
director's duties, of any business opportunity of the Corporation (ii) for acts
or omissions which involved intentional misconduct or a knowing violation of
law, (iii) for the types of liabilities set forth in Section 14-2-832 of the
Georgia Business Corporation Code, or (iv) for any transaction from which the
director received an improper personal benefit. If the Georgia Business
Corporation Code is amended to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of a director
of the Corporation shall be eliminated or limited to the fullest extent
permitted by the Georgia Business Corporation Code, as amended.
Section 7.2. Indemnification of Directors. The Corporation shall
indemnify to the fullest extent permitted by the Georgia Business Corporation
Code and, to the extent that applicable law from time to time in effect shall
permit indemnification that is broader than provided in these Articles, to the
maximum extent authorized by law, any individual made a party to a proceeding
(as
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defined in the Georgia Business Corporation Code), because he or she is or was a
director or officer against liability (as defined in the Georgia Corporation
Code), incurred in the proceeding, if he or she acted in a manner he or she
believed in good faith to be in or not opposed to the best interests of the
Corporation and, in the case of any criminal proceeding, he or she had no
reasonable cause to believe his or her conduct was unlawful.
Section 7.3. Effect of Repeal or Modification. Neither the repeal or
modification of this Article 7 nor the adoption of any provision of these
Articles of Incorporation inconsistent with these Articles shall eliminate or
adversely affect any right or protection of a director of the Corporation
existing immediately prior to such repeal, modification or adoption.
8.
Section 8.1. Definitions. The following terms shall have the following
meanings for purposes of these Articles of Incorporation:
"Beneficial Ownership" shall mean ownership of Equity Stock by a person
who (i) either would own such shares directly (other than as a nominee or
custodian) or would have beneficial ownership under a nominee or custodial
arrangement (in either case without taking into account the application of
Section 544 of the Code, as modified by Section 856(h)(l)(B) of the Code) or
(ii) would be treated as the indirect or constructive owner of such shares
through the application of Section 544 of the Code, as modified by Section
856(h)(1)(B) of the Code. The terms "Beneficial owner," "Beneficially Owns" and
"Beneficially Owned" shall have correlative meanings.
"Beneficiary" shall mean, with respect to any Trust, one or more
organizations described in each of Section 170(b)(1)(A) and Section 170(c) of
the Code that are named by the Corporation as the beneficiary or beneficiaries
of such Trust, in accordance with the provisions of Section 8.12(a) of this
Article 8.
"Board of Directors" shall mean the Board of Directors of the
Corporation.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"Equity Stock" shall mean, as of any particular time, all the
outstanding shares of Common Stock and Preferred Stock, including all shares of
Common Stock and Preferred Stock that are held as Shares-in-Trust at such time
in accordance with the provisions of Section 8.12 of this Article 8.
"General Ownership Limit" shall initially mean, with respect to each
class of Equity Stock of the Corporation outstanding as of any particular time,
9.8% of the total number of shares of such class of Equity Stock outstanding as
of such time, except with respect to Lend Lease there shall be no limit so long
as the capital stock of Lend Lease is publicly held.
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"Initial Public Offering" means the sale of shares of Common Stock
pursuant to the Corporation's first effective registration statement for such
Common Stock filed under the Securities Act of 1933, as amended.
"Lend Lease" means Lend Lease Corporation Limited and its subsidiaries
and affiliates.
"Market Price" on any date shall mean the average of the Closing Price
for the ten consecutive Trading Days ending on such date. The "Closing Price" on
any date shall mean with respect to the Equity Stock the last sale price,
regular way, or, in case no such sale takes place on such day, the average of
the closing bid and asked prices, regular way, in either case as reported, in
the principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the New York Stock Exchange or, if
the Equity Stock is not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the Equity Stock is listed or admitted to trading or, if the Equity
Stock is not listed or admitted to trading on any national securities exchange,
the last quoted price, or if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. Automated Quotation System or, if such
system is no longer in use, such other reliable automated quotations system as
is selected by the Corporation, or, if the Equity Stock is not quoted by any
such organization, the average of the closing bid and asked prices as furnished
by a professional market maker making a market in the Equity Stock selected by
the Corporation or, if there is no such professional market maker such amount as
an independent investment banking firm selected by the Corporation determines to
be the value of a share of Equity Stock. "Trading Day" shall mean a day on which
the principal national securities exchange on which the Equity Stock is listed
or admitted to trading is open for the transaction of business or, if the Equity
Stock is not listed or admitted to trading on any national securities exchange,
shall mean any day other than a Saturday, a Sunday or a day on which banking
institutions in the State of New York are authorized or obligated by law or
executive order to close.
"Non-Transfer Event" shall mean any event other than a purported
Transfer that would cause (i) any Person to Beneficially Own shares of Equity
Stock in excess of the General Ownership Limit as provided in Section 8.2(a) of
this Article 8, (ii) the Corporation to become "closely held" within the meaning
of Section 856(h) of the Code, and/or (iii) the Corporation to otherwise fail to
qualify as a REIT (other than as a result of a violation of the
"100-shareholder" requirement of Section 856(a) (5) of the Code); in each case
including, but not limited to, the granting of any option or entering into any
agreement for the sale, transfer or other disposition of Equity Stock or the
sale, transfer, assignment or other disposition of any securities or rights
convertible into or exchangeable for Equity Stock.
"Permitted Transferee" shall mean any Person designated as a Permitted
Transferee in accordance with the provisions of Section 8.12(e) hereof.
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"Person" shall mean an individual, corporation, limited liability
company, partnership, estate, trust, association, joint stock company,
government agency or political subdivision thereof, charitable organization, or
other entity, and also includes a group as that term is used for purposes of
Section 13(d) (3) of the Securities Exchange Act of 1934, as amended.
"Prohibited Owner" shall mean, with respect to any purported Transfer
or Non-Transfer Event, any Person who, but for the provisions of Section 8.3 of
this Article 8, would own record title to shares of Equity Stock.
"REIT" shall mean a "real estate investment trust" as defined in
Section 856(a) of the Code.
"Restriction Termination Date" shall mean the first day after the date
of the Initial Public Offering on which the Board of Directors and the
shareholders of the Corporation determine, in accordance with Section 5.4 that
it is no longer in the best interests of the Corporation to attempt to, or
continue to, qualify as a REIT.
"Transfer" shall mean any sale, transfer, gift, assignment, devise or
other disposition of Equity Stock, whether voluntary or involuntary, whether of
record, constructively or beneficially and whether by operation of law or
otherwise.
"Trust" shall mean any separate trust created pursuant to Section 8.3
of this Article 8 and administered in accordance with the terms of Section 8.12
of this Article 8, for the exclusive benefit of any Beneficiary.
"Trustee" shall mean any person or entity unaffiliated with both the
Corporation and any Prohibited Owner, such Trustee to be designated by the
Corporation to act as trustee of any Trust, or any successor trustee thereof.
Section 8.2. Restrictions on Ownership and Transfers.
(a) From the date of the Initial Public Offering and
prior to the Restriction Termination Date, except as provided in Section 8.9 of
this Article 8, no Person shall Beneficially Own shares of the outstanding
Equity Stock in excess of the General Ownership Limit.
(b) Except as provided in Section 8.9 of this Article 8,
from the date of the Initial Public Offering and prior to the Restriction
Termination Date, any Transfer that, if effective, would result in any Person
Beneficially Owning shares of the outstanding Equity Stock in excess of the
General Ownership Limit shall be void ab initio as to the Transfer of that
number of shares of Equity Stock that would be otherwise Beneficially Owned by
such Person in excess of the General Ownership Limit; and the intended
transferee shall acquire no rights in such excess shares of Equity Stock.
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(c) Notwithstanding any other provision herein (subject,
however, to Section 8.13 of this Article 8), from the date of the Initial Public
Offering and prior to the Restriction Termination Date, any Transfer that, if
effective, would result in the Equity Stock being directly or indirectly owned
by fewer than 100 Persons (determined without reference to any rules of
attribution) shall be void ab initio in its entirety; and the intended
transferee shall acquire no rights in any of such shares of Equity Stock
intended to be Transferred.
(d) Notwithstanding any other provision herein (subject,
however, to Section 8.13 of this Article 8), from the date of the Initial Public
Offering and prior to the Restriction Termination Date, any Transfer of shares
of Equity Stock that, if effective, would result in the Corporation being
"closely held" within the meaning of Section 856(h) of the Code shall be void ab
initio as to the Transfer of that number of shares of Equity Stock that would
cause the Corporation to be "closely held" within the meaning of Section 856(h)
of the Code; and the intended transferee shall acquire no rights in such excess
shares of Equity Stock.
(e) Notwithstanding any other provision herein (subject,
however, to Section 8.13 of this Article 8), from the date of the Initial Public
Offering and prior to the Restriction Termination Date, any Transfer of shares
of Equity Stock that, if effective, would cause the Corporation to fail to
qualify as a REIT shall be void ab initio as to the Transfer of that number of
shares of Equity Stock in excess of the number that could have been Transferred
without such result; and the intended transferee shall acquire no rights in such
excess shares of Equity Stock.
Section 8.3. Transfer in Trust.
(a) If, notwithstanding the other provisions contained in
this Article 8, at any time after the date of the Initial Public Offering and
prior to the Restriction Termination Date, there is a purported Transfer or
Non-Transfer Event such that any Person would Beneficially Own shares of the
outstanding Equity Stock in excess of the General Ownership Limit, then, (i)
except as otherwise provided in Section 8.9, the purported transferee shall
acquire no right or interest (or, in the case of a Non-Transfer Event, the
Person holding record title to the Equity Stock Beneficially Owned by such
Beneficial Owner shall cease to own any right or interest) in such number of
shares of Equity Stock that would cause such Beneficial Owner to Beneficially
Own shares of Equity Stock in excess of the General Ownership Limit, and (ii)
such number of shares of Equity Stock in excess of the General Ownership Limit,
(rounded up to the nearest whole share) shall be designated Shares-in-Trust and,
in accordance with Section 8.12 of this Article 8, transferred automatically and
by operation of law to a Trust to be held in accordance with that Section 8.12.
Such transfer to a Trust and the designation of the shares as Shares-in-Trust
shall be effective as of the close of business on the business day prior to the
date of the purported Transfer or Non-Transfer Event, as the case may be.
(b) If, notwithstanding the other provisions contained in
this Article 8, at any time after the date of the Initial Public Offering and
prior to the Restriction Termination Date, there is a purported Transfer or
Non-Transfer Event that, if effective, would cause the Corporation
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to become "closely held" within the meaning of Section 856(h) of the Code or to
otherwise fail to qualify as a REIT (other than as a result of a violation of
the 100-shareholder requirement of Section 856(a) (5) of the Code), then (i) the
purported transferee shall not acquire any right or interest (or, in the case of
a Non-Transfer Event, the Person holding record title to the Equity Stock with
respect to which such Non-Transfer Event occurred shall cease to own any right
or interest) in such number of shares of Equity Stock, the ownership of which by
such purported transferee or record holder would cause the Corporation to be
"closely held" within the meaning of Section 856(h) of the Code or to otherwise
fail to qualify as a REIT (other than as a result of a violation of the
100-shareholder requirement of Section 856(a) (5) of the Code); and (ii) such
number of shares of Equity Stock (rounded up to the nearest whole share) shall
be designated Shares-in-Trust and, in accordance with the provisions of Section
8.12 of this Article 8, transferred automatically and by operation of law to the
Trust to be held in accordance with that Section 8.12. Such transfer to a Trust
and the designation of shares as Shares-in-Trust shall be effective as of the
close of business on the business day prior to the date of the Transfer or
Non-Transfer Event, as the case may be.
Section 8.4. Remedies For Breach. If the Corporation or its designees
shall at any time determine in good faith that Transfer has taken place in
violation of Section 8.2 of this Article 8 or that a Person intends to acquire
or has attempted to acquire Beneficial Ownership of any shares of Equity Stock
in violation of Section 8.2 of this Article 8, the Corporation shall take such
action as it deems advisable to refuse to give effect to or to prevent such
Transfer or acquisition, including, but not limited to, refusing to give effect
to such Transfer on the books of the Corporation or instituting proceedings to
enjoin such Transfer or acquisition.
Section 8.5. Notice of Restricted Transfer. Any Person who acquires or
attempts to acquire shares of Equity Stock in violation of Section 8.2 of this
Article 8, or any Person who owned shares of Equity Stock that were transferred
to the Trust pursuant to the provisions of Section 8.3 of this Article 8, shall
immediately give written notice to the Corporation of such event and shall
provide to the Corporation such other information as the Corporation may request
in order to determine the effect, if any, of such Transfer or the Non-Transfer
Event, as the case may be, on the Corporation's status as a REIT.
Section 8.6. Owners Required to Provide Information. From the date of
the Initial Public Offering and prior to the Restriction Termination Date:
(a) Every Beneficial Owner of more than 5%, or such lower
percentage as may be required pursuant to the Code or the regulations
thereunder, of the outstanding Equity Stock shall within 30 days after January 1
of each year give written notice to the Corporation stating the name and address
of such Beneficial Owner, the number of shares of Equity Stock Beneficially
Owned, and a description of how such shares are held. In addition, at such times
Lend Lease shall provide to the Corporation a list of all beneficial owners of
10% or more of its capital stock. Each such Beneficial Owner shall provide to
the Corporation such additional information as the Corporation may request in
order to determine the effect, if any, of such Beneficial Ownership on the
Corporation's status as a REIT and to ensure compliance with the General
Ownership Limit.
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(b) Each Person who is a Beneficial Owner of Equity Stock
and each Person (including the shareholder of record) who is holding Equity
Stock for a Beneficial Owner shall provide to the Corporation such information
as the Corporation may request in order to determine the Corporation's status
as a REIT and to ensure compliance with the General Ownership Limit.
Section 8.7. Remedies Not Limited. Nothing contained in this Article 8
(subject, however, to Section 8.13 of this Article 8) shall limit the authority
of the Corporation to take such other action as it deems necessary or advisable
to protect the Corporation and the interests of its shareholders by preservation
of the Corporation's status as a REIT and to ensure compliance with the General
Ownership Limit.
Section 8.8. Ambiguity. In the case of an ambiguity in the application
of any of the provisions of this Article 8, including any definition contained
in Section 8.1, the Board of Directors shall have the power to determine the
application of the provisions of this Section 8 with respect to any situation,
based on the facts known to it.
Section 8.9. Exception. The restrictions on ownership and transfers set
forth in Sections 8.2(a) and 8.2(b) of this Article 8 shall not apply to the
acquisition of shares of Equity Stock of the Corporation by an underwriter in a
public offering of those shares or in any transaction involving the issuance of
shares of Equity Stock by the Corporation in which the Board of Directors
determines that the underwriter (or other Person initially acquiring those
shares will timely distribute those shares to or among others so that, following
such distribution, the ownership of those shares will not be in violation of
Section 8.2 of this Article 8). The Board of Directors, in the exercise of its
sole and absolute discretion, also may exempt from the operation of Sections
8.2(a) and 8.2(b) of this Article 8 certain specified shares of Equity Stock of
the Corporation proposed to be Transferred to, and/or Beneficially Owned by, a
Person who has provided the Board of Directors with such evidence, undertakings
and assurances as the Board of Directors may require that such Transfer to,
and/or Beneficial Ownership by, such Person of the specified shares will not
prevent the continued qualification of the Corporation as a REIT under the Code
and the regulations thereunder. The Board of Directors may, but shall not be
required to, condition the grant of any such exemption upon the obtaining of an
opinion of counsel, a ruling from the Internal Revenue Service, or such other
assurances as the Board of Directors may deem to be satisfactory.
Section 8.10. Legend. Each certificate for Equity Stock shall
bear the following legend:
"The shares of [ ] Stock represented by this certificate are subject to
restrictions on transfer for the purpose of the Corporation's maintenance of its
status as a real estate investment trust (a "REIT") under the Internal Revenue
Code of 1986, as amended (the "Code"). No Person (other than Lend Lease so long
as the common stock of Lend Lease is publicly held) may at any time (1)
Beneficially Own shares of any class of Equity Stock in excess of 9.8% (or such
other percentage
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as may be determined by the Board of Directors of the Corporation) of the total
number of shares of such class of Equity Stock outstanding as of such time; or
(2) Beneficially Own Equity Stock that would result in the Corporation being
"closely held" under Section 856(h) of the Code or otherwise failing to qualify
as a REIT. Any Person who attempts to Beneficially Own shares of Equity Stock in
excess of the above limitations must immediately notify the Corporation in
writing. If the restrictions above are violated, the shares of Equity Stock
represented hereby will be transferred automatically and by operation of law to
a Trust and shall be designated Shares-in-Trust. All capitalized terms in this
legend have the meanings defined in the Corporation's Articles of Incorporation,
as the same may be further amended from time to time, a copy of which, including
the restrictions on transfer, will be sent without charge to each shareholder
who so requests."
Section 8.11. Severability. If any provision of this Article 8 or any
application of any such provision is determined to be invalid by any federal or
state court having jurisdiction over the issues, the validity of the remaining
provisions shall not be affected and other applications of such provision shall
be affected only to the extent necessary to comply with the determination of
such court.
Section 8.12. Shares-in-Trust.
(a) Trust. Any shares of Equity Stock transferred to a
Trust and designated Shares-in-Trust pursuant to Section 8.3 of this Article 8
shall be held for the exclusive benefit of the Beneficiary. The Corporation
shall name a beneficiary of each Trust within five (5) days after discovery of
the existence thereof. Any transfer to a Trust, and subsequent designation of
shares of Equity Stock as Shares-in-Trust, pursuant to Section 8.3 of this
Article 8 shall be effective as of the close of business on the business day
prior to the date of the Transfer or Non-Transfer Event that results in the
transfer to the Trust. Shares-in-Trust shall remain issued and outstanding
shares of Equity Stock of the Corporation and shall be entitled to the same
rights and privileges on identical terms and conditions as are all other issued
and outstanding shares of Equity Stock of the same class and series. When
transferred to the Permitted Transferee in accordance with the provisions of
Section 8.12(e) of this Article 8, such Shares-in Trust shall cease to be
designated as Shares-in-Trust.
(b) Dividend Rights. The Trustee, as record holder of
Shares-in-Trust, shall be entitled to receive all dividends and distributions
as may be declared by the Board of Directors of the Corporation on such shares
of Equity Stock and shall hold such dividends or distributions in trust for the
benefit of the Beneficiary. The Prohibited Owner with respect to
Shares-in-Trust shall repay to the Trustee the amount of any dividends or
distributions received by it that (i) are attributable to any shares of Equity
Stock designated Shares-in-Trust and (ii) the record date of which is on or
after the date that such shares became Shares-in-Trust. The Corporation shall
take all measures that it determines reasonably necessary to recover the amount
of any such dividend or distribution paid to a Prohibited Owner, including, if
necessary, withholding any portion of future dividends or distributions payable
on shares of Equity Stock Beneficially Owned by the Person who, but for the
provisions of Section 8.3 of this Article 8, would Beneficially Own the
Shares-in-Trust;
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and, as soon as reasonably practicable following the Corporation's receipt or
withholding thereof, shall pay over to the Trustee for the benefit of the
Beneficiary the dividends so received or withheld, as the case may be.
(c) Rights Upon Liquidation. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of, or any distribution of
the assets of, the Corporation, each Trustee of Shares-in-Trust shall be
entitled to receive, ratably with each other holder of Equity Stock of the same
class or series, that portion of the assets of the Corporation that is available
for distribution to the holders of such class and series of Equity Stock. The
Trustee shall distribute to the Prohibited Owner the amounts received upon such
liquidation, dissolution, or winding up, or distribution; provided, however,
that the Prohibited Owner shall not be entitled to receive amounts pursuant to
this Section 8.13(e) in excess of, in the case of a purported Transfer in which
the Prohibited Owner gave value for shares of Equity Stock and which Transfer
resulted in the transfer of the shares to the Trust, the price per share, if
any, such Prohibited Owner paid for the Equity Stock and, in the case of a
Non-Transfer Event or Transfer in which the Prohibited Owner did not give value
for such shares (e.g., if the shares were received through a gift or devise) and
which Non-Transfer Event or Transfer, as the case may be, resulted in the
transfer of shares to the Trust, the price per share equal to the Market Price
on the date of such Non-Transfer Event or Transfer. Any remaining amount in such
Trust shall be distributed to the Beneficiary.
(d) Voting Rights. The Trustee shall be entitled to vote all
Shares-in-Trust. Any vote by a Prohibited Owner as a holder of shares of Equity
Stock prior to the discovery by the Corporation that the shares of Equity Stock
are Shares-in-Trust shall, subject to applicable law and only to the extent that
no Person other than the Corporation and/or the Prohibited Owner are materially
and adversely affected, be rescinded and shall be void ab initio with respect to
such Shares-in-Trust and the Prohibited Owner shall be deemed to have given, as
of the close of business on the business day prior to the date of the purported
Transfer or Non-Transfer Event that results in the transfer to the Trust of the
shares of Equity Stock under Section 8.3 of this Article 8, an irrevocable proxy
to the Trustee to vote the Shares-in-Trust in the manner in which the Trustee,
in its sole and absolute discretion, desires.
(e) Designation of Permitted Transferee. The Trustee shall have the
exclusive and absolute right to designate a Permitted Transferee of any and all
Shares-in-Trust. As soon as reasonably practicable, in an orderly fashion so as
not to materially adversely affect the Market Price of the Shares-in-Trust, the
Trustee shall designate any Person as a Permitted Transferee, provided, however,
that (i) the Permitted Transferee so designated purchases for valuable
consideration (whether in a public or private sale) the Shares-in-Trust and (ii)
the Permitted Transferee so designated may acquire such Shares-in-Trust without
such acquisition resulting in a transfer to a Trust and the redesignation of
such shares of the Equity Stock so acquired as Shares-in-Trust under Section 8.3
of this Article 8. Upon the designation by the Trustee of a Permitted Transferee
in accordance with the provisions of this paragraph, the Trustee of a Trust
shall (i) cause to be transferred to the Permitted Transferee that number of
Shares-in-Trust acquired by the Permitted Transferee; (ii) cause to be recorded
on the books of the Corporation that the Permitted
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Transferee is the holder of record of such number of shares of Equity Stock; and
(iii) distribute to the Beneficiary any and all amounts held with respect to the
Shares-in-Trust after making that payment to the Prohibited Owner pursuant to
Section 8.12(f) of this Article 8.
(f) Compensation to Record Holder of Shares of Equity
Stock that Become Shares-In-Trust. Any Prohibited Owner shall be entitled
(following discovery of the Shares-in-Trust and subsequent designation of the
Permitted Transferee in accordance with Section 8.12(e) of this Article 8) to
receive from the Trustee the lesser of (i) in the case of (a) a purported
Transfer in which the Prohibited Owner gave value for shares of Equity Stock
and which Transfer resulted in the transfer of the shares to the Trust, the
price per share, if any, such Prohibited Owner paid for the Equity Stock, or
(b) a Non-Transfer Event or Transfer in which the Prohibited Owner did not give
value for such shares (e.g., if the shares were received through a gift or
devise) and which Non-Transfer Event or Transfer, as the case may be, resulted
in the transfer of shares to the Trust, the price per share equal to the Market
Price on the date of such Non-Transfer Event or Transfer, and (ii) the price
per share received by the Trustee of the Trust from the sale or other
disposition of such Shares-in-Trust in accordance with Section 8.12(e) of this
Article 8. Any amounts received by the Trustee in respect of such
Shares-in-Trust in excess of such amounts to be paid the Prohibited Owner
pursuant to this Section 8.12(f) of this Article 8 shall be distributed to the
Beneficiary in accordance with the provisions of Section 8.12(e) of this
Article 8. Each Beneficiary and Prohibited Owner waives any and all claims that
they may have against the Trustee and the Corporation arising out of the
disposition of Shares-in-Trust, except for claims arising out of the gross
negligence or willful misconduct of, or any failure to make payments in
accordance with this Section 8.12 by such Trustee or the Corporation.
(g) Purchase Right in Share-in-Trust. Shares-in-Trust
shall be deemed to have been offered for sale to the Corporation, or its
designee, at a price per share equal to the lesser of (i) the price per share
in the transaction that created such Shares-in-Trust (or, in the case of
devise, gift or Non-Transfer Event, the Market Price at the time of such
devise, gift or Non-Transfer Event) and (ii) the Market Price on the date the
Corporation, or its designee, accepts such offer. The Corporation shall have
the right to accept such offer for a period of ninety days after the later of
(i) the date of the Non-Transfer Event or purported Transfer that resulted in
such Shares-in-Trust and (ii) the date the Corporation determines in good faith
that a Transfer or Non-Transfer Event resulting in Shares-in-Trust has
occurred, if the Corporation does not receive a notice of such Transfer or
Non-Transfer Event pursuant to Section 8.5 of this Article 8.
Section 8.13. Settlement. Nothing in these Articles of Incorporation
shall preclude the settlement of any transaction entered into through the
facilities of the New York Stock Exchange or any national securities exchange on
which any capital stock of the Company is listed.
9.
Section 9.1. Number of Directors. The number of directors shall be as
set forth in the Bylaws of the Corporation.
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Section 9.2. Initial Directors. The Corporation shall initially have
two directors and they shall be as follows:
Matthew Banks
1965 Broadway
New York, New York 10023
Kurt L. Wright
2100 Lake Grove Lane
Alpharetta, Georgia 30004
Section 9.3. Director Conflicts of Interest. Beginning ninety days
after the Initial Public Offering, a majority of the Corporation's Board of
Directors must not be affiliates of Lend Lease or the Corporation.
10.
In discharging the duties of their respective positions and in
determining what is believed to be in the best interests of the Corporation, the
Board of Directors, committees of the Board of Directors, and individual
directors, in addition to considering the effects of any action on the
Corporation or its shareholders, may consider the interests of the employees,
customers, suppliers and creditors of the Corporation and its subsidiaries, the
communities in which offices or other establishments of the Corporation and its
subsidiaries are located, and all other factors such directors consider
pertinent; provided, however, that this provision solely grants discretionary
authority to the directors and no constituency shall be deemed to have been
given any right to consideration hereby.
11.
The mailing address of the principal office of the Corporation is 3424
Peachtree Road, N.E. Suite 800, Atlanta, Fulton County, Georgia 30326.
12.
These Articles of Incorporation may not be amended without the
affirmative vote of at least a majority of the outstanding shares of Common
Stock (and majority of the outstanding shares of Preferred Stock, if any, to the
extent that such amendment would materially adversely affect the holders of the
Preferred Stock), with the shareholders voting as a class with one vote per
share; provided, that the Articles of Incorporation provision relating to the
Corporation's election to be taxed as a REIT shall not be amended, altered,
changed or repealed without the affirmative vote of at least 80% of the members
of the Board of Directors and the affirmative vote of holders of two-
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thirds of the outstanding shares of Common Stock and any other shares of Equity
Stock entitled to vote generally in the election of directors voting as a class.
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IN WITNESS WHEREOF, the undersigned has executed these Articles of
Incorporation this 16th day of December, 1997.
By: /s/ Stacey A. Kipinis
------------------------------
Stacey A. Kipinis
Incorporator
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EXHIBIT 3.2
BYLAWS OF
CHASTAIN CAPITAL CORPORATION
ARTICLE I
SHAREHOLDERS
Section 1. Annual Meeting. The annual meeting of the
shareholders for the election of directors and for the transaction of such other
business as may properly come before the meeting shall be held at such place,
either within or without the State of Georgia, on such date, and at such time,
as the Board of Directors may by resolution provide, or if the Board of
Directors fails to provide, then such meeting shall be held at the principal
office of the Corporation at 10:00 a.m., local time, on the second Thursday in
May of each year, if not a legal holiday under the laws of the State of Georgia,
and if a legal holiday, on the next succeeding business day. The Board of
Directors may specify by resolution prior to any special meeting of shareholders
held within the year that such meeting shall be in lieu of the annual meeting.
Section 2. Special Meetings. Special meetings of the
shareholders may be called by the Board of Directors or by the Chairman of the
Board, and shall be called by the Corporation upon the written request (which
request shall set forth the purpose or purposes of the meeting) of the
shareholders of record (as established pursuant to Section 6(b) of Article I of
these Bylaws) of outstanding shares representing more than 50% of all the votes
entitled to be cast on any issue proposed to be considered at the proposed
special meeting. In the event such meeting is called by the Board of Directors
or the Chairman of the Board, such meeting may be held at such place, either
within or without the State of Georgia, as is stated in the call and notice
thereof. If such meeting is called at the request of shareholders as provided in
this Section 2, then such meeting shall be held at such place in the State of
Georgia as is stated in the notice thereof.
Section 3. Notice of Meetings. A written or printed notice
stating the place, day and hour of the meeting, and in case of a special
meeting, the purpose or purposes for which the meeting is called, shall be
delivered or mailed by the Secretary of the Corporation to each holder of record
of stock of the Corporation at the time entitled to vote, at his address as it
appears upon the records of the Corporation, not less than 10 nor more than 60
days prior to such meeting. If the Secretary fails to give such notice within 20
days after the call of a meeting, the person calling or requesting such meeting,
or any person designated by them, may give such notice. Notice of such meeting
may be waived in writing by any shareholder. Notice of any adjourned meeting of
the shareholders shall not be required if the time and place to which the
meeting is adjourned are announced at the meeting at
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which the adjournment is taken, unless the Board of Directors sets a new record
date for such meeting in which case notice shall be given in the manner provided
in this Section 3.
Section 4. Quorum and Shareholder Vote. A quorum for action on
any subject matter at any annual or special meeting of shareholders shall exist
when the holders of shares entitled to vote a majority of the votes entitled to
be cast on such subject matter are represented in person or by proxy at such
meeting. If a quorum is present, the affirmative vote of such number of shares
as is required by the Georgia Business Corporation Code (as in effect at the
time the vote is taken), for approval of the subject matter being voted upon,
shall be the act of the shareholders, unless a greater vote is required by the
Articles of Incorporation or these Bylaws. If a quorum is not present, a meeting
of shareholders may be adjourned from time to time by the vote of shares having
a majority of the votes of the shares represented at such meeting, until a
quorum is present. When a quorum is present at the reconvening of any adjourned
meeting, and if the requirements of Section 3 of this Article I have been
observed, then any business may be transacted at such reconvened meeting in the
same manner and to the same extent as it might have been transacted at the
meeting as originally noticed.
Section 5. Proxies. A shareholder may vote either in person or
by proxy duly executed in writing by the shareholder or created pursuant to
Article 8 of the Articles of Incorporation. Unless written notice to the
contrary is delivered to the Corporation by the shareholder, a proxy for any
meeting shall be valid for any reconvention of any adjourned meeting.
Section 6. Fixing Record Date.
(a) Except as provided in paragraph (b) of this Section 6, for
the purpose of determining shareholders entitled to notice of or to vote at any
meeting of shareholders or any adjournment thereof, or entitled to receive
payment of any dividend, or in order to make a determination of shareholders for
any other proper purpose, the Board of Directors shall have the power to fix a
date, not more than 70 days prior to the date on which the particular action
requiring a determination of shareholders is to be taken, as the record date for
any such determination of shareholders. A record date for the determination of
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof shall not be set less than 10 days prior to such
meeting; provided that the record date for the determination of shareholders
entitled to notice of or to vote at any special meeting of shareholders called
by the Corporation at the request of holders of shares pursuant to Section 2 of
Article I hereof or any adjournment thereof shall be 20 days after the
"Determination Date" (as defined in paragraph (b) of this Section 6), and
provided further that such record date shall be 70 days prior to such special
meeting. In any case where a record date is set, under any provision of this
Section 6, only shareholders of record on the said date shall be entitled to
participate in the action for which the determination of shareholders of record
is made, whether the action is payment of a dividend, allotment of any rights or
any change or conversion or exchange of capital stock or other such action, and,
if the record date is set for the determination of shareholders entitled to
notice of or to vote at a meeting of shareholders, only such shareholders of
record shall be entitled to such notice or vote, notwithstanding any transfer of
any shares on the books of the Corporation after such record date.
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(b) (i) In order that the Corporation may determine the
shareholders entitled to request a special meeting of the shareholders or a
special meeting in lieu of the annual meeting of the shareholders pursuant to
Section 2 of Article I hereof, the Board of Directors may fix a record date,
which record date shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors, and which date shall not
be more than 10 days after the date upon which the resolution fixing the record
date is adopted by the Board of Directors. Any shareholder of record seeking to
have the shareholders request such a special meeting shall, by written notice to
the Secretary, request the Board of Directors to fix a record date. The Board of
Directors shall, within 10 business days after the date on which such a request
is received, adopt a resolution fixing the record date. If no record date has
been fixed by the Board of Directors within 10 business days after the date on
which such a request is received, the record date for determining shareholders
entitled to request such a special meeting shall be the first day on which a
signed written request setting forth the request to fix a record date is
delivered to the Corporation by delivery to its principal place of business, or
any officer or agent of the Corporation having custody of the books in which
proceedings of meetings of shareholders are recorded.
(ii) Every written request for a special meeting shall bear
the date of signature of each shareholder who signs the request and no such
request shall be effective to request such a meeting unless, within 70 days
after the record date established in accordance with paragraph (b)(i) of this
Section, written requests signed by a sufficient number of record holders as of
such record date to request a special meeting in accordance with Section 2 of
Article I hereof are delivered to the Corporation in the manner prescribed in
paragraph (b)(i) of this Section.
(iii) In the event of the delivery, in the manner provided by
this Section, to the Corporation of the requisite written request or requests
for a special meeting and/or any related revocation or revocations, the
Corporation shall engage nationally recognized independent inspectors of
elections for the purpose of promptly performing a ministerial review of the
validity of the requests and revocations. For the purpose of permitting a prompt
ministerial review by the independent inspectors, no request by shareholders for
a special meeting shall be effective until the earlier of (i) five business days
following delivery to the Corporation of requests signed by the holders of
record (on the record date established in paragraph (b)(i) of this Section) of
the requisite minimum number of shares that would be necessary to request such a
meeting under Section 2 of Article I hereof, or (ii) such date as the
independent inspectors certify to the Corporation that the requests delivered to
the Corporation in accordance with this Article represent at least the minimum
number of shares that would be necessary to request such meeting (the earlier of
such dates being herein referred to as the "Determination Date"). Nothing
contained in this paragraph shall in any way be construed to suggest or imply
that the Board of Directors or any shareholder shall not be entitled to contest
the validity of any request or revocation thereof, whether during or after such
five business day period, or to take any other action (including, without
limitation, the commencement, prosecution or defense of any litigation with
respect thereto).
(iv) Unless the independent inspectors shall deliver, on or
before the Determination Date, a certified report to the Corporation stating
that the valid requests for a special meeting
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submitted pursuant to paragraph (iii) above represent less than the requisite
minimum number of shares that would be necessary to request a special meeting
under Section 2 of Article I hereof, the Board of Directors shall, within five
business days after the Determination Date, adopt a resolution calling a special
meeting of the shareholders and fixing a record date for such meeting, in
accordance with Section 6(a) of Article I of these Bylaws.
Section 7. Notice of Shareholder Business. At an annual
meeting of the shareholders, only such business shall be conducted as shall have
been brought before the meeting (a) by or at the direction of the Board of
Directors or (b) by any shareholder of the Corporation who complies with the
notice procedures set forth in this Section 7 and only to the extent that such
business is appropriate for shareholder action under the provisions of the
Georgia Business Corporation Code. For business to be properly brought before an
annual meeting by a shareholder, the shareholder must have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, a
shareholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation not later than the close of
business on the 7th day following the day on which notice of the date of the
annual meeting was mailed or delivered to such shareholder. A shareholder's
notice to the Secretary shall set forth as to each matter the shareholder
proposes to bring before the annual meeting (a) a brief description of the
business desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting, (b) the name and address, as
they appear on the Corporation's books, of the shareholder proposing such
business, (c) the class and number of shares of stock of the Corporation which
are beneficially owned by the shareholder, and (d) any material interest of the
shareholder in such business. Notwithstanding anything in the Bylaws to the
contrary, no business shall be conducted at an annual meeting except in
accordance with the procedures set forth in this Section 7. At an annual
meeting, the Chairman shall, if the facts warrant, determine and declare to the
meeting that business was not properly brought before the meeting in accordance
with the provisions of this Section 7, and if he should so determine, he shall
so declare to the meeting and any such business not properly brought before the
meeting shall not be transacted.
Section 8. Notice of Shareholder Nominees. Except for
Directors who are elected by Directors pursuant to the provisions of Section 9
of Article II of these Bylaws, only persons who are nominated in accordance with
the procedures set forth in this Section 8 shall be eligible for election as
Directors. Nominations of persons for election to the Board of Directors of the
Corporation may be made at a meeting of shareholders (a) by or at the direction
of the Board of Directors or (b) by any shareholder of the Corporation entitled
to vote for the election of Directors at the meeting who complies with the
notice procedures set forth in this Section 8. Such nominations, other than
those made by or at the direction of the Board of Directors, shall be made
pursuant to timely notice in writing to the Secretary of the Corporation. To be
timely, a shareholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation not later than the close of
business on the 7th day following the day on which notice of the date of the
meeting was mailed or delivered to such shareholder. Such shareholder's notice
shall set forth (a) as to each person whom the shareholder proposes to nominate
for election or re-election as a Director, all information relating to such
person that is required to be disclosed in solicitations of proxies for election
of Directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended; and (b) as to the
shareholder giving the notice (i) the name and address, as they appear on the
Corporation's books, of such shareholder and (ii) the class
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and number of shares of stock of the Corporation which are beneficially owned by
such shareholder. No person shall be eligible for election as a Director of the
Corporation unless nominated in accordance with the procedures set forth in the
Bylaws. The Chairman shall, if the facts warrant, determine and declare to the
meeting that a nomination was not made in accordance with the procedures
prescribed by the Bylaws, and if he should so determine, he shall so declare to
the meeting and the defective nomination shall be disregarded.
ARTICLE II
DIRECTORS
Section 1. Powers of Directors. The Board of Directors shall
manage the business and affairs of the Corporation and, subject to any
restrictions imposed by law, by the Articles of Incorporation, or by these
Bylaws, may exercise all the powers of the Corporation.
Section 2. Number and Term of Directors. The Board of
Directors shall consist of five natural persons. At any annual or special
meeting the shareholders may, and at any meeting of directors, the directors (by
a vote of not less than 75% of the directors then in office) may, fix a
different number of Directors who shall constitute the full board. No decrease
in the number of Directors shall shorten the term of an incumbent Director.
Section 3. Meetings of the Directors. The Board of Directors
shall meet each year immediately following the annual meeting of shareholders,
and the Board may by resolution provide for the time and place of other regular
meetings. Special meetings of the Directors may be called by the Chairman of the
Board or by any two of the Directors.
Section 4. Notice of Meetings. Notice of each meeting of the
Directors shall be given by the Secretary by mailing the same at least ten days
before the meeting or by telephone, telecopy or cablegram or in person at least
five days before the meeting, to each Director, except that no notice need be
given of regular meetings fixed by the resolution of the Board or of the meeting
of the Board held at the place of and immediately following the annual meeting
of the shareholders. Any Director may waive notice, either before or after the
meeting, and shall be deemed to have waived notice if he is present at the
meeting.
Section 5. Quorum; Vote Requirement. A majority of the number
of directors fixed in accordance with Article II, Section 2 of these Bylaws
shall constitute a quorum for the transaction of business at any meeting. When a
quorum is present, the vote of a majority of the directors present shall be the
act of the Board of Directors, unless a greater vote is required by law, by the
Articles of Incorporation, or by these bylaws.
Section 6. Action of Directors Without a Meeting. Any action
required by law to be taken at a meeting of the Board of Directors, or any
action which may be taken at a meeting of the
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Board of Directors, or of any committee thereof, may be taken without a meeting
if written consent, setting forth the action so taken, shall be signed by all
the Directors, or all the members of the committee, as the case may be, and be
filed with the minutes of the proceedings of the Board or the committee. Such
consent shall have the same force and effect as a unanimous vote of the Board or
the committee, as the case may be.
Section 7. Committees. The Board of Directors may, in its
discretion, appoint committees, each consisting of one or more Directors, which
shall have and may exercise such delegated powers as shall be conferred on or
authorized by the resolutions appointing them, except that no such committee
may: (1) approve or propose to shareholders action that the Georgia Business
Corporation Code requires to be approved by shareholders, (2) fill vacancies on
the Board of Directors or any of its committees, (3) amend the Articles of
Incorporation of the Corporation pursuant to Section 14-2-1002 of the Georgia
Business Corporation Code, (4) adopt, amend or repeal these Bylaws, (5) approve
a plan of merger not requiring shareholder approval or (6) appoint another
committee of the Board of Directors. A majority of any such committee may
determine its action, fix the time and place of its meetings, and determine its
rules of procedure. Each committee shall keep minutes of its proceedings and
actions and shall report regularly to the Board of Directors. The Board of
Directors shall have power at any time to fill vacancies in, change the
membership of, or discharge any such committee.
Section 8. Compensation. The Board of Directors shall have the
authority to determine from time to time the amount of compensation that shall
be paid to its members for attendance at meetings of, or service on, the Board
of Directors or any committee of the Board, except that no such compensation
shall be paid to Directors who are also employees of the Corporation or any
entity that has a management agreement with the Corporation. The Board of
Directors also shall have the power to reimburse Directors for reasonable
expenses of attendance at Directors' meetings and committee meetings.
Section 9. Removal. Subject to the rights of the holders of
any series of Preferred Stock then outstanding, any or all Directors may be
removed from office at any time, with or without cause, only by the vote of a
majority of the votes entitled to be cast.
Section 10. Vacancies. Subject to the rights of the holders of
any series of Preferred Stock then outstanding to fill director vacancies,
vacancies on the Board of Directors (including vacancies resulting from
retirement, resignation, removal from office or death) shall be filled by the
Board of Directors.
Section 11. Telephone Conference Meetings. Unless the Articles
of Incorporation otherwise provide, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board or committee by means of telephone conference or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to this
Section 10 shall constitute presence in person at such meeting.
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ARTICLE III
OFFICERS
Section 1. Officers. The officers of the Corporation shall
consist of a Chairman of the Board, a Chief Executive Officer, a President, a
Chief Operating Officer, a Secretary and a Treasurer, and such other officers or
assistant officers (including Vice Presidents) as may be elected by the Board of
Directors. Any two offices may be held by the same person.
Section 2. Chairman of the Board. The Chairman of the Board
shall be under the direction of the Board of Directors. He or she shall preside
at all meetings of the shareholders and all meetings of the Board of Directors
and shall have such other duties as the Board of Directors shall from time to
time prescribe.
Section 3. Chief Executive Officer. The Chief Executive
Officer shall be under the direction of the Board of Directors. He or she shall
have responsibility for the general direction of the business, policies and
affairs of the Corporation.
Section 4. President. The President shall, under the direction
of the Chief Executive Officer, supervise the management of the day-to-day
business of the Corporation. He or she shall have such further powers and duties
as from time to time may be conferred on him by the Board of Directors or the
Chief Executive Officer. In the absence of the Chairman of the Board, he or she
shall preside at all meetings of the shareholders and the Board of Directors.
Section 5. Chief Operating Officer. The Chief Operating
Officer shall act in the case of the absence or disability of the Chairman of
the Board, the Chief Executive Officer and the President. He or she shall, under
the direction of the Chief Executive Officer, supervise the management of the
day-to-day business of the Corporation. He or she shall have such further powers
and duties as from time to time may be conferred on him by the Board of
Directors or the Chief Executive Officer.
Section 6. Treasurer. The Treasurer shall be responsible for
the maintenance of proper financial books and records of the Corporation.
Section 7. Secretary. The Secretary shall keep the
minutes of the meetings of the shareholders and the Directors and shall have
custody of and attest the seal of the Corporation.
Section 8. Other Duties and Authorities. Each officer,
employee and agent shall have such other duties and authorities as may be
conferred on them by the Board of Directors.
Section 9. Removal. Any officer may be removed at any time by
the Board of Directors, and such vacancy may be filled by the Board of
Directors. A contract of employment for a definite term shall not prevent the
removal of any officer, but this provision shall not prevent the
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<PAGE> 8
making of a contract of employment with any officer and shall have no effect
upon any cause of action which any officer may have as a result of removal in
breach of a contract of employment or upon the enforceability of any other
provision of a contract of employment.
Section 10. Compensation. The salaries of the officers shall
be fixed from time to time by the Board of Directors, subject to the provisions
of any applicable contracts of employment. No officer shall be prevented from
receiving such salary by reason of the fact that he is also a Director of the
Corporation.
ARTICLE IV
DEPOSITORIES, SIGNATURE AND SEAL
Section 1. Depositories. All funds of the Corporation shall be
deposited in the name of the Corporation in such depository or depositories as
the Board may designate and shall be drawn out on checks, drafts or other orders
signed by such officer, officers, agent or agents as the Board may from time to
time authorize.
Section 2. Contracts. All contracts and other instruments
shall be signed on behalf of the Corporation by the Chairman of the Board, the
Chief Executive Officer, the President, the Chief Operating Officer, any Vice
President or by such other officer, officers, agent or agents, as the Chairman
of the Board, the Chief Executive Officer or the President designates from time
to time or as the Board from time to time may by resolution provide.
Section 3. Seal. The seal of the Corporation shall be as
follows:
The seal may be manually affixed to any document or may be
lithographed or otherwise printed on any document with the same force and effect
as if it had been affixed manually. The signature of the Secretary or Assistant
Secretary shall attest the seal and may be a facsimile if and to the extent
permitted by law.
8
<PAGE> 9
ARTICLE V
STOCK TRANSFERS
Section 1. Form and Execution of Certificates. The
certificates of shares of capital stock of the Corporation shall be in such form
as may be approved by the Board of Directors and shall be signed by the Chairman
of the Board, the Vice Chairman of the Board, the President or a Vice President
and by the Secretary or any Assistant Secretary or the Treasurer or any
Assistant Treasurer, provided that any such certificate may be signed by the
facsimile signature of any of such officers imprinted thereon if the same is
countersigned by a transfer agent of the Corporation, and provided further that
certificates bearing the facsimile of the signature of such officers imprinted
thereon shall be valid in all respects as if such person or persons were still
in office, even though such officer or officers shall have died or otherwise
ceased to be officers.
Section 2. Transfers of Shares. Shares of stock in the
Corporation shall be transferable only on the books of the Corporation by proper
transfer signed by the holder of record thereof or by a person duly authorized
to sign for such holder of record. The Corporation or its transfer agent or
agents shall be authorized to refuse any transfer unless and until it is
furnished such evidence as it may reasonably require showing that the requested
transfer is proper.
Section 3. Lost, Destroyed or Stolen Certificates. Where the
holder of record of a share or shares of stock of the Corporation claims that
the certificate representing said share has been lost, destroyed or wrongfully
taken, the Board shall by resolution provide for the issuance of a certificate
to replace the original if the holder of record so requests before the
Corporation has notice that the certificate has been acquired by a bona fide
purchaser, files with the Corporation a sufficient indemnity bond, and furnishes
evidence of such loss, destruction or wrongful taking satisfactory to the
Corporation, in the reasonable exercise of its discretion. The Board may
authorize such officer or agent as it may designate to determine the sufficiency
of such an indemnity bond and to determine reasonably the sufficiency of the
evidence of loss, destruction or wrongful taking.
Section 4. Transfer Agent and Registrar. The Board may (but
shall not be required to) appoint a transfer agent or agents and a registrar or
registrars to transfers, and may require that all stock certificates bear the
signature of such transfer agent or of such transfer agent and registrar.
ARTICLE VI
INDEMNIFICATION
Section 1. Mandatory Indemnification. The Corporation shall
indemnify to the fullest extent permitted by the Georgia Business Corporation
Code, and to the extent that applicable law from time to time in effect shall
permit indemnification that is broader than provided in these Bylaws,
9
<PAGE> 10
then to the maximum extent authorized by law, any individual made a party to a
proceeding (as defined in the Georgia Business Corporation Code) because he or
she is or was a director or officer, against liability (as defined in the
Georgia Business Corporation Code), incurred in the proceeding, if he or she
acted in a manner he or she believed in good faith to be in or not opposed to
the best interests of the Corporation and, in the case of any criminal
proceeding, he or she had no reasonable cause to believe his or her conduct was
unlawful.
Section 2. Permissive Indemnification. The Corporation shall
have the power to indemnify to the fullest extent permitted by the Georgia
Business Corporation Code, any individual made a party to a proceeding (as
defined in the Georgia Business Corporation Code) because he or she is or was an
employee or agent of the Company, against liability (as defined in the Georgia
Business Corporation Code), incurred in the proceeding.
Section 3. Advances for Expenses. The Corporation shall pay
for or reimburse the reasonable expenses incurred by a director or officer who
is a party to a proceeding, and shall have the authority to pay for or reimburse
the reasonable expenses of an employee or agent of the Company who is a party to
a proceeding, in each case in advance of the final disposition of a proceeding
if:
(a) Such person furnishes the Corporation a written
affirmation of his good faith belief that he or she
has met the standard of conduct set forth in Section
1 or Section 2 above, as applicable; and
(b) Such person furnishes the Corporation a written
undertaking, executed personally on his behalf to
repay any advances if it is ultimately determined
that he or she is not entitled to indemnification.
The written undertaking required by paragraph (b) above must be an
unlimited general obligation of such person but need not be secured and may be
accepted without reference to financial ability to make repayment.
Section 4. Indemnification Not Exclusive. The right to
indemnification and the payment of expenses incurred in defending a proceeding
in advance of its final disposition conferred in this Article VI shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, provision of the Articles of Incorporation, provision of
these Bylaws, agreement, vote of shareholders or disinterested directors or
otherwise.
Section 5. Amendment or Repeal. Any repeal or modification of
the foregoing provisions of this Article VI shall not adversely affect any right
or protection hereunder of any person in respect of any act or omission
occurring prior to the time of such repeal or modification.
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ARTICLE VII
AMENDMENT OF BYLAWS
Section 1. Amendment. These Bylaws may be altered, amended,
repealed or new Bylaws adopted by the Board of Directors by the affirmative vote
of a majority of all directors then holding office, but any bylaws adopted by
the Board of Directors may be altered, amended, repealed, or any new bylaws
adopted, by the shareholders at an annual or special meeting of shareholders,
when notice of any such proposed alteration, amendment, repeal or addition shall
have been given in the notice of such meeting. The shareholders may prescribe
that any bylaw or bylaws adopted by them shall not be altered, amended or
repealed by the Board of Directors. Action by the shareholders with respect to
these Bylaws shall be taken by an affirmative vote of a majority of all shares
outstanding and entitled to vote generally in the election of directors, voting
as a single voting group.
11
<PAGE> 1
KING & SPALDING
191 PEACHTREE STREET
ATLANTA, GEORGIA 30303-1763
TELEPHONE: 404/572-4600
FACSIMILE: 404/572-5100
EXHIBIT 8.1
December 18, 1997
Chastain Capital Corporation
c/o ERE Yarmouth
3424 Peachtree Road, N.E.
Suite 800
Atlanta, Georgia 30326
Ladies and Gentlemen:
We have acted as counsel to Chastain Capital Corporation, a Georgia
corporation (the "Company") in connection with its registration under the
Securities Act of 1933, as amended, of the Common Stock of the Company, as
described in that certain Registration Statement filed with the Securities and
Exchange Commission on December 18, 1997 (the "Registration Statement"). In
connection therewith, the Company has requested our opinion with respect to (i)
the qualification of the Company as a real estate investment trust ("REIT")
under the Internal Revenue Code of 1986, as amended (the "Code") and (ii) the
accuracy of the information contained in the Prospectus, which is part of the
Registration Statement, under the heading "Federal Income Tax Considerations."
We understand that our opinion will be referred to in the Prospectus
and attached as an exhibit to the Registration Statement. We hereby consent to
such use of our opinion.
Unless otherwise indicated, all terms used herein with initial capital
letters shall have the same meaning as in the Prospectus, and all section
references herein are to the Code.
FACTS AND ASSUMPTIONS RELIED UPON
In rendering the opinions expressed herein, we have examined such
documents as we have deemed appropriate, including, without limitation, the
Registration Statement and the Company's Articles of Incorporation. In our
examination of documents, we have assumed, with your consent, that all
documents submitted to us are authentic originals, or if submitted as
photocopies or telecopies, that they faithfully reproduce the originals
thereof, that all such documents have been or will be duly executed to the
extent required, that all representations and statements set forth in such
documents are true and correct, and that all obligations imposed by any such
documents on the parties thereto have been or will be performed or satisfied in
accordance with their terms. We also have obtained such additional information
and representations as we have deemed relevant and necessary through
consultation with officers of the Company, including certain representations
set forth in a letter to us of even date herewith.
<PAGE> 2
December 18, 1997
Page 2
OPINIONS
Based upon and subject to the foregoing, we are of the following
opinions:
(1) The Company has been organized in conformity with the requirements
for qualification and taxation as a REIT under the Code, and its proposed
method of operation will enable it to meet the requirements for qualification
and taxation as a REIT beginning with its taxable year ended December 31, 1998.
(2) The information in the Prospectus under the heading "Federal
Income Tax Considerations" constitutes, in all material respects, a fair and
accurate summary of the material United States federal income tax consequences
of the purchase, ownership and disposition of the Common Stock.
The opinions expressed herein are based upon the Code, the U.S.
Treasury regulations promulgated thereunder, current administrative positions
of the U.S. Internal Revenue Service, and existing judicial decisions, any of
which could be changed at any time, possibly on a retroactive basis. Any such
changes could adversely affect the opinions rendered herein and the tax
consequences to the Company and the investors in the Common Stock. In addition,
as noted above, our opinions are based solely on the documents that we have
examined, the additional information that we have obtained, and the
representations that have been made to us, and cannot be relied upon if any of
the facts contained in any such documents or in any such additional information
is, or later becomes, inaccurate or if any of the representations made to us
is, or later becomes, inaccurate. Moreover, we assume no obligation to advise
you after the date hereof of any facts or circumstances that come to our
attention or of any changes in law that could affect the opinions expressed
herein.
The Company's qualification as a REIT depends upon the Company's
ability to meet, on a continuing basis through actual annual operating results,
distribution levels, and stock ownership, several requirements imposed by the
Code. We assume no obligation to review the Company's compliance with those
requirements on a continuing basis. Accordingly, no assurance can be given that
the actual results of the Company's operations for any particular taxable year
will satisfy such requirements.
Finally, our opinions are limited to the tax matters specifically
covered thereby, and we have not been asked to address, nor have we addressed,
any other tax consequences of an investment in the Common Stock.
Very truly yours,
King & Spalding
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION OF
NAME INCORPORATION
---- ---------------
<S> <C>
Chastain GP Holdings, Inc. Georgia
Chastain LP Holdings, Inc. Georgia
</TABLE>
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Chastain Capital
Corporation on Form S-11 of our report dated December 17, 1997, appearing in
the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
December 18, 1997
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