<PAGE> 1
As filed with the Securities and Exchange Commission on February 3, 1998
Registration No. 333-_______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM S-11
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
--------------------
AMRESCO CAPITAL TRUST
(Exact Name of Registrant as Specified in its Governing Instruments)
--------------------
700 NORTH PEARL STREET, SUITE 2400, DALLAS, TEXAS 75201
(214) 953-7700
(Address, Including Zip Code, and Telephone Number, including Area Code, of
Registrant's Principal Executive Offices)
--------------------
MARK D. GIBSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
AMRESCO CAPITAL TRUST
700 NORTH PEARL STREET, SUITE 2400
DALLAS, TEXAS 75201
(214) 953-7700
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
--------------------
COPIES TO:
<TABLE>
<S> <C> <C>
Michelle P. Goolsby, Esq. L. Keith Blackwell, Esq. Peter T. Healy, Esq.
Winstead Sechrest & Minick P.C. AMRESCO, INC. O'Melveny & Myers LLP
5400 Renaissance Tower 700 North Pearl Street Embarcadero Center West
1201 Elm Street Suite 2400, LB 342 275 Battery Street, 26th Floor
Dallas, Texas 75270 Dallas, Texas 75201 San Francisco, California 94111
(214) 745-5400 (214) 953-7700 (415) 984-8833
</TABLE>
--------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, 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 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,
please check the following box.[ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
========================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES BEING AMOUNT BEING OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED (1) SHARE PRICE (2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares of
Beneficial Interest, par
value $0.01 per share 17,250,000 shares $21.00 $362,250,000 $106,864
========================================================================================================================
</TABLE>
(1) Includes 2,250,000 shares which may be purchased by the Underwriters
to cover over-allotments, if any.
(2) Estimated based on a bona fide estimate of the proposed maximum
offering price solely for the purpose of calculating the registration
fee pursuant to Rule 457(a) of the Securities Act of 1933, as amended.
--------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 2
Red Herring Legend:
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
PROSPECTUS SUBJECT TO COMPLETION - DATED FEBRUARY 3, 1998
- --------------------------------------------------------------------------------
15,000,000 Shares
AMRESCO CAPITAL TRUST
Common Shares of Beneficial Interest
- --------------------------------------------------------------------------------
All of the 15,000,000 common shares of beneficial interest, par value $.01 per
share ("Common Shares"), of AMRESCO Capital Trust (the "Company") offered
hereby (this "Offering") are being offered by the Company. The Company is a
newly organized Texas real estate investment trust formed to take advantage of
certain mid- to high-yield lending and investment opportunities in real estate
related assets, including various types of commercial mortgage loans,
mortgage-backed securities and commercial real properties. 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"), and generally will not be
subject to federal taxation on its income to the extent that it distributes its
net income to its shareholders and maintains its qualification as a REIT.
The Company's operations will be managed by AMREIT Managers, L.P. (the
"Manager"), an affiliate of AMRESCO, INC. ("AMRESCO"). AMRESCO, together with
its affiliated entities (collectively, the "AMRESCO Group"), is a
publicly-traded diversified financial services company specializing in real
estate lending, specialized commercial finance, and the acquisition, resolution
and servicing of nonperforming and underperforming commercial real estate
loans.
Simultaneously with the closing of, and in addition to, this Offering, the
Company will sell 1,675,000 Common Shares (1,925,000 if the Underwriters'
over-allotment option is separately exercised in full) to AMRESCO at the
initial public offering price pursuant to a private placement. See "Private
Placement." After such sale, AMRESCO will own 10% of the then outstanding
Common Shares. In addition, at the request of the Company, the Underwriters
have reserved an aggregate of up to 750,000 of the Common Shares offered hereby
for sale at the initial public offering price to trust managers, directors,
officers and employees of the Company and members of the AMRESCO Group.
Prior to this Offering, there has been no public market for the Common Shares.
It is currently anticipated that the initial public offering price for the
Common Shares offered hereby will be between $19 and $21 per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. An application has been submitted to have
the Common Shares approved for inclusion in the Nasdaq Stock Market's National
Market (the "Nasdaq National Market") under the symbol "AMCT."
SEE "RISK FACTORS" ON PAGES 16 TO 30 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
COMMON SHARES OFFERED HEREBY, INCLUDING AMONG OTHERS:
o The Company has identified only a limited number of real estate related
assets to purchase with the net proceeds of this Offering and may be unable
to acquire additional real estate related assets on favorable terms.
o The Company intends to invest in types of commercial mortgage loans,
mortgage-backed securities and real estate that involve a high degree of
risk.
o The Company will be dependent upon key personnel, the Manager and other
members of the AMRESCO Group for successful operations.
o Changes in interest rate levels or a deterioration of general economic
conditions may negatively impact operating results.
o The Company intends to significantly leverage its real estate related assets,
which may result in operating losses.
o Conflicts of interest between the Company and one or more members of the
AMRESCO Group could result in decisions not in the best interest of the
Company's shareholders.
o Neither the Company nor the Manager has any operating history or any prior
experience in managing and operating a REIT, which could adversely affect the
Company's results of operations.
o The Company may be taxed as a corporation if it fails to qualify as a REIT,
which would substantially reduce the amount of cash available for
distribution.
o The Manager may be entitled to a significant termination fee upon
termination of the management agreement which, if paid, could substantially
reduce cash available for distribution to shareholders.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===========================================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company (2)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Common Share . . . . . . . . . . . $ $ $
Total(3) . . . . . . . . . . . . . . . $ $ $
===========================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be
approximately $_________.
(3) The Company has granted the Underwriters a 30-day over-allotment option
to purchase up to 2,250,000 additional Common Shares on the same terms and
conditions as set forth above. If all such additional Common Shares are
purchased, the total Price to Public will be $________, the total
Underwriting Discounts and Commissions will be $________ and the total
Proceeds to Company will be $_______. See "Underwriting."
- --------------------------------------------------------------------------------
The Common Shares are being offered by the several Underwriters,
subject to delivery by the Company and acceptance by the Underwriters, to prior
sale and to withdrawal, cancellation or modification of the offer without
notice. Delivery of the Common Shares to the Underwriters is expected to be
made through the facilities of the Depository Trust Company, New York, New York,
on or about____, 1998.
PRUDENTIAL SECURITIES INCORPORATED
CREDIT SUISSE FIRST BOSTON
J.C. BRADFORD & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
PIPER JAFFRAY INC.
_________________, 1998
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES,
INCLUDING PURCHASES OF COMMON SHARES TO STABILIZE THE MARKET PRICE, PURCHASES
OF COMMON SHARES TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON SHARES
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
TABLE OF CONTENTS
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PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Trust Managers and Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Business and Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Targeted Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Industry Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Initial Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Summary Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The Management Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Dividend Policy and Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
The Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Organization and Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Investment Activity Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Limited Identified Assets; Available Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Risks Related to Investments in Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Commercial Mortgage Loans May Involve a Greater Risk of Loss Than Single-Family
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Mezzanine, Construction and Bridge Loans Involve Greater Risks of Loss . . . . . . . . . . 16
Participating Loans, Mezzanine Loans, Construction Loans and Bridge Loans Involve
Higher Administrative Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Distressed Mortgage Loans May Have Greater Default Risks Than Performing Loans . . . . . . 16
Limited Recourse Loans May Limit the Company's Recovery to the Value of the Mortgaged
Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Volatility of Values of Mortgaged Properties May Affect Adversely the Company's
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
General Default Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
One Action Rules May Limit the Company's Rights Following Defaults . . . . . . . . . . . . 17
Risks Related to Investments in MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Subordinated Interests are Subject to Greater Credit Risks Than More Senior Classes . . . . 17
Yields on Subordinated Interests May Be Affected Adversely By Prepayments and Interest
Rate Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Certain Investments May Generate Taxable Income Exceeding Cash Flow . . . . . . . . . . . . 18
Risks Related to Investments in Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Risks Involved in Real Estate Ownership Through Partnerships and Joint Ventures . . . . . . 18
Reliance on Third Party Operators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Tenant Defaults and Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Conditions Beyond the Company's Control May Affect Adversely the Value of Real Estate . . . 19
</TABLE>
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TABLE OF CONTENTS
(Continued)
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Page
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<S> <C>
Real Estate is Illiquid and its Value May Decrease . . . . . . . . . . . . . . . . . . . . 19
The Company's Insurance Will Not Cover All Losses . . . . . . . . . . . . . . . . . . . . . 19
Property Taxes Decrease Returns on Real Estate . . . . . . . . . . . . . . . . . . . . . . 20
Compliance With Americans with Disabilities Act and Other Changes in Governmental
Rules and Regulations May Be Costly . . . . . . . . . . . . . . . . . . . . . . . . 20
Real Estate with Hidden Environmental Problems Will Increase Costs and May Create
Liability for the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Real Estate With Known Environmental Problems May Create Liability for the Company . . . . 20
Foreign Real Estate is Subject to Currency Conversion Risks and Uncertainty of Foreign
Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Economic and Business Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Dependence on Key Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Dependence on the Manager and the AMRESCO Group . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Risks Associated With Interest Rate Fluctuations . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Interest Rate Mismatch Between Invested Portfolio Yield and Borrowing Rates . . . . . . . . 21
Yield Curve Reshaping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Decreased Demand for Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Risks Associated With Leveraging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Risks Associated With Hedging Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Lack of Prior Experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Possible Significant Termination Fee Payable to the Manager . . . . . . . . . . . . . . . . . . . . 24
Absence of Prior Public Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Shares Eligible for Future Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Temporary Investment in Short-Term Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Active Formation and Operation of Competing Mortgage REITs and Other Companies . . . . . . . . . . . 26
Future Revisions in Policies and Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Effect of Future Offerings of Debt and Equity on Market Price of the Common Shares . . . . . . . . . 26
Year 2000 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Tax and Legal Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Failure to Maintain REIT Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Failure to Maintain Exclusion From the Investment Company Act . . . . . . . . . . . . . . . . . . . 28
Risk of Adverse Tax Treatment of Excess Inclusion Income . . . . . . . . . . . . . . . . . . . . . . 28
Restrictions on Ownership of the Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Restrictions on or Impediments to Change of Control . . . . . . . . . . . . . . . . . . . . . . . . 29
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
DIVIDEND AND DISTRIBUTION POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES . . . . . . . . . . . . . . . . . . . . . . . 32
Warehouse Line . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Repurchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
BUSINESS AND STRATEGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
</TABLE>
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<PAGE> 6
TABLE OF CONTENTS
(Continued)
<TABLE>
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Page
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<S> <C>
Operating Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Capital and Leverage Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Warehouse Line . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Reverse Repurchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Collateralized Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Unsecured Financings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Credit Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Asset/Liability Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Hedging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Relationship With AMRESCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Compliance Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Future Revisions in Policies and Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Description of Targeted Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Participating Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Construction Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Mezzanine Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Bridge Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Distressed Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Real Estate Pools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Mortgage-Backed Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
RMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Commercial Real Estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Net Leased Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
REO Properties and Other Distressed Real Estate . . . . . . . . . . . . . . . . . . . . . . 49
Other Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Investment in Other Entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Foreign Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
The Initial Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
MANAGEMENT OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Executive Officers and Trust Managers of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Share Option Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Share Options Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
THE MANAGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Description of the AMRESCO Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Commercial Mortgage Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Real Estate Capital Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Commercial Real Estate Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Commercial Loan Servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
</TABLE>
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Commercial Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Franchise Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Specialty Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Single-Family Residential Construction Lending . . . . . . . . . . . . . . . . . . . . . . 59
Asset Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Asset Portfolio Management and Investment . . . . . . . . . . . . . . . . . . . . . . . . . 59
Special Servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
The Management Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Management Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Certain Relationships; Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Limits of Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Taxation of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Requirements For Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Organizational Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Qualified REIT Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Ownership of a Partnership Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Income Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Asset Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Annual Distribution Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Failure to Qualify . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Taxation of Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Taxation of Taxable U.S. Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Taxation of Tax-Exempt Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Taxation of Non-U.S. Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Information Reporting Requirements and Backup Withholding Tax . . . . . . . . . . . . . . . . . . . . . . . 83
Possible Legislative or Other Actions Affecting Tax Consequences . . . . . . . . . . . . . . . . . . . . . . 83
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Employee Benefit Plans, Tax-Qualified Retirement Plans, and IRAs . . . . . . . . . . . . . . . . . . . . . . 84
Status of the Company Under ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND REAL ESTATE INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 86
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Types of Mortgage Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Interests in Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Leases and Rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Condemnation and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Judicial Foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Public Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Non-Judicial Foreclosure/Power of Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Equitable Limitations on Enforceability of Certain Provisions . . . . . . . . . . . . . . . . . . . 88
</TABLE>
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Post-Sale Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Anti-Deficiency Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Bankruptcy Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Default Interest and Limitations on Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Forfeitures in Drug and RICO Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Environmental Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
CERCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Certain Other Federal and State Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Superlien Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Additional Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Environmental Site Assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Applicability of Usury Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Americans With Disabilities Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Ground Lease Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Due on Sale and Due on Encumbrance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Subordinate Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Acceleration on Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Certain Laws and Regulations; Types of Mortgaged Property . . . . . . . . . . . . . . . . . . . . . . . . . 95
Soldiers' and Sailors' Civil Relief Act of 1940 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Liquidation Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Other Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Meetings of Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Restrictions on Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Dividend Reinvestment and Share Purchase Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
CERTAIN PROVISIONS OF TEXAS LAW AND OF THE DECLARATION OF TRUST AND BYLAWS . . . . . . . . . . . . . . . . . . . . . 100
Board of Trust Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Removal of Trust Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Staggered Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Business Combinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Amendment to the Declaration of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Amendment of Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Termination of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
Special Meetings of the Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
Advance Notice of Trust Manager Nominations and New Business . . . . . . . . . . . . . . . . . . . . . . . . 103
Possible Anti-Takeover Effect of Certain Provisions of Texas Law and of the Declaration of Trust and
Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
Transfer Agent and Registrar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
Reports to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
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SHARES AVAILABLE FOR FUTURE SALE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
UNDERWRITING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
PRIVATE PLACEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
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PROSPECTUS SUMMARY
The following summary should be read in conjunction with and is
qualified in its entirety by the more detailed information appearing elsewhere
in this Prospectus. Certain capitalized and other terms used herein shall have
the meanings assigned to them in the Glossary, which starts at page 107.
Unless otherwise indicated, the information in this Prospectus assumes that the
Underwriters' over-allotment option will not be exercised. As used in this
Prospectus, the "Company" means either (i) AMRESCO Capital Trust, a Texas real
estate investment trust ("AMCT"), or (ii) AMCT collectively with its affiliated
entities (which does not include the Manager or any other member of the AMRESCO
Group), as the context may require.
THE COMPANY
The Company is a newly organized Texas real estate investment trust
formed to take advantage of certain mid- to high-yield lending and investment
opportunities in real estate related assets, including various types of
commercial Mortgage Loans (including among others, Participating Loans,
Mezzanine Loans, Construction Loans and Bridge Loans, as such terms are defined
below), mortgage-backed securities ("MBS"), commercial real estate (including
Net Leased Real Estate, as such term is defined below, real estate acquired at
foreclosure or by deed-in-lieu of foreclosure or other underperforming or
otherwise distressed real estate) and certain other real estate related assets.
The Company will elect to be taxed as a REIT. The Company generally will not
be subject to federal income taxation to the extent that it distributes its net
income to its shareholders and maintains its qualification as a REIT. See
"Federal Income Tax Consequences--Requirements for Qualification."
The Company was formed to pursue and capitalize upon certain
investment opportunities arising within the AMRESCO Group which are currently
referred to entities unaffiliated with AMRESCO. Such investment opportunities
(which may include co-investment opportunities with members of the AMRESCO
Group) arise from the existing business and operations of the AMRESCO Group,
including primarily its commercial mortgage brokerage operations conducted
through Holliday Fenoglio Fowler, a member of the AMRESCO Group. Holliday
Fenoglio Fowler, one of the largest commercial mortgage banking companies in
the United States (based on origination volume), is engaged in three primary
lines of business: real estate related debt placement, real estate investment
banking and real estate dispositions. See "The Manager--Description of the
AMRESCO Group." Upon closing of this Offering, the Company will enter into the
Correspondent Agreement with Holliday Fenoglio Fowler pursuant to which
Holliday Fenoglio Fowler will agree, so long as the Manager or any other member
of the AMRESCO Group is acting as manager of the Company, to present to the
Company (on a nonexclusive basis) Mortgage Loan origination and other real
estate related investment opportunities identified by Holliday Fenoglio Fowler
which meet the investment criteria and objectives of the Company. The Company
believes that a substantial portion of the real estate related assets in which
it invests (the "Invested Portfolio") will be identified through the AMRESCO
Group pursuant to the Correspondent Agreement. See "Business and
Strategy--Operating Policies--Relationship With AMRESCO" and "The Manager--
Description of the AMRESCO Group" and "Risk Factors--Economic and Business
Risks--Dependence on the Manager and the AMRESCO Group."
MANAGEMENT
TRUST MANAGERS AND EXECUTIVE OFFICERS
The day-to-day operations of the Company will be managed by AMREIT
Managers, L.P., a newly formed member of the AMRESCO Group (the "Manager"),
subject to the direction and oversight of the Board of Trust Managers. Upon
closing of this Offering, the Board of Trust Managers will consist of seven
members, four of whom will be unaffiliated with the AMRESCO Group. Mr. Robert
H. Lutz, Jr., Chairman of the Board and Chief Executive Officer of AMRESCO will
serve as a member of the Board of Trust Managers. Mr. Robert L. Adair III,
President
<PAGE> 11
and Chief Operating Officer of AMRESCO, will serve as Chairman of the Board of
Trust Managers, and Mr. Mark D. Gibson, President of Holliday Fenoglio Fowler,
will serve as a member of the Board of Trust Managers. See "Management of the
Company--Executive Officers and Trust Managers of the Company."
Mr. Gibson will also serve as President and Chief Executive Officer of
the Company and the Manager. Prior to the closing of this Offering, the
Company will hire a Chief Investment Officer for the Company and the Manager.
See "Management of the Company--Executive Officers and Trust Managers of the
Company." Upon closing of this Offering, the Manager will have in place a team
of investment officers with expertise in the various types of Targeted
Investments. However, the Manager will rely on the employees and other
resources of the AMRESCO Group for a significant portion of its operations.
See "Risk Factors--Economic and Business Risks--Dependence on the Manager and
the AMRESCO Group" and "The Manager."
THE MANAGER
The Manager is a newly formed member of the AMRESCO Group. The
AMRESCO Group is a leading diversified financial services company with
approximately 1,600 employees and offices located throughout the United States
and in Canada and England. The AMRESCO Group is currently engaged in four
principal lines of business, including:
COMMERCIAL MORTGAGE BANKING. Through its subsidiaries, Holliday
Fenoglio Fowler, AMRESCO Capital and AMRESCO Services, the AMRESCO
Group performs a wide range of commercial mortgage banking services,
including the origination, underwriting, placement, sale, servicing
and securitization of commercial Mortgage Loans. In addition, the
AMRESCO Group provides various services in support of its commercial
mortgage banking operations, including real estate market and economic
research and analysis with respect to all major cities in the United
States and Canada as well as research and analysis regarding specific
assets proposed for investment.
Holliday Fenoglio Fowler primarily serves commercial real estate
developers and owners by originating commercial Mortgage Loans and
providing brokerage and other real estate capital markets services for
commercial real estate transactions. In January 1998, Holliday
Fenoglio Fowler significantly expanded its operations by acquiring the
mortgage banking business of Fowler, Goedecke, Ellis & O'Connor
Incorporated ("Fowler Goedecke"). Pursuant to such acquisition,
Holliday Fenoglio Fowler acquired five of its current 17 offices and
17 of its current 96 mortgage bankers. Holliday Fenoglio Fowler
changed its name subsequent to the acquisition to reflect the Fowler
Goedecke acquisition. Mortgage Loans and other real estate financings
originated by Holliday Fenoglio Fowler have historically been funded
by institutional lenders, principally insurance companies, pension
funds and other investment funds, and by AMRESCO Capital and other
conduit purchasers. During 1997, Holliday Fenoglio Fowler closed over
$6.0 billion in 709 real estate transactions (including only those
transactions actually closed by Holliday Fenoglio Fowler during 1997
and not those closed by Fowler Goedecke during 1997). Of such
transactions, $4.2 billion involved the placement of non-participating
senior Mortgage Loans (including, among others, Permanent Mortgage
Loans, Construction Loans and Bridge Loans), $933 million involved the
placement of Participating Loans and Mezzanine Loans, and $892 million
involved real estate dispositions. Pursuant to the Correspondent
Agreement, Holliday Fenoglio Fowler has agreed to present to the
Company (on a nonexclusive basis) Mortgage Loan origination and other
real estate investment opportunities which meet the investment
criteria and objectives of the Company. See "Business and
Strategy--Operating Policies-- Relationship With AMRESCO" and "The
Manager."
AMRESCO Capital originates, underwrites, accumulates and securitizes
commercial Mortgage Loans. AMRESCO Capital targets commercial
Mortgage Loans that are suitable for sale to various securitization
programs. During 1997, AMRESCO Capital originated approximately $1.7
billion of commercial Mortgage Loans, approximately 38% of which were
identified through Holliday Fenoglio Fowler.
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<PAGE> 12
Through AMRESCO Services, the AMRESCO Group serves as a primary
servicer for whole commercial Mortgage Loans and securitized pools of
commercial Mortgage Loans, and as a Master Servicer for securitized
pools of commercial Mortgage Loans. As a primary servicer for whole
commercial Mortgage Loans and securitized pools of commercial Mortgage
Loans, AMRESCO Services is currently rated by Standard & Poor's as
"strong," its highest rating category. As a commercial Master
Servicer, AMRESCO Services is rated by Standard & Poor's as "above
average," which is the highest rating ever awarded by Standard &
Poor's in the commercial Master Servicer category. All other Rating
Agencies which have rated AMRESCO Services as either a primary
servicer or a Master Servicer have given AMRESCO Services their
highest rating. At December 31, 1997, AMRESCO Services acted as
servicer with respect to approximately $20.2 billion of Mortgage
Loans.
ASSET MANAGEMENT. The AMRESCO Group manages and resolves pools or
portfolios of performing, nonperforming or underperforming commercial
Mortgage Loans ("Asset Portfolios") acquired (either solely by the
AMRESCO Group or by the AMRESCO Group and other co-investors) at a
discount to face value. The AMRESCO Group also manages and resolves
Asset Portfolios owned by parties unaffiliated with the AMRESCO Group.
Through its asset management division, the AMRESCO Group also acts as
a Special Servicer for pools of securitized commercial Mortgage Loans.
At December 31, 1997, the AMRESCO Group was the designated Special
Servicer for securitized pools holding approximately $13.5 billion
(face value) of Mortgage Loans. As a Special Servicer, the AMRESCO
Group is currently rated in the highest category by all Rating
Agencies which have rated it.
COMMERCIAL FINANCE. The AMRESCO Group's commercial finance division
provides (i) loans to franchisees of nationally recognized restaurant,
hospitality and service organizations, (ii) special situation loans,
with an emphasis on the real estate and communications industries, and
(iii) single-family residential construction loans. Loans originated
by the franchise lending operation are sold to parties unaffiliated
with the AMRESCO Group, principally through securitization, while the
real estate, communications and single-family residential loans are
generally retained for the AMRESCO Group's own portfolio. During
1997, the commercial finance division of the AMRESCO Group originated
approximately $247 million of franchise loans, $154 million of special
situation loans, and $124 million of residential construction loans.
RESIDENTIAL MORTGAGE BANKING. Through various subsidiaries, the
AMRESCO Group originates, acquires, warehouses and securitizes
residential Mortgage Loans to borrowers who do not qualify for
conventional Mortgage Loans or whose borrowing needs are not met by
traditional residential mortgage lenders. During 1997, the AMRESCO
Group's residential mortgage banking group originated or acquired
approximately $3.6 billion of residential Mortgage Loans.
As a result of the Manager's relationship with the AMRESCO Group and
AMRESCO's investment in the Company, and pursuant to the Correspondent
Agreement, the Company expects to benefit from (i) the market reputation and
expertise of the AMRESCO Group in the underwriting, origination and closing of
Mortgage Loans and in the acquisition, management and servicing of both
performing and nonperforming Mortgage Loans, Mortgage Loan portfolios and MBS,
(ii) the significant number of Targeted Investments expected to be identified
to it by the AMRESCO Group, including primarily Holliday Fenoglio Fowler, (iii)
the relationships of Holliday Fenoglio Fowler with potential borrowers and
other institutional investors, and (iv) opportunities to co-invest with members
of the AMRESCO Group.
BUSINESS AND STRATEGY
OBJECTIVE
The Company's principal business objective is to maximize shareholder
value by producing cash flow for distribution to its shareholders through
investment in mid- to high-yield real estate related assets which earn an
attractive spread over the Company's cost of funds. Accordingly, the Company
intends to acquire and/or originate
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those real estate related assets which it believes are likely to generate the
highest risk-adjusted returns on capital invested, after considering all
material relevant factors. Such factors include the amount and nature of
anticipated cash flows from the asset, the credit risk of the borrower or
lessee, as applicable, the Company's ability to pledge the asset to secure
collateralized borrowings, the capital requirements resulting from the purchase
and financing of the asset, the potential for appreciation and the costs of
financing, hedging and managing the asset.
STRATEGY
To achieve its principal business objective, the Company's strategy is
to:
o capitalize upon its relationship with the AMRESCO Group by
seeking to take advantage of investment and co-investment
opportunities arising from the business and operations of the
AMRESCO Group;
o utilize the expertise and resources of Holliday Fenoglio
Fowler to monitor trends and demands in the Mortgage Loan and
real estate markets and to adjust its Mortgage Loan products
in response thereto in order to increase its ability to
successfully compete for Targeted Investments;
o invest in certain types of assets, such as Participating
Loans, Mezzanine Loans, Construction Loans and Bridge Loans,
which are expected to generate higher levels of return (and
which are typically subject to higher risks) than Permanent
Mortgage Loans;
o capitalize upon the market research capabilities of the
AMRESCO Group to analyze the Company's investment
opportunities and the economic conditions in the Company's
proposed geographic markets to assist the Company in selecting
investments which satisfy the Company's investment criteria
and targeted returns;
o utilize the expertise of the AMRESCO Group in the
underwriting, origination and closing of Mortgage Loans and in
the acquisition, management and servicing of Mortgage Loans,
Mortgage Loan portfolios and MBS;
o borrow against or leverage its Invested Portfolio (initially
through the Warehouse Line, the Credit Facility and the
Repurchase Agreement), to the extent consistent with the
Company's leverage policies, in order to increase the size of
the Invested Portfolio and increase potential returns to the
Company's shareholders;
o utilize acquisition and borrowing strategies to offset the
potential adverse effects resulting from the differences
between fixed rates or other limitations on coupon rate
adjustments associated with its Invested Portfolio and the
shorter-term variable nature of the Company's borrowings;
o implement various hedging strategies, including interest rate
swaps, interest rate collars, caps or floors, forward
contracts and U.S. Treasury and Eurodollar futures and options
(to the extent permitted by the REIT Provisions of the Code),
to minimize the effects of interest rate fluctuations on its
Invested Portfolio; and
o manage the credit risk of its Invested Portfolio by (i)
extensively underwriting its investments utilizing the
processes developed and utilized by the AMRESCO Group, (ii)
selectively choosing its investments for origination or
acquisition in compliance with the Company's investment
policies, (iii) actively monitoring (through the servicing and
asset management capabilities of the AMRESCO Group) the credit
quality of the Invested Portfolio, and (iv) maintaining
appropriate capital levels and allowances for credit losses.
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TARGETED INVESTMENTS
The Company intends to originate or purchase primarily the following
types of assets (the "Targeted Investments"):
SENIOR MORTGAGE LOANS. The Company intends to invest (either by
origination or purchase) in various types of senior Mortgage Loans
including primarily Mortgage Loans that entitle the lender to receive
contingent interest based on a percentage of the mortgaged property's
revenues or cash flow, and/or any gain on sale of the property
("Participating Loans"). The senior Mortgage Loans in which the
Company invests may also include Mortgage Loans used to finance the
construction or rehabilitation of real property ("Construction
Loans"), Mortgage Loans used as temporary financing ("Bridge Loans"),
and/or Permanent Mortgage Loans. See "Risk Factors--Investment
Activity Risks--Risks Relating to Investments in Mortgage Loans." The
Company may also invest in Mortgage Loans that are in default or for
which default is likely or imminent or for which the borrower is
making monthly payments in accordance with a forbearance plan. The
Company may hold its Mortgage Loans or use them as collateral for its
own MBS.
MEZZANINE LOANS. The Company intends to originate commercial Mortgage
Loans the repayment of which is subordinated to senior Mortgage Loans,
and which are secured by either a second lien mortgage or a pledge of
the ownership interests of the borrower. Alternatively, such Mortgage
Loans can take the form of a preferred equity investment in the
borrower (collectively, "Mezzanine Loans"). Mezzanine Loans generally
afford a relatively higher yield and entail greater risks than senior
Mortgage Loans. See "Risk Factors--Investment Activity Risks--Risks
Relating to Investments in Mortgage Loans."
MORTGAGE-BACKED SECURITIES. The Company intends to invest in
interests in commercial and multifamily MBS ("CMBS"). The Company
intends to invest primarily in Subordinated Interests in CMBS,
including investment grade, sub-investment grade and unrated classes.
The Company may also invest in various classes, including rated or
unrated Subordinated Interests, of residential MBS ("RMBS").
Subordinated Interests generally afford a higher yield and entail
greater risk than more senior investment grade securities. See "Risk
Factors--Investment Activity Risks--Risks Related to Investments in
MBS."
EQUITY INVESTMENTS IN REAL ESTATE. The Company intends to invest in
commercial real estate, including properties which are leased on a
long-term basis (ten years or more) to tenants who are typically
responsible for paying a majority of the costs of owning, operating
and maintaining the leased property during the term of the lease, in
addition to the payment of a monthly rent to the landlord for the use
and occupancy of the premises ("Net Leased Real Estate"). The Company
expects to acquire Net Leased Real Estate on a leveraged basis that
will provide sufficient cash flow to provide an attractive return on
its investment after debt service. The Company also intends to
participate with others (including members of the AMRESCO Group) in
real property ownership through joint ventures, partnerships or
limited liability companies. The Company may also acquire real estate
at foreclosure sales or by deed-in-lieu of foreclosure and other
Distressed Real Estate. The Company does not intend to directly
operate any of the real estate owned by it, but rather intends to rely
upon qualified and experienced real estate operators unaffiliated with
the Company. See "Risk Factors--Investment Activity Risks--Risks
Related to Investments in Real Estate."
OTHER INVESTMENTS. The Company will take an opportunistic approach
toward its investments and, therefore, depending upon market
conditions, the Company may invest from time to time in other real
estate related assets, including, without limitation, foreign real
estate and Mortgage Loans to borrowers in foreign countries or secured
by foreign real estate (principally in the markets in which the
AMRESCO Group conducts business or has invested or made Mortgage Loans
in the past, currently including Canada, the United Kingdom and
Mexico). The Company may also invest in interests in other REITs,
registered investment companies, partnerships and other investment
funds and real estate operating companies.
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<PAGE> 15
The Company's business decisions and investment strategies will depend
on changing market factors. Thus, the types of assets which constitute
Targeted Investments and the percentage of the Company's Invested Portfolio
that will be invested in a particular category of assets will vary from time to
time.
INDUSTRY TRENDS
Management of the Company believes that there have been significant
recoveries in real estate property values in recent years, as well as
fundamental structural changes in the real estate capital markets, which have
created significant new opportunities in commercial real estate lending and
investing. These opportunities are the result of the following developments,
among other factors:
o SCALE AND ROLLOVER. The Mortgage Loan market in the United
States has increased from $965 billion in 1980 to
approximately $3.9 trillion in 1996. Commercial real estate
debt outstanding in the United States has increased from $955
billion in 1995 to approximately $1.06 trillion in 1996. A
significant amount of these commercial Mortgage Loans are
scheduled to mature in the near future. The Company believes
that significant rollover or maturity of commercial Mortgage
Loans over the next several years will create demand for
Bridge Loans and Mezzanine Loans which will be utilized to
transition underlying assets for sale or long-term financing
through either securitization or the private debt market.
o RAPID GROWTH OF SECURITIZATION. The total amount of MBS
currently outstanding has grown to approximately $1.9 trillion
in 1996 from $1.0 billion in 1980. The total amount of CMBS
currently outstanding has grown to over $100 billion in 1996
from approximately $6 billion in 1990. The Company believes
that as securitized lending continues to grow, demand for
Mezzanine Loans will increase. Lenders originating commercial
Mortgage Loans for securitization, as well as traditional
lenders such as banks and insurance companies which are
subject to regulatory constraints on their lending activities,
have relatively inflexible underwriting standards,
particularly with regard to Loan to Value Ratios. Mezzanine
Loans are used to finance the portion of a real estate
project's value (typically, the tranche equal to between 75%
to 95% of total capitalized cost) which are typically not
financed by lenders originating commercial Mortgage Loans for
securitization or other traditional lenders. The Company
believes that it is well positioned to review a significant
number of investment opportunities of this type through the
AMRESCO Group, including primarily Holliday Fenoglio Fowler,
which, if carefully underwritten and structured, could
represent attractive investment opportunities with potentially
less risk than direct ownership of real estate. See "Risk
Factors--Investment Activity Risks--Risks Related to
Investments in Mortgage Loans."
o GROWTH IN ECONOMY. The Company believes, given the current
favorable ratio of supply to demand for commercial real estate
in many real estate markets in the United States, that
continued economic growth and job creation will result in the
construction of additional commercial real estate projects.
Therefore, the Company intends to offer Construction Loans to
accommodate new development. The Company may also offer
Construction Loans together with Mezzanine Loans in order to
deliver a convenient, single financing source to commercial
real estate owners and developers. However, there can be no
assurance that economic growth and job creation will continue
and, accordingly, that sufficient demand will exist for
Construction Loans or other Mortgage Loans. See "Risk
Factors--Investment Activity Risks--Limited Identified Assets;
Available Investments."
The Company believes that it is well-positioned to capitalize on the
opportunities resulting from these changes in the real estate market because of
its relationship to the AMRESCO Group, the resources available to the Manager
and the experience and unique relationships of the key executives of the
Manager. Further, the Company believes that traditional providers of debt and
equity financing to the real estate industry have not (i) fully recognized
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<PAGE> 16
the changing environment, (ii) prepared for the changing environment, (iii)
recognized the need for more specialized products, or (iv) developed the
corporate infrastructure and management expertise to effectively implement a
business strategy designed to meet the demands and capitalize on the
opportunities developing in real estate lending and investment.
INITIAL ASSETS
The Company has entered into non-binding commitments or has otherwise
identified $____ million of Mortgage Loans in which it intends to invest with a
portion of the net proceeds of this Offering. Such Mortgage Loans include
primarily Mezzanine Loans, Construction Loans and Bridge Loans identified
through Holliday Fenoglio Fowler. Such Mortgage Loans will be reviewed and
approved by the Company's Chief Investment Officer and the Board of Trust
Managers prior to purchase. The Company's commitments relating to, or
identification of, such Mortgage Loans are not binding upon the Company or the
borrowers and there can be no assurances that the Company will originate or
acquire such Mortgage Loans. See "Risk Factors--Investment Activity
Risks--Limited Identified Assets; Available Investments."
SUMMARY RISK FACTORS
Set forth below is a brief summary of certain material risks involved
in an investment in the Company. The following summary should be read in
conjunction with, and is qualified in its entirety by, the more detailed
information set forth in this Prospectus under the heading "Risk Factors."
o Limited Identified Assets; Available Investments. The Company has
identified only a limited number of Mortgage Loans in which it intends
to invest with a portion of the net proceeds of this Offering. The
Company expects that a significant portion of its Invested Portfolio
will be identified, originated or otherwise made available to it
through the AMRESCO Group, including primarily Holliday Fenoglio
Fowler. There can be no assurance, however, that a sufficient
quantity or quality of Targeted Investments will be provided by the
AMRESCO Group, or that any such Targeted Investments (which will
typically be made available to the Company on a nonexclusive basis)
will be acquired by the Company. Moreover, the REIT Provisions of the
Code place certain restrictions on the Company's ability to invest in
Participating Loans, Mezzanine Loans and certain real estate, which
may diminish the Company's ability to compete with other investors for
such Targeted Investments. If the Manager is unable to originate or
acquire Targeted Investments on favorable terms and conditions and on
a timely basis, the Company's results of operations will be adversely
affected.
o Higher-Risk Mortgage Loans. The Targeted Investments include
Participating Loans (including Mezzanine Loans, Construction Loans and
Bridge Loans), Distressed Mortgage Loans and other types of
non-traditional Mortgage Loans which involve a higher degree of risk
than Mortgage Loans meeting the traditional underwriting criteria of
institutional lenders, and thus could result in losses to the Company.
o Economic Downturn or Recession. The Company expects that a
significant portion of its Invested Portfolio will consist of Mortgage
Loans, which, particularly if economic conditions deteriorate, could
subject the Company to risks of borrower defaults and bankruptcies, as
well as other events and circumstances which could result in losses on
the Company's investments. Moreover, the Company expects that a
significant portion of the Invested Portfolio will consist of
Participating Loans (including Mezzanine Loans, Construction Loans and
Bridge Loans), which typically entitle the Company to share in
appreciation or cash flows from the underlying real estate, as well as
direct ownership of real estate. The returns to the Company on these
types of Mortgage Loans will likely be significantly reduced in the
event of any economic downturn or recession in the markets in which
the real estate owned or the real estate underlying such Mortgage
Loans is located.
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<PAGE> 17
o Risks Related to Investments in Subordinated MBS. The Company expects
that a significant portion of the Invested Portfolio will consist of
Subordinated Interests in MBS which are subject to greater risk of
loss than more senior investment grade securities.
o Risks Related to Investments in Real Estate. The Targeted Investments
include Net Leased Real Estate. The Company intends to purchase such
real estate on a highly leveraged basis. If the tenant of a net
leased property owned by the Company experiences a downturn in its
business, such tenant may be unable to make its lease payments when
due, which in turn could render the Company unable to make timely
payments on its related debt. The Company also intends to make equity
investments in real estate joint ventures, partnerships and limited
liability companies. Such investments may involve risks not present
in direct investments in real estate made solely by the Company, such
as risks that the co-investors will become bankrupt or have economic
or business interests or goals that are inconsistent with those of the
Company, or that such co-investors will take action contrary to the
Company's investment policies or objectives, including the Company's
policies with respect to maintaining its qualification as a REIT. The
Company also may invest in Distressed Real Estate, which may not
generate sufficient revenues to meet operating expenses and debt
service. Neither the Company nor the Manager has any experience in
the operation of real estate. Therefore, neither the Company nor the
Manager will directly operate any of the Company's real estate
investments. The Company will engage experienced real estate
operators to operate its properties and will be dependent upon the
abilities of such third parties to operate such properties. The
ownership of real estate may expose the Company to environmental
liabilities substantially in excess of the Company's investment.
Further, because real estate is a relatively illiquid investment, the
ability of the Company to vary its Invested Portfolio in response to
changes in economic and other conditions may be limited.
o Dependence on Key Personnel. The Company's success will depend to a
significant degree upon the continuing contributions of its key
management personnel, including Mark Gibson, Robert Adair and the
Chief Investment Officer. None of Messrs. Gibson, Adair or the Chief
Investment Officer will enter into employment agreements with the
Company and there can be no assurance that these individuals will
remain in the Company's employ. The loss of any one of these
individuals could have a material adverse effect on the Company's
business and results of operations.
o Dependence on the Manager and the AMRESCO Group. The Company will
contract with the Manager to advise the Board of Trust Managers and
direct the day-to-day business affairs of the Company. Thus, the
Company's success will depend to a large degree on the skill and
experience of the Manager. Moreover, the Company expects that a
significant portion of its Invested Portfolio will be identified,
originated or otherwise made available to it through the AMRESCO
Group. If the Management Agreement is terminated (and no member of
the AMRESCO Group is serving as Manager of the Company), the
Correspondent Agreement may be terminated by Holliday Fenoglio Fowler,
in which case, the AMRESCO Group may not continue to offer Targeted
Investments to the Company. If the Company's relationship with the
AMRESCO Group is terminated, the AMRESCO Group will no longer have an
obligation to identify Targeted Investments to the Company, which
could have a material adverse effect on the results of operations of
the Company.
o Risks Associated With Interest Rate Fluctuations. A significant
portion of the Company's Invested Portfolio and income will be
sensitive to changes in prevailing interest rates and reshaping of the
yield curve which may result in a mismatch between the Company's
borrowing rates and the yield on its Invested Portfolio. In addition,
a significant increase in interest rates would likely reduce the
demand for the Company's Mortgage Loans which would restrict the
Company's ability to originate Mortgage Loans and could reduce the
amount of cash available for distribution to the Company's
shareholders.
o Risks Associated With Leveraging. The Company expects to increase the
size of its Invested Portfolio by employing a significant amount of
leverage, which is likely to increase the volatility of the Company's
income and net value of its Invested Portfolio and could result in
operating or capital losses.
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<PAGE> 18
o Conflicts of Interest. Conflicts of interest between members of the
AMRESCO Group and the Company, including potential purchases from the
AMRESCO Group of Mortgage Loans originated by the AMRESCO Group and
potential competition between the Company and members of the AMRESCO
Group for Targeted Investments, could result in decisions by the
Manager or the Company that do not fully reflect the interests of the
Company's shareholders.
o Lack of Experience. The lack of prior experience of the Company and
the Manager in managing and operating a REIT could adversely affect
the Company's business, financial condition and results of operations.
o Lack of Operating History. The Company has no operating history and
will have many competitors. Active formation and operation of
competing REITs may adversely affect the market price of the Common
Shares and the ability of the Company to acquire Targeted Investments.
o Significant Termination Fee. The Manager may be entitled to a
significant termination fee if the Company does not renew, or elects
to terminate, the Management Agreement which, if paid, could
materially adversely affect the cash available for distribution to the
Company's shareholders and may result in material net operating
losses.
o Absence of Prior Public Market. Prior to this Offering, there has
been no public market for the Common Shares, and there can be no
assurance that an active trading market for the Common Shares offered
will develop or, if developed, be sustained.
o Future Policy Revisions. Future revisions in policies and strategies
may be made at the discretion of the Board of Trust Managers.
o Future Offerings. Future offerings of debt and equity may have an
adverse effect on the market price of the Common Shares.
o Failure to Maintain REIT Status. The Company will be taxed as a
corporation if it fails to maintain its qualification as a REIT.
o Restrictions on Ownership of Common Shares. Restrictions on ownership
of the Common Shares may make it more difficult to change control of
the Company even where such change may be in the best interest of the
Company's shareholders.
THE MANAGEMENT AGREEMENT
Upon the closing of this Offering, the Company will enter into the
Management Agreement with the Manager pursuant to which, subject to the
direction and oversight of the Board of Trust Managers, the Manager will be
responsible for the day-to-day operations of the Company and will perform such
services and activities relating to the assets and operations of the Company as
may be required or appropriate. Such responsibilities will include: (i)
underwriting, originating and acquiring Targeted Investments; (ii) servicing
and managing the Invested Portfolio; (iii) asset/liability and risk management,
hedging of floating rate liabilities, and financing, management and disposition
of the Invested Portfolio, including credit and prepayment risk management;
(iv) capital management, structuring and analysis, capital raising and investor
relations activities; and (v) the provision of certain administrative and
managerial services such as accounting, legal, market research and information
technology services.
The Manager will receive a base management fee (the "Base Management
Fee") payable and calculated quarterly in an amount equal to (i) 1% per annum
of the Average Invested Non-Investment Grade Assets for such calendar quarter,
and (ii) 0.50% per annum of the Average Invested Investment Grade Assets for
such calendar quarter. The term "Average Invested Non-Investment Grade Assets"
for any quarter means the average of the
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<PAGE> 19
aggregate book value of (i) all assets of the Company on a consolidated basis
(as reflected on the Company's balance sheet), excluding the Company's
investment in its nonconsolidated taxable subsidiaries and (ii) all assets of
the Company's nonconsolidated taxable subsidiaries, excluding from (i) and (ii)
all Average Invested Investment Grade Assets, before reserves for depreciation
or bad debts or other similar noncash reserves, computed by dividing (a) the
sum of such values for each of the three months during such quarter (based on
the book value of such assets as of the last day of each month) by (b) three.
The term "Average Invested Investment Grade Assets" means, for any quarter, the
average of the aggregate book value of (i) all assets of the Company on a
consolidated basis (as reflected on the Company's balance sheet), excluding the
Company's investment in its nonconsolidated taxable subsidiaries and (ii) all
assets of the Company's nonconsolidated taxable subsidiaries, which either (a)
have received an Investment Grade Rating from all Rating Agencies which have
rated such asset, or (b) are unrated but are guaranteed by the U.S. government
or any agency or instrumentality thereof, before reserves for depreciation or
bad debts or other similar noncash reserves, computed by dividing (A) the sum
of such values for each of the three months during such quarter (based on the
book value of such assets as of the last day of each month) by (B) three. The
Manager will not receive any management fee for the period prior to the sale of
the Common Shares offered hereby. The Base Management Fee is intended to
compensate the Manager, among other things, for its costs in providing
management services to the Company.
In addition to the Base Management Fee, the Manager will be entitled
to receive incentive compensation (the "Incentive Compensation") for each
fiscal quarter in an amount equal to the product of (a) 25% of the dollar
amount by which (1)(a) funds from operations of the Company (before the
incentive compensation) per Common Share (based on the weighted average number
of shares outstanding) for such quarter plus (b) gains (or minus losses) from
debt restructuring and sales of property per Common Share (based on the
weighted average number of shares outstanding), exceeds (2) an amount equal to
(a) the weighted average of the price per share of this offering and the prices
per share of all subsequent issuances of Common Shares by the Company
multiplied by (b) the ten-year U.S. Treasury rate for such quarter plus 3.5%
multiplied by (b) the weighted average number of Common Shares outstanding
during such quarter. "Funds From Operations" as defined by NAREIT means net
income (computed in accordance with generally accepted accounting principals
("GAAP") excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation and amortization on real estate assets, and after
adjustments for unconsolidated partnerships and joint ventures. Funds From
Operations does not represent cash generated from operating activities in
accordance with GAAP and should not be considered as an alternative to net
income as an indication of the Company's performance or to cash flows as a
measure of liquidity or ability to make distributions. See "The
Manager--Management Compensation" for a more detailed explanation of the
management compensation arrangements.
The Manager is expected to use the proceeds from its Base Management
Fee and Incentive Compensation in part to pay compensation to its officers and
employees who, notwithstanding that certain of them also are officers of the
Company, will initially receive no cash compensation directly from the Company.
The Manager will be reimbursed by the Company for (or charge the
Company directly for) the Manager's costs and expenses for performing due
diligence and certain other tasks with respect to assets purchased, originated
or approved for purchase or origination by the Company. Expense reimbursement
will be made quarterly. See "The Manager--Expenses."
The Base Management Fee and Incentive Compensation are payable in
arrears. The Manager's Base Management Fee and Incentive Compensation and
reimbursable costs and expenses 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, costs and
expenses within 60 days after the end of each fiscal quarter.
The Management Agreement will have an initial term of two years during
which period it will not be terminable by the Manager or the Company except for
"cause" as defined therein. Upon termination of the Management Agreement by
the Company or failure of the Company to renew the Management Agreement after
the initial two-year period (except in the case of a termination by the Company
for cause), the Company will be
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<PAGE> 20
obligated to pay the Manager a substantial termination fee. See "Risk
Factors--Economic and Business Risks--Possible Significant Termination Fee
Payable to the Manager" and "The Manager--The Management Agreement." The
Manager has the right, at any time after the initial two-year period, to
terminate the Management Agreement upon 180 days prior written notice. The
Company has the right, at any time after the initial two-year period, to
terminate the Management Agreement upon 90 days prior written notice.
DIVIDEND POLICY AND DISTRIBUTIONS
To maintain its qualification as a REIT, the Company intends to make
quarterly distributions to its shareholders equal, on an annual basis, to at
least 95% of the Company's Taxable Income (computed without regard to the
dividends paid deduction and any net capital gains) ("REIT Taxable Income").
The foregoing dividend policy is subject to revision at the discretion of the
Board of Trust Managers. All distributions in excess of those required for the
Company to maintain REIT status will be made by the Company at the discretion
of the Board of Trust Managers and will depend on the earnings of the Company,
its financial condition and such other factors as the Board of Trust Managers
deems relevant. The Board of Trust Managers has not established a minimum
dividend level.
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<PAGE> 21
THE OFFERING
Common Shares Offered . . . . . . . . 15,000,000 shares(1)
Common Shares to be Outstanding
After this Offering . . . . . . . . . . 16,675,100 shares(1)(2)(3)
Use of Proceeds . . . . . . . . . . . . Approximately $________ of the
estimated net proceeds of this
Offering will be used to acquire the
Initial Assets and the remaining net
proceeds will be used to acquire
additional Targeted Investments. The
Company intends to temporarily invest
the net proceeds of this Offering in
readily marketable interest bearing
assets until appropriate Targeted
Investments are identified and
acquired. Pending full investment in
the desired mix of Targeted
Investments, funds will be committed
to short-term investments that are
expected to provide a lower net
return than the Company hopes to
achieve from its Targeted
Investments. See "Risk
Factors--Economic and Business
Risks--Temporary Investment in
Short-Term Investments."
Proposed Nasdaq National Market
Symbol. . . . . . . . . . . . . . . . . AMCT
_________________
(1) Assumes that the Underwriters' over-allotment option will not be
exercised. See "Underwriting."
(2) Includes 1,675,000 Common Shares subscribed for by AMRESCO in the
Private Placement, and 100 Common Shares issued to AMRESCO in
connection with the initial organization of the Company. See "Private
Placement."
(3) Excludes 2,501,265 Common Shares to be reserved for issuance under the
Share Option Plan. Upon the closing of this Offering, options to
acquire 1,667,510 Common Shares will be issued under the Share Option
Plan to the Manager, which options will vest ratably over a four-year
period commencing on the first anniversary of the closing of this
Offering. See "Management of the Company--Share Options Outstanding."
CONFLICTS OF INTEREST
Because of the Company's relationship with the Manager and the AMRESCO
Group, the Company will be subject to various potential conflicts of interest.
See "Risk Factors--Economic and Business Risks--Conflicts of Interest" and "The
Manager--Certain Relationships; Conflicts of Interest."
The Company expects to acquire Targeted Investments from, or co-invest
with members of, the AMRESCO Group from time to time and, although the
Independent Trust Managers will review all such transactions, they will rely
primarily upon the Manager, a member of the AMRESCO Group, to advise it as to
the fairness of the terms of any such transaction.
Members of the AMRESCO Group are not restricted from investing in
Targeted Investments (except that the AMRESCO Group has agreed not to invest in
any tranche of MBS, other than MBS issued in securitizations in which any
member of the AMRESCO Group participates in the profit or loss from the
securitization, unless the Independent Trust Managers shall have determined
that the Company should not invest in such securities or should invest in only
a portion of such securities) and, therefore, the investment opportunities of
the Company may be limited if any such Targeted Investments would be attractive
to other members of the AMRESCO Group.
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<PAGE> 22
The Management Agreement does not restrict the Manager or any of its
officers or employees from engaging in any business which competes with the
Company or rendering services of any kind to any other Person who competes with
the Company, except that the AMRESCO Group has agreed that it will not sponsor,
act as manager to or make any significant equity investment in any other
mortgage REIT with investment objectives substantially similar to those of the
Company, without the prior approval of the Independent Trust Managers.
Holliday Fenoglio Fowler receives all of its compensation for Mortgage
Loan originations and real estate dispositions from the applicable borrower or
the applicable seller. Therefore, Holliday Fenoglio Fowler, a member of the
AMRESCO Group and an Affiliate of the Manager, will receive compensation for
any Mortgage Loan or real estate placed with or sold to the Company through
Holliday Fenoglio Fowler regardless of the quality of the Mortgage Loan or real
estate. The President and Chief Executive Officer of the Company and the
Manager is also the President of Holliday Fenoglio Fowler. Such conflicts may
result in decisions by the Manager that are not in the best interest of the
Company.
In order to increase the amount of its Incentive Compensation, the
Manager may place undue emphasis on the maximization of Funds From Operations
at the expense of other criteria, such as preservation of capital, which could
result in increased risk to the Invested Portfolio.
Three of the seven members of the Board of Trust Managers and all of
its officers are employed by members of the AMRESCO Group.
Although (i) the Bylaws require that a majority of the Board of Trust
Managers consist of Independent Trust Managers, (ii) the Independent Trust
Managers will review the activities of the Manager periodically and (iii) the
AMRESCO Group has committed to make a significant equity investment in the
Company pursuant to the Private Placement, there can be no assurance that the
aforementioned conflicts of interest will not have a material adverse effect on
the Company.
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ORGANIZATION AND RELATIONSHIPS
The Manager will manage the day-to-day operations of the Company,
subject to the supervision of the Board of Trust Managers. The relationship
among AMCT, its subsidiaries, the Manager and certain other members of the
AMRESCO Group is depicted below:
[CHART]
An organizational chart is inserted here which graphically shows that AMCT
is owned by (i) AMRESCO, (ii) certain Trust Managers, officers and employees of
the Company, the Manager and other members of the AMRESCO Group, and (iii) the
public shareholders. The chart also shows that the Manager, which is owned by
AMRESCO, as limited partner, and AMREIT G.P., Inc., as general partner, has
certain contractual relationships with AMCT. Finally, the chart shows AMREIT I,
Inc. as a wholly-owned subsidiary of AMCT, and AMREIT II, Inc. as a taxable
subsidiary of AMCT owned by AMCT and the Manager.
(1) Upon the closing of this Offering and the Private Placement, (i)
AMRESCO will own 10% of the outstanding Common Shares, (ii) the Trust
Managers and officers and key employees of the Company, the Manager
and other members of the AMRESCO Group will own 5% of the outstanding
Common Shares, and (iii) the remainder of the outstanding Common
Shares will be owned by the public investors. See "Private
Placement."
(2) The Company will enter into a Management Agreement with the Manager
pursuant to which the Manager will formulate operating strategies and
provide certain managerial and administrative functions for the
Company, subject to the supervision of the Board of Trust Managers. In
addition, upon the closing of this Offering, the Company will grant to
the Manager options to purchase 1,667,510 Common Shares. See
"Management of the Company--Share Options Outstanding."
(3) AMREIT I, Inc., a Delaware corporation, is a wholly-owned Qualified
REIT Subsidiary of AMCT, through which the Company will conduct most
of its mortgage lending and related activities in states other than
the State of Texas.
(4) AMREIT II, Inc., a Delaware corporation, is a taxable subsidiary of
AMCT. In order to comply with the REIT Provisions of the Code, the
Company will own 100% of the non-voting common stock and 5% of the
voting common stock of AMREIT II, Inc. The other 95% voting common
stock of AMREIT II, Inc. will be owned by AMRESCO. See "Federal
Income Tax Consequences--Requirements for Qualification."
(5) All of the partnership interests of the Manager are owned by members
of the AMRESCO Group. AMREIT Managers G.P., Inc. is a wholly-owned
subsidiary of AMRESCO.
The Company may, from time to time, form additional subsidiaries
(which may include wholly-owned Qualified REIT Subsidiaries, taxable
subsidiaries and other entities owned in part by the Company and in part by
third parties, including members of the AMRESCO Group) for purposes of carrying
out its investment or co-investment activities. See "Risk Factors--Economic
and Business Risks--Conflicts of Interest" and "Federal Income Tax
Consequences--Requirements for Qualification." The Company may also form one
or more partnerships, the limited partnership interests in which would be
convertible into Common Shares, for the purpose of enabling the Company to
acquire real estate or interests therein from real estate owners on a tax
deferred basis in exchange for such real estate or interests therein. See
"Business and Strategy--Description of Targeted Investments--Commercial Real
Estate."
The Company's principal executive offices are located at 700 North
Pearl Street, Suite 2400, Dallas, Texas 75201. Its telephone number is (214)
953-7700.
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<PAGE> 24
RISK FACTORS
An investment in the Common Shares involves a high degree of risk.
Prospective investors should carefully consider the following risk factors, in
addition to the other information set forth in this Prospectus.
When used in this Prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "believe," "project," "intend," and
similar expressions are intended to identify forward-looking statements
regarding events, conditions and financial trends that may affect the Company's
future plans of operations, business strategy, results of operations and
financial position. Prospective investors are cautioned that any
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties and that actual results may differ
materially from those included within the forward-looking statements as a
result of various factors. Factors that could cause or contribute to such
differences include, but are not limited to, those described below, and on the
inside front cover page of this Prospectus.
INVESTMENT ACTIVITY RISKS
LIMITED IDENTIFIED ASSETS; AVAILABLE INVESTMENTS. The Company has
identified only a limited number of Mortgage Loans in which it intends to
invest with a portion of the net proceeds of this Offering. The Company's
income and its ability to make distributions to its shareholders will depend
upon its ability to acquire Targeted Investments on acceptable terms and at
favorable spreads over the Company's borrowing costs. The Company expects that
a significant portion of its Invested Portfolio will be identified, originated
or otherwise made available to it through the AMRESCO Group, including
primarily Holliday Fenoglio Fowler. There can be no assurance, however, that a
sufficient quantity or quality of Targeted Investments will be provided by the
AMRESCO Group, or that any Targeted Investments (which will typically be
revealed to the Company on a nonexclusive basis) will be acquired by the
Company. The Company will compete in the acquisition of Targeted Investments
with a significant number of other REITs, investment banking firms, savings and
loan associations, banks, mortgage bankers, insurance companies, mutual funds,
and other entities, some of which have greater financial resources than the
Company. In addition, there are several REITs similar to the Company, and
others may be organized in the future. The effect of the existence of such
additional investors may be to increase competition for the available supply of
Targeted Investments. Increased competition for the acquisition of Targeted
Investments or a diminution in the supply could result in lowered underwriting
standards, which could result in higher risk of loss to the Company, or higher
prices and, thus, lower yields on such Targeted Investments that could further
narrow the yield spread over borrowing costs. The availability of Targeted
Investments is dependent upon, among other things, the size of and level of
activity in the commercial real estate lending market, which depend on various
factors, including the level of interest rates, regional and national economic
conditions and inflation and deflation in commercial real estate values.
Moreover, the REIT Provisions of the Code place certain restrictions on the
Company's ability to invest in Participating Loans, Mezzanine Loans and certain
real estate, which may diminish the Company's ability to compete with other
investors for such Targeted Investments. See "--Tax and Legal Risks--Failure
to Maintain REIT Status." To the extent the Company is unable to acquire a
sufficient volume of Targeted Investments, the Company's income and the
Company's ability to make distributions to its shareholders will be adversely
affected.
RISKS RELATED TO INVESTMENTS IN MORTGAGE LOANS
Commercial Mortgage Loans May Involve a Greater Risk of Loss Than
Single-Family Mortgage Loans. Commercial Mortgage Loans are considered to
involve a higher degree of risk than single-family Mortgage Loans because of a
variety of factors, including generally larger loan balances, dependency for
repayment on successful operation of the mortgaged property and tenant
businesses operating therein, the fact that such loans are usually non-recourse
to the borrower and loan terms that include amortization schedules longer than
the stated maturity and provide for balloon payments at stated maturity rather
than periodic principal payments. In addition, the value of commercial real
estate can be affected significantly by the supply and demand in the market for
that type of property.
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<PAGE> 25
Mezzanine, Construction and Bridge Loans Involve Greater Risks of
Loss. Mezzanine Loans, Construction Loans and Bridge Loans are considered to
involve a higher degree of risk than Permanent Mortgage Loans. In the case of
Mezzanine Loans, foreclosure by the mezzanine lender is often prohibited while
the senior debt is outstanding, and a foreclosure by the holder of the senior
Mortgage Loan could result in a Mezzanine Loan becoming unsecured. The
repayment of Construction Loans is often dependent on successful completion and
operation of the project. Construction Loans are also subject to additional
risk due to 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. Bridge Loans are considered to involve a high degree of risk because,
among other things, repayment is often dependent upon the borrower obtaining a
Permanent Mortgage Loan. In addition, Mezzanine Loans, Construction Loans and
Bridge Loans typically have higher Loan to Value Ratios than conventional
Mortgage Loans.
Participating Loans, Mezzanine Loans, Construction Loans and Bridge
Loans Involve Higher Administrative Costs. Participating Loans, Mezzanine
Loans, Construction Loans and Bridge Loans typically require more extensive
underwriting efforts than Permanent Mortgage Loans which increases the lender's
cost of originating such Mortgage Loans, or considering such Mortgage Loans for
origination. The Management Agreement requires the Company to reimburse the
Manager for expenses incurred in seeking to originate Mortgage Loans approved
by the Company for consideration, including all due diligence expenses. If the
Company incurs a significant amount of due diligence expenses in connection
with Mortgage Loans it does not acquire, the Company's cash flow from
operations may be materially adversely effected. Moreover, if the Company's
total costs to originate such Mortgage Loans become excessive, the Company's
returns on such Mortgage Loans may be materially adversely affected. See "The
Manager--Expenses."
Distressed Mortgage Loans May Have Greater Default Risks Than
Performing Loans. The Company may hold Nonperforming Mortgage Loans 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, higher quality Mortgage Loans. Returns on an investment of
this type depend on accurate pricing of the investment (if the Mortgage Loan is
acquired), the borrower's ability to make required payments, the timeliness of
payments, or, in the event of default, the ability of the Mortgage 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, cost-effectively or in a timely fashion.
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 acquire or originate and of the Mortgage
Loans underlying MBS that it will acquire may contain limitations on the
lender's recourse against the borrower. In other cases, the lender'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 lender'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. Even 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 property securing that
Mortgage Loan.
Volatility of Values of Mortgaged Properties May Affect Adversely the
Company's Mortgage Loans. Commercial real estate values and net operating
income derived therefrom are subject to volatility and may be affected
adversely by a number of factors, including, but not limited to, national,
regional and local economic conditions (which may be adversely affected by
plant closings, industry slowdowns and corporate consolidations, among 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,
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, to make capital
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<PAGE> 26
expenditures and improvements and to provide leasing concessions; construction
quality, age and design; demographic factors; retroactive changes to building
or similar codes; and increases in operating expenses (such as energy costs).
The Company expects a substantial portion of its Invested Portfolio to consist
of Participating Loans and Mezzanine Loans which typically entitle the Company
to a portion of the appreciation or cash flow from the mortgaged property. In
the event of any economic downturn or recession in the market in which the real
estate underlying any such Participating Loan or Mezzanine Loan is located, or
in the event of any other decrease in value of such property, the returns to
the Company will be significantly reduced.
General Default Risks. With respect to its Mortgage Loans, the
Company will be subject to risks of borrower defaults, bankruptcies, fraud and
special hazard losses that are not covered by standard hazard insurance. In
the event of any default under Mortgage Loans held by the Company, the Company
will bear a risk of loss of principal to the extent of any deficiency between
the value of the collateral and the principal amount of the Mortgage Loan, and
may not receive interest payments on such Mortgage Loans which could have a
material adverse effect on the Company's cash flow from operations. In the
event of the bankruptcy of a Mortgage Loan borrower, the Mortgage Loan to such
borrower will be deemed to be secured only to the extent of the value of the
underlying collateral at the time of bankruptcy (as determined by the
bankruptcy court), and the lien securing the Mortgage Loan will be subject to
the avoidance powers of the bankruptcy trustee or debtor-in-possession to the
extent the lien may be unenforceable under state law. Foreclosure of a
Mortgage Loan can be an expensive and lengthy process which could have a
substantial negative effect on the Company's anticipated return on the
foreclosed Mortgage Loan. If the Company forecloses on a Mortgage Loan secured
by real property which is contaminated by hazardous substances, not only will
the real property be subject to a reduced value, but, if the Company assumes
ownership of the real estate, the Company could be subject to environmental
liabilities (which could exceed the value of the real estate) regardless of
whether the Company was responsible for the contamination. Finally, there can
be no assurance that any reserves which the Company may set aside from time to
time on its balance sheet for losses on Mortgage Loans will be adequate to
cover the Company's actual losses on its investments in Mortgage Loans. See
"Certain Legal Aspects of Mortgage Loans and Real Estate Investments."
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 Loan, and some courts have construed the term "judicial
action" broadly. The servicer of the Mortgage Loan may be required to
foreclose first on properties located in states where such "one action" rules
apply (and when non-judicial foreclosure is permitted) before foreclosing on
properties located in states where judicial foreclosure is the only permitted
method of foreclosure. Such rules may increase the Company's costs to
foreclose on a Mortgage Loan and materially reduce the Company's return. See
"Certain Legal Aspects of Mortgage Loans and Real Estate
Investments--Foreclosure."
RISKS RELATED TO INVESTMENTS IN MBS
Subordinated Interests are Subject to Greater Credit Risks Than More
Senior Classes. The Company expects the Invested Portfolio to include a
significant amount of various classes of MBS, including "first loss" classes of
subordinated MBS (hereinafter referred to as "Subordinated Interests"). 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 underlying Mortgage Collateral. Subordinated Interests are
subject to special risks, including a substantially greater risk of loss of
principal and non-payment of interest than more senior classes. While the
market values of most Subordinated Interest classes tend to react less to
fluctuations in interest rate levels than more senior classes, the market
values of Subordinated Interest classes tend to be more sensitive to changes in
economic conditions than more senior classes. As a result of these and other
factors, Subordinated Interests generally are not actively traded, are more
difficult to pledge as collateral for borrowings and may not provide holders
thereof with liquidity of investment.
The yield to maturity on Subordinated Interests of the type the
Company intends to acquire will be extremely sensitive to the default and loss
experience of the underlying mortgage pass-through securities or pools of whole
loans securing or backing a series of MBS and the timing of any such defaults
or losses. Because the
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<PAGE> 27
Subordinated Interests of the type the Company intends to acquire generally
have no credit support, to the extent there are realized losses on the Mortgage
Collateral for such classes, the Company may recover less than the full amount,
if any, of its initial investment in such Subordinated Interests.
When the Company acquires a Subordinated Interest, it may be unable to
obtain the right to service the underlying performing Mortgage Collateral. To
minimize its losses, if the underlying Mortgage Collateral is in default, the
Company will seek to obtain the rights to service such underlying Mortgage
Collateral, although in some cases it will not be able to obtain Special
Servicing Rights on acceptable terms. To the extent the Company does not
obtain Special Servicing Rights with respect to the Mortgage Collateral
underlying its MBS, the servicer of the Mortgage Collateral generally would be
responsible to holders of the senior classes of MBS, 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 Subordinated Interests to more senior classes may
affect adversely the yield on the Subordinated Interests even if realized
losses are not ultimately allocated to such classes. On any payment date,
interest and principal are paid on the more senior classes before interest and
principal are paid with respect to the unrated or non-investment grade credit
support classes. Typically, interest deferred on these credit support classes
is payable on subsequent payment dates to the extent funds are available, but
such deferral may not itself bear interest. Such deferral of interest will
affect adversely the yield on the Subordinated Interests.
Yields on Subordinated Interests May Be Affected Adversely By
Prepayments and Interest Rate Changes. The yield on the Subordinated Interests
also will be affected by the rate and timing of payments of principal
(including prepayments, repurchase, defaults and liquidations) on the Mortgage
Loans underlying a series of MBS. The rate of principal payments may vary
significantly over time depending on a variety of factors such as the level of
prevailing Mortgage Loan interest rates and economic, demographic, tax, legal
and other factors. Prepayments on the Mortgage Loans underlying a series of
MBS are generally allocated to the more senior classes of MBS until those
classes are paid in full or until the end of a lock-out period, typically of
five years or more. Generally, prepayments of principal from the Mortgage
Loans are not received by the Subordinated Interest holders for a period of at
least four years. As a result, the weighted average lives of the Subordinated
Interests may be longer than would be the case if, for example, prepayments
were allocated pro rata to all classes of MBS. To the extent that the holder
of a Subordinated Interest is not paid compensating interest on interest
shortfalls due to prepayments, liquidations or otherwise, the yield on the
Subordinated Interests may be affected adversely.
Certain Investments May Generate Taxable Income Exceeding Cash Flow.
The Company also may invest in certain classes of MBS that are designated as
the residual interest in the related REMIC (a "REMIC Residual Interest") or
that represents the residual interest in a non-REMIC securitization ("Non-REMIC
Residual Interest"), which receive principal and interest payments in excess of
amounts needed to make payments on other classes of securities or to fund a
reserve account. Like interest otherwise allocable to Sub IOs, principal and
interest amounts otherwise allocable to such residual interests are used to
protect the senior classes of securities from credit losses on the underlying
Mortgage Loans. Moreover, in any given year, the taxable income produced by a
residual interest may exceed its cash flow. The Company may also invest in
Distressed Mortgage Loans and such loans may produce taxable interest income
for the Company prior to the Company's receipt of loan payments.
RISKS RELATED TO INVESTMENTS IN REAL ESTATE
Risks Involved in Real Estate Ownership Through Partnerships and Joint
Ventures. The Company intends to participate with other entities in real
estate ownership through joint ventures or partnerships. Partnership or joint
venture investments may, under certain circumstances, involve risks not
otherwise present, including the possibility that the Company's partners or
co-venturers might become bankrupt, that such partners or co-venturers might at
any time have economic or other business interests or goals that are
inconsistent with the business interests or goals of the Company, and that such
partners or co-venturers may be in a position to take action contrary to the
instructions or the requests of the Company or contrary to the Company's
policies or objectives, including the Company's policy
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with respect to maintaining its qualification as a REIT. See "--Tax and Legal
Risks--Failure to Maintain REIT Status." The Company will, however, seek to
maintain sufficient control of such partnerships or joint ventures to permit
the Company's business objectives to be achieved. In addition, the Company may
in the future acquire either a limited partnership interest in a property
partnership without partnership management responsibility or a co-venturer
interest or co-general partnership interest in a property partnership with
shared responsibility for managing the affairs of a property partnership or
joint venture and, therefore, will not be in a position to exercise sole
decision-making authority regarding the property partnership or joint venture.
There is no limitation under the Company's organizational documents or
operating policies as to the amount of available funds that may be invested in
partnerships or joint ventures.
Reliance on Third Party Operators. Neither the Company nor the
Manager has experience in the operation of real estate. Therefore, neither the
Company nor the Manager intends to operate any of the Company's real estate
investments. The Company will engage experienced real estate operators to
operate its properties and will be dependent upon the abilities of such third
parties to operate such real estate. The failure of any such operator to
operate the Company's real estate competently or efficiently, or to operate any
such real estate in accordance with the Company's policies and objectives,
including the Company's policy with respect to maintaining its status as a
REIT, could have a material adverse effect on the results of operations of the
Company.
Tenant Defaults and Bankruptcy. A portion of the Company's income is
expected to be derived from rental income on real estate owned and,
consequently, the Company's distributable cash flow and ability to make
expected distributions to shareholders would be adversely affected if a
significant number of tenants of the Company's owned real estate failed to meet
their lease obligations. At any time, a tenant of the Company could seek the
protection of the bankruptcy laws, which could result in delays in rental
payments or in the rejection and termination of such tenant's lease. No
assurance can be given that tenants will not file for bankruptcy protection in
the future or, if any tenants file, that they will affirm their leases and
continue to make rental payments in a timely manner. In addition, a commercial
tenant from time to time may experience a downturn in its business which may
weaken its financial condition and result in the failure to make rental
payments when due.
Conditions Beyond the Company's Control May Affect Adversely the Value
of Real Estate. The underlying value of the Company's real estate investments
and the Company's income and ability to make distributions to its shareholders
are dependent upon the ability of the third party operators engaged by the
Company to operate such real estate in a manner sufficient to maintain or
increase revenues in excess of operating expenses and debt service or, in the
case of real estate leased to a single lessee, the ability of the lessee to
make rent payments. Revenues may be adversely affected by adverse changes in
national or local economic conditions, competition from other properties
offering the same or similar services, changes in interest rates and in the
availability, cost and terms of mortgage funds, the impact of present or future
environmental legislation and compliance with environmental laws, the ongoing
need for capital improvements (particularly in older structures), changes in
real estate tax rates and other operating expenses, adverse changes in
governmental rules and fiscal policies, civil unrest, acts of God, including
earthquakes, hurricanes and other natural disasters (which may result in
uninsured losses), acts of war, adverse changes in zoning laws, and other
factors which are beyond the control of the Company.
Real Estate is Illiquid and its Value May Decrease. Real estate
investments are relatively illiquid. To the extent the Company holds a
significant amount of real estate, the ability of the Company to vary its
Invested Portfolio in response to changes in economic and other conditions will
be limited. No assurances can be given that the fair market value of any of
the Company's real estate assets will not decrease in the future.
The Company's Insurance Will Not Cover All Losses. The Company
intends to maintain comprehensive insurance on all of its real estate,
including liability and fire and extended coverage, in amounts sufficient to
permit the replacement of the improvements thereon 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 real
estate similar in nature in the areas where such real estate is located. There
are certain types of losses, however, generally of a catastrophic nature, such
as earthquakes, floods and hurricanes, that may be uninsurable or not
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<PAGE> 29
economically insurable. Inflation, changes in building codes and ordinances,
environmental considerations, and other factors also might make it infeasible
to use insurance proceeds to replace a property if it is damaged or destroyed.
Under such circumstances, the insurance proceeds received by the Company, 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 estate 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 estate could affect adversely the Company's income and ability
to make distributions to its shareholders and could decrease the value of that
real estate.
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 estate acquired by the Company may not be in compliance
with the ADA. If a property is not in compliance, the owner of the property
will be required to make modifications to such property to bring it in
compliance, or face the possibility of an imposition of fines or an award of
damages to private litigants. In addition, changes in governmental rules and
regulations or enforcement policies affecting the use and operation of the real
estate, including changes to building codes and fire and life-safety codes, may
occur. If the Company is required to make substantial modifications to any of
its properties to comply with the ADA or other changes in governmental rules
and regulations, the Company's ability to make expected distributions to its
shareholders could be adversely affected. See "Certain Legal Aspects of
Mortgage Loans and Real Estate Investments."
Real Estate with Hidden Environmental Problems Will Increase Costs and
May Create Liability for the Company. Operating costs and the value of the
real estate acquired 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 future legislation. Under various federal,
state and local environmental laws, ordinances and regulations, a current or
previous owner or operator of real estate may be liable for the costs of
removal or remediation of hazardous or toxic substances on, under or in such
real estate. Such laws often impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. Therefore, an environmental liability could have a material
adverse effect on the value of the real estate acquired by the Company, the
Company's income and cash available for distribution to its shareholders. The
Company intends to obtain Phase I environmental assessments on all real estate
acquired by the Company prior to the acquisition by the Company of such real
estate. The purpose of Phase I environmental assessments is to identify
potential environmental contamination that is made apparent from historical
reviews of the real estate, reviews of certain public records, preliminary
investigations of the sites and surrounding real estate, and screening for the
presence of hazardous substances, toxic substances and underground storage
tanks. Even if a Phase I environmental assessment is obtained, however, there
is no assurance it will reveal all existing and potential environmental risks
and liabilities, and there is no assurance that there will be no unknown or
material environmental obligations or liabilities. See "Certain Legal Aspects
of Mortgage Loans and Real Estate Investments."
Real Estate With Known Environmental Problems May Create Liability for
the Company. The Company may invest in real estate with known environmental
problems that materially impair the value of the real estate. In such cases,
the Company will generally take certain steps to seek to limit its
environmental liability, including the creation of a special purpose entity
which will own such real estate. Despite these precautionary measures, there
are risks associated with such an investment. See "Certain Legal Aspects of
Mortgage Loans and Real Estate Investments."
Foreign Real Estate is Subject to Currency Conversion Risks and
Uncertainty of Foreign Laws. The Company may invest in real estate located
outside the United States. Investing in real estate located in foreign
countries creates risks associated with the uncertainty of foreign laws and
markets including, without limitation, laws respecting foreign ownership, the
enforceability of loan documents and foreclosure laws. Moreover, investments
in
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foreign real estate are subject to currency conversion risks. In addition,
income from investment in foreign real estate may be subject to tax by foreign
jurisdictions, which would reduce the economic benefit of such investments.
Neither the Company nor the Manager has experience in investing in foreign real
estate. The Company intends to limit its investments in foreign real estate to
those jurisdictions in which the AMRESCO Group has historically conducted
business (currently, Canada, the United Kingdom and Mexico).
ECONOMIC AND BUSINESS RISKS
DEPENDENCE ON KEY PERSONNEL. The Company's success will depend to a
significant degree upon the continuing contributions of its key management
personnel including Mark D. Gibson, its President and Chief Executive Officer,
Robert L. Adair III, its Chairman, and _______________, its Executive Vice
President and Chief Investment Officer (collectively, the "Principals"). The
Company currently has no employment agreements with any of the Principals. The
loss of these or other key management or technical personnel could have a
material adverse effect on the Company's financial condition and results of
operations. The Company does not intend to obtain key man life insurance with
respect to any of its executives.
DEPENDENCE ON THE MANAGER AND THE AMRESCO GROUP. The Company will be
wholly dependent for the selection, structuring and monitoring of its Invested
Portfolio and associated borrowings on the diligence and skill of the officers
and employees of the Manager. The Manager, in turn, is dependent on its
ability to attract, retain and motivate qualified personnel. The Company does
not anticipate requiring the Manager to enter into employment agreements with
its officers or employees. The loss of key employees of the Manager could have
a material adverse effect on the Company's business, financial condition, cash
flows and results of operations. Moreover, the Company expects that a
significant portion of its Invested Portfolio will be identified, originated or
otherwise made available to it through the AMRESCO Group. If the Management
Agreement is terminated (and no member of the AMRESCO Group is serving as
manager of the Company), the Correspondent Agreement may be terminated by
Holliday Fenoglio Fowler, in which case, the AMRESCO Group would have no
further obligation to offer Targeted Investments to the Company. The inability
of the Company to acquire Targeted Investments on favorable terms and
conditions could have a material adverse effect on the results of operations of
the Company.
RISKS ASSOCIATED WITH INTEREST RATE FLUCTUATIONS
Interest Rate Mismatch Between Invested Portfolio Yield and Borrowing
Rates. The Company's operating results will depend in large part on
differences between the income earned on its Invested Portfolio (net of credit
losses) and its borrowing costs. The Company may fund a substantial portion of
its Invested Portfolio with borrowings having interest rates that reset
relatively rapidly, such as monthly or quarterly. The Company anticipates
that, in some cases, the income from its Invested Portfolio may respond more
slowly to interest rate fluctuations than the cost of its borrowings, creating
a potential mismatch between the yield on its Invested Portfolio and borrowing
rates. Consequently, changes in interest rates, particularly short-term
interest rates, may significantly influence the Company's net income. If there
is a mismatch, increases in these rates will tend to decrease the Company's net
income and market value of the Company's net Invested Portfolio. Interest rate
fluctuations resulting in the Company's interest expense exceeding interest
income would result in the Company incurring operating losses.
Yield Curve Reshaping. The relationship between short-term and
long-term interest rates is often referred to as the "yield curve." Ordinarily,
short-term interest rates are lower than long-term interest rates. If
short-term interest rates rise disproportionately relative to long-term
interest rates (a flattening of the yield curve), the borrowing costs of the
Company may increase more rapidly than the interest income earned on its
Invested Portfolio. Because the Company's borrowings will primarily bear
interest at short-term rates and its Invested Portfolio will primarily earn
interest at medium-term to long-term rates, a flattening of the yield curve
will tend to decrease the Company's net income and market value of its net
Invested Portfolio. Additionally, to the extent cash flows from long-term
assets that return scheduled and unscheduled principal and other payments are
reinvested, the spread between the yields of the new assets and available
borrowing rates may decline and also may tend to decrease the net income and
market value of the Company's net Invested Portfolio. It is also possible that
short-term interest rates may adjust
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relative to long-term interest rates such that the level of short-term rates
exceeds the level of long-term rates (a yield curve inversion). In such event,
the Company's borrowing costs may exceed its interest income and operating
losses would be incurred.
Decreased Demand for Mortgage Loans. A significant increase in
interest rates would likely reduce the demand for Mortgage Loans, which could
impair the Company's ability to acquire Targeted Investments, which could in
turn reduce the Company's income and ability to make distributions to its
shareholders.
RISKS ASSOCIATED WITH LEVERAGING. The Company's operations are
expected to be highly leveraged. The Company intends to finance its
acquisitions of Targeted Investments through the net proceeds of this Offering
and by borrowing against or "leveraging" its Invested Portfolio. The Company
will leverage primarily with reverse repurchase agreements, securitizations of
its Mortgage Loans and secured and unsecured loans. The Company has entered
into agreements or obtained commitments which are expected to provide the
Company with $________ of financing for the acquisition of Targeted
Investments. See "Management's Discussion and Analysis of Liquidity and
Capital Resources" and "Business and Strategy--Operating Policies--Capital and
Leverage Policies." The Company expects to maintain a debt to equity ratio no
greater than 3:1, although the actual ratio may be higher or lower from time to
time depending upon market conditions and other factors deemed relevant by the
Manager, subject to the review of the Board of Trust Managers. However, the
Declaration of Trust and Bylaws do not limit the amount of indebtedness the
Company can incur, and the Board of Trust Managers has the discretion to
deviate from or change its indebtedness policy at any time, without consent
from or notice to the Company's shareholders. See "--Future Revisions in
Policies and Strategies."
Leverage creates an opportunity for increased net income, but at the
same time creates volatility in the Company's income and the value of its net
Invested Portfolio. The Company will leverage its Invested Portfolio only when
there is an expectation that it will enhance returns, although there can be no
assurance that the Company's use of leverage will prove to be beneficial or
advantageous to the Company, relative to the Company's risks. Moreover, there
can be no assurance that the Company will be able to meet its debt service
obligations. The Company's ability to meet its debt service obligations will
be dependent upon the Company's receipt of sufficient income from its Invested
Portfolio. In the event of a mismatch in interest rates between the Company's
borrowings and the yield on its Invested Portfolio or other reductions in cash
flow, including without limitation reductions resulting from payment defaults
on the Company's Mortgage Loans, MBS or other assets, the Company may not have
sufficient cash flow to meet its debt service obligations. See "--Risks
Associated With Interest Rate Fluctuations" and "--Investment Activity Risks."
The ability of the Company to achieve its desired level of leverage,
and therefore its investment objective, depends to a significant extent on its
ability to borrow money in sufficient amounts and on sufficiently favorable
terms to earn incremental returns. The Company may not be able to achieve the
degree of leverage it believes to be optimal due to decreases in the proportion
of the value of its Invested Portfolio that it can borrow, decreases in the
market value of the Invested Portfolio, increases in interest rates, changes in
the availability of financing in the market, conditions then applicable in the
lending market and other factors. If the Company is unable to enter into
borrowing arrangements on terms and conditions satisfactory to the Company, or
if such arrangements are subsequently terminated, the Company may be unable to
effectively implement its leveraging strategy. Such an occurrence may cause
the Company to experience losses or lower profits than would otherwise be the
case.
A substantial portion of the Company's borrowings are expected to be
in the form of collateralized borrowings. If the value of the assets pledged
to secure such borrowings were to decline, the Company would be required to
post additional collateral, to reduce the amount borrowed or suffer forced
sales of the collateral. If sales were made at prices lower than the carrying
value of the collateral, the Company would experience additional losses. If
the Company is forced to liquidate Qualified REIT Real Estate Assets to repay
borrowings, there can be no assurance that it will be able to maintain
compliance with the REIT Provisions of the Code regarding asset and source of
income requirements. See "--Tax and Legal Risks--Failure to Maintain REIT
Status."
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RISKS ASSOCIATED WITH HEDGING TRANSACTIONS. The Company may, from
time to time, enter into hedging transactions in an effort to protect itself
from the effect of interest rate fluctuations on any floating rate debt it may
incur and also to protect its Invested Portfolio from interest rate and
prepayment rate fluctuations. There can be no assurance that the Company will
enter into hedging activities or that if entered into, such activities will
have the desired beneficial impact on the Company's results of operations or
financial condition. Moreover, no hedging activity can completely insulate the
Company from the risks associated with changes in interest rates and prepayment
rates.
Hedging involves risk and typically involves costs, including
transaction costs. Such costs increase dramatically as the period covered by
the hedging increases and during periods of rising and volatile interest rates.
The Company may increase its hedging activity and, thus, increase its hedging
costs, during such periods when interest rates are volatile or rising and
hedging costs have increased. The Company intends generally to hedge as much
of the interest rate risk as the Manager determines is in the best interest of
the shareholders of the Company given the cost of such hedging transactions and
the need to maintain the Company's status as a REIT.
Hedging instruments often are not traded on regulated exchanges,
guaranteed by an exchange or its clearing house, or regulated by any U.S. or
foreign governmental authorities. Consequently, there are no requirements with
respect to record keeping, financial responsibility or segregation of customer
funds and positions. The business failure of a counterparty with which the
Company has entered into a hedging transaction will most likely result in a
default. Default by a party with which the Company has entered into a hedging
transaction may result in the loss of unrealized profits and force the Company
to cover its resale commitments, if any, at the then current market price.
Although generally the Company will seek to reserve for itself the right to
terminate its hedging positions, it may not always be possible to dispose of or
close out a hedging position without the consent of the counterparty, and the
Company may not be able to enter into an offsetting contract in order to cover
its risk. There can be no assurance that a liquid secondary market will exist
for hedging instruments purchased or sold, and the Company may be required to
maintain a position until exercise or expiration which could result in losses.
CONFLICTS OF INTEREST. As a result of the relationship between the
Manager, the AMRESCO Group and the Company, there are conflicts of interest
between the operations of the AMRESCO Group and the Company in the acquisition
and disposition of assets. The Company expects to acquire Targeted Investments
from members of the AMRESCO Group from time to time and to co-invest with
members of the AMRESCO Group in Mortgage Loans or other Targeted Investments
originated or acquired by such members of the AMRESCO Group. Transactions with
members of the AMRESCO Group that fall within the provisions of the Guidelines
need not be specifically approved in advance by a majority of the Independent
Trust Managers. Although the Independent Trust Managers will review the
Guidelines periodically and monitor compliance with those Guidelines, it is
anticipated that they will rely primarily on information provided by the
Manager. Such conflicts may result in decisions and/or allocations of assets
by the Manager that are not in the best interest of the Company.
Although the AMRESCO Group has agreed to present to the Company (on a
nonexclusive basis) investment opportunities arising within Holliday Fenoglio
Fowler which meet the investment parameters and objectives of the Company, the
AMRESCO Group will have no obligation to make other investment opportunities
available to the Company, even when such opportunities are consistent with the
Company's investment objectives and criteria. Members of the AMRESCO Group
expect to continue to originate and purchase Mortgage Loans and other real
estate related assets in the future, including some which meet the investment
parameters and objectives of the Company. Although such other investment
opportunities are expected to generally be made available to the Company,
neither the Manager nor any other member of the AMRESCO Group will have any
obligation to offer such opportunities to the Company or be prevented from
presenting the same to competitors of the Company, except as described below,
nor will the Company have a right of first refusal with respect thereto. As a
consequence, the investment opportunities for the Company may be limited if
such investment opportunities would be attractive to the Manager or other
members of the AMRESCO Group.
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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,
except that the AMRESCO Group has agreed not to invest in any tranche of MBS
(other than MBS issued in securitizations in which any member of the AMRESCO
Group participates in the profit or loss from such securitizations) unless the
Independent Trust Managers have determined not to invest in such securities or
have determined only to invest in a portion of such securities. In addition,
the AMRESCO Group has agreed not to sponsor, manage or make any significant
equity investment in any other mortgage REIT with the same investment
objectives as the Company. See "The Manager--Certain Relationships; Conflicts
of Interest."
Holliday Fenoglio Fowler receives all of its compensation for Mortgage
Loan originations and real estate dispositions from the applicable borrower or
the applicable seller. Therefore, Holliday Fenoglio Fowler, a member of the
AMRESCO Group and an Affiliate of the Manager, will receive compensation for any
Mortgage Loan or real estate placed with or sold to the Company through
Holliday Fenoglio Fowler regardless of the quality of such Mortgage Loan or real
estate. The President and Chief Executive Officer of the Company and the
Manager is also the President of Holliday Fenoglio Fowler. Such conflicts may
result in decisions by the Manager that are not in the best interest of the
Company.
In addition to its Base Management Fee, the Manager will have the
opportunity to earn Incentive Compensation under the Management Agreement for
each fiscal quarter based upon the Company's FFO for such quarter. In
evaluating Targeted Investments and other management strategies, the
opportunity to earn Incentive Compensation based on FFO may lead the Manager to
place undue emphasis on the maximization of FFO at the expense of other
criteria, such as preservation of capital, in order to achieve a higher
Incentive Compensation and could result in increased risk to the value of the
Invested Portfolio. In addition, the Manager's Incentive Compensation is
calculated and earned based upon the results of each quarter. Therefore, the
Manager could earn Incentive Compensation based upon one quarter's results even
during a year when the Company experiences a net loss for the year. The
structure of the Base Management Fee, which does not decrease with the size of
the Company's Invested Portfolio, provides an incentive for the Manager to
highly leverage the Invested Portfolio, even when such action may not be in the
best interest of the Company. See "The Manager--Management Compensation."
The Management Agreement does not specify a minimum amount of time
that the Manager or its officers and employees must devote to the business of
the Company. The ability of the Manager and its employees to engage in other
business activities on behalf of other members of the AMRESCO Group could
reduce the time and effort spent on the management of the Company which would
adversely impact the Company's performance. None of the senior executive
officers of the Manager (other than the Chief Investment Officer) will be
full-time employees of the Manager. See "The Manager."
LACK OF PRIOR EXPERIENCE. Both the Company and the Manager are newly
formed and, therefore, neither the Company nor the Manager has previously
managed or operated a REIT. In particular, neither the Manager nor any other
member of the AMRESCO Group has experience in complying with the asset and
source of income requirements imposed by the REIT Provisions of the Code. This
lack of prior experience could adversely affect the Company's business,
financial conditions and results of operations. The Company will commence
substantive operations upon the closing of this Offering and, accordingly, has
not yet developed any financial or operating history or experienced interest
rate fluctuations or market conditions.
POSSIBLE SIGNIFICANT TERMINATION FEE PAYABLE TO THE MANAGER. The
Manager may be entitled to a significant termination fee if the Company does
not renew, or elects to terminate, the Management Agreement, which, if paid,
would materially adversely affect the cash available for distribution to the
Company's shareholders and may result in material net operating losses for the
period.
ABSENCE OF PRIOR PUBLIC MARKET. Prior to this Offering, there has
been no public market for the Common Shares, and there can be no assurance that
an active trading market for the Common Shares offered hereby will develop or,
if developed, be sustained. The initial public offering price will be
determined through negotiations between the Company and the Representatives of
the Underwriters and may bear no relationship to the price at which
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the Common Shares will trade after the closing of this Offering. See
"Underwriting." The market price of the Common Shares may be volatile and may
be significantly affected by factors such as actual or anticipated fluctuations
in the Company's operating results, developments with respect to conditions and
trends in the Company's lines of business or in the financial services industry
or real estate market as a whole, governmental regulation, changes in estimates
by securities analysts of the Company's or its competitors' future financial
performance, general market conditions and other factors, many of which are
beyond the Company's control. In addition, the stock market has from time to
time experienced significant price and volume fluctuations that have adversely
affected the market prices of securities of companies irrespective of such
companies' operating performances.
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of this Offering and
the Private Placement, the Company will have a total of 16,675,100 Common Shares
outstanding (19,175,100 if the Underwriters' over-allotment option in this
Offering is exercised in full and the number of Common Shares sold in the
Private Placement is increased as a result). Of these shares, the 15,000,000
Common Shares offered hereby (17,250,000 if the Underwriters' over-allotment
option is exercised in full) will be freely tradeable without restriction or
registration under the Securities Act by Persons other than Affiliates of the
Company. The remaining 1,675,100 Common Shares (1,925,000 if the Private
Placement is increased to its maximum as a result of the separate exercise
in full of the Underwriters' over-allotment option) will be "restricted
securities" as that term is defined by Rule 144 as promulgated under the
Securities Act. Upon completion of this Offering, the Company will issue
options to purchase 1,667,510 Common Shares at the initial public offering
price. Options to purchase an additional 833,755 Common Shares will remain
available for issuance under the Share Option Plan. See "Management of the
Company--Share Options Outstanding" and "Shares Available for Future Sale."
The "restricted securities" and Common Shares issued upon the exercise of
Share Options will become eligible for sale upon expiration of the lock-up
restrictions described below. AMRESCO has agreed not to offer, sell, offer to
sell, or contract to sell, pledge, grant any option to purchase or otherwise
dispose of or sell (or announce any offer, sale, offer of sale, contract of
sale, pledge, grant any option to purchase or other sale or disposition of) the
Common Shares acquired by it pursuant to the Private Placement for a period of
two years from the closing of this Offering without the prior written consent of
Prudential Securities Incorporated on behalf of the Underwriters so long as the
Manager or another member of the AMRESCO Group continues to serve as manager of
the Company during such period. In addition, the Company and the Trust Managers
and executive officers of the Company have agreed not to offer, sell, offer to
sell, contract to sell, pledge, grant any option to purchase or otherwise
dispose of or sell (or announce any offer, sale, offer of sale, contract of
sale, pledge, grant any option to purchase or other sale or disposition of) any
Common Shares, or any securities convertible into, or exchangeable or
exercisable therefor, for a period of 180 days after the closing of this
Offering, without the prior written consent of Prudential Securities
Incorporated on behalf of the Underwriters, except that during such period,
Common Shares may be issued upon the exercise of outstanding Share Options and
the Company may issue Share Options which are exercisable after the 180th day
after the closing of this Offering. Prudential Securities Incorporated may, in
its sole discretion, at any time and without notice, release all or any portion
of the Common Shares subject to such lock-up agreements.
The Company has agreed that, upon AMRESCO's demand, it will file and seek
to have declared effective a resale registration statement covering the sale in
the public market of the shares sold to AMRESCO in the Private Placement. See
"Description of Shares of Beneficial Interest--Registration Rights" and "Private
Placement." Following expiration of the lock-up period described above,
assuming such resale registration statement is filed and declared effective,
those shares will be available for sale in the public market. If such resale
registration statement is not filed and declared effective, those shares will be
available for sale, following expiration of the lock-up restrictions discussed
above, pursuant to Rule 144 including the manner of sale and volume limitations
thereof. See "Private Placement."
In addition, the Company anticipates that, during 1998, it will file a
registration statement with respect to the 2,501,265 Common Shares issuable
under the Share Option Plan and any Common Shares which may be issued in
connection with other incentive compensation arrangements thereby allowing such
shares to be transferred or resold without restriction under the Securities Act,
subject to the lock-up restrictions discussed above. See "Management of the
Company--Share Option Plan" and "Management of the Company--Share Options
Outstanding."
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Prior to this Offering, there has been no public market for the Common
Shares and no prediction can be made of the effect, if any, that the sale or
availability for sale of additional Common Shares will have on the market price
of the Common Shares. Nevertheless, sales of substantial amounts of such
shares in the public market, or the perception that such sales could occur,
could materially and adversely affect the market price of the Common Shares and
could impair the Company's future ability to raise capital through an offering
of its equity securities. See "Shares Eligible for Future Sale."
TEMPORARY INVESTMENT IN SHORT-TERM INVESTMENTS. The Company may
require up to six months to have the net proceeds of this Offering fully
invested in Targeted Investments and up to an additional nine months to fully
implement a leveraging strategy to increase the Invested Portfolio to the
desired level. The Company's results of operations may be adversely affected
during the period in which the Company is initially implementing its
investment, leveraging and hedging strategies since during this time the
Company will be primarily investing in short-term investments which are
expected to provide a lower net return than the Company expects to achieve from
its Targeted Investments. See "Use of Proceeds."
ACTIVE FORMATION AND OPERATION OF COMPETING MORTGAGE REITS AND OTHER
COMPANIES. In addition to existing companies, other companies may be organized
for purposes similar to that of the Company, including companies organized as
REITs focused on acquiring investments similar to the Targeted Investments. A
proliferation of such companies may increase the competition for equity capital
and thereby adversely affect the market price of the Common Shares. In
addition, adverse publicity affecting this sector of the capital markets or
significant operating failures of competitors may adversely affect the market
price of the Common Shares.
FUTURE REVISIONS IN POLICIES AND STRATEGIES. The Board of Trust
Managers has established the policies and strategies set forth in this
Prospectus as the policies and strategies of the Company. However, these
policies and strategies may be modified or waived by the Board of Trust
Managers without shareholder consent, subject, in certain cases, to approval by
a majority of the Independent Trust Managers. The ultimate effect of these
changes may have a positive or negative effect on the results of operations of
the Company. See "Business and Strategy--Operating Policies--Future Revisions
in Policies and Strategies."
EFFECT OF FUTURE OFFERINGS OF DEBT AND EQUITY ON MARKET PRICE OF THE
COMMON SHARES. The Company may in the future increase its capital resources by
making additional offerings of equity and debt securities, including classes of
Preferred Shares, Common Shares, commercial paper, medium-term notes, MBS and
senior or subordinated notes. All debt securities and other borrowings, as
well as all classes of Preferred Shares, will be senior to the Common Shares in
a liquidation of the Company. The effect of additional equity offerings may be
the dilution of the equity of shareholders of the Company or the reduction of
the price of Common Shares, or both. The Company is unable to estimate the
amount, timing or nature of additional offerings as they will depend upon
market conditions and other factors.
YEAR 2000 COMPLIANCE. The Company will rely upon a significant number
of computer software programs and operating systems of the Manager and other
members of the AMRESCO Group as well as parties unaffiliated with the AMRESCO
Group in conducting its operations. To the extent that these software
applications contain source code that is unable to appropriately interpret the
upcoming calendar year "2000," some level of modification or even possibly
replacement of such source code or applications will be necessary. Given the
information known at this time about the systems of the AMRESCO Group and other
parties upon which the Company intends to rely, it is currently not anticipated
that these "Year 2000" costs will have any material adverse impact on the
Company's business, financial condition or results of operations. However, the
Company will be dependent upon the AMRESCO Group to determine that its systems
and applications and those of other parties utilized by it are "Year 2000"
compliant.
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TAX AND LEGAL RISKS
FAILURE TO MAINTAIN REIT STATUS. In order to maintain its
qualification as a REIT for federal income tax purposes, the Company must
continually satisfy certain tests with respect to the sources of its income,
the nature of its assets, the amount of its distributions to shareholders and
the ownership of its shares. If the Company fails to qualify as a REIT in any
tax year, it would be taxed as a regular domestic corporation. In such a case,
the Company would be subject 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 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 the Company's shareholders, which in turn could have an adverse
impact on the value of, and trading prices for, the Common Shares. In
addition, the unremedied failure of the Company to be treated as a REIT for any
one year would disqualify the Company from being treated as a REIT for four
subsequent years. See "Federal Income Tax Consequences--Requirements for
Qualification" and "Federal Income Tax Consequences--Failure to Qualify."
Investment by the Company in certain real estate and in Participating
Loans and Mezzanine Loans may involve special considerations in applying the
various REIT qualification tests. For instance, since certain of the Company's
Participating Loans and Mezzanine Loans will entitle the Company to an interest
in either a percentage of the revenues of a mortgaged property or the borrower,
such Mortgage Loans must be structured to avoid violation by the Company of the
REIT Provisions of the Code. Generally, to the extent interest is based upon
or attributable to net cash flow from the real estate, the real estate
underlying such Mortgage Loans must be operated in accordance with the REIT
Provisions of the Code in order for the interest income on such Mortgage Loans
to qualify under the REIT Provisions of the Code, regardless of whether the
owner of any such real estate has elected to be taxed as a REIT. If any such
real estate is not operated in accordance with the REIT Provisions of the Code,
the interest income from such Mortgage Loans will not qualify under the REIT
Provisions of the Code. Further, the Company may be required to transfer the
related Participating Loan or Mezzanine Loan to a taxable corporation owned in
whole or in part by the Company, in which case there would be a corporate level
income tax on any income derived from such Mortgage Loan. Moreover, the
requirement that the real estate underlying a Mezzanine Loan or Participating
Loan must be operated in accordance with the REIT Provisions of the Code may
diminish the Company's ability to compete with other lenders for such Mortgage
Loans. See "--Investment Activity Risks--Limited Identified Assets; Available
Investments," "Business and Strategy--Description of Targeted Investments" and
"Federal Income Tax Consequences--Requirements for Qualification--Income
Tests."
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The Company must also ensure that at the end of each calendar quarter
at least 75% of the value of its assets consists of cash, cash items,
government securities and Qualifying REIT Real Estate Assets, and of the
investments in securities not included in the foregoing, the Company does not
hold more than 10% of the outstanding voting securities of any one issuer and
no more than 5% by value of the Company's assets consists of the securities of
any one issuer. Failure to comply with any of the foregoing tests would
require the Company to dispose of a portion of its assets within 30 days after
the end of the calendar quarter or face loss of REIT status and adverse tax
consequences. See "Federal Income Tax Consequences--Requirements for
Qualification--Asset Tests" and "Federal Income Tax Consequences--Failure to
Qualify."
The Company must generally distribute at least 95% of its REIT Taxable
Income each year after taking various timing considerations into account. The
Company's operations may from time to time generate Taxable Income in excess of
cash flows. To the extent that the Company does not otherwise have funds
available, the Company may need to borrow money, receive additional capital or
sell assets to obtain the cash needed for distribution to the Company's
shareholders. The Company generally intends to distribute sufficient amounts
to avoid excise tax liability unless retention of income will create additional
shareholder value. See "Federal Income Tax Consequences--Requirements for
Qualification--Annual Distribution Requirements."
FAILURE TO MAINTAIN EXCLUSION FROM THE INVESTMENT COMPANY ACT. The
Company at all times intends to conduct its business so as not to become
regulated as an investment company under the Investment Company Act.
Accordingly, the Company does not expect to be subject to the restrictive
provisions of the Investment Company Act. The Investment Company Act excludes
from regulation entities that are primarily engaged in the business of
purchasing or otherwise acquiring "mortgages and other liens on and interests
in real estate." Under the current interpretations of the staff of the
Commission, in order to qualify for this exception, the Company must, among
other things, maintain at least 55% of its assets directly in Mortgage Loans
and certain other qualifying liens on or interests in real estate. In
addition, unless certain MBS represent all the certificates issued with respect
to an underlying pool of Mortgage Loans, such securities may be treated as
securities separate from the underlying Mortgage Loans and, thus, may not
qualify as qualifying interests in real estate for purposes of the 55%
requirement. The Company's ownership of certain types of mortgage assets,
therefore, will be limited by the provisions of the Investment Company Act. If
the Company fails to qualify for exemption from registration as an investment
company, its ability to use leverage would be substantially reduced, and it
would be unable to conduct its business as described herein. Any such failure
to qualify for such exemption would have a material adverse effect on the
Company.
RISK OF ADVERSE TAX TREATMENT OF EXCESS INCLUSION INCOME. In general,
dividend income that a Tax-Exempt Entity receives from the Company should not
constitute unrelated trade or business income as defined in Section 512 of the
Code ("UBTI"). If, however, Excess Inclusion income were realized by the
Company and allocated to shareholders, such income cannot be offset by net
operating losses and, if the shareholder is a Tax-Exempt Entity, is fully
taxable as UBTI under Section 512 of the Code and, as to foreign shareholders,
would be subject to federal income tax withholding without reduction pursuant
to any otherwise applicable income tax treaty. Excess Inclusion income would
be generated if the Company were to issue debt obligations with two or more
maturities and the terms of the payments on such obligations bore a
relationship to the payments that the Company received on its assets securing
those debt obligations. The Company intends to arrange its borrowings in a
manner to avoid generating significant amounts of Excess Inclusion income.
Furthermore, certain types of Tax-Exempt Entities, such as voluntary employee
benefit associations and entities that have borrowed to acquire their Common
Shares, may be required to treat all or a portion of the dividends they may
receive from the Company as UBTI. See "Federal Income Tax
Consequences--Taxation of Shareholders--Taxation of Tax-Exempt Shareholders."
RESTRICTIONS ON OWNERSHIP OF THE COMMON SHARES. In order for the
Company to meet the requirements for qualification as a REIT at all times, the
Declaration of Trust prohibits any Person from acquiring or holding, directly
or indirectly, shares of beneficial interest in excess of 9.8% (in value or in
number of shares, whichever is more restrictive) of the aggregate of the
outstanding shares of beneficial interest of the Company ("Excess Shares").
The Declaration of Trust further prohibits (i) any Person from beneficially or
constructively owning shares of beneficial interest that would result in the
Company being "closely held" under Section 856(h) of the Code or
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otherwise cause the Company to fail to qualify as a REIT and (ii) any Person
from transferring shares of beneficial interest if such transfer would result
in shares of beneficial interest being owned by fewer than 100 Persons.
Subject to certain limitations, the Board of Trust Managers may increase or
decrease the ownership limitations or waive the limitations for individual
investors. The Board of Trust Managers has waived the foregoing limitations
for the Manager and other members of the AMRESCO Group who will own
approximately 20% of the outstanding Common Shares, in the aggregate (assuming
no exercise of the Underwriters' over-allotment option, and exercise of all
options granted to the Manager). See "Description of Shares of Beneficial
Interest--Restrictions on Transfer" and "Management of the Company--Share
Options Outstanding."
RESTRICTIONS ON OR IMPEDIMENTS TO CHANGE OF CONTROL. The authorized
capital shares of the Company include Preferred Shares issuable in one or more
series. The issuance of Preferred Shares could have the effect of making an
attempt to gain control of the Company more difficult by means of a merger,
tender offer, proxy contest or otherwise. The Preferred Shares, if issued,
would have a preference on dividend payments that could affect the ability of
the Company to make dividend distributions to the holders of Common Shares.
The provisions of the Declaration of Trust or relevant Texas law may
inhibit market activity and the resulting opportunity for the holders of the
Common Shares to receive a premium for their Common Shares that might otherwise
exist in the absence of such provisions. Such provisions also may make the
Company an unsuitable investment vehicle for any Person seeking to obtain
ownership of more than 9.8% of the outstanding Common Shares. See "Certain
Provisions of Texas Law and the Declaration of Trust and Bylaws."
Certain provisions of the Declaration of Trust and Bylaws may also
have the effect of delaying, deterring or preventing a takeover attempt or
other change in control of the Company that would be beneficial to shareholders
and might otherwise result in a premium over then prevailing market prices.
See "Certain Provisions of Texas Law and the Declaration of Trust and Bylaws."
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<PAGE> 39
USE OF PROCEEDS
The net proceeds from this Offering are estimated to be approximately
$_________ ($________ if the Underwriters' over-allotment option is exercised
in full), assuming an initial public offering price of $20 per Common Share
(the mid-point of the filing range set forth on the cover page of this
Prospectus). The Company will receive an additional $____ million in net
proceeds from the Private Placement.
A portion of the estimated net proceeds from this Offering
(approximately $________) is expected to be used by the Company to acquire the
Initial Assets. The remaining estimated net proceeds from this Offering
(approximately $_______) and the net proceeds from the Private Placement will
be used by the Company to acquire additional Targeted Investments and for other
general corporate purposes.
The Company intends temporarily to invest the net proceeds of this
Offering in interest bearing investment grade securities or guaranteed
obligations of the United States government until appropriate Targeted
Investments are identified and acquired. The Company may require up to six
months to have the net proceeds of this Offering fully invested in Targeted
Investments and up to an additional nine months to fully implement a leveraging
strategy to increase the Invested Portfolio to the desired level. Pending full
investment in the desired mix of assets, funds will be committed to short-term
investments that are expected to provide a lower net return than the Company
expects to achieve from its Targeted Investments. See "Risk Factors--Economic
and Business Risks--Risks Associated With Interest Rate Fluctuations," "Risk
Factors--Investment Activity Risks--Limited Identified Assets; Available
Investments" and "Risk Factors--Economic and Business Risks--Temporary
Investments in Short-Term Investments."
DIVIDEND AND DISTRIBUTION POLICY
The Company intends to distribute substantially all of its net REIT
Taxable Income (which does not ordinarily equal net income as calculated in
accordance with GAAP) to shareholders in each year. The Company intends to
declare four regular quarterly dividends. The Company's dividend policy is
subject to revision at the discretion of the Board of Trust Managers. All
distributions will be made by the Company at the discretion of the Board of
Trust Managers and will depend on the earnings and financial condition of the
Company, maintenance of REIT status and such other factors as the Board of
Trust Managers deems relevant. See "Risk Factors--Economic and Business
Risks--Future Revisions in Policies and Strategies."
In order to qualify as a REIT under the Code, the Company must make
distributions to its shareholders each year in an amount at least equal to (i)
95% of its REIT Taxable Income, plus (ii) 95% of the excess of the net income
from Foreclosure Property over the tax imposed on such income by the Code,
minus (iii) any excess noncash income. The "Taxable Income" of the Company for
any year means the taxable income of the Company for such year (excluding any
net income derived either from property held primarily for sale to customers or
from Foreclosure Property) subject to certain adjustments provided in the REIT
Provisions of the Code. "REIT Taxable Income" means Taxable Income, computed
without regard to the dividends paid deduction or any net capital gain. See
"Federal Income Tax Consequences--Requirements for Qualification--Annual
Distribution Requirements."
It is anticipated that distributions generally will be taxable as
ordinary income to shareholders of the Company, although a portion of such
distributions may be designated by the Company as capital gain 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 characterization as ordinary income, return of capital
or capital gains. For a discussion of the federal income tax treatment of
distributions by the Company, see "Federal Income Tax Consequences--Taxation of
Shareholders."
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CAPITALIZATION
The capitalization of the Company, as of February 2, 1998 and as
adjusted to reflect the sale of the Common Shares offered hereby at an assumed
initial public offering price of $20 per Common Share (the mid-point of the
filing range set forth on the cover page of this Prospectus), is as follows:
<TABLE>
<CAPTION>
--------------------------------------------
Actual As Adjusted(1)(2)
------------ -------------------
<S> <C> <C>
Shareholders' Equity:
Preferred Shares, par value $.01
Authorized--50,000,000 shares
Outstanding--none
Common Shares, par value $.01
Authorized--200,000,000 shares
Outstanding--100 shares (as adjusted,
16,675,100 shares)(1) $ 1 $ 166,751
Additional Paid-in Capital 999 333,334,249
------------ --------------
Total $ 1,000 $ 333,501,000
============ ==============
</TABLE>
______________
(1) Before deducting offering expenses payable by the Company estimated to
be approximately $______________, and assuming no exercise of the
Underwriters' over-allotment option and no corresponding increase in
the number of shares sold pursuant to the Private Placement. See
"Private Placement."
(2) Includes 1,675,000 Common Shares subscribed for in the Private
Placement. See "Private Placement." Does not include 2,501,265
Common Shares to be reserved for issuance upon exercise of options to
be granted under the Share Option Plan. See "Management of the
Company--Share Options Outstanding."
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<PAGE> 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES
The Company has no operating history. The Company's opening audited
balance sheet as of February 2, 1998, and related footnotes are presented
elsewhere in this Prospectus. The Management's Discussion and Analysis of
Liquidity and Capital Resources should be read in conjunction with such opening
balance sheet and related notes. 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. 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 ownership of real estate related assets. See "Business and
Strategy."
The principal sources of the Company's funds in the near term will be
the net proceeds of this Offering and the Private Placement and funds available
under the Warehouse Line, the Credit Facility and the Repurchase Agreement. A
portion of the net proceeds of this Offering (approximately $________) is
expected to be utilized to fund the origination or acquisition of the Initial
Assets. The remaining net proceeds of this Offering ($________), together with
the net proceeds of the Private Placement and the funds expected to be
available under the Warehouse Line, the Credit Facility and the Repurchase
Agreement ($________ in the aggregate) will be used to acquire additional
Targeted Investments and to fund the operations of the Company.
WAREHOUSE LINE. The Company expects to obtain a warehouse facility
prior to the closing of this Offering to provide up to $_____ of financing for
the origination or acquisition of Mortgage Loans (the "Warehouse Line"). The
Company is currently negotiating with Prudential Securities Credit Corporation
(an affiliate of Prudential Securities Incorporated, one of the Underwriters)
("PSCC") to provide the Warehouse Line, which is expected to bear interest at a
floating rate over LIBOR and to be secured by a first lien security interest in
the Mortgage Loans funded with the proceeds of the Warehouse Line.
The Company intends to utilize the Warehouse Line and other warehouse
lending arrangements to finance Mortgage Loans until a sufficient quantity is
accumulated at which time they may be refinanced via securitization or other
financing. In order to comply with the REIT Provisions of the Code, such
securitizations may be conducted through taxable subsidiaries of the Company.
See "Business and Strategy--Operating Policies--Capital and Leverage
Policies--Collateralized Borrowings" and "Federal Income Tax
Consequences--Income Tests."
The Warehouse Line is expected to be renewable annually. The Company
expects that it will renew the Warehouse Line or enter into similar or
additional secured warehouse lending arrangements with institutional lenders in
the future, although there can be no assurances that the Company will be able
to obtain renewed or additional warehouse financing on acceptable terms. See
"Risk Factors--Economic and Business Risks--Risks Associated With Leveraging."
CREDIT FACILITY. Prior to the closing of this Offering, the Company
expects to obtain a commitment from an institutional lender for approximately
$____ million credit facility to be made available upon closing of this
Offering (the "Credit Facility"). The Credit Facility is expected to require
payments of interest only at a to be negotiated floating rate over LIBOR until
its maturity. The Credit Facility will be used to finance the acquisition of
certain assets not financed through the Warehouse Line, the Repurchase
Agreement or other sources and for general corporate purposes. Upon maturity of
the Credit Facility (expected to be __________), the Company will likely seek
to obtain an extension or replacement of such facility, either on a secured or
unsecured basis, although there can be no assurance that the Company will be
successful in obtaining any such extension or replacement. See "Risk
Factors--Economic and Business Risks--Risks Associated With Leveraging."
REPURCHASE AGREEMENT. The Company expects to enter into a reverse
repurchase agreement with certain institutional lenders (the "Repurchase
Agreement") pursuant to which the Company may obtain up to $__________ of
financing for the purchase of CMBS. The Repurchase Agreement is expected to
provide that the lenders will loan to the Company a varying percentage of the
market value of the purchased CMBS, depending upon the credit quality of the
CMBS. The Repurchase Agreement is expected to require payment of interest at
varying percentages over
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<PAGE> 42
LIBOR, depending upon market conditions and the credit quality of the CMBS.
The Company anticipates that the Repurchase Agreement will mature after one
year at which time the Company intends to extend or renew such Repurchase
Agreement or enter into similar or additional reverse repurchase agreements,
although there can be no assurance that the Company will be successful in
obtaining any such extension or replacement. See "Risk Factors--Economic and
Business Risks--Risks Associated With Leveraging."
In the event the Company were to utilize all financing expected to be
available to it under the Warehouse Line, the Credit Facility and the
Repurchase Agreement to acquire Targeted Investments prior to the issuance of
any additional Common Shares or any Preferred Shares or other equity investment
in the Company, the Company would have total outstanding indebtedness of
$_______ and the Company's debt to equity ratio will be _______. See "Business
and Strategy--Operating Policies--Capital and Leverage Policies."
The Company plans to raise additional operating funds by leveraging
its Invested Portfolio, primarily through additional secured financings,
including reverse repurchase agreements, secured term loans, warehouse lines of
credit and collateralized borrowings (i.e., issuance of MBS) and other
borrowing arrangements, which management believes will be sufficient to enable
the Company to meet its anticipated liquidity and capital requirements in the
long term. See "Business and Strategy" and "Use of Proceeds."
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<PAGE> 43
BUSINESS AND STRATEGY
GENERAL
The Company was recently organized to take advantage of certain mid-
to high-yield lending and investment opportunities in real estate related
assets, including various types of Mortgage Loans, MBS, commercial real estate
and certain other real estate related assets. The Company will elect to be
taxed as a REIT under the Code. The Company generally will not be subject to
federal income taxation to the extent that it distributes at least 95% of its
REIT Taxable Income to its shareholders and maintains its qualification as a
REIT. See "Federal Income Tax Consequences." The day-to-day operations of the
Company will be managed by the Manager subject to the direction and oversight
of the Board of Trust Managers, a majority of whom will be unaffiliated with
the AMRESCO Group. See "The Manager--The Management Agreement."
The Company was formed to pursue and capitalize upon certain
investment opportunities arising within the AMRESCO Group which are currently
referred to entities unaffiliated with AMRESCO. Such investment opportunities
(which may include co-investment opportunities with members of the AMRESCO
Group) arise from the existing business and operations of the AMRESCO Group,
including primarily its commercial mortgage brokerage operations conducted
through Holliday Fenoglio Fowler.
The Company's principal business objective is to maximize shareholder
value by producing cash flow for distribution to its shareholders through
investment in mid- to high-yield real estate related assets which earn an
attractive spread over the Company's cost of funds. Accordingly, the Company
intends to acquire those real estate related assets which it believes are
likely to generate the highest risk-adjusted returns on capital invested, after
considering all material relevant factors. Such factors include the amount and
nature of anticipated cash flows from the asset, the credit risk of the
borrower or lessee, as applicable, the Company's ability to pledge the asset to
secure collateralized borrowings, the capital requirements resulting from the
purchase and financing of the asset, the potential for appreciation and the
costs of financing, hedging and managing the asset.
STRATEGY
To achieve its principal business objective, the Company's strategy is
to:
o capitalize upon its relationship with the AMRESCO Group by
seeking to take advantage of investment and co-investment
opportunities arising from the business and operations of the
AMRESCO Group;
o utilize the expertise and resources of Holliday Fenoglio
Fowler to monitor trends and demands in the Mortgage Loan and
real estate markets and to adjust its Mortgage Loan products
in response thereto in order to increase its ability to
successfully compete for Targeted Investments;
o invest in certain types of assets, such as Participating
Loans, Mezzanine Loans, Construction Loans and Bridge Loans,
which are expected to generate higher levels of return (and
which are typically subject to higher risks) than Permanent
Mortgage Loans;
o capitalize upon the market research capabilities of the
AMRESCO Group to analyze the Company's investment
opportunities and the economic conditions in the Company's
proposed geographic markets to assist the Company in selecting
investments which satisfy the Company's investment criteria
and targeted returns;
o utilize the expertise of the AMRESCO Group in the
underwriting, origination and closing of Mortgage Loans and in
the acquisition, management and servicing of Mortgage Loans,
Mortgage Loan portfolios and MBS;
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<PAGE> 44
o borrow against or leverage its Invested Portfolio (initially
through the Warehouse Line, the Credit Facility and the
Repurchase Agreement), to the extent consistent with the
Company's leverage policies, in order to increase the size of
the Invested Portfolio and increase potential returns to the
Company's shareholders;
o utilize acquisition and borrowing strategies to offset the
potential adverse effects resulting from the differences
between fixed rates or other limitations on coupon rate
adjustments associated with its Invested Portfolio and the
shorter-term variable nature of the Company's borrowings;
o implement various hedging strategies, including interest rate
swaps, interest rate collars, caps or floors, forward
contracts, U.S. Treasury and Eurodollar futures and options
(to the extent permitted by the REIT Provisions of the Code),
to minimize the effects of interest rate fluctuations on its
Invested Portfolio; and
o manage the credit risk of its Invested Portfolio by (i)
extensively underwriting its investments utilizing the
processes developed and utilized by the AMRESCO Group, (ii)
selectively choosing its investments for origination or
acquisition in compliance with the Company's investment
policies, (iii) actively monitoring (through the servicing and
asset management capabilities of the AMRESCO Group) the credit
quality of the Invested Portfolio and (iv) maintaining
appropriate capital levels and allowances for credit losses.
OPERATING POLICIES
The Board of Trust Managers has established certain operating policies
for the Company. The Board of Trust Managers may, in its discretion, revise
such policies from time to time in response to changes in market conditions or
opportunities without shareholder approval. See "Risk Factors--Economic and
Business Risks--Future Revisions in Policies or Strategies." Such policies
include the Company's policies with respect to (i) investments, (ii) leveraging
of the Invested Portfolio, (iii) the management of the credit risk of the
Invested Portfolio, (iv) management of the interest rate risks of the Invested
Portfolio, including its policies with respect to hedging of the Invested
Portfolio, (v) its relationship with the AMRESCO Group and (vi) compliance with
certain legal requirements, including the REIT Provisions of the Code.
INVESTMENT POLICIES. The Manager is authorized in accordance with the
terms of the Management Agreement to make the day-to-day investment decisions
of the Company based on the Guidelines adopted by the Board of Trust Managers.
The Guidelines may be changed by the Board of Trust Managers at any time
without a vote of the shareholders. The investment decisions of the Manager
will include decisions to issue commitments on behalf of the Company to
originate or purchase Mortgage Loans, MBS, commercial real estate and other
Targeted Investments. The Trust Managers will review all transactions of the
Company on a quarterly basis to insure compliance with the Guidelines.
Pursuant to the Guidelines, the Company intends to invest in a
diversified portfolio of Mortgage Loans (including, among others, Participating
Loans, Mezzanine Loans, Construction Loans and Bridge Loans), MBS, commercial
real estate (including Net Leased Real Estate, real estate acquired at
foreclosure or by deed-in-lieu of foreclosure or other underperforming or
Distressed Real Estate) and certain other real estate related assets. Upon the
closing of this Offering, the Company will enter into the Correspondent
Agreement with Holliday Fenoglio Fowler pursuant to which Holliday Fenoglio
Fowler will agree, so long as the Manager or any other member of the AMRESCO
Group is acting as manager of the Company, to present to the Company (on a
nonexclusive basis) Mortgage Loan origination and other real estate investment
opportunities identified by Holliday Fenoglio Fowler which meet the investment
criteria and objectives of the Company. The Company expects that a substantial
portion of its Invested Portfolio will be identified through the mortgage
brokerage operations of Holliday Fenoglio Fowler and pursuant to the
Correspondent Agreement. In creating and managing its Invested Portfolio, the
Company will utilize the Manager's expertise and significant business
relationships with members of the AMRESCO Group, as well
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<PAGE> 45
as unaffiliated participants in the real estate and financial services
industries. The Company believes that Holliday Fenoglio Fowler's relationships
and its reputation and credibility with potential borrowers and other
institutional investors will continue to result in significant commercial
brokerage business to Holliday Fenoglio Fowler which will, in turn, provide
investment opportunities and competitive advantages to the Company. See "The
Manager--Description of the AMRESCO Group."
The Company intends, through the services of the Manager, to
selectively and extensively underwrite its Targeted Investments. The Company
believes, due to the nature of its Targeted Investments (typically higher risk,
with higher Loan to Value Ratios and more contingent returns than Permanent
Mortgage Loans), that the underwriting analysis and procedures will be more
extensive and will require a greater level of expertise than those required in
connection with other types of real estate related assets. The Company intends
to utilize and benefit from the expertise, processes and procedures developed
by the AMRESCO Group with respect to the underwriting of assets such as the
Targeted Investments. See "Risk Factors--Economic and Business
Risks--Dependence on the Manager and the AMRESCO Group" and "--Description of
Targeted Investments" for a description of the underwriting analysis and
procedure expected to be applicable to the underwriting of each type of
Targeted Investment.
The Company has, in consultation with the Manager, established certain
underwriting criteria for the Company's investments. Such underwriting
criteria, which vary for each type of Targeted Investment, include, among
others, required credit quality of the prospective borrower, tenant or Mortgage
Collateral, as applicable, Loan to Value Ratios, debt service coverage ratios,
projected returns and satisfaction of certain due diligence requirements. See
"--Description of Targeted Investments" for a general description of such
underwriting criteria with respect to each type of Targeted Investment.
Compliance with the Company's underwriting criteria will be monitored by the
Company's Chief Investment Officer and will be reviewed annually by the Board
of Trust Managers. The Company's underwriting criteria may be changed from
time to time upon the recommendation of the Manager, with the approval of the
Chief Investment Officer, based upon changes in market conditions or Targeted
Investments, the performance of the Invested Portfolio or such other factors
that the Manager and the Chief Investment Officer or the Company determines are
appropriate.
Although the Company intends to invest primarily in Mortgage Loans,
MBS and commercial real estate, the Company will take an opportunistic approach
to its investments and its business decisions will depend on changing market
factors. Thus, the Company cannot anticipate with any certainty the percentage
of its Invested Portfolio that will be invested in each category of Targeted
Investments. The Company has substantial discretion as to the manner in which
it may invest, leverage and hedge its assets. The Company may change any of
its policies without further shareholder approval. See "Risk Factors--Economic
and Business Risks--Future Revisions in Policies and Strategies."
The Company may require up to six months to have the net proceeds of
this Offering fully invested in Targeted Investments and up to an additional
nine months to fully implement a leveraging strategy to increase the Invested
Portfolio to the desired level. Pending investment of the net proceeds of this
Offering in the Targeted Investments as provided in the Guidelines, the Company
intends to invest the net proceeds of this Offering in short-term interest
bearing investment grade securities or guaranteed obligations of the United
States government until appropriate Targeted Investments are identified and
acquired. Such short-term investments are expected to provide a lower net
return than the Company expects to achieve from its Targeted Investments. See
"Risk Factors--Economic and Business Risks--Temporary Investments in Short-Term
Investments" and "Use of Proceeds."
CAPITAL AND LEVERAGE POLICIES. The Company intends to increase its
Invested Portfolio through the use of leverage. Initially, the Company intends
to finance its acquisition of Targeted Investments with the net proceeds of
this Offering, the net proceeds of the Private Placement, and with funds
available under the Warehouse Line, the Credit Facility and the Repurchase
Agreement. In the future, the Company intends to continue to borrow against or
"leverage" its Invested Portfolio and use the proceeds to acquire additional
Targeted Investments. Such financings are expected to include, among other
things, reverse repurchase agreements, securitizations of its Mortgage Loans
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<PAGE> 46
and secured and unsecured loans. The Company may also borrow on a long-term
basis and issue additional shares as a source of longer-term capital, including
Preferred Shares or additional Common Shares. See "Risk Factors--Economic and
Business Risks--Risks Associated With Leveraging." The Company has adopted a
policy to maintain a debt to equity ratio no greater than 3:1 although the
actual ratio may be higher or lower from time to time depending upon market
conditions and other factors deemed relevant by the Manager, subject to the
review of the Board of Trust Managers. However, neither the Declaration of
Trust nor the Bylaws limit the amount of indebtedness the Company can incur,
and the Board of Trust Managers has discretion to deviate from or change the
Company's indebtedness policy at any time, without the consent of the Company's
shareholders. The Company intends to maintain an adequate capital base to
protect against various business environments in which the Company's financing
and hedging costs might exceed interest income (net of credit losses) from its
Invested Portfolio. These conditions could occur, for example, due to credit
losses or when, due to interest rate fluctuations, interest income on the
Invested Portfolio lags behind interest rate increases in the Company's
borrowings, which are expected to be predominantly variable rate. See "Risk
Factors--Economic and Business Risks--Risks Associated With Interest Rate
Fluctuations." The Company may enter into hedging transactions in an effort to
protect its Invested Portfolio and related debt from interest rate
fluctuations. See "--Asset/Liability Management."
The Company expects to utilize a variety of debt vehicles (both
secured and unsecured) to execute its business strategy. Initially, the
Company will utilize proceeds from the Warehouse Line, the Credit Facility and
the Repurchase Agreement and other collateralized borrowings to finance the
acquisition of Targeted Investments.
Warehouse Line. The Company expects to enter into the Warehouse Line
prior to the closing of this Offering to provide up to $____ of financing for
the origination or acquisition of Mortgage Loans. The Warehouse Line is
expected to bear interest at a floating rate over LIBOR and to be secured by a
first lien security interest in the Mortgage Loans funded with the proceeds of
the Warehouse Line.
The Warehouse Line and other warehouse lending arrangements will
typically be used to finance Mortgage Loans which will be accumulated until a
sufficient quantity is accumulated at which time they will be refinanced via
securitization or other financing.
The Warehouse Line is expected to be renewable annually. The Company
expects that it will renew the Warehouse Line or enter into similar or
additional secured warehouse lending arrangements with institutional lenders in
the future, although there can be no assurances that the Company will be able
to obtain renewed or additional warehouse financing on acceptable terms. See
"Risk Factors--Economic and Business Risks--Risks Associated With Leveraging"
and "Management's Discussion and analysis of Liquidity and Capital Resources."
Credit Facility. The Company expects to obtain the Credit Facility
upon closing of this Offering. The Credit Facility is expected to be secured
by all unencumbered assets of the Company and to require payments of interest
only at a to be negotiated floating rate over LIBOR until its maturity. The
Credit Facility will be used to finance the acquisition of certain assets not
financed through the Warehouse Line, the Repurchase Agreement or other sources
and for general corporate purposes. Upon maturity of the Credit Facility, the
Company will likely seek to obtain an extension or replacement of such
facility, either on a secured or unsecured basis, although there can be no
assurance that the Company will be successful in obtaining any such extension
or replacement. See "Risk Factors--Risks Associated With Leveraging."
Reverse Repurchase Agreement. The Company expects to enter into the
Repurchase Agreement pursuant to which the Company may obtain up to $____
million of financing for the purchase of CMBS. Reverse repurchase agreements
(including the Repurchase Agreement) are structured as sale and repurchase
obligations and have the economic effect of allowing a borrower to pledge
purchased CMBS as collateral securing short-term loans to finance the purchase
of such CMBS. Typically, the lender in a reverse repurchase arrangement makes
a loan in an amount equal to a percentage of the market value of the pledged
collateral. At maturity, the borrower is required to repay the loan and the
pledged collateral is released. The pledged assets continue to pay principal
and interest to the borrower.
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The Repurchase Agreement is expected to provide that the lenders will
loan to the Company varying percentages of the market value of the purchased
CMBS, depending upon the credit quality of the CMBS. The Repurchase Agreement
is expected to require payment of interest at varying percentages over LIBOR,
depending upon the credit quality of the CMBS. The Repurchase Agreement is
expected to mature after one year at which time the Company intends to extend
or renew such Repurchase Agreement or enter into similar or additional reverse
repurchase agreements, although there can be no assurance that the Company will
be successful in obtaining any such extension or replacement. See "Risk
Factors--Economic and Business Risks--Risks Associated With Leveraging" and
"Management's Discussion and Analysis of Liquidity and Capital Resources."
Warehouse lines and reverse repurchase agreements (including the
Warehouse Line and the Repurchase Agreement) typically require the Company to
deposit additional collateral or reduce its borrowings thereunder, if the
market value of the pledged collateral declines. This may require the Company
to sell a portion of its Invested Portfolio to provide such additional
collateral or to reduce its borrowings. The Company intends to maintain an
equity cushion sufficient to provide liquidity in the event of interest rate
movements and other market conditions affecting the market value of the pledged
CMBS. However, there can be no assurance that the Company will be able to
safeguard against being required to sell a portion of its Invested Portfolio in
the event of a change in market conditions.
Collateralized Borrowings. The Company may obtain additional secured
financing through the securitization of all or any portion of its Mortgage
Loans. Securitization is the process of pooling Mortgage Loans and other fixed
income assets in a trust or other special purpose vehicle and issuing
securities, such as MBS or other debt securities, from the special purpose
vehicle. The Company expects that its securitizations will be accomplished
primarily through the issuance of structured debt. Under this approach, for
accounting purposes, the securitized Mortgage Loans will remain on the
Company's balance sheet as assets and the debt obligations (such as the CMOs)
will appear as liabilities. The proceeds of securitizations by the Company
will be used to reduce pre-existing borrowings relating to such Mortgage Loans
and to originate or acquire additional Mortgage Loans. Issuing structured debt
in this manner locks in potentially less expensive, long-term, non-recourse
financing that generally better matches the terms of the Mortgage Loans and
fixed income instruments serving as collateral for such debt.
The Company also may employ, from time to time, in a manner consistent
with the REIT Provisions of the Code, other forms of securitization under which
a "sale" of an interest in the Mortgage Loans occurs, and a resulting gain or
loss is recorded for accounting purposes at the time of sale. In a "sale"
securitization, only the net retained interest in the securitized Mortgage
Loans would remain on the Company's balance sheet. The Company may elect to
conduct certain of its securitization activities, including such sales, through
one or more taxable subsidiaries, as defined under the REIT Provisions of the
Code, formed for such purpose. In most cases, the special purpose vehicle
would elect to be taxed as a REMIC or a Financial Asset Securitization
Investment Trust ("FASIT"). See "Federal Income Tax Consequences--Requirements
for Qualification--Income Tests."
The Company may retain interests in the underlying Mortgage Loans
which will be subordinated with respect to payments of principal and interest
on the underlying Mortgage Loans to the classes of securities issued to
investors in such securitizations. Accordingly, any losses incurred on the
underlying Mortgage Loans will be applied first to reduce the remaining amount
of the Company's retained interest, until reduced to zero. Thereafter, the
Company would have no further exposure to losses.
Typically, in connection with the creation of a new Mortgage Loan
securitization, the issuer generally will be required to enter into a master
servicing agreement with respect to such series of securities with an entity
acceptable to the Rating Agencies, that regularly engages in the business of
servicing Mortgage Loans (a "Master Servicer"). Currently the AMRESCO Group
engages in this business through AMRESCO Services. AMRESCO Services provided
Master Servicing for approximately $20.2 billion of loans as of December 31,
1997. See "The Manager--Description of the AMRESCO Group." In order to
maintain its exclusion from regulation under the Investment Company Act, the
Company expects that it will retain the right to initiate, direct or forbear
from instituting foreclosure proceedings in connection with defaults on any of
the underlying Mortgage Loans and may
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retain AMRESCO Services, other affiliates of the AMRESCO Group or other Special
Servicers to maintain borrower performance and to exercise available remedies,
including foreclosure, at the direction of the Company. See "Risk Factors--Tax
and Legal Risks--Failure to Maintain Exclusion From Investment Company Act."
Pursuant to and in accordance with the Management Agreement, the expenses of
all Master Servicing will be borne by the Manager, and the expenses of all
Special Servicing will be borne by the Company. See "The Manager--Expenses."
The Company intends to structure any securitizations of its Mortgage
Loans so as to avoid the attribution of any Excess Inclusion income to the
Company's shareholders. See "Federal Income Tax Consequences--Taxation of
Shareholders."
Unsecured Financings. The Company may, at any time and from time to
time in the future, obtain financing on an unsecured basis. Such unsecured
financings (which will likely be in addition to the Company's secured
financings) may include unsecured lines of credit, medium or long-term notes or
Preferred Shares.
CREDIT RISK MANAGEMENT. With respect to its Invested Portfolio, the
Company will be exposed to various levels of credit and special hazard risk,
depending on the nature of the investments. The Company will originate or
purchase Targeted Investments which satisfy the Company's underwriting
criteria, including standards as to credit quality, Loan to Value Ratios,
minimum debt service coverage and other standards established by the Company.
Pursuant to the Management Agreement, the Manager will review and monitor
credit risk and other risks of loss associated with each investment. In
addition, the Manager will seek to diversify the Company's Invested Portfolio
to avoid undue geographic, borrower, issuer, product type, industry and certain
other types of concentrations. The Board of Trust Managers will monitor the
Invested Portfolio risk and review levels of provision for loss.
The Chief Investment Officer will closely monitor the performance of
the Invested Portfolio. The Manager will report to the Board of Trust Managers
on a quarterly basis, as to the performance and status of the Invested
Portfolio as compared to budgets or projected operating results. To the extent
any investments become nonperforming, the Manager will analyze the performance
of such investments and develop a proposed course of action for resolution or
disposition of such investments. Such action may include engaging a member of
the AMRESCO Group to act as Special Servicer for such investments.
ASSET/LIABILITY MANAGEMENT. To the extent consistent with its
election to qualify as a REIT, the Company will follow an interest rate risk
management policy intended to mitigate the negative effects of major interest
rate changes. Where appropriate, the Company intends to minimize its interest
rate risk from borrowings through hedging activities and by attempting to
structure the key terms of its borrowings to generally correspond (in the
aggregate for its entire Invested Portfolio, and not on an
investment-by-investment basis) to the interest rate and maturity parameters of
its Invested Portfolio.
Hedging. The Company may, from time to time, enter into hedging
transactions to protect its Invested Portfolio from interest rate fluctuations
and other changes in market conditions. These transactions may include the
purchase or sale of interest rate swaps, interest rate collars, caps or floors,
forward contracts and U.S. Treasury and Eurodollar futures and options. These
instruments will be used to hedge as much of the interest rate risk as the
Manager determines is in the best interest of the Company, given the cost of
such hedges and the need to maintain the Company's status as a REIT. See
"Federal Income Tax Consequences--Requirements for Qualification--Income
Tests." The Manager may elect to have the Company bear a level of interest
rate risk that could otherwise be hedged when the Manager believes, based on
all relevant facts, that bearing such risk is advisable. The business failure
of a counterparty with which the Company has entered into a hedging transaction
will most likely result in a default, which may result in the loss of
unrealized profits and force the Company to cover its resale commitments, if
any, at the then current market price. Although generally the Company will
seek to reserve for itself the right to terminate its hedging positions, it may
not always be possible to dispose of or close out a hedging position without
the consent of the counterparty, and the Company may not be able to enter into
an offsetting contract in order to cover its risk. There can be no assurance
that a liquid secondary market will exist for hedging instruments purchased or
sold, and
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the Company may be required to maintain a position until exercise or
expiration, which could result in losses. See "Risk Factors--Economic and
Business Risks--Risks Associated With Hedging Transactions."
The Company intends to protect its Invested Portfolio against the
effects of significant interest rate fluctuations and to preserve the net
income flows and capital value of the Company. Specifically, the Company's
acquisition and borrowing strategies are intended to offset the potential
adverse effects resulting from the differences between fixed rates or other
limitations on coupon rate adjustment, such as interest rate caps, associated
with its Invested Portfolio and the shorter term predominantly variable nature
of the Company's related borrowings.
The Company's hedging activities are intended to address both income
and capital preservation. Income preservation refers to maintaining a stable
spread between the yield on the Invested Portfolio and the Company's borrowing
costs across a reasonable range of adverse interest rate environments. Capital
preservation refers to maintaining a relatively steady level in the market
value of the Company's capital across a reasonable range of adverse interest
rate scenarios. To monitor and manage capital preservation risk, the Company
will model and measure the sensitivity of the market value of its capital
(i.e., the combination of its Invested Portfolio, liabilities and hedging
positions) to various changes in interest rates in various economic scenarios.
The Company does not expect to enter into these types of transactions for
speculative purposes.
The Company believes its hedging activities, when utilized, will
provide a level of income and capital protection against reasonable interest
rate risks. However, no strategy can insulate the Company completely from
changes in interest rates. See "Risk Factors--Economic and Business
Risks--Risks Associated With Interest Rate Fluctuations."
RELATIONSHIP WITH AMRESCO. Upon the closing of this Offering, the
Company will enter into the Correspondent Agreement with Holliday Fenoglio
Fowler pursuant to which Holliday Fenoglio Fowler will agree, so long as the
Manager or any other member of the AMRESCO Group is acting as manager of the
Company, to present to the Company (on a nonexclusive basis) Mortgage Loan
origination and other real estate related investment opportunities identified
by Holliday Fenoglio Fowler which meet the investment criteria and objectives
of the Company. The Company expects that a substantial portion of its Invested
Portfolio will be identified through the mortgage brokerage operations of
Holliday Fenoglio Fowler and pursuant to the Correspondent Agreement. In
addition, AMRESCO has agreed that members of the AMRESCO Group will not invest
in any tranche of MBS (other than MBS issued in securitizations in which any
member of the AMRESCO Group participates in the profit or loss from such
securitization), unless a majority of the Independent Trust Managers shall have
first determined that the Company (i) should not invest in such securities or
(ii) should invest in only a portion of the offered securities of such tranche
(in which case, members of the AMRESCO Group may co-invest, on the same basis
as the Company, in such securities). See "Risk Factors--Economic and Business
Risks--Conflicts of Interest."
The Company may purchase from the AMRESCO Group, or co-invest with
other members of the AMRESCO Group in, Mortgage Loans, MBS, commercial real
estate and other Targeted Investments that may be offered from time to time by
the AMRESCO Group. Although no binding commitment will exist on the part of
the AMRESCO Group or the Company to identify or offer Targeted Investments to
the Company, the Company expects to be able to purchase Targeted Investments
from time to time from members of the AMRESCO Group on the same or better terms
as would be available from third parties for similar investments in bona fide
arms' length transactions. If a Targeted Investment is being offered to the
Company by the AMRESCO Group at a price that is greater, or on terms that are
less favorable, than would be available from third parties for similar
investments in bona fide arms' length transactions, the Manager would be
expected to recommend that the Company decline to acquire that Targeted
Investment at the quoted price and terms, notwithstanding the relationship
among the Company and the AMRESCO Group.
In deciding whether to approve an acquisition of or an investment in
any Targeted Investment, including Targeted Investments identified or offered
by the AMRESCO Group, the Manager may consider such information as it deems
appropriate to determine whether the acquisition is consistent with the
Guidelines, such as whether the
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price is fair, reflective of appropriate diversification and risk levels and
whether the Targeted Investment otherwise is suitable and in the best interest
of the Company. In addition, the Manager may consider, among other factors,
whether the acquisition of that Targeted Investment will enhance the Company's
ability to achieve or exceed the Company's risk adjusted target rate of return,
if any, whether the Targeted Investment otherwise is well-suited for the
Company and whether the Company financially is able to take advantage of the
investment opportunity presented thereby. There is no geographic limitation or
requirement of geographic diversification (either as to size, jurisdictional
boundary, zip code or other geographic measure) as to the real estate that
secures repayment of the Mortgage Loans, the real estate underlying the MBS, or
the commercial real estate in which the Company may invest. The only
limitations as to the Targeted Investments that the Company may acquire and the
characteristics thereof being limitations either (i) imposed by law, (ii) set
forth in the Guidelines or other policies of the Company or (iii) with which
the Company must comply as a condition of maintaining both its status as a REIT
and its exemption from regulation under the Investment Company Act.
The Manager will determine fair transfer prices for the Company's
acquisitions of Targeted Investments from members of the AMRESCO Group based on
Guidelines approved by the Independent Trust Managers. The Independent Trust
Managers will review those transactions on a quarterly basis to ascertain
compliance with the Guidelines. When possible, the price that the Company will
pay for any Targeted Investments acquired from the AMRESCO Group will be
determined by reference to the prices most recently paid to the AMRESCO Group
for similar investments, 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 investments have
occurred, the Company will attempt to determine a market price for the Targeted
Investments 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 or co-investment in any Targeted Investment
between the Company on the one hand and the AMRESCO Group on the other hand are
fair to both parties. However, there can be no assurance that any 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.
The Company anticipates that the price it pays for Targeted
Investments acquired from members of the AMRESCO Group, in certain cases, may
be lower than the price that a third party would pay for those investments if
economic benefits would inure to the AMRESCO Group by selling to the Company,
rather than a third party. For example, the AMRESCO Group generally would not
incur any broker's fees in connection with a sale of Mortgage Loans and MBS to
the Company. In addition, if AMRESCO and its affiliates engage in repetitive
sales of Targeted Investments to the Company, the form of purchase and sale
agreement used in the successive transactions is likely to contain standard
terms and conditions that previously will have been negotiated by the parties,
which may result in reduced legal and other transaction costs.
In the event the Manager determines, in accordance with the
Guidelines, that the Company should co-invest in any Targeted Investment with
any member of the AMRESCO Group, the Company's investment will be on
substantially the same terms as the investment of the AMRESCO Group, except for
such differences as may be attributable solely to the size of the investment or
as may otherwise be approved by a majority of the Independent Trust Managers.
See "Risk Factors--Investment Activity Risks--Risks Related to Investments in
Real Estate."
COMPLIANCE POLICIES. As a requirement for maintaining REIT status,
the Company generally intends to distribute to the shareholders of the Company
aggregate dividends equaling at least 95% of its REIT Taxable Income each year.
See "Federal Income Tax Consequences--Requirements for Qualification--Annual
Distribution Requirements."
The Company will adopt compliance policies, including restrictions on
acquiring, holding and selling Targeted Investments, to ensure that the Company
continues to qualify as a REIT. Before acquiring any Targeted Investment, the
Manager will determine whether such Targeted Investment would constitute a
Qualified REIT Real
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Estate Asset under the REIT Provisions of the Code. Substantially all of the
Targeted Investments that the Company intends to acquire are expected to be
Qualified REIT Real Estate Assets. The Company will regularly monitor its
Invested Portfolio and the income generated from its Invested Portfolio,
including income from its hedging activities, in an effort to ensure that at
all times the Company maintains its qualification as a REIT. The Company has
engaged a nationally recognized independent public accounting firm to assist it
in developing internal accounting and testing procedures and to assist in
monitoring and conducting quarterly compliance reviews to determine compliance
with the REIT Provisions of the Code. See "Risk Factors--Tax and Legal
Risks--Failure to Maintain REIT Status."
The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act. The Company may (i) invest in the
securities of other issuers for the purpose of exercising control over such
issuers, (ii) underwrite securities of other issuers, particularly in the
course of disposing of portions of the Invested Portfolio, (iii) originate
Mortgage Loans and (iv) issue securities in exchange for real estate or other
assets. See "Risk Factors--Tax and Legal Risks--Failure to Maintain Exclusion
From Investment Company Act."
FUTURE REVISIONS IN POLICIES AND STRATEGIES. The Board of Trust
Managers has approved the operating policies and the strategies set forth in
this Prospectus. The Board of Trust Managers has the power to modify or waive
such policies and strategies without the consent of the shareholders of the
Company to the extent that the Board of Trust Managers determines that such
modification or waiver is in the best interest of the Company or the
shareholders of the Company. Among other factors, developments in the market
that affect the policies and strategies mentioned herein or which change the
Company's assessment of the market may cause the Board of Trust Managers to
revise its policies and strategies. See "Risk Factors--Economic and Business
Risks--Future Revisions in Policies and Strategies."
DESCRIPTION OF TARGETED INVESTMENTS
The Company intends to invest principally in the following Targeted
Investments, subject to the operating restrictions described in "Operating
Policies" above and the additional policies described below. See "Risk
Factors--Investment Activity Risks" for a discussion of certain of the risks
involved in connection with the Company's investments in the Targeted
Investments.
MORTGAGE LOANS
PARTICIPATING LOANS. The Company intends to originate or acquire
Mortgage Loans secured by mortgages or deeds of trust on commercial
real estate which will typically entitle the Company to receive a
stated interest rate (which may be fixed or variable) plus a portion
of the pledged real estate's net operating income or gross revenues
and/or a stated amount of additional interest (i.e. an "exit fee") due
upon, or a specified percentage of the net proceeds from, any sale or
refinancing of the pledged real estate. Such Participating Loans may
be Construction Loans, Bridge Loans, Mezzanine Loans or other types of
Mortgage Loans.
CONSTRUCTION LOANS. The Company believes, given the current favorable
ratio of supply and demand for commercial real estate in many real
estate markets in the United States, that continued economic growth
and job creation will result in construction of additional commercial
real estate projects. Accordingly, the Company believes there are
significant opportunities to invest in or provide Construction Loans.
The Company intends to make Construction Loans of up to 90% of total
project costs if the Construction Loan is secured by a first lien
mortgage, deed of trust or deed to secure debt, as collateral security
for the borrower's obligations with respect to the Construction Loan.
The Company may receive a stated fixed or variable interest rate on
the Construction Loan, and a percentage of gross revenues or a
percentage of the increase in the fair market value of the property
securing repayment of that Construction Loan, payable upon maturity or
refinancing of the applicable Construction Loan or upon the sale of
the property. The Company may also offer Construction Loans together
with Mezzanine Loans to deliver a convenient, single financing source
to commercial real estate owners and developers.
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MEZZANINE LOANS. The Company intends to take advantage of
opportunities to provide Mezzanine Loans on commercial real estate
that is subject to first lien mortgage debt. The Company believes
that there is a growing need for mezzanine capital (i.e., capital
representing the level typically between 75% and 95% of property
value) as a result of current commercial mortgage lending practices
setting Loan to Value Ratio targets as low as 65%. The Company's
Mezzanine Loans may take the form of subordinated Mortgage Loans,
commonly known as second mortgages, or, in the case of Mezzanine Loans
originated for securitization, partnership loans (also known as pledge
loans) or preferred equity investments. For example, in the case of a
commercial real estate project 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 25% of the value of the property.
The Company believes that as a result of (i) the significant changes
in the lending practices of traditional commercial real estate
lenders, primarily relating to more conservative Loan to Value Ratios,
and (ii) the significant increase in securitized lending with strict
Loan to Value Ratios imposed by the Rating Agencies, there will be
increasing demand for mezzanine capital by property owners.
Typically, as security for a Mezzanine Loan, the borrower would pledge
to the Company either the real estate subject to the first lien
(giving the Company a second lien position) or the limited partnership
and/or general partnership interest in the borrower. If the
borrower's general partnership interest is pledged, then the Company
would be in a position to assume the operation of the real estate
pursuant to a foreclosure proceeding in the event of a default by the
borrower. By borrowing against the additional value in the real
estate, the borrower obtains an additional level of liquidity to apply
to real estate improvements or alternative uses. Mezzanine Loans
generally will provide the Company with the right to receive a stated
interest rate on the Mezzanine Loan balance plus various commitment
and/or exit fees. In certain instances, the Company will negotiate to
receive a percentage of gross revenues or cash flows from the real
estate, payable to the Company on an ongoing basis, and a percentage
of any increase in value of the real estate, payable upon maturity or
refinancing of the Mezzanine Loan, or the Company will otherwise seek
terms to allow the Company to charge an interest rate that would
provide an attractive risk adjusted return. Alternatively, the
Mezzanine Loans can take the form of a non-voting preferred equity
investment in a single-purpose entity borrower.
The Company may originate or acquire Mezzanine Loans in connection
with Permanent Mortgage Loans on the same real estate.
BRIDGE LOANS. The Company intends to actively pursue opportunities to
originate and fund Mortgage Loans to owners and developers of
commercial and multifamily real estate who need interim or "bridge"
financing until permanent financing can be obtained. Such Mortgage
Loans generally are not intended to be "permanent" in nature, but
rather are intended to be of a relatively short-term duration, with
extension options as deemed appropriate, and generally require a
balloon payment of principal and interest at maturity. Bridge Loans
are intended to be higher-yield loans with higher interest rates and
commitment fees than Permanent Mortgage Loans. Property owners or
developers in the market for Bridge Loans include, but are not limited
to, traditional property owners and operators who desire to acquire a
property before it has received a commitment for a Permanent Mortgage
Loan from a traditional commercial mortgage lender, or a property
owner or investor who has an opportunity to purchase its existing
mortgage debt or third party mortgage debt at a discount. In
addition, the Company believes that, as a result of the recent
increase in commercial real estate securitization, there are
attractive opportunities to originate Bridge Loans to owners of
mortgaged properties that are temporarily prevented, as a result of
timing and structural reasons, from securing Permanent Mortgage Loans
through securitization. Bridge Loans are generally exposed to a
higher default risk as well as the risk of extension of principal
repayment terms due to the need for refinancing and minimal principal
amortization. As they are associated with transfers of equity
ownership, property repositioning and tenant lease-up, Bridge Loans
bear the risk that operating strategies may not be successful,
economic conditions may deteriorate and competitors may undertake
competing strategies.
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DISTRESSED MORTGAGE LOANS. The Company may acquire Nonperforming
Mortgage Loans or Subperforming Mortgage Loans secured by multifamily
and commercial real estate. The Company may foreclose on such Mortgage
Loans in an attempt to acquire title to the underlying Distressed Real
Estate. If the Company acquires pools of Distressed Mortgage Loans
(or pools of Mortgage Loans that are primarily Distressed Mortgage
Loans), the Company's policy is that the due diligence to be performed
before acquiring such Distressed Mortgage Loans or pools is to be
substantially similar to the due diligence process described below in
connection with the acquisition of performing pools of Mortgage Loans
and in connection with the acquisition of Distressed Real Estate.
REAL ESTATE POOLS. The Company may also acquire Mortgage Loans
originated by or purchased from various suppliers of Mortgage Loans
throughout the United States and abroad, such as savings and loan
associations, banks, mortgage bankers, home builders, insurance
companies and other mortgage lenders. The Company may acquire
Mortgage Loans directly from originators and from entities holding
Mortgage Loans originated by others.
In considering whether to acquire a pool of Mortgage Loans, the
Company's policy is to require that the Manager perform certain due
diligence tasks on behalf of the Company that reasonably may be
expected to provide relevant and material information as to the value
of the Mortgage Loans within that pool and whether the Company should
acquire that pool.
The Company's policy is to acquire or originate Mortgage Loans only at
prices that are fair to the Company and that meet the Company's investment
criteria. In determining the price of a Mortgage Loan, the Company will
require that the Manager review and analyze a number of factors. These factors
may include market conditions, market interest rates, the availability of
mortgage credit and economic, demographic, geographic, tax, legal and other
factors. They also may include yield to maturity of the Mortgage Loan, the
liquidity of the Mortgage Loan, the limitations on the obligations of the
seller with respect to the Mortgage Loan, the rate and timing of payments to be
made with respect to the Mortgage Loan, the mortgaged property underlying the
Mortgage Loan, the risk of adverse fluctuations in the market values of that
mortgaged property as a result of economic events or governmental regulations,
the historical performance and other attributes of the property manager
responsible for managing the mortgaged property, relevant laws limiting actions
that may be taken with respect to Mortgage Loans and limitations on recourse
against the borrowers following realization on the collateral through various
means, risks of timing with respect to Mortgage Loan prepayments, risks
associated with geographic concentration of mortgaged property, environmental
risks, pending and threatened litigation, junior liens and other issues
relating to title, a prior history of real estate mortgage and other
contractual defaults by affiliated parties on similar and dissimilar
obligations, and other factors.
It is generally expected that when the Company acquires Mortgage
Loans, the seller will represent and warrant to the Company that there has been
no fraud or misrepresentation during the origination of the Mortgage Loans and
it will agree to repurchase any Mortgage Loan with respect to which there is
fraud or misrepresentation. The Company will provide similar representations
and warranties when the Company sells or pledges Mortgage Loans as collateral
for MBS. Although the Company will generally have recourse to the seller for
any loss resulting from the breach of the seller's representations and
warranties to the Company, the Company will generally be at risk for loss due
to credit quality and to the extent the seller does not perform its repurchase
obligations.
The Company may retain a Subordinate Interest in the pools of Mortgage
Loans it securitizes and to acquire Subordinate Interests in pools of Mortgage
Loans securitized by others. The credit quality of Mortgage Loans and the MBS
utilizing Mortgage Loans as the underlying collateral, depends on a number of
factors, including their Loan to Value Ratio, their terms and the geographic
diversification of the location of the real estate securing the Mortgage Loans
and, in the case of multifamily and commercial real estate, the
creditworthiness of tenants and debt service coverage ratios.
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MORTGAGE-BACKED SECURITIES. The Company intends to acquire MBS,
primarily non-investment grade classes of CMBS, from various sources. MBS
typically are divided into two or more interests, sometimes called "tranches"
or "classes." The senior classes are often securities which, if rated, would
have ratings ranging from low investment grade "BBB" to higher investment
grades "A," "AA" or "AAA." The junior, subordinated classes typically would
include one or more non-investment grade classes which, if rated, would have
ratings below investment grade "BBB." Such subordinated classes also typically
include an unrated higher-yield, credit support class (which generally is
required to absorb the first losses on the underlying Mortgage Loans).
CMBS. CMBS 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 CMBS. Pass-Through Certificates evidence interests in trusts, the primary
assets of which are Mortgage Loans. CMO bonds 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. CMBS are not guaranteed by an
entity having the credit status of a governmental agency or instrumentality and
are generally structured with one or more of the types of credit enhancement
described below. In addition, CMBS may be illiquid. See "Risk
Factors--Investment Activity Risks--Risks Related to Investments in MBS."
In most commercial Mortgage Loan securitizations, a series of CMBS is
issued in multiple classes in order to obtain investment-grade credit ratings
for the senior classes and thus increase their marketability. Each class of
CMBS 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 collateral (i.e., mortgage pass-through
securities or pools of whole Mortgage Loans securing or backing a series of
CMBS) ("Mortgage Collateral") may cause the CMBS 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
Mortgage Loan. Interest is paid or accrued on CMBS on a periodic basis,
typically monthly.
The credit quality of CMBS depends on the credit quality of the
underlying Mortgage Collateral. CMBS are collateralized generally by a more
limited number of commercial or multifamily Mortgage Loans with larger
principal balances than those of single-family 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 Investments in
such CMBS.
Among the factors determining the credit quality of the Mortgage
Collateral will be the ratio of the Mortgage Loan balances to the value of the
properties securing the Mortgage Loans, the purpose of the Mortgage Loans
(e.g., refinancing or new purchase), the amount of the Mortgage Loans, their
terms, the geographic diversification of the location of the real estate
securing the Mortgage Loans, and the creditworthiness of tenants.
The principal of and interest on the underlying Mortgage Loans may be
allocated among the several classes of CMBS 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 in CMBS carry significant credit risks. See "Risk
Factors--Investment Activity Risks--Risks Related to Investments in MBS."
Typically, in a "senior-subordinated" structure, the Subordinated Interests
provide credit protection to the senior classes by absorbing losses from
Mortgage Loan defaults or foreclosures before such losses are allocated to more
senior classes. Moreover, typically as long as the more senior classes of
securities are outstanding, all prepayments on the Mortgage Loans generally are
paid to those senior classes, at least until the end of a lock-out period,
which typically is four years or more. In some instances, particularly with
respect to Subordinated Interests in commercial Mortgage Loan securitizations,
the holders of Subordinated Interests are not entitled to receive scheduled
payments of principal until the more senior classes are paid in full or until
the end of a lock-out period. Because of this structuring of the cash flows
from the underlying Mortgage Loans, Subordinated Interests in a typical
securitization are subject to a substantially greater risk of non-payment than
are those more senior classes. Accordingly, the
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<PAGE> 55
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 United States government or
by other governmental entities and accordingly are subject, among other things,
to credit risks. See "Risk Factors-- Investment Activity Risks--Risks Related
to Investments in MBS."
As a result of the typical "senior-subordinated" structure, the
Subordinated Interests will be extremely sensitive to losses on the underlying
Mortgage Loans. Accordingly, the holder of the Subordinated Interest is
particularly interested in minimizing the loss frequency (the percentage of the
Mortgage Loan balances that default over the life of the Mortgage Collateral)
and the loss severity (the amount of loss on defaulted Mortgage Loans, i.e.,
the principal amount of the Mortgage Loan unrecovered after applying any
recovery to the expenses of foreclosure and accrued interest) on the underlying
Mortgage Loans.
Losses on the Mortgage Collateral underlying the Company's MBS will
depend upon a number of factors, many of which will be beyond the control of
the Company or the applicable servicer. Among other things, the default
frequency on the Mortgage Collateral will reflect broad conditions in the
economy generally and real property particularly, economic conditions in the
local area in which the underlying mortgaged real estate is located, the Loan
to Value Ratio of the Mortgage Loan, the purpose of the Mortgage Loan, and the
debt service coverage ratio (with respect to commercial and multifamily
Mortgage Loans). The loss severity on the Mortgage Collateral will depend upon
many of the same factors described above, and will also be influenced by
certain legal aspects of Mortgage Loans that underlie the MBS acquired by the
Company, including the servicer's ability to foreclose on the defaulted
Mortgage Loan and sell the underlying Mortgaged Collateral. Various legal
issues affect the ability to foreclose on a Mortgage Loan or sell the Mortgaged
Collateral. These legal issues may extend the time of foreclosure proceedings
or may require the expenditure of additional sums to sell the underlying
Mortgage Collateral, in either case increasing the amount of loss with respect
to the Mortgage Loans. See "Certain Legal Aspects of Mortgage Loans and Real
Estate Investments."
In considering whether to acquire MBS, the Company's policy is to
determine, in consultation with the Manager, the scope of review to be
performed before the Company acquires that MBS, which will be designed to
provide to the Company such information regarding the MBS as the Company and
Manager determine to be relevant and material to the Company's decision
regarding the acquisition of the MBS. The Company's policy generally is to
require that the Manager perform due diligence substantially similar to that
described above in connection with the acquisition of performing Mortgage
Loans. The due diligence may include an analysis of (i) the underlying
collateral pool, (ii) the prepayment and default history of the Mortgage Loans
previously originated by the originator, (iii) cash flow analyses under various
prepayment and interest rate scenarios (including sensitivity analyses) and
(iv) an analysis of various default scenarios. The Company also may request
that the Manager determine and advise the Company as to the price at which the
Manager would recommend acquisition of the MBS by the Company, and the
Manager's reasons for such advice. However, which of these characteristics (if
any) are important and how important each characteristic may be to the
evaluation of a particular MBS depends on the individual circumstances.
Because there are so many characteristics to consider, each MBS must be
analyzed individually, taking into consideration both objective data as well as
subjective analysis.
With respect to CMBS, the Manager will use sampling and other
appropriate analytical techniques to determine on a loan-by-loan basis which
Mortgage Loans will undergo a full-scope review and which Mortgage Loans will
undergo a more streamlined review process. Although the choice is a subjective
one, considerations that influence the choice for scope of review often include
Mortgage Loan size, debt service coverage ratio, Loan to Value Ratio, Mortgage
Loan maturity, lease rollover, property type and geographic location. A
full-scope review may include, among other factors, a site inspection,
tenant-by-tenant rent roll analysis, review of historical income and expenses
for each property securing the Mortgage Loan, a review of major leases for each
property (if available); recent appraisals (if available), engineering and
environmental reports (if available), and the price paid for similar CMBS by
unrelated third parties in arm's length purchases and sales (if available) or a
review of broker price opinions (if the price paid by a bona fide third party
for similar CMBS is not available and such price opinions are available). For
those Mortgage Loans that are selected for the more streamlined review process,
the Manager's
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evaluation may include a review of the property operating statements, summary
loan level data, third party reports, and a review of prices paid for similar
CMBS by bona fide third parties or broker price opinions, each as available.
If the Manager's review of such information does not reveal any unusual or
unexpected characteristics or factors, no further due diligence will be
performed.
Many of the MBS to be acquired by the Company will not have been
registered under the Securities Act, but instead initially will have been sold
in private placements. These MBS will be subject to restrictions on resale
and, accordingly, will have substantially more limited marketability and
liquidity.
Many special purpose trusts or corporations that issue multi-class MBS
elect to be treated, for federal income tax purposes, as REMICs. The Company
may acquire not only MBS that are treated as regular interests in REMICs, but
also those that are designated as REMIC Residual Interests or as Non-REMIC
Residual Interests. The cash flow generated by the Mortgage Loans underlying a
series of CMOs is first applied to the required payments of principal and
interest on the CMOs and second to pay the related administrative expenses of
the issuer. The Residual Interests generally receive excess cash flows, if
any, after making the foregoing payments. Unlike regular interests, CMO
Residuals typically generate Excess Inclusion income or other forms of Taxable
Income (including the accretion of market discount) that bear no relationship
to the actual economic income that is generated by a REMIC. CMO Residuals that
are required to report taxable income or loss, but receive no cash flow from
the Mortgage Loans are called "Non-Economic". Any purchases and sales of CMO
Residuals will be conducted in a fully taxable corporate subsidiary to prevent
the liability for Excess Inclusion income from being passed to the Company's
shareholders. See "Federal Income Tax Consequences--Taxation of
Shareholders--Taxation of Taxable U.S. Shareholders."
Any securitizations effected by the Company will generally create a
Residual Interest. If the residual is a Non-Economic Residual Interest, the
Company may incur a negative purchase price to dispose of it, or the Company
may retain it in a fully taxable corporate subsidiary. See "--Operating
Policies--Capital and Leverage Policies--Collateralized Borrowings."
Subordinated Interests generally are issued at a significant discount
to their outstanding principal balance, which gives rise to OID for federal
income tax purposes. The Company will be required to accrue the OID as taxable
income over the life of the related MBS on a level-yield method whether or not
the Company receives the related cash flow. The OID income attributable to a
Subordinated Interest generally will increase the Company's REIT distribution
requirement in the early years of the Company's ownership of the MBS even
though the Company may not receive the related cash flow from the MBS until a
later taxable year. As a result, the Company could be required to borrow
funds, to issue capital shares or to liquidate assets in order to satisfy the
REIT distribution requirements for any taxable year. See "Federal Income Tax
Consequences--Requirements for Qualification--Annual Distribution
Requirements."
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 generally exempts entities
that are "primarily engaged in purchasing or otherwise acquiring mortgages and
other liens on and interests in real estate" ("Qualifying Interests"). The
Company intends to rely on current interpretations by the staff of the
Commission in an effort to qualify for this exemption. To comply with the
foregoing guidance, the Company, among other things, must maintain at least 55%
of its assets in Qualifying Interests and also may be required to maintain an
additional 25% in Qualifying Interests or other real estate-related assets.
Generally, the Mortgage Loans in which the Company may invest constitute
Qualifying Interests. While certain MBS may not constitute Qualifying
Interests, the Company may seek to structure such investments in a manner in
which the Company believes such interests may constitute Qualifying Interests.
The Company may seek, where appropriate, to obtain foreclosure rights or other
similar arrangements (including rights to control the oversight and management
of the resolution of such Mortgage Loans by workout or modification of loan
provisions, foreclosure, deed in lieu of foreclosure or otherwise, and to
control decisions with respect to the preservation of the collateral generally,
including property management and maintenance decisions with respect to the
underlying Mortgage Loans, however, there can be no assurance that it will be
able to do so on acceptable terms. As a result of obtaining such rights, the
Company believes that the
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<PAGE> 57
related MBS will constitute Qualifying Interests for purposes 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. Any decision by the Commission or its staff
advancing a position with respect to whether such MBS constitute Qualifying
Interests that differs from the position taken by the Company could have a
material adverse effect on the Company. See "Risk Factors--Tax and Legal
Risks--Failure to Maintain Exclusion From the Investment Company Act."
RMBS. The Company may also acquire interests, including Subordinated
Interests, in RMBS. Such RMBS will consist primarily of securities backed by
"non-conforming" Mortgage Loans, that is, single-family Mortgage Loans secured
by liens on residential property that do not qualify for sale to GNMA, FNMA or
FHLMC. Typically, non-conforming Mortgage Loans do not meet agency guarantee
criteria because their principal balances exceed agency limits. Sometimes the
Mortgage Loans or the borrower do not meet other agency credit underwriting
standards. In addition, such RMBS may include Agency Certificates primarily
issued by GNMA, FNMA or FHLMC, which represent interests in fixed rate or
adjustable rate Mortgage Loans secured primarily by liens on single-family
(one-to-four units) residential property.
The process of a single-family Mortgage Loan securitization is similar
to the process of a commercial Mortgage Loan securitization. As in CMBS, a
typical RMBS series allocates the cash flow on the underlying Mortgage Loans so
that the Subordinated Interests shield the more senior classes from losses due
to defaults on the underlying residential Mortgage Loans, resulting in
substantially greater credit risk to the Subordinated Interests.
In addition to creating credit support for the more senior classes,
another general goal in allocating cash flows from the Mortgage Loans to the
various classes of a securitization, particularly an RMBS issuance, is to
create certain tranches on which the expected cash flows have a higher degree
of predictability than the cash flows on the underlying Mortgage Loans. As a
general matter, the more predictable the cash flow is on a particular RMBS
tranche, the lower the anticipated yield will be on that tranche at the time of
issuance relative to prevailing market yields on certain other RMBS. As part
of the process of seeking to create more predictable cash flows on certain
tranches of a non-conforming Mortgage Loan securitization, one or more tranches
generally must be created that absorb most of the changes in the cash flows
from the Mortgage Collateral. The yields on these tranches generally are
higher than prevailing market yields on MBS with similar expected average
lives. Because of the uncertainty of the cash flows on these tranches, the
market prices of, and yields on, these tranches are more volatile.
Although Subordinated Interests in RMBS bear substantial credit risk,
because of the structuring of cash flows typically provided in RMBS
transactions, such Subordinated Interests generally tend to be less subject to
a substantial prepayment risk. Typically, all prepayments of principal are
allocated to the more senior, generally investment-grade, RMBS classes (for at
least five years for fixed-rate Mortgage Loans and ten years for
adjustable-rate Mortgage Loans) in order to increase the outstanding percentage
of subordination. After this initial period during which prepayments are
shifted to the more senior RMBS classes, prepayments then are made pro rata or
more likely phased in over a five-year period until all classes are receiving
their pro rata share. The net effect on the subordinated classes is a degree
of call protection because the principal amounts of the subordinated classes
are not reduced by prepayments of the Mortgage Loans, generally for at least
five years. The structuring of cash flows generally creates a Subordinated
Interest in RMBS with a longer but more predictable average life.
The Company may also acquire interests, including Subordinated
Interests, in RMBS secured by lower credit quality Mortgage Loans known as "B,"
"C" and "D" Mortgage Loans. B, C and D Mortgage Loans are made to borrowers
who have credit histories of a lower overall quality than "A" borrowers. These
credit histories generally result from previous repayment difficulties, brief
job histories, previous bankruptcies or other causes. The loan-to-value ratio
for a B, C and D Mortgage Loan is typically significantly lower than the
loan-to-value ratio of an "A" Mortgage Loan, and the pass-through coupon of a
B, C and D Mortgage Loan is typically higher than the coupon on an A Mortgage
Loan. Although the Company does not currently anticipate investing in such
RMBS, the Company may, in the future, consider investing in these types of RMBS
in the event and to the extent the Company determines that market conditions or
yields on such investments justify accepting the higher credit risk.
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COMMERCIAL REAL ESTATE. The Company intends to invest in commercial
real estate, including Net Leased Real Estate, REO Properties or other
Distressed Real Estate. Such investment may be made directly by the Company or
through partnerships or other entities formed with other parties, including
members of the AMRESCO Group. The Company may also form one or more
partnerships, the limited partnership interests in which would be convertible
into Common Shares, for the purpose of enabling the Company to acquire real
estate or interests therein from real estate owners on a tax deferred basis in
exchange for such real estate or interests therein.
Net Leased Real Estate. The Company intends to invest in Net Leased
Real Estate on a leveraged basis. Net Leased Real Estate is generally defined
as real estate that is net leased on a long-term basis (i.e., ten years or
more) to tenants who are customarily responsible for paying all costs of
owning, operating, and maintaining the leased property during the term of the
lease, in addition to the payment of a monthly rent to the landlord for the use
and occupancy of the premises. The Company expects to acquire Net Leased Real
Estate on a leveraged basis that will provide sufficient cash flow to provide
an attractive return on its investment therein after debt service. Although
the time during which the Company will hold Net Leased Real Estate will vary,
the Company anticipates holding most Net Leased Real Estate for more than ten
years, although there are no assurances that it will do so. The Company will
focus on Net Leased Real Estate that is either leased to creditworthy tenants
or is real estate that can be leased to other tenants in the event of a default
of the initial tenant. See "Risk Factors--Investment Activity Risks--Risks
Related to Investments in Real Estate--Tenant Defaults and Bankruptcy."
The Company expects to have the tax depreciation associated with such
investments to offset the non-cash accrual of interest on certain MBS and
Mortgage Loans, including the OID generally associated with either MBS that are
issued at a discount from par or Participating Loans and the "phantom" taxable
income associated with other MBS derivatives.
REO Properties and Other Distressed Real Estate. The Company believes
that under appropriate circumstances the acquisition of multifamily and
commercial real estate, including REO Properties and other Distressed Real
Estate, may offer significant opportunities to the Company. The Company's
policy will be to cause the Manager to conduct an investigation and evaluation
of the real estate proposed to be purchased before purchasing such real estate.
Prior to purchasing real estate, the Manager generally will obtain and analyze
rent and sale comparables for the real estate contemplated to be acquired. The
Manager will either obtain a Phase I environmental assessment or review a
previously obtained Phase I environmental assessment (if available) for each
property prior to its acquisition by the Company. This information will be
used to supplement other due diligence that will be performed by the Manager's
employees.
The Company's policy generally is to request that the Manager include
within its due diligence review and analysis of the real estate contemplated to
be acquired by the Company a review of market studies for each geographic
market designated by the Company in which the real estate proposed to be
purchased is concentrated. The Company may request that such studies include
area economic data, employment trends, absorption rates and market rental
rates. The Company's policy is that such due diligence analyses generally also
include (i) site inspections of significant properties (and, if the Company
determines that such a review will be cost-effective, a random sampling of less
significant properties) and (ii) a review of all property files and
documentation that are made available to the Company or the Manager. The
Company generally will require that the Manager's review include, to the extent
possible, examinations of available legal documents, litigation files,
correspondence, title reports, operating statements, appraisals, engineering
reports and environmental reports, among other due diligence items.
The Company's policy is that the process of determining the fair
market value of real estate is to utilize those procedures that the Company and
the Manager deem relevant for the specific real estate being evaluated, which
procedures need not be the same for each property being evaluated. Sources of
information that may be examined in determining the fair market value of a
property may include one or more of the following: (a) current and historical
operating statements; (b) existing or new appraisals; (c) sales comparables;
(d) industry statistics and reports regarding operating expenses; (e) existing
leases and market rates for comparable leases; (f) deferred maintenance
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observed during site inspections or described in structural and engineering
reports; and (g) correspondence and other documents and memoranda found in the
files of the seller of that real estate or other relevant parties.
The Manager is expected to develop projections of net operating income
and cash flows taking into account lease rollovers, tenant improvement costs
and leasing commissions. The Manager will compare its estimates of revenue and
expenses to historical operating statements and estimates provided in
appraisals and general industry and regional statistics. Market capitalization
rates and discount rates are then applied to the cash flow projections to
estimate values. These values are then compared to available appraisals and
market sale comparables to determine recommended bid prices for each property.
The amount offered by the Company generally will take into account projected
holding periods, capital costs and projected profit expectations, and will be
the price that the Manager estimates is sufficient to generate an acceptable
risk-adjusted return on the Company's investment.
After the Company acquires Distressed Real Estate, the Company's goal
will be to improve management of that property so as to increase its cash flow.
See "Risk Factors--Investment Activity Risks--Risks Related to Investments in
Real Estate--Reliance on Third Party Operators." If cash flows can be
increased and the net operating income stabilized, the Company may seek an
opportunity to sell the real estate. The length of time the Company will hold
Distressed Real Estate may vary considerably from property to property, and
will be based in part on the Manager's analysis and conclusions as to the best
time to sell some or all of them and will be subject to certain limitations
imposed by the REIT Provisions of the Code.
OTHER INVESTMENTS. The Company may also pursue a variety of
complementary commercial real estate and finance-related businesses and
investments in furtherance of its investment policies and strategies. Such
activities may include, but are not limited to, foreign real estate-related
asset investments and investing in (or lending to) other REITs and similar
companies. Any lending with regard to the foregoing may be on a secured or an
unsecured basis and will be subject to risks similar to those attendant to
investing in Mortgage Loans, MBS and commercial real estate. The Company seeks
to maximize yield by managing credit risk through credit underwriting, although
there can be no assurance that the Company will be successful in this regard.
Investment in Other Entities. The Company may acquire equity
interests or make other investments in other REITs, registered investment
companies, partnerships and other investment funds and real estate operating
companies to the extent permitted by the REIT Provisions of the Code when the
Manager believes that such purchase will yield attractive returns on capital
employed. When the stock market valuations of such companies are low in
relation to the market value of their assets, such stock purchases can be a way
for the Company to acquire an interest in a pool of Targeted Investments at an
attractive price. The Company may also decide in the future to pursue business
acquisition opportunities that it believes will complement the Company's
operations.
Foreign Investments. The Company may acquire or originate Mortgage
Loans to foreign borrowers secured by real estate located outside the United
States or may acquire such real estate. The Company intends that any such
investments in real estate or Mortgage Loans secured by real estate located in
foreign countries will be primarily in countries in which the AMRESCO Group
conducts business or has invested or made Mortgage Loans in the past (currently
Canada, the United Kingdom and Mexico). Investing in real estate related
assets located in foreign countries creates risks associated with the
uncertainty of foreign laws and markets and risks related to currency
conversion. The Company may attempt to mitigate such currency risks, to the
extent practicable, depending on the nature of the investment. For example,
the Company may originate Mortgage Loans or acquire Net Leased Real Estate
which require payments or are otherwise denominated in U.S. dollars. The
Company may be subject to foreign income tax with respect to its investments in
foreign real estate related assets. However, any foreign tax credit that
otherwise would be available to the Company for U.S. federal income tax
purposes will not flow through to the Company's shareholders.
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THE INITIAL ASSETS
The Company has entered into non-binding commitments or has otherwise
identified approximately $____ million of Mortgage Loans in which it intends to
invest with a portion of the net proceeds of this Offering. Such Mortgage
Loans include primarily Mezzanine Loans, Construction Loans and Bridge Loans
identified through Holliday Fenoglio Fowler. Such Mortgage Loans will be
reviewed and approved by the Company's Chief Investment Officer and the Board
of Trust Managers prior to purchase or origination. The Company's commitments
relating to, or identification of, such Mortgage Loans are not binding upon the
Company or the borrowers and there can be no assurances that the Company will
purchase or originate such Mortgage Loans. See "Risk Factors--Investment
Activity Risks--Limited Identified Assets; Available Investments."
EMPLOYEES
The Company initially expects not to have any employees other than
officers, each of whom will also be employees of the Manager. See "Management
of the Company" and "The Manager."
FACILITIES
The executive offices of the Company, the Manager and AMRESCO are
located at 700 North Pearl Street, Suite 2400, Dallas, Texas 75201.
LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company is a party
or to which any property of the Company is subject.
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MANAGEMENT OF THE COMPANY
EXECUTIVE OFFICERS AND TRUST MANAGERS OF THE COMPANY
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Mark D. Gibson 38 President and Chief Executive Officer
Thomas J. Andrus 40 Executive Vice President and Chief Financial Officer
Jonathan S. Pettee 38 Senior Vice President--Mortgage-Backed Securities
Michael L. McCoy 42 Senior Vice President, General Counsel and Secretary
John M. Jumonville 38 Vice President and Treasurer
Thomas R. Lewis 34 Vice President and Controller
</TABLE>
Mark D. Gibson is President and Chief Executive Officer of the Company
and a member of the Board of Trust Managers. Mr. Gibson also serves as
President and Chief Executive Officer of the Manager and as President of
Holliday Fenoglio Fowler. Mr. Gibson joined Holliday Fenoglio Fowler in 1984
and served at Holliday Fenoglio Fowler in various capacities until becoming
President in April 1996. Prior to joining Holliday Fenoglio Fowler, Mr. Gibson
was employed by Bank of the Southwest in various capacities from 1981 to 1984,
including Vice President of Commercial Lending. Mr. Gibson holds a B.B.A.
degree in Finance from The University of Texas.
Thomas J. Andrus is Executive Vice President and Chief Financial
Officer of both the Company and the Manager. Since May 1995, Mr. Andrus has
also served as Vice President and Treasurer of AMRESCO where his primary
responsibilities include financing, capital raising, investor relations, cash
management, insurance and strategic planning. Mr. Andrus has been employed by
the AMRESCO Group in various capacities since 1987, including Managing Director
of Asset Marketing (with responsibility for directing the marketing
activities for loan and real estate assets) and Director and Senior Vice
President of Asset Management (with responsibility for directing the
management and liquidation of distressed commercial and real estate loans).
Prior to 1987, Mr. Andrus was employed by KPMG Peat Marwick, as Manager in the
Managing Consulting Department, and NationsBank of Texas in various capacities
including Senior Vice President of Special Assets and Vice President of
Commercial Lending. Mr. Andrus holds a B.S. degree in Finance from Trinity
University and an M.B.A. degree from Texas A&M University.
Jonathan S. Pettee is Senior Vice President--Mortgage-Backed
Securities of both the Company and the Manager. Since 1996, Mr. Pettee has
also been an employee of the AMRESCO Group, where he is responsible for
mortgage product development, capital raising and CMBS portfolio management for
AMRESCO. Mr. Pettee has over ten years of experience in corporate finance,
fixed income and real estate. From 1995 to 1996, Mr. Pettee was Managing
Director for BBC Investment Advisors, a joint venture between Back Bay Advisors
and Copley Real Estate Advisors. At BBC, Mr. Pettee managed an investment
grade CMBS portfolio. Mr. Pettee has held previous positions as Managing
Director at Copley Real Estate Advisors (1992 to 1994), where he was
responsible for managing the external financing activities for Copley's
institutional funds, and as Senior Associate at Morgan Stanley Realty (1986 to
1992), where he executed sale, financing and investment banking transactions
for the firm's clients. Mr. Pettee has a B.S. degree in Mechanical Engineering
from Cornell University and an M.B.A. degree from the Harvard Business School.
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<PAGE> 62
Michael L. McCoy is Senior Vice President, General Counsel and
Secretary of the Company. Since February 1996, Mr. McCoy has also served as
Assistant General Counsel of AMRESCO responsible for overseeing the legal
support to the commercial mortgage banking, commercial finance and commercial
loan servicing areas of the AMRESCO Group. Mr. McCoy has been employed by the
AMRESCO Group since 1989. Prior to joining the AMRESCO Group, Mr. McCoy was a
Director with the law firm of Baker, Mills & Glast, P.C., where he practiced in
the areas of commercial real estate and banking, and an associate with the law
firm of Carrington, Coleman, Sloman & Blumenthal. Mr. McCoy holds a J.D.
degree and a B.B.A. degree from the University of Texas at Austin.
John M. Jumonville is Vice President and Treasurer of both the Company
and the Manager. Since August 1996, Mr. Jumonville has also served as
Assistant Treasurer of AMRESCO, where his primary responsibilities have
included corporate asset and liability management and cash management. He has
also performed acquisition analysis and other special projects for the AMRESCO
Group. Mr. Jumonville has been employed by the AMRESCO Group in various
capacities since 1989, including Director of Asset Marketing (with
responsibility for marketing and valuation analysis of loans and Asset
Portfolios) and Vice President of Asset Management (with responsibility for
management and disposition of underperforming and distressed Mortgage Loan
portfolios) Mr. Jumonville holds a B.S. degree in Accounting from Louisiana
State University.
Thomas R. Lewis is Vice President and Controller of both the Company
and the Manager. Since November 1995, Mr. Lewis has also been an employee of
the AMRESCO Group, with current responsibility for accounting, cash management
and reporting for its 40 institutional advisory clients. Mr. Lewis has over
twelve years of experience in real estate accounting and reporting. From 1993
to 1995, Mr. Lewis served in a similar capacity as Vice President-Finance for
Acacia Realty Advisors, Inc. ("Acacia"), a predecessor organization. From 1989
to 1993, Mr. Lewis served as Senior controller for Prentiss Properties Limited,
Inc., an affiliate of Acacia, where he was responsible for the identification
and resolution of technical accounting and reporting issues as well as the
annual business planning and reporting for several closed-end commingled real
estate investment partnerships. Mr. Lewis worked in the Dallas office of Price
Waterhouse from 1985 to 1989, where he was responsible for the audit of a large
real estate development company and the related audits of its second-tier
partnerships and joint ventures. Mr. Lewis holds a B.B.A. degree in Accounting
from Texas A&M University and is a Certified Public Accountant.
Prior to the closing of this Offering, the Company will hire a Chief
Investment Officer, who will oversee all investment activities of the Company.
The members of the Board of Trust Managers of the Company are as
follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Robert L. Adair III 54 Chairman of the Board of Trust Managers
Robert H. Lutz, Jr. 48 Trust Manager
Mark D. Gibson(1) 38 Trust Manager
</TABLE>
_______________
(1) See above for certain biographical information regarding Mr. Gibson.
Robert L. Adair III is Chairman of the Board of Trust Managers. Since
1994, Mr. Adair has also served as a director, President and Chief Operating
Officer of AMRESCO. Mr. Adair has served AMRESCO and its predecessors in
various capacities since 1987. Mr. Adair holds a B.B.A. degree in Accounting
from The University of Texas and an M.B.A. degree from the Wharton School at
the University of Pennsylvania.
Robert H. Lutz, Jr. serves as a member of the Board of Trust Managers.
Since May 1994, Mr. Lutz has also served as Chairman of the Board and Chief
Executive Officer of AMRESCO. From November 1991 to May 1994, Mr. Lutz served
as President of Allegiance Realty, a real estate management company. Mr. Lutz,
who is also a director of Bristol Hotel Company, holds a B.A. degree from
Furman University, and an M.B.A. degree from Georgia State University.
Prior to the closing of this Offering, AMRESCO will elect four Independent
Trust Managers.
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Trust Managers and executive officers of the Company are 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 time to the affairs of the Company. However, in their capacities
as officers or employees of the Manager, or its Affiliates, they will devote
significant amounts 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. See "Risk Factors--Economic and Business Risks--Conflicts of
Interest" and "The Manager." All officers serve at the discretion of the Board
of Trust Managers. Although the Company may have salaried employees, it
currently has no such employees.
The Bylaws of the Company provide that the Board of Trust Managers
will have not less than two nor more than nine members, as determined from time
to time by the existing Board of Trust Managers. Upon the closing of this
Offering, the Board of Trust Managers will have seven members consisting of
three Trust Managers affiliated with the Manager and four Independent Trust
Managers. The Bylaws further provide that except in the case of a vacancy, the
majority of the members of the Board of Trust Managers and of any committee of
the Board of Trust Managers must at all times after the issuance of the Common
Shares in this Offering be Independent Trust Managers. Vacancies occurring on
the Board of Trust Managers among the Independent Trust Managers may be filled
by the vote of a majority of the Trust Managers, including the Independent
Trust Managers, or a majority of the outstanding Common Shares at an annual or
special meeting of shareholders.
The Declaration of Trust provides that immediately after closing of
this Offering, the Board of Trust Managers will be divided into three classes,
each class to consist as nearly as possible of one-third of the Trust Managers.
Each class of Trust Managers will contain one affiliated Trust Manager and at
least one Independent Trust Manager. The term of office of one class of Trust
Managers will expire each year. The initial term of office of the Class I,
Class II and Class III Trust Managers will expire at the 1999, 2000 and 2001
annual meeting of shareholders, respectively. Commencing with the 1999 annual
meeting of shareholders, the Trust Managers of the class elected at each annual
meeting of shareholders will hold office for a term of three years.
The Company will pay an annual Trust Manager's fee to each Independent
Trust Manager of $20,000, a fee of $1,000 for each meeting of the Board of
Trust Managers attended by each Independent Trust Manager and reimbursement of
costs and expenses of all Trust Managers for attending such meetings. Trust
Managers who are also employed by the Company or the Manager will not be
separately compensated by the Company other than through the Share Option Plan.
Upon the closing of this Offering, the Company will establish an Audit
Committee of the Board of Trust Managers. The Audit Committee will be composed
of the Independent Trust Managers, and will be responsible for reviewing the
functions of the Company's management, the Manager and the Company's
independent auditors pertaining to the Company's financial statements, and
performing such other duties and functions as are deemed appropriate by the
Audit Committee or the Board of Trust Managers.
The Declaration of Trust provides for the indemnification of the Trust
Managers, officers, employees, and controlling Persons of the Company to the
fullest extent permitted by Texas law. The Texas REIT Act generally permits
the indemnification of a trust manager, officer, employee, or agent of a real
estate investment trust, who was, is or is threatened to be made a named
defendant or respondent in a proceeding because of the Person's affiliation
with the real estate investment trust only if that Person: (i) conducted
himself in good faith; (ii) reasonably believed: (a) in the case of conduct in
his official capacity, that his conduct was in the real estate investment
trust's best interest; and (b) in all other cases, that his conduct was at
least not opposed to the real estate investment trust's best interest; and
(iii) in the case of any criminal proceeding, had no reasonable cause to
believe that his conduct was unlawful. Furthermore, except to the extent
permitted by the Texas REIT Act, such Person may not be indemnified in respect
of a proceeding (i) in which the Person is found liable on the basis that
personal benefit was improperly
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received by him, whether or not the benefit resulted from an action taken in
the Person's official capacity; or (ii) in which the Person is found liable to
the real estate investment trust.
If, in connection with a proceeding against the real estate investment
trust, such Person is found liable to the real estate investment trust or is
found liable on the basis that personal benefit was improperly received by the
Person, the indemnification (i) is limited to reasonable expenses actually
incurred by the Person in connection with the proceeding and (ii) shall not be
made to a Person that has been found liable for willful or intentional
misconduct in the performance of his duty to the real estate investment trust.
The Texas REIT Act also provides that the real estate investment trust
may indemnify Persons who are not or were not officers, employees, or agents of
the real estate investment trust but who are or were serving at the request of
the real estate investment trust as a trust manager, director, officer,
partner, venturer, proprietor, trustee, employee, agent or similar functionary
of another real estate investment trust or of a foreign or domestic
corporation, partnership, or other enterprise to the same extent that it may
indemnify its own trust managers, officers, employees, or agents.
Pursuant to the Texas REIT Act and the Declaration of Trust, no Trust
Manager will be liable for any act, omission, loss, damage or expense arising
from his or her duty to the Company, except for such Trust Manager's own
willful misfeasance, willful malfeasance or gross negligence. Under the Texas
REIT Act, a trust manager is not subject to any liabilities imposed by law upon
trust managers of a real estate investment trust nor liable for any claims or
damages that may result from his acts in the discharge of any duty imposed or
power conferred upon him by the real estate investment trust, if, in the
exercise of ordinary care, he acted in good faith and in reliance upon
information, opinions, reports or statements, including financial statements
and other financial data, concerning the real estate investment trust or
another Person, that were prepared or presented by: (i) one or more officers
or employees of the real estate investment trust, other than the real estate
investment trust manager; (ii) legal counsel, public accountants, investment
bankers, or other Persons as to matters the trust manager reasonably believes
are within the Person's professional or expert competence; or (iii) a committee
of the trust managers of which the trust manager is not a member.
EXECUTIVE COMPENSATION
The Company has not paid and does not intend to pay annual
compensation to the Company's executive officers for their services as
executive officers. This policy may be changed, however, by a vote of the
Trust Managers without notice to or approval by the shareholders. The Company
has granted options to purchase Common Shares to the Manager. See "--Share
Options Outstanding." The Company may from time to time, in the discretion of
the Independent Trust Managers, grant additional options to purchase Common
Shares to the Manager, its officers or employees or to the executive officers
and Trust Managers of the Company pursuant to the Share Option Plan.
SHARE OPTION PLAN
The Company will adopt a share option plan (the "Share Option Plan")
that will provide for the grant of both qualified incentive share options
("ISOs") that meet the requirements of Section 422 of the Code, and
non-qualified share options, share appreciation rights and dividend equivalent
rights. ISOs may be granted to the employees of the Company. Nonqualified
share options may be granted to the Manager, Trust Managers, officers,
directors and any key employees of the Company and to the Manager and its
officers and key employees. The exercise price for any ISO granted under the
Share Option Plan may not be less than 100% of the fair market value of the
Common Shares at the time the option is granted. The purpose of the Share
Option Plan is to provide a means of performance-based compensation to the
Manager and its officers and key employees and to the officers, directors,
Trust Managers and key employees of the Company in order to attract and retain
qualified personnel and to provide an incentive to others whose job performance
affects the Company.
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<PAGE> 65
Subject to anti-dilution provisions for share splits, share dividends
and similar events, the Share Option Plan authorizes the grant of options to
purchase an aggregate of up to 15% of the outstanding Common Shares. If an
option granted under the Share Option Plan expires or terminates, the Common
Shares subject to any unexercised portion of that option will again become
available for the issuance of further options under the Share Option Plan.
Unless previously terminated by the Board of Trust Managers, the Share Option
Plan will terminate ten years from its effective date, and no options may be
granted under the Share Option Plan thereafter.
The Share Option Plan will be administered by a committee of the Board
of Trust Managers comprised of the Independent Trust Managers (the
"Compensation Committee"). Except for the grant of options issuable upon the
closing of this Offering described below, options granted under the Share
Option Plan will become exercisable in accordance with the terms of the grant
made by the Compensation Committee. The Compensation Committee has
discretionary authority to determine at the time an option is granted whether
it is intended to be an ISO or a non-qualified option, and when and in what
increments Common Shares covered by the option may be purchased.
Under current law, ISOs may not be granted to any Person who is not a
full-time employee of the Company or to directors, officers and other employees
of entities unrelated to the Company. In addition, no options may be granted
under the Share Option Plan to any Person (other than AMRESCO and its
Affiliates) who, assuming exercise of all options held by such Person, would
own or be deemed to own more than 9.8% of the outstanding Common Shares.
Each option must terminate no more than ten years from the date it is
granted. Options may be granted on terms providing that they will be
exercisable in whole or in part at any time or times during their respective
terms, or only in specified percentages at stated time periods or intervals
during the term of the option.
The exercise price of any option granted under the Share Option Plan
is payable in full (i) by cash, (ii) by surrender of Common Shares having a
market value equal to the aggregate exercise price of all shares to be
purchased, (iii) by cancellation of indebtedness owed by the Company to the
optionholder, (iv) by a full recourse promissory note executed by the
optionholder, or (v) by any combination of the foregoing. The terms of the
promissory note may be changed from time to time by the Board of Trust Managers
to comply with applicable regulations or other relevant pronouncements of the
IRS or the Commission.
The Board of Trust Managers may, without affecting any outstanding
options, from time to time revise or amend the Share Option Plan, and may
suspend or discontinue it at any time. However, no such revision or amendment
may increase the number of Common Shares subject to the Share Option Plan (with
the exception of adjustments resulting from changes in capitalization), change
the class of participants eligible to receive options granted under the Share
Option Plan or modify the period within which or the terms upon which the
options may be exercised without shareholder approval.
SHARE OPTIONS OUTSTANDING
Upon closing of this Offering, the Company will grant to the Manager
options to purchase 1,667,510 Common Shares. 1,167,257 of the Common Shares
issuable upon the exercise of such options may be purchased at the initial
public offering price and the remaining 500,253 Common Shares may be purchased
for _____% of the initial public offering price. All of such options vest
ratably over a four-year period commencing on the first anniversary of the
closing of this Offering, and will expire 10 years after the date of grant.
Upon the closing of this Offering, the Company may issue options to
purchase up to an additional ________ Common Shares to officers and key
employees of the Company and the Manager. Such options will be exercisable at
the initial public offering price and will vest ratably over a four-year period
beginning one year after the date of grant.
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Upon the closing of this Offering, each Independent Trust Manager will
receive an initial grant of options to purchase up to _______ Common Shares at
the initial public offering price. These options will vest ratably over a
four-year period beginning one year from the date of grant and expire 10 years
from the date of grant. Any Independent Trust Manager newly elected to the
Board of Trust Managers thereafter may receive an identical grant at the fair
market value on the date of grant.
THE MANAGER
The day-to-day operations of the Company will be managed by AMREIT
Managers, L.P., a newly formed member of the AMRESCO Group, pursuant to the
Management Agreement, which will become effective upon the closing of this
Offering. In addition to the Chief Investment Officer, who will be a full-time
employee of the Manager and not an employee of any other member of the AMRESCO
Group, the Manager expects to have a staff of six full-time Mortgage Loan
investment officers, each of whom will report directly to the Chief Investment
Officer, and six full-time CMBS investment officers, each of whom will report
to the Senior Vice President--MBS, who will report to the Chief Investment
Officer. In addition, the Manager will have a staff of several full-time
analysts, assistants and closing administrators. However, the Manager intends
to rely heavily upon the employees and other resources of the AMRESCO Group to
fulfill its obligations under the Management Agreement. For a description of
the Manager's obligations under the Management Agreement, see "--The Management
Agreement."
DESCRIPTION OF THE AMRESCO GROUP
The AMRESCO Group is a diversified financial services company
specializing in real estate lending, specialized commercial finance, and the
acquisition, resolution and servicing of nonperforming and underperforming
commercial real estate loans. During 1997, the AMRESCO Group derived its
earnings from four principal lines of business: residential mortgage banking
(33%), asset management (32%), commercial mortgage banking (21%) and commercial
finance (14%). At December 31, 1997, the AMRESCO Group employed approximately
1,600 persons. In order to fulfill its obligations under the Management
Agreement, the Manager expects to rely significantly on the AMRESCO Group for
administrative support and for expertise in the areas described below. See
"Business and Strategy--Strategy" and "Risk Factors--Economic and Business
Risks--Dependence on the Manager and the AMRESCO Group."
COMMERCIAL MORTGAGE BANKING
General. The AMRESCO Group performs a wide range of commercial
mortgage banking services, including originating, underwriting, placing,
selling, securitizing and servicing commercial real estate loans through
Holliday Fenoglio Fowler, AMRESCO Capital and AMRESCO Services.
Real Estate Capital Markets. Holliday Fenoglio Fowler, one of the
largest commercial mortgage banking companies in the United States (based on
origination volume), is engaged in three primary lines of business: real
estate related debt placement (which involves assisting real estate developers
and owners in obtaining non-Participating Mortgage Loans, including Permanent
Mortgage Loans, Bridge Loans and Construction Loans), real estate investment
banking (which involves assisting real estate developers and owners in
obtaining Participating Loans, Mezzanine Loans and other types of
non-traditional real estate financing) and real estate dispositions (which
involves brokering sales of institutional grade assets to pension funds, REITs
and private investors). In January 1998, Holliday Fenoglio Fowler
significantly expanded its operations by acquiring the mortgage banking
business of Fowler Goedecke. Pursuant to such acquisition, Holliday Fenoglio
Fowler acquired five of its current 17 offices and 17 of its current 96
mortgage bankers. Subsequent to such acquisition, Holliday Fenoglio Fowler
changed its name to reflect the Fowler Goedecke acquisition. Mortgage Loans
and other real estate financings originated by Holliday Fenoglio Fowler have
historically been funded by institutional lenders, principally insurance
companies, pension funds and other investment funds, and by AMRESCO Capital and
other conduit purchasers. Real estate related investments originated by
Holliday Fenoglio Fowler during 1997 (on an actual basis) were placed with
approximately 128 different lenders. During 1997, Holliday Fenoglio Fowler
closed over $6.0 billion in 709 real estate transactions
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(including only those transactions actually closed by Holliday Fenoglio Fowler
during 1997 and not those closed by Fowler Goedecke during 1997). The
transactions closed by Holliday Fenoglio Fowler during 1997, 1996 and 1995
included the following types of transactions (on an actual basis):
<TABLE>
<CAPTION>
Holliday Fenoglio Fowler
--------------------------------------------------
Real Estate Transactions
--------------------------------------------------
1997 1996 1995
---- ---- ----
(in millions)
<S> <C> <C> <C>
Permanent Mortgage Loans 3,650 2,022 1,408
Mezzanine Loans $933 $304 $225
Bridge Loans 312 221 134
Construction Loans 267 197 240
Real Estate Dispositions 892 386 185
------ ------ ------
Total $6,054 $3,130 $2,193
====== ====== ======
</TABLE>
Pursuant to the Correspondent Agreement, Holliday Fenoglio Fowler has
agreed to present Targeted Investments to the Company (on a nonexclusive
basis). The Company believes that a substantial portion of the Invested
Portfolio will be identified through Holliday Fenoglio Fowler pursuant to the
Correspondent Agreement.
Commercial Real Estate Lending. AMRESCO Capital originates,
underwrites and securitizes commercial Mortgage Loans. AMRESCO Capital serves
its market directly through branch offices, as well as through a network of
independent mortgage brokers, including Holliday Fenoglio Fowler. AMRESCO
Capital is approved by Fannie Mae to participate in its Delegated Underwriting
and Servicing ("DUS") program, which AMRESCO Capital believes makes it a more
competitive Mortgage Loan originator and underwriter of multifamily Mortgage
Loans. AMRESCO Capital is also an approved lender in the FHLMC multifamily
seller/servicer program in the states of Florida, New York, North Carolina and
South Carolina.
AMRESCO Capital warehouses the commercial Mortgage Loans it acquires
or originates for securitization and sale as MBS. The AMRESCO Group
accumulates commercial Mortgage Loans until the pool of Mortgage Loans is of a
sufficient size (generally in excess of $400 million) to allow for an efficient
securitization in the public markets. The AMRESCO Group completed a single
securitization in 1997 relating to approximately $480.1 million of commercial
Mortgage Loans.
Commercial Loan Servicing. Through AMRESCO Services, the AMRESCO
Group serves as a primary servicer for whole commercial Mortgage Loans and
securitized pools of commercial Mortgage Loans, and as a Master Servicer for
securitized pools of commercial Mortgage Loans. As a primary servicer for
whole commercial Mortgage Loans and securitized pools of commercial Mortgage
Loans, AMRESCO Services is currently rated by Standard & Poor's as "strong,"
its highest rating category. As a commercial Master Servicer, AMRESCO Services
is rated by Standard & Poor's as "above average," which is the highest rating
ever awarded by Standard & Poor's in the commercial Master Servicer category.
All other Rating Agencies which have rated AMRESCO Services as either a primary
servicer or a Master Servicer have given AMRESCO Services their highest rating.
At December 31, 1997, AMRESCO Services acted as servicer with respect to
approximately $20.2 billion of Mortgage Loans.
The Manager expects to rely heavily on the expertise of the Commercial
Mortgage Banking division of the AMRESCO Group in the performance of its duties
under the Management Agreement.
COMMERCIAL FINANCE
General. Through its commercial finance group, the AMRESCO Group
focuses on (i) loans to franchisees of nationally recognized restaurant,
hospitality and service organizations, (ii) special situation lending, with an
emphasis on the real estate and communications industries, and (iii)
single-family residential construction lending. Loans originated by the
franchise lending operation are sold to third parties, principally through
securitization, while
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the real estate, communications and single-family residential loans are
generally retained for the AMRESCO Group's own portfolio. Other ancillary
products, services and investments provided by the commercial finance group
include equipment leasing, small business lending and loan servicing.
The Manager expects to benefit from the expertise of the commercial
finance division of the AMRESCO Group, and to have co-investment opportunities
with such group.
Franchise Lending. AMRESCO Commercial Lending Corporation ("ACLC")
specializes primarily in the origination of loans to operators of nationally
known franchise concepts and has loan producers in Idaho, Colorado, Michigan,
Oklahoma, Kansas and Georgia. ACLC funds these loans through a warehouse
borrowing facility until they are securitized and sold to investors, with ACLC
retaining the right to service the loans. ACLC also underwrites and originates
commercial real estate loans outside this core concept that are funded by third
party conduit purchasers. ACLC completed two loan securitizations in 1997
which totalled approximately $298 million.
Specialty Lending. The AMRESCO Group provides mid-to-high yield loans
to borrowers that have been unable to obtain financing from traditional funding
sources. In these transactions, the AMRESCO Group funds senior and
subordinated indebtedness with maturities ranging from one to four years for
borrowers with an established management record. Typically, these loans have a
defined "exit" strategy, such as a committed interim or permanent loan.
Currently, the AMRESCO Group lends primarily to the real estate and
communications industries from production offices in Texas, California, Oregon,
Rhode Island, Virginia and Canada. At December 31, 1997, the AMRESCO Group
portfolio of loans in this sector was approximately $145.3 million.
Single-Family Residential Construction Lending. AMRESCO Builders
Group provides construction financing to builders of homes for first time and
first move-up buyers. The AMRESCO Group targets experienced homebuilders
starting between approximately 100-1,500 units per year that have proven
construction and sales expertise. AMRESCO Builders Group is headquartered in
Houston, Texas, and has loan production offices in California, Arizona, Nevada,
Colorado, Georgia and Florida. AMRESCO Builders Group also provides a limited
amount of acquisition and development lending for residential lots to
facilitate its construction loan program. As of December 31, 1997, AMRESCO
Builders Group had advanced approximately $65.5 million of residential
construction loans on commitments of $114.6 million.
ASSET MANAGEMENT
General. The AMRESCO Group manages and resolves Asset Portfolios and
provides Special Servicing for nonperforming and underperforming Mortgage Loans
in commercial mortgage-backed bond trusts and similar securitized commercial
asset-backed Mortgage Loan portfolios. The AMRESCO Group also provides real
estate investment advice to various institutional investors (primarily pension
funds) seeking to invest in real estate and related investments. The Manager
expects to utilize the expertise of the asset management division of the
AMRESCO Group for the benefit of the Company, including primarily its servicing
expertise. See "--The Management Agreement."
Asset Portfolio Management and Investment. The AMRESCO Group manages
and resolves Asset Portfolios acquired at a discount to face value by the
AMRESCO Group alone and by the AMRESCO Group with co-investors. The AMRESCO
Group also manages and resolves Asset Portfolios owned by third parties. Asset
Portfolios generally include secured loans of varying qualities and collateral
types including fee-owned real estate. The majority of the loans in the Asset
Portfolios in which the AMRESCO Group invests are in payment default at the
time of acquisition. While the majority of the Asset Portfolios are located in
the United States, the AMRESCO Group has opened offices in Toronto and London
through which it pursues Asset Portfolio acquisition opportunities and manages
its investments in Canada and Western Europe. At December 31, 1997, the face
value of the Company's total investment in wholly-owned Asset Portfolios
aggregated approximately $606.9 million, which was composed of approximately
$431.1 million (71%) of collateralized business loans, approximately $91.0
million (15%) of asset-backed securities, approximately $84.8 million (14%) of
real estate.
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Special Servicing. The AMRESCO Group provides Special Servicing to
commercial mortgage-backed bond trusts and similar securitized commercial
asset-backed loan portfolios in respect of nonperforming or underperforming
assets included in such trusts or portfolios. As a Special Servicer, the
AMRESCO Group receives an annual fee (typically, approximately 50 basis points
of the face value of the delinquent or nonperforming loan being serviced), plus
a 75 to 100 basis points fee based on the total cash flow from resolution of
each loan as it is received. The AMRESCO Group has received a superior rating
from Standard & Poor's, the highest rating currently given by that rating agency
for Special Servicers such as the AMRESCO Group. As of December 31, 1997, the
AMRESCO Group was the designated Special Servicer for securitized pools holding
approximately $13.5 billion face value of loans, of which $459.2 million (face
value) had been assigned to the AMRESCO Group for resolution.
THE MANAGEMENT AGREEMENT
The Company will enter into the Management Agreement with the Manager
at the closing of this Offering. The Management Agreement will have an initial
term (the "Initial Term") of two years from the closing of this Offering. The
Management Agreement may be renewed at the end of the Initial Term (and each
successive term thereafter) for a period of one year, upon review and approval
by a majority of the Independent Trust Managers. If the Independent Trust
Managers do not vote to terminate or renew at least 90 days prior to the end of
the then current period, the Management Agreement will automatically renew for
a one-year period. The Manager will be primarily involved in three activities:
(i) underwriting, originating and acquiring real estate related assets; (ii)
asset/liability management, financing, hedging, management and disposition of
assets, including credit and prepayment risk management; and (iii) capital
management, oversight of the Company's structuring, analysis, capital raising
and investor relations activities. In conducting these activities, the Manager
will formulate operating strategies for the Company, arrange for the
acquisition of Targeted Investments by the Company, arrange for various types
of financing for the Company, monitor the performance of the Company's Invested
Portfolio and provide administrative and managerial services in connection with
the operation of the Company. The Manager will be required to manage the
business affairs of the Company in conformity with the policies that are
approved and monitored by the Board of Trust Managers. The Manager will be
required to prepare regular reports for the Board of Trust Managers that will
review the Company's acquisitions of Targeted Investments, portfolio
composition and characteristics, credit quality, performance and compliance
with the policies approved by the Board of Trust Managers.
At all times, the Manager will be subject to the direction and
oversight of the Board of Trust Managers and will have only such functions and
authority as the Company may delegate to it. The Manager will be responsible
for the day-to-day operations of the Company and will perform services and
activities relating to the assets and operations of the Company, including,
without limitation, the following:
(i) providing a complete program of investing and reinvesting the
capital and assets of the Company in pursuit of its investment
objectives and in accordance with the Guidelines and policies
adopted by the Board of Trust Managers from time to time;
(ii) serving as the Company's consultant with respect to
formulation of investment criteria and policies and
preparation of the Guidelines by the Board of Trust Managers;
(iii) assisting the Company in developing criteria for asset
purchase commitments that are specifically tailored to the
Company's investment objectives and making available to the
Company its knowledge and experience with respect to Mortgage
Loans, MBS, real estate and other real estate related assets;
(iv) representing and making recommendations to the Company in
connection with the origination of Mortgage Loans, the
purchase and commitment to purchase and financing of Mortgage
Loans, MBS, real estate and other real estate related assets,
the sale and commitment to sell such assets (including the
underwriting of Mortgage Loans, the accumulation of Mortgage
Loans for
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securitization and arrangement for the issuance of MBS from
pools of Mortgage Loans owned by the Company);
(v) furnishing reports and statistical and economic research to
the Company regarding market conditions in the areas in which
the Company proposes to invest as well as the Company's
activities and the services performed for the Company by the
Manager;
(vi) monitoring and providing to the Board of Trust Managers on an
ongoing basis market information and other data, obtained from
certain nationally recognized brokers or dealers identified by
the Board of Trust Managers from time to time, and providing
data and recommendations to the Board of Trust Managers in
connection with the identification of such brokers or dealers;
(vii) providing the executive and administrative personnel and
office space and office and administrative services required
in rendering services to the Company;
(viii) monitoring the operating performance of the Company's
investments and providing periodic reports with respect
thereto to the Board of Trust Managers including comparative
information with respect to such operating performance and
budgeted or projected operating results;
(ix) administering the day-to-day operations of the Company and
performing and supervising the performance of such other
administrative functions necessary for the management of the
Company and its assets as may be agreed upon by the Manager and
the Board of Trust Managers, 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;
(x) communicating on behalf of the Company with the holders of the
equity and debt securities of the Company as required to
satisfy the reporting and other requirements of any
governmental bodies or agencies and to maintain effective
relations with such holders;
(xi) counseling the Company in connection with policy decisions
made or to be made by the Board of Trust Managers;
(xii) advising the Company regarding its status as a REIT,
consulting with legal counsel as appropriate regarding the
application of the REIT Provisions of the Code to the proposed
investments and operations of the Company and monitoring
compliance with the REIT Provisions of the Code;
(xiii) advising the Company regarding the status of its exemption from
the Investment Company Act, consulting with legal counsel as
appropriate regarding the nature of its proposed investments
and the impact thereof on the Company's exemption from
registration under such Act and monitoring the Company's
continuing exemption from registration thereunder;
(xiv) evaluating and recommending hedging strategies to the Board of
Trust Managers and, upon approval by the Board of Trust
Managers, engaging in hedging activities on behalf of the
Company, consistent with the Company's status as a REIT and
the Guidelines;
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(xvii) upon request by and in accordance with the Board of Trust
Managers, investing or reinvesting any money of the Company,
and advising the Company as to its capital structure and
capital raising;
(xviii) causing the Company to retain qualified accountants and/or
legal counsel to assist in developing appropriate accounting
procedures, compliance procedures and testing systems with
respect to financial reporting obligations and compliance with
the REIT Provisions of the Code and to conduct quarterly
compliance reviews with respect thereto;
(xix) causing the Company to qualify to do business in all
applicable jurisdictions;
(xx) assisting the Company in complying with all regulatory
requirements applicable to the Company in respect of its
business activities, including preparing or causing to be
prepared all financial statements required under applicable
regulations and contractual undertakings and all reports and
documents, if any, required under the Exchange Act;
(xxi) taking all necessary actions to enable the Company to make
required tax filings and reports, including soliciting
shareholders for required information to the extent provided
in the REIT Provisions of the Code;
(xxii) handling and resolving all claims, disputes or controversies
(including all litigation, arbitration, settlement or other
proceedings or negotiations) in which the Company may be
involved or to which the Company may be subject arising out of
the Company's day-to-day operations, subject to such
limitations or parameters as may be imposed from time to time
by the Board of Trust Managers;
(xxiii) using commercially reasonable efforts to cause expenses
incurred by or on behalf of the Company to be reasonable or
customary and within any budgeted parameters or Guidelines set
by the Board of Trust Managers from time to time;
(xxiv) performing such other services as may be required from time to
time for management and other activities relating to the
assets of the Company as the Board of Trust Managers shall
reasonably request or the Manager shall deem appropriate under
the particular circumstances; and
(xxv) using commercially reasonable efforts to cause the Company to
comply with all applicable laws.
The Manager will perform portfolio management services on behalf of the
Company pursuant to the Management Agreement with respect to the Company's
investments. Such services will include, but not be limited to, consulting with
the Company on purchase, sale and other opportunities, collection of information
and submission of reports pertaining to the Company's assets, interest rates,
and general economic conditions, periodic review and evaluation of the
performance of the Company's portfolio of assets, acting as liaison between the
Company and banking, mortgage banking, investment banking and other parties with
respect to the purchase, financing and disposition of assets, and other
customary functions related to portfolio management. The Manager may enter into
subcontracts with other parties, including the AMRESCO Group, to provide any
such services to the Company.
The Manager will perform monitoring services on behalf of the Company
pursuant to the Management Agreement with respect to loan servicing activities
provided by third parties and 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; acting as a
liaison between the servicers of the Mortgage Loans and the Company; 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.
The Manager expects to rely heavily on the resources and expertise of
the AMRESCO Group to fulfill its obligations under the Management Agreement.
See "Risk Factors--Economic and Business Risks--Dependence on the Manager and
the AMRESCO Group."
Pursuant to the Management Agreement, the Manager has agreed, at all
times during which it is serving as manager of the Company, to maintain a
tangible net worth of at least $250,000. In addition, the Manager has agreed
to maintain "errors and omissions" insurance coverage (which may be provided by
a policy or policies maintained through, and providing coverage for, other
members of the AMRESCO Group) in an amount which is comparable to that
customarily maintained by other managers or servicers of other assets similar
to those held by the Company.
TERMINATION
During the Initial Term, the Management Agreement may not be
terminated except by the Company (upon a majority vote of the Independent Trust
Managers) as a result of "cause" as defined therein. After the Initial Term,
the Management Agreement may be terminated at any time by the Company upon at
least 90 days prior written notice to the Manager or by the Manager upon at
least 180 days prior written notice to the Company.
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Upon termination of the Management Agreement by the Company or failure
of the Company to renew the Management Agreement after the Initial Term (except
in the case of a termination by the Company for cause), the Company will be
obligated to pay the Manager a substantial termination fee. The termination
fee will be equal to the sum of the Manager's Base Management Fee and Incentive
Compensation earned during the four calendar quarters immediately preceding the
termination. The payment of such a fee would adversely affect the results of
the Company's operations.
The Management Agreement may be assigned by the Manager to an
Affiliate without the consent of the Company. The Management Agreement may be
assigned to a non-Affiliate only with the approval of a majority of the
Independent Trust Managers.
MANAGEMENT COMPENSATION
The Manager will receive the Base Management Fee calculated and
payable quarterly in an amount equal to (i) 1% per annum of the "Average
Invested Non-Investment Grade Assets" of the Company for such quarter and (ii)
0.50% per annum of the "Average Invested Investment Grade Assets" of the
Company for such quarter. "Average Invested Non-Investment Grade Assets"
means, for any quarter, the average of the aggregate book value of (i) all
assets of the Company on a consolidated basis (as reflected on the Company's
balance sheet), excluding the Company's investment in its nonconsolidated
taxable subsidiaries and (ii) all assets of the Company's taxable subsidiaries
(excluding from (i) and (ii) all Average Invested Investment Grade Assets)
before reserves for depreciation or bad debts or other similar noncash
reserves, computed by dividing (a) the sum of such values for each of the three
months during such quarter (based on the book value of such assets as of the
last day of each month) by (b) three. "Average Invested Investment Grade
Assets" means, for any quarter, the average of the aggregate book value of (i)
all assets of the Company on a consolidated basis (as reflected on the
Company's balance sheet), excluding the Company's investment in its
nonconsolidated taxable subsidiaries and (ii) all assets of the Company's
nonconsolidated taxable subsidiaries, in each case which either (a) have
received an Investment Grade Rating from all Rating Agencies which have rated
such assets or (b) are unrated but are guaranteed by the U.S. government or any
agency or instrumentality thereof before reserves for depreciation or bad debts
or other similar noncash reserves, computed by dividing (A) the sum of such
values for each of the three months during such quarter (based on the book
value of such assets as of the last day of each month) by (B) three. The Base
Management Fee is payable in arrears. For example, if the Company had $875.0
million of Average Invested Non-Investment Grade Assets and $137.5 million of
Average Invested Investment Grade Assets during a one-year period, the Manager
will be entitled to a Base Management Fee for such period of $9.56 million.
The Base Management Fee is intended to compensate the Manager, among other
things, for its costs in providing management services to the Company.
In addition to its Base Management Fee, the Manager will be entitled
to receive Incentive Compensation for each fiscal quarter in an amount equal to
the product of (A) 25% of the dollar amount by which (1)(a) Funds From
Operations (before the Incentive Compensation) of the Company per weighted
average number of Common Shares outstanding for such quarter plus (b) gains (or
minus losses) from debt restructuring and sales of property per weighted
average number of Common Shares, exceed (2) an amount equal to (a) the weighted
average of the price per share at the initial offering and the prices per share
of any subsequent issuances of Common Shares by the Company multiplied by (b)
the Ten-Year U.S. Treasury Rate for such quarter, plus 3.5% multiplied by (B)
the weighted average number of Common Shares outstanding during such period.
"Funds From Operations" as defined by the National Association of Real Estate
Investment Trusts ("NAREIT") means net income (computed in accordance with
GAAP) excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation and amortization on real estate assets, and after
adjustments for unconsolidated partnerships and joint ventures. 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
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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 12 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 Manager to earn the Incentive Compensation
described in the preceding paragraph, is dependent upon the level of credit
losses, 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.
Base Management Fees and Incentive Compensation are payable in
arrears. Such amounts will be calculated by the Manager within 45 days after
the end of each quarter, and paid by the Company within 60 days after the end
of each quarter. In connection with its audit of the Company's financial
statements, an annual review of Base Management Fees and Incentive Compensation
will be conducted by the Company's independent auditors, with adjustment to be
made to fourth quarter fees if it is determined that fees for any preceding
quarter of the year were not correctly determined. The Manager will not
receive any Base Management Fee for the period prior to the sale of the Common
Shares offered hereby.
The Manager is expected to use the proceeds from its Base Management
Fee and Incentive Compensation in part to pay compensation to its officers and
employees who, notwithstanding that certain of them also are officers of the
Company, will initially receive no cash compensation directly from the Company.
The Company expects to rely primarily on the facilities, personnel and
resources of the Manager and other members of the AMRESCO Group to conduct its
operations. The Manager will be reimbursed for (or charge the Company directly
for) the Manager's costs and expenses in employing third-parties, including
Affiliates of the Manager, to perform due diligence, underwriting and other
tasks with respect to assets purchased or originated, or considered for
purchase or origination by the Company. Further, the Manager will be
reimbursed for any expenses incurred in contracting with third parties,
including Affiliates of the Manager, for the Special Servicing of assets of the
Company. Such arrangements may also be made using an income sharing
arrangement such as a joint venture. Expense reimbursement will be made
quarterly.
The Company will adopt the Share Option Plan pursuant to which the
Manager will be granted and certain directors, officers and any employees of
the Manager and the Company may be granted options to purchase Common Shares.
See "Management of the Company--Share Options."
EXPENSES
The Company will be required to pay all offering expenses (including
accounting, legal, printing, clerical, filing and other expenses) incurred by
the Company, the Manager or its Affiliates on behalf of the Company in
connection with this Offering, estimated at $__________.
Subject to the limitations set forth below, the Company will also pay
all operating expenses except those specifically required to be borne by the
Manager under the Management Agreement (including salary, wages, payroll taxes
and the cost of employee benefit plans for such personnel). The operating
expenses required to be borne by the Manager (or other members of the AMRESCO
Group) include the compensation of the Manager's officers and employees, the
cost of office space, telephone, utilities and equipment and other expenses
required for the Company's day-to-day operations, including accounting,
clerical, Mortgage Loan primary or Master Servicing (including all expenses
customarily paid by Master Servicers in performing Master Servicing for third
parties) and back office services provided by the Manager or its Affiliates.
The expenses that will be paid by the Company will include (but not necessarily
be limited to) issuance and transaction costs incident to the acquisition,
disposition and financing of investments, legal and auditing fees and expenses,
the compensation and expenses of the Independent Trust
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Managers, the costs associated with the establishment of any credit facilities
and other indebtedness of the Company (including commitment fees, legal fees,
closing costs, etc.), or any other securities offerings of the Company, the
costs of printing and mailing proxies and reports to shareholders, costs
incurred by employees of the Manager for travel on behalf of the Company, costs
associated with any computer software or hardware that is used solely for the
Company, costs to obtain liability insurance to indemnify the Company's Trust
Managers and officers and the compensation and expenses of the Company's
custodian and transfer agent, if any. The Company will also be required to pay
all expenses incurred in connection with due diligence of certain assets or
transactions (provided that such assets or transactions which were
preliminarily approved for investment by the Chief Investment Officer or the
Board of Trust Managers prior to the time such costs were incurred), the
underwriting and accumulation of Mortgage Loans, the Special Servicing of
Mortgage Loans, the issuance and administration of MBS from pools of Mortgage
Loans or otherwise, the raising of capital, incurrence of debt, the acquisition
of assets, interest expenses, taxes and license fees, non-cash costs,
litigation or other dispute resolution, the Base Management Fee and Incentive
Compensation and extraordinary or non-recurring expenses. Such services may be
provided to the Company by Affiliates of the Manager if the Manager believes
such services are of comparable or superior quality to those provided by third
parties and can be provided at comparable cost. The Company will reimburse the
Manager for expenses within 60 days after the end of each quarter, following
receipt of written certification from the Manager as to the amount of expenses
incurred. The Board of Trust Managers will periodically review the Company's
expense levels, the division of expenses between the Company and the Manager
and reimbursements of expenses advanced by the Manager. Before incurring
extraordinary expenses on behalf of the Company (typically in excess of
$500,000 for one asset or one transaction) the Manager will seek advance
approval from the Board of Trust Managers.
Because employees of the Manager and its Affiliates will perform
certain due diligence investigations that purchasers of real estate related
assets (including managers of REITs) typically hire outside consultants or
professionals to perform, the Manager will be reimbursed for (or charge the
Company directly for) the Manager's out-of-pocket costs in performing such due
diligence (subject to the preapproval requirements set forth above with respect
to extraordinary costs). In addition, certain legal and other services
typically performed by third party professionals may be performed by employees
of Affiliates of the Manager to the extent the Manager determines in good faith
that the requisite expertise is available through the Manager or other members
of the AMRESCO Group and that such services are superior in quality to those
available from third parties or that cost savings or other efficiencies arise
from the use of such employees rather than third party service providers. The
Manager and its affiliates will track the time their respective employees spend
on due diligence investigations and on legal and other services typically
provided by outside consultants or third party professionals and will be
entitled to reimbursement for the allocable portion of salary and benefits of
such employees.
CERTAIN RELATIONSHIPS; CONFLICTS OF INTEREST
The Company, on the one hand, and the Manager and other members of the
AMRESCO Group, on the other, may enter into a number of relationships other
than those governed by the Management Agreement, some of which may give rise to
conflicts of interest between the Manager and other members of the AMRESCO
Group and the Company. Moreover, three of the members of the Board of Trust
Managers and all of the officers of the Company are also employed by the
Manager or its Affiliates. See "Risk Factors--Economic and Business
Risks--Conflicts of Interest."
The relationships between the Company, on the one hand, and the
Manager and other members of the AMRESCO Group, on the other, will be governed
by policies set forth in the Guidelines to be approved by a majority of the
Independent Trust Managers. The Guidelines are to assist and instruct the
Manager and to establish restrictions applicable to transactions with
Affiliates of the Manager. Transactions with Affiliates of the Manager
(including the purchase of Targeted Investments from, or the co-investment in
Targeted Investments with, members of the AMRESCO Group) that fall within the
provisions of the Guidelines need not be specifically approved by a majority of
the Independent Trust Managers. The Independent Trust Managers will, however,
review the Company's transactions on a quarterly basis to ensure compliance
with the Guidelines. Although the Independent Trust
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Managers will review the Guidelines periodically and will monitor compliance
with those Guidelines, investors should be aware that, in conducting this
review, the Independent Trust Managers will rely primarily on information
provided to them by the Manager.
Although the AMRESCO Group has agreed to present to the Company (on a
nonexclusive basis) Targeted Investments arising within Holliday Fenoglio
Fowler which meet the investment parameters and objectives of the Company, the
AMRESCO Group will have no obligation to make other investment opportunities
available to the Company. Members of the AMRESCO Group expect to continue to
originate and purchase Mortgage Loans and other real estate related assets in
the future. Although the Company expects that such other investment
opportunities will generally be made available to the Company to the extent
consistent with the Company's objectives and investment parameters, except as
described above, neither the Manager nor any other member of the AMRESCO Group
will have any obligation to offer such opportunities to the Company, nor will
the Company have a right of first refusal with respect thereto. As a
consequence, the investment opportunities for the Company may be limited if
such investment opportunities would be attractive to the Manager or other
members of the AMRESCO Group.
AMRESCO has agreed that during the term of the Management Agreement no
member of the AMRESCO Group will (i) sponsor, (ii) act as manager to or (iii)
make any significant equity investment in, any other mortgage REIT with
investment objectives substantially similar to that of the REIT, without the
prior approval of the Independent Trust Managers of the REIT; otherwise, there
will be no limits or restrictions on the right of the Manager, the AMRESCO
Group or any of their respective officers, directors, employees or Affiliates
to engage in any business or render services of any kind to any other Person,
including the purchase or origination of, or rendering advice to others
purchasing, real estate related assets that meet the REIT's policies and
criteria. However, AMRESCO has agreed that members of the AMRESCO Group will
not invest in any tranche of MBS (other than MBS issued in securitizations in
which any member of the AMRESCO Group participates in the profit or loss from
such securitization) unless a majority of the Independent Trust Managers shall
have first determined that the Company (i) should not invest in such securities
or (ii) should invest in only a portion of the offered securities of such
tranche (in which case, members of the AMRESCO Group may co-invest, on the same
basis as the Company, in such securities).
In addition to its Base Management Fee payable under the Management
Agreement, the Manager will have an opportunity to earn Incentive Compensation,
payable quarterly, based upon Funds From Operations of the Company. As a
result, in evaluating assets for investment and in implementing the Company's
other operating strategies, the Manager may place undue emphasis on the
maximization of income at the expense of other criteria, such as preservation
of capital, in order to achieve a higher Incentive Compensation which could
result in increased risk to the value of the Company's portfolio. However, the
Board of Trust Managers will evaluate the performance of the Manager before
entering into or renewing any management arrangement and the Independent Trust
Managers will review the Manager's compensation in relation to the nature and
quality of services performed. Any material changes in the Company's
investment and operating policies are required to be approved by the Board of
Trust Managers. See "Risk Factors--Conflicts of Interest"; and "--Future
Revisions of Policies and Strategies."
All of the executive officers of the Company and the Manager, except
the Chief Investment Officer, are also officers and/or employees of other
members of the AMRESCO Group. The Management Agreement does not specify a
minimum amount of time that the Manager or its officers or employees must
devote to the Company's business. See "Risk Factors--Economic and Business
Risks--Conflicts of Interest."
Pursuant to the Private Placement, AMRESCO will purchase 1,675,000
(1,925,000 if the Underwriters' over-allotment option is separately exercised
in full) Common Shares at a price equal to the initial public offering price.
See "Private Placement." As a result of this purchase, the AMRESCO Group will
own approximately 10% of the total Common Shares outstanding after this
Offering. AMRESCO has agreed not to offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose of any
such Common Shares for a period of two years from the closing of this Offering
without the prior written consent of Prudential Securities Incorporated, on
behalf of the Underwriters so long as the Manager or another member of the
AMRESCO Group continues to serve as manager of the Company
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during such period. In addition, the Manager will receive options to purchase
Common Shares pursuant to the Company's Share Option Plan. See "Management of
the Company--Share Options."
Directors, officers and employees of the Company, the Manager and
other members of the AMRESCO Group are expected to purchase up to 750,000
Common Shares pursuant to this Offering (or up to approximately 5% of the total
Common Shares offered hereby, exclusive of the Underwriters' over-allotment
option) at a price equal to the initial public offering price. The foregoing
parties have agreed not to sell any Common Shares or any rights to acquire
Common Shares to any unaffiliated third party for a period of 180 days from the
closing of this Offering without the consent of Prudential Securities
Incorporated, but may dispose of the Common Shares any time thereafter. See
"Underwriting." The Manager and its employees and the Independent Trust
Managers may also receive options to purchase Common Shares pursuant to the
Company's Share Option Plan. See "Management of the Company--Share Options."
The market in which the Company expects to purchase Targeted
Investments is characterized by rapid evolution of products and services and,
thus, there may in the future be relationships between the Company, the
Manager, and other members of the AMRESCO Group in addition to those described
herein.
LIMITS OF RESPONSIBILITY
Pursuant to the Management Agreement, the Manager will not assume any
responsibility other than to undertake the services called for thereunder and
will not be responsible for any action of the Board of Trust Managers in
following or declining to follow its advice or recommendations. Neither the
Manager nor any member of the AMRESCO Group, nor any of their respective
directors or its officers will be liable to the Company, any issuer of MBS, any
subsidiary of the Company, the Independent Trust Managers, the Company's
shareholders or any other party 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 Manager does not have significant
assets and may not have significant assets in the future. Consequently, there
can be no assurance that the Company would be able to recover any damages for
claims it may have against the Manager.
The Company has agreed to indemnify the Manager and its directors,
officers, employees and controlling Persons with respect to all expenses,
losses, damages, liabilities, demands, charges and claims arising from any acts
or omissions of the Manager or its employees made in good faith in the
performance of the Manager's duties under the Management Agreement and not
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of its duties.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of ____________,
1998, relating to the beneficial ownership of the Common Shares by (i) all
Persons known by the Company to beneficially own more than 5% of the
outstanding Common Shares, (ii) each Trust Manager and (iii) all officers and
Trust Managers as a group.
<TABLE>
<CAPTION>
Name and Address of
Beneficial Amount and Nature of Percentage of Shares
Owner(1)(2) Beneficial Ownership Beneficially Owned
----------- -------------------- ------------------
Before Offering After Offering Before Offering After Offering
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
AMRESCO(4) . . . . . . . . . . 100 shares 1,675,100(5) shares 100% 10%(5)
____________(3)(4) . . . . . .
____________(3)(4) . . . . . .
Officers and Trust Managers
as a Group (Persons)(3) . . . -- 750,000 shares -- 5%
</TABLE>
___________________
*Less than 1%.
(1) Unless otherwise noted, the Company believes that each Person named in
the table has sole voting and investment power with respect to all
Common Shares owned by it.
(2) A Person is deemed to be the beneficial owner of securities that can
be acquired by such Person within 60 days from the date of this
Prospectus upon the exercise of warrants or options. Each beneficial
owner's percentage ownership is determined by assuming that options or
warrants that are held by such Person (but not those held by any other
Person) and which are exercisable within 60 days from the date of this
Prospectus have been exercised. None of the outstanding options to
acquire Common Shares of the Company are exercisable within 60 days of
this Prospectus.
(3) Includes Common Shares to be purchased in this Offering. See "The
Manager--Certain Relationships; Conflicts of Interests."
(4) Address is 700 North Pearl Street, Suite 2400, Dallas, Texas 75201.
(5) Includes Common Shares to be purchased in the Private Placement. See
"Private Placement."
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of material federal income tax consequences
that may be relevant to a prospective holder of Common Shares who purchases
such shares in this Offering. Winstead Sechrest & Minick P.C. has acted as
special tax counsel ("Tax Counsel") to the Company in connection with this
Offering and the preparation of this Prospectus. This summary should not be
construed as tax advice. The discussion contained herein does not address all
aspects of federal income taxation that may be relevant to particular holders
in light of their personal investment or tax circumstances, or to certain types
of holders (including, without limitation, insurance companies, financial
institutions, broker-dealers, Persons whose functional currency is other than
the United States dollar, Persons who hold Common Shares as part of a straddle,
hedging, or conversion transaction or, except as specifically described herein,
tax-exempt entities and foreign Persons) who are subject to special treatment
under the federal income tax laws. In addition, this summary is generally
limited to Persons who will hold Common Shares as "capital assets" (generally,
property held for investment) within the meaning of section 1221 of the Code.
The statements in this summary are based on current provisions of the
Code (including provisions enacted by the Taxpayer Relief Act of 1997 (the
"1997 Tax Act") which are effective for taxable years of the Company beginning
after August 5, 1997), Treasury Regulations promulgated thereunder, and
administrative and judicial
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interpretations thereof, as of the date hereof, all of which are subject to
change, possibly with retroactive effect. The provisions of the Code, the
Treasury Regulations promulgated thereunder and the administrative and judicial
interpretations thereof that concern REITs are highly technical and complex and
this summary is qualified in its entirety by such Code provisions, Treasury
Regulations, and administrative and judicial interpretations. No assurance can
be given that future legislative, judicial, or administrative actions or
decisions will not affect the accuracy of any statements in this summary. In
addition, no ruling will be sought from the Internal Revenue Service (the
"IRS") with respect to any matter discussed herein, and there can be no
assurance that the IRS or a court will agree with the statements made herein.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OR HER OWN TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE,
OWNERSHIP, AND SALE OF COMMON SHARES 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.
GENERAL
The Company intends to make an election to be taxed as a REIT under
sections 856 through 860 of the Code and the applicable Treasury Regulations
promulgated thereunder, which together set forth the requirements for
qualifying as a REIT (the "REIT Provisions of the Code"), beginning with its
taxable year ending on December 31, 1998. The provisions of the 1997 Tax Act
will be fully applicable to the Company. The Company believes that it will be
organized and will operate in such a manner to qualify for taxation as a REIT
under the Code. No assurance can be given, however, that the Company actually
will operate in such a manner to so qualify as a REIT or will continue to
operate in such a manner so as to remain qualified as a REIT.
Subject to the qualifications stated herein and in its opinion, Tax
Counsel has given the Company an opinion that the Company will qualify to be
taxed as a REIT under the Code beginning with its taxable year ending December
31, 1998 and that 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. An opinion of counsel is not binding on the
IRS or a court and there can be no assurance that the IRS or a court will not
take a position different from that expressed by Tax Counsel. It also must be
emphasized that Tax Counsel's opinion is based on various assumptions and is
conditioned upon numerous representations made by the Company as to factual
matters, including those related to its business and its assets as set forth in
this Prospectus. Tax Counsel has not independently verified the Company's
representations. Moreover, the Company's qualification and taxation as a REIT
depend upon the Company's ability to meet on a continuing basis the actual
operating results, distribution levels, diversity of share ownership and the
various other qualification tests imposed by the Code as discussed below. Tax
Counsel will not review the Company's compliance with these tests on a
continuing basis. Accordingly, no assurance can be given that the actual
results of the Company's operations for any given taxable year will satisfy the
requirements for qualification and taxation as a REIT. See "--Failure to
Qualify."
TAXATION OF THE COMPANY
For any taxable year in which the Company qualifies for taxation as a
REIT, it generally will not be subject to federal corporate income tax on that
portion of its ordinary income or capital gain that is currently distributed to
its shareholders. The REIT Provisions of the Code generally allow a REIT to
deduct dividends paid to its shareholders. This deduction for dividends paid
to shareholders substantially eliminates the federal "double taxation" on
earnings (once at the corporate level and once again at the shareholder level)
that generally results from an investment in a corporation.
Even if the Company continues to qualify for taxation as a REIT, it
may be subject to federal income tax in certain circumstances. First, the
Company will be taxed at regular corporate rates on any undistributed REIT
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Taxable Income and undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the corporate "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" which is held primarily for sale to customers in the ordinary course
of business or (ii) other nonqualifying income from foreclosure property, the
Company will be subject to tax on such income at the highest regular corporate
rate (currently, 35%). Fourth, if the Company has net income from prohibited
transactions (which are, in general, certain sales or other dispositions of
property held primarily for sale to customers in the ordinary course of
business, other than foreclosure property or property that is involuntarily
converted), such income will be subject to a 100% tax. Fifth, if the Company
should fail to satisfy the 75% gross income test or the 95% gross income test
(as discussed below), but nonetheless maintains its qualification as a REIT
because certain other requirements are met, the Company 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 the 95% test, multiplied by a fraction intended to
reflect the Company's profitability. Sixth, if the Company should fail to
distribute for 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 will be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. However, to the extent the
Company elects to retain and pay income tax on net long-term capital gains it
received during the year such amounts will be treated as having been
distributed for purposes of the 4% excise tax. Finally, if the Company
acquires any asset from a C corporation (i.e., generally a corporation subject
to full corporate level tax) in a 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 property) in the hands of the C corporation, and the Company
subsequently recognizes gain on the disposition of such asset during the
ten-year period (the "Recognition Period") beginning on the date on which the
asset was acquired by the Company, then, pursuant to guidelines issued by the
IRS, the excess of (i) the fair market value of the asset as of the beginning
of the applicable Recognition Period, over (ii) the Company's adjusted basis in
such asset as of the beginning of such Recognition Period (i.e., "built-in
gain") will be subject to tax at the highest regular corporate rate. 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.
Upon the acquisition of a corporation which is a "Qualified REIT Subsidiary"
the Company also would be taxed on any built-in gain attributable to the
Qualified REIT Subsidiary's assets. See "--Requirements for
Qualification--Organizational Requirements--Qualified REIT Subsidiary."
The Company will be subject to tax at the highest marginal corporate
rate on the portion of any excess inclusion income (see "--Taxation of
Shareholders--Taxation of Taxable U.S. Shareholders" for a more complete
discussion of excess inclusion income) derived by the Company from REMIC
Residual Interests ("Excess Inclusion") equal to the percentage of the shares
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 shares of the Company held by a Disqualified
Organization will reduce the cash available for distribution from the Company
to all shareholders.
If the Company invests in properties in foreign countries, the
Company's profits from such investments will generally be subject to tax in the
countries where such properties are located. The precise nature and amount of
any such taxation will depend on the laws of the countries where the properties
are located. If the Company satisfies the annual distribution requirements for
qualification as a REIT and is therefore not subject to federal corporate
income tax on that portion of its ordinary income and capital gain that is
currently distributed to its shareholders, the Company will generally not be
able to recover the cost of any foreign tax imposed on profits from its foreign
investments by claiming foreign tax credits against its U.S. tax liability on
such profits. Moreover, a REIT is not able to pass foreign tax credits through
to its shareholders.
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The Company will use the calendar year for both federal income tax
purposes and financial reporting purposes.
REQUIREMENTS FOR QUALIFICATION
To qualify as a REIT, the Company must meet and continue to meet the
requirements, discussed below, relating to the Company's organization, the
sources of its gross income, the nature of its assets, and the level of
distributions to its shareholders.
ORGANIZATIONAL REQUIREMENTS. The Code requires that a REIT be a
corporation, trust, or association:
(i) which 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) which would be taxable as a domestic corporation but
for compliance with the REIT requirements;
(iv) which is neither a financial institution nor an
insurance company subject to certain special provisions of the Code;
(v) the beneficial ownership of which is held by 100 or
more Persons;
(vi) at all times during the last half of each taxable
year not more than 50% in value of the outstanding shares of which is
owned, directly or indirectly through the application of certain
attribution rules, by or for five or fewer individuals (as defined in
the Code to include certain tax-exempt entities other than, in
general, qualified domestic pension funds)(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 IRS
that must be met in order to elect and maintain REIT status;
(viii) that uses a calendar year for federal income tax
purposes; and
(ix) which meets certain other tests, described below,
regarding the nature of its income and assets.
The Code provides that conditions (i) through (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) do not apply
until after the first taxable year for which a REIT election is made. For
purposes of determining share 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 anticipates issuing sufficient Common Shares with
sufficient diversity of ownership pursuant to this Offering to allow it to
satisfy requirements (v) and (vi). In addition, the Declaration of Trust
provides for restrictions regarding the transfer of the Common Shares 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 Shares of Beneficial
Interest--Restrictions on Transfer." For purposes of determining
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ongoing compliance with the beneficial share ownership requirements, Treasury
Regulations require the Company to issue letters to certain shareholders
demanding information regarding the amount of shares each such shareholder
actually or constructively owns ("shareholder demand letters"). If the Company
fails to comply with these regulatory rules it will be subject to a $25,000
penalty ($50,000 for intentional violations).
As set forth in (vi) above, to qualify as a REIT, the Company must
also satisfy the requirement set forth in Section 856(a)(6) of the Code that it
not be closely held. The Company will not be closely held so long as at all
times during the last half of any taxable year of the Company (other than the
first taxable year for which the REIT election is made) not more than 50% in
value of its outstanding shares is owned, directly or constructively under the
applicable attribution rules of the Code, by five or fewer individuals (as
defined in the Code to include certain tax-exempt entities, other than, in
general, qualified domestic pension funds). Although the Declaration of Trust
of the Company contains certain restrictions on the ownership and transfer of
the Common Shares, the restrictions do not ensure that the Company will be able
to satisfy the 5/50 Rule requirement. If the Company fails to satisfy the 5/50
Rule, the Company's status as a REIT will terminate, and the Company will not
be able to prevent such termination. However, if the Company complies with the
procedures prescribed in the Treasury Regulations for issuing shareholder
demand letters and does not know, or with the exercise of reasonable diligence
would not have known, that the 5/50 Rule was violated, the requirement will be
deemed to be satisfied for the year. See "--Failure to Qualify."
Qualified REIT Subsidiary. If a REIT owns a corporate subsidiary that
is a "Qualified REIT Subsidiary," within the meaning of section 856(i) of the
Code, that subsidiary is disregarded for federal income tax purposes, and all
assets, liabilities, and items of income, deduction, and credit of the
subsidiary are treated as assets, liabilities and such items of the REIT
itself. A "Qualified REIT Subsidiary" is a corporation all of the capital
shares of which are owned by the REIT. If an existing corporation is acquired
by a REIT and is a "Qualified REIT Subsidiary", all of its pre-REIT earnings
and profits must be distributed before the end of the REIT's taxable year. See
"--Taxation of the Company."
Ownership of a Partnership Interest. In the case of a REIT that is a
partner in a partnership, Treasury Regulations provide that the REIT is deemed
to own its proportionate share of the assets of the partnership corresponding
to the REIT's capital interest in such partnership and is deemed to be entitled
to the income of the partnership attributable to such proportionate share. In
addition, the character of the assets and gross income of the partnership
retain the same character in the hands of the REIT for purposes of the REIT
requirements, including satisfying the gross income tests and the asset tests.
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.
INCOME TESTS. To maintain its qualification as a REIT, the Company
must satisfy two gross income requirements annually. First, at least 75% of
the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property" and, in certain circumstances, interest) or from
certain types of temporary investments. Second, at least 95% of the Company's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived from such real property investments and from
dividends, interest, and gain from the sale or disposition of shares or
securities or from any combination of the foregoing.
The term "interest," as defined for purposes of the 75% and 95% gross
income tests, generally does not include any amount received or accrued
(directly or indirectly) if the determination of such amount depends in whole
or in part on the income or profits of any Person. However, an amount received
or accrued generally will not be excluded from the term "interest" solely by
reason of being based on a fixed percentage or percentages of receipts or
sales. In addition, an amount received or accrued generally will not be
excluded from the term "interest" solely by reason of being based on the income
or profits of a debtor if the debtor derives substantially all of its gross
income from the related property through the leasing of substantially all of
its interests in the property, to the extent
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the amounts received by the debtor would be characterized as rents from real
property if received by a REIT. Furthermore, to the extent that interest from
a loan that is based on the cash proceeds from the sale of the property
securing the loan constitutes a "shared appreciation provision" (as defined in
the Code), income attributable to such participation feature will be treated as
gain from the sale of the secured property, which generally may be qualifying
income for purposes of the 75% and 95% gross income tests.
Interest on obligations secured by mortgages on real property or on
interests in real property generally is qualifying income for purposes of the
75% gross income test. 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 receiving directly
its proportionate share of the income of the REMIC. In addition, if the
Company receives interest income with respect to a Mortgage Loan that is
secured by both real property and other property and the highest principal
amount of the loan outstanding during a taxable year exceeds the fair market
value of the real property on the date the Company acquired the Mortgage Loan,
the interest income will be apportioned between the real property and the other
property, which apportionment may cause the Company to recognize income that is
not qualifying income for purposes of the 75% gross income test.
Tax Counsel is of the opinion that the interest, OID, and any market
discount income that the Company derives from its investments in MBS and
Mortgage Loans 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% and 95% gross
income tests. Most of the income that the Company recognizes with respect to
its investments in Mortgage Loans will be qualifying income for purposes of
both gross income tests. In some cases, however, the loan amount of a Mortgage
Loan, particularly with respect to a Distressed Mortgage Loan, a Performing
Mortgage Loan, or any Subordinated Interest in any MBS, 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 Mortgage
Loan may be based in part on the borrower's profits or net income, which in
some instances may disqualify the income from the loan for purposes of both the
75% and the 95% gross income tests.
The Company may originate or acquire Mortgage Loans that have shared
appreciation provisions. To the extent interest from a loan that is based on
the cash proceeds from the sale of property 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 may be qualifying income for purposes of the 75% and 95% gross income
tests. Also, the Company may be required to recognize income from a shared
appreciation provision over the term of the related loan using the constant
yield method pursuant to certain Treasury Regulations.
The Company may originate or acquire Mortgage Loans and securitize
such loans through the issuance of non-REMIC CMOs. As a result of such
transactions, the Company will retain an equity ownership interest in the
Mortgage Loans that has economic characteristics similar to those of a
subordinated interest in a MBS. In addition, the Company may securitize MBS
(or non-REMIC CMOs) through the issuance of REMIC or non-REMIC CMOs, retaining
an equity interest in the MBS used as collateral in the resecuritization
transaction. Such transactions will not cause the Company to fail to satisfy
the gross income tests or the asset tests described below.
The Company may receive income not described above that is not
qualifying income for purposes of the 75% and 95% gross income tests. For
example, certain fees for services rendered by the Company will not be
qualifying income for purposes of the gross income tests. It is not
anticipated that the Company will receive a significant amount of such fees.
The Company will monitor the amount of nonqualifying income produced by its
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assets and intends to manage its portfolio in order to comply at all times with
both the 75% and the 95% gross income tests.
Rents received by the Company will qualify as "rents from real
property" in satisfying the gross income requirements for a REIT described
above only if several conditions are met. First, the amount of rent received
or accrued with respect to any property must not be based in whole or in part
on the income or profits derived by any Person from such property, although 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 gross receipts or gross sales. Rents received from a tenant
that are based on the tenant's income from the property will not be treated as
rents based on income or profits and thus excluded from the term "rents from
real property" if the tenant derives substantially all of its income with
respect to such property from the leasing or subleasing of substantially all of
such property, provided that the tenant receives from subtenants only amounts
that would be treated as rents from real property if received directly by a
REIT. Second, rents received from a tenant will not qualify as "rents from
real property" in satisfying the gross income tests if the REIT, or an owner of
10% or more of the REIT, directly or constructively owns 10% or more of such
tenant (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, a REIT generally must not operate or manage the property or
furnish or render services to the tenants of such property, other than through
an "independent contractor" from whom the REIT derives no income. The
independent contractor requirement, however, does not apply to the extent the
services rendered by the REIT are customarily furnished or rendered in
connection with the rental of the real property such that they are services
that a tax-exempt organization could provide to its tenants without causing its
rental income to be unrelated business taxable income under the Code. A
tax-exempt organization may provide services which are "usually or customarily
rendered" in connection with the rental of space for occupancy only and are not
otherwise considered "rendered to the occupant," without incurring unrelated
business taxable income. A de minimis exception allows a REIT to provide
non-customary services to its tenants and not disqualify income as rents from
real property so long as the amount received or accrued by the REIT from the
impermissible services does not exceed 1.0% of the Company's gross income from
the property. The amount the Company receives that is attributable to
impermissible services cannot be valued at less than 150% of the direct cost to
the REIT of providing these services.
The Company intends to operate so that it will not charge rent for any
portion of any of its 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 intends to operate so 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 intends to operate so 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 intends to operate so that 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.
Should the potential amount of nonqualifying income in the future
create a risk as to the qualification of the Company as a REIT, the Company
intends to take action to avoid not qualifying as a REIT. The Company may for
instance transfer certain nonqualifying activities to a taxable corporation,
from which it would receive dividends. If this should occur, the Company would
be entitled to receive dividends as a shareholder of such corporation. The
amount of dividends available for distribution to the Company would be reduced
below the comparable amount of income that would otherwise be received by the
Company because such a corporation would be subject to a corporate level tax on
its taxable income, thereby reducing the amount of cash available for
distribution.
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
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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% and
95% gross income tests, but, if the Company does receive any such income, the
Company intends to 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 that
any income it receives with respect to Ineligible Property will be qualifying
income for purposes of the 75% and 95% gross income tests.
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 such hedging transactions could take a variety of forms, including interest
rate swap contracts, interest rate cap or floor contracts, futures or forward
contracts, and options. To the extent that the Company enters into an interest
rate swap or cap agreement, option, futures contract, forward rate agreement,
or any similar financial instrument to reduce its interest rate risk with
respect to debt that was or will be incurred to acquire or carry real estate
assets, any periodic income or gain from the disposition of such contract
should be 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 that are not similar to the above 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. If necessary, 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% or the 95%
gross income tests for any taxable year, it may nevertheless qualify as a REIT
for such year if it is entitled to relief under certain provisions of the Code.
These relief provisions generally will be available if (i) the Company's
failure to meet such test(s) was due to reasonable cause and not due to willful
neglect, (ii) the Company reported the nature and amount of each item of its
income included in the test(s) for such taxable year on a schedule attached to
its return, and (iii) 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. For example, if the Company fails to satisfy the gross
income tests because nonqualifying income that the Company intentionally earns
exceeds the limits on such income, the IRS could conclude that the Company's
failure to satisfy the tests was not due to reasonable cause. As discussed
above in "--Taxation of the Company" even if these relief provisions apply, the
Company will still be subject to a 100% tax on the gross income attributable to
the greater of the amount of by which the Company failed the 75% or the 95%
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 two 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 shares or long-term (at least five-year) debt offerings,
temporary investments in shares 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"
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(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, of the investments not included in
the 75% asset class, the value of any one issuer's 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 its interests in any Qualified REIT Subsidiary).
The Company expects that any Mortgage Loans, MBS or commercial real
property 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 non-qualifying assets for purposes of the 75%
asset test. In addition, the Company expects that any preferred equity
investments in partnerships that own real estate would also be treated as
qualifying real estate assets for such purposes as long as the assets were
qualifying assets in the hands of such partnership. Similarly, a preferred
equity investment in a corporation, which if acquired by the Company would
constitute a Qualified REIT Subsidiary, would be treated as a qualifying asset
to the extent that the principal balance of a 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 intends
to 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.
ANNUAL DISTRIBUTION REQUIREMENTS. To continue to qualify as a REIT,
the Company is required to distribute dividends (other than capital gain
dividends and retained capital gains) to its shareholders each year in an
amount at least equal to (i) the sum of (A) 95% of the Company's REIT Taxable
Income plus (B) 95% of the net income (after tax), if any, from foreclosure
property, minus (ii) the sum of certain items of non-cash income. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before the Company timely files its tax
return for such year and if paid on or before the first regular dividend
payment after such declaration. A distribution which is not pro rata within a
class of shares entitled to a dividend or which is not consistent with the
rights to distributions between classes of shares (a "preferential dividend")
is not taken into consideration for the purpose of meeting the distribution
requirement. Accordingly, the payment of a preferential dividend could affect
the Company's ability to meet this distribution requirement.
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 REIT
Taxable Income, as adjusted, it will be subject to tax on the undistributed
amount at regular capital gains or ordinary corporate tax rates, as the case
may be. Furthermore, if the Company should fail to distribute for 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, plus (iii)
any undistributed taxable income from prior periods, the Company will be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. However, to the extent the Company elects to
retain and pay income tax on net long-term capital gains
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it received during the year such amounts will be treated as having been
distributed for purposes of the 4% excise tax. 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 REIT 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 MBS. Furthermore, some Distressed and
Participating Loans may be deemed to have OID, in which case the Company will
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, MBS and 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
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. Also, because the
Company is an accrual-basis taxpayer, it may have to recognize income on
Distressed Mortgage Loans even though the borrower is unable to pay the full
amount due. 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 principal amount of the modified loan, as applicable, exceeds the Company's
basis in the original loan. Although the Code allows certain items of excess
noncash income (including OID) to be disregarded for purposes of the
distribution requirements, 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 Shares or additional Common Shares.
If the Company fails to meet the 95% distribution requirement as a
result of an adjustment to the Company's tax return by the IRS upon audit, the
Company may retroactively cure the failure by paying "deficiency dividends" to
its shareholders in a later year, which may then be included in the Company's
deduction for dividends paid for the earlier year. The Company may thus be
able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company will be required to pay interest to the IRS based upon the
amount of any deduction taken for deficiency dividends.
Any gross income derived from a prohibited transaction is not taken
into account in applying the 95% and 75% gross income tests necessary to
qualify as a REIT (but the net income from such a transaction is subject to a
100% tax). The term "prohibited transaction" generally includes a sale or
other disposition of property (other than foreclosure property or property that
was involuntarily converted) 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 it 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 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. When
relevant, the Company will attempt to comply with the terms of safe-harbor
provisions in the Code prescribing when asset sales will not be characterized
as prohibited transactions. Complete assurance cannot be given, however, that
the Company can comply with the safe-harbor provisions of the Code or avoid
owning property that may be characterized as property held "primarily for sale
to customers in the ordinary course of a trade or business."
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FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable
year and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to shareholders in any year in which
the Company fails to qualify as a REIT will not be required and, if made, will
not be deductible by the Company. As a result, the Company's failure to
qualify as a REIT will reduce the cash available for distribution by the
Company to its shareholders. In addition, if the Company fails to qualify as a
REIT, all distributions to the Company's shareholders will be taxable as
ordinary dividend income to the extent of the Company's then current and
accumulated earnings and profits, and, subject to certain limitations in 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 ineligible for qualification as a REIT for the four
taxable years following the year during which qualification was lost. It is
not possible to determine whether the Company would be entitled to such
statutory relief in all circumstances.
TAXATION OF SHAREHOLDERS
TAXATION OF TAXABLE U.S. SHAREHOLDERS. As used herein, the term "U.S.
Shareholder" means a holder of Common Shares who (for United States federal
income tax purposes) (i) is a citizen or resident of the United States, (ii) is
a corporation, partnership, or other entity created or organized in or under
the laws of the United States or of any state unless, in the case of a
partnership, Treasury Regulations provide otherwise, (iii) is an estate whose
income is subject to taxation in the United States regardless of its connection
with the conduct of a U.S. trade or business or (iv) is a trust if a court
within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States Persons have the
authority to control all substantial decisions of the trust.
As long as the Company continues to qualify as a REIT, distributions
made by the Company out of its current or accumulated earnings and profits (and
not designated as capital gain dividends) will constitute dividends taxable to
its U.S. Shareholders as ordinary income. Such distributions will not be
eligible for the dividends-received deduction in the case of U.S. Shareholders
that are corporations.
Dividends paid to U.S. Shareholders will be treated as portfolio
income. Such income, therefore, will not be subject to reduction by losses
from passive activities (i.e., any interest in a rental activity or in a trade
or business in which the holder does not materially participate, such as
certain interests held as a limited partner) of any holder who is subject to
the passive activity loss rules. Such distributions will, however, be
considered investment income which may be offset by certain investment expense
deductions.
Distributions made by the Company that are properly designated by the
Company as capital gain dividends will be taxable to U.S. Shareholders as
long-term capital gains (to the extent that they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which a U.S. Shareholder has held his/her Common Shares. The highest marginal
individual income tax rate currently is 39.6%. The maximum tax rate on
long-term capital gains applicable to noncorporate taxpayers is 28% for sales
and exchange of assets held for more than one year but not more than 18 months
and 20% for sales and exchange of assets held for more than 18 months. Thus,
the tax rate differential between capital gain and ordinary income for
noncorporate taxpayers may be significant. In addition, the characterization
of income as capital gain or ordinary income may affect the deductibility of
capital losses. Capital losses not offset by capital gains may be deducted
against noncorporate taxpayers' ordinary income only up to a maximum annual
amount of $3,000. Unused capital losses may be carried forward indefinitely by
individuals. All net capital gain of a corporate taxpayer is subject to tax at
ordinary corporate rates. A corporate taxpayer can deduct capital losses only
to the extent of capital gains, with unused losses being carried back three
years and forward five years. U.S. Shareholders that are corporations may,
however, be required to treat up to 20% of certain capital gain dividends as
ordinary income.
The Company may elect to retain amounts representing long-term capital
gain income on which the Company will be taxed at regular corporate rates. In
that case, each shareholder will be taxed on a proportionate
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share of the total long-term capital gains retained by the Company and will
also receive a credit for a proportionate share of the tax paid by the Company.
Finally, each shareholder shall increase the adjusted basis in his/her shares
by the difference between the allocable amount of long-term capital gain and
the tax deemed paid by the shareholder. If the Company should elect to retain
long-term capital gains, it will notify each shareholder of the relevant tax
information after the close of the taxable year.
To the extent that the Company makes distributions (not designated as
capital gain dividends) in excess of its current and accumulated earnings and
profits, such distributions will be treated first as a tax-free return of
capital to each U.S. Shareholder, reducing the adjusted basis which such U.S.
Shareholder has in his/her shares of Common Shares for tax purposes by the
amount of such distribution (but not below zero), with distributions in excess
of a U.S. Shareholder's adjusted basis in his/her shares taxable as capital
gains (provided that the shares have been held as a capital asset). Dividends
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 dividend is actually paid by the
Company on or before January 31 of the following calendar year. Shareholders
may not include in their own income tax returns any net operating losses or
capital losses of the Company.
The Company's investment in Subordinated Interests and certain types
of MBS may cause it under certain circumstances to recognize taxable income in
excess of its economic income ("phantom income") and to experience an
offsetting excess of economic income over its taxable income in later years.
As a result, shareholders may from time to time be required to pay federal
income tax on distributions that economically represent a return of capital,
rather than a dividend. Such distributions would be offset in later years by
distributions representing economic income that would be treated as returns of
capital for federal income tax purposes. Accordingly, if the Company receives
phantom income, its shareholders may be required to pay federal income tax with
respect to such income on an accelerated basis, i.e., before such income is
realized by the shareholders in an economic sense. Taking into account the
time value of money, such an acceleration of federal income tax liabilities
would cause shareholders to receive an after-tax rate of return on an
investment in the Company that would be less than the after-tax rate of return
on an investment with an identical before-tax rate of return that did not
generate phantom income. For example, if an investor subject to an effective
income tax rate of 30% purchased a bond (other than a tax-exempt bond) with an
annual interest rate of 10% for its face value, his before-tax return on his
investment would be 10%, and his after-tax return would be 7%. However, if the
same investor purchased shares of the Company at a time when the before-tax
rate of return was 10%, his after-tax rate of return on his shares might be
somewhat less than 7% as a result of the Company's phantom income. In general,
as the ratio of the Company's phantom income to its total income increases, the
after-tax rate of return received by a taxable shareholder of the Company will
decrease.
Because the Company expects to own REMIC Residual Interests, it is
likely that shareholders (other than certain thrift institutions) 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 his 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 uses those loans to collateralize one or more multiple-class
offerings of
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CMOs for which no REMIC election is made ("Non-REMIC Transactions"), it is
possible that, to the extent provided in future Treasury Regulations,
shareholders (other than certain thrift institutions) 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 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.
Upon any sale or other disposition of Common Shares, the holder will
generally recognize gain or loss for federal income tax purposes in an amount
equal to the difference between (i) the amount of cash and the fair market
value of any property received on such sale or other disposition, and (ii) the
holder's adjusted basis in the shares. Such gain or loss will generally be
capital gain or loss and will be long-term capital gain or loss if such shares
have been held for more than twelve months. In general, any loss recognized by
a U.S. Shareholder upon the sale or other disposition of Common Shares that
have been held for six months or less (after applying certain holding period
rules) will be treated as a long-term capital loss, to the extent of
distributions received by such U.S. Shareholder from the Company which were
required to be treated as long-term capital gains.
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 IRS has issued a published ruling that dividend distributions from a REIT
to an exempt employee pension trust do not constitute UBTI, provided that the
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
Shares 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 and any gain realized on the sale
of Common Shares as UBTI.
Special rules apply to certain tax-exempt pension funds (including
401(k) plans but excluding IRAs or government pension plans) that own more than
10% (measured by value) of a "pension held REIT" at any time during a taxable
year. Such a pension fund must treat a certain percentage of all dividends
received from the REIT during the year as unrelated business taxable income.
The percentage is equal to the ratio of the REIT's gross income (less direct
expenses related thereto) derived from the conduct of unrelated trades or
businesses determined as if the REIT were a tax-exempt pension fund, to the
REIT's gross income (less direct expenses related thereto) from all sources.
The special rules will not apply to require a pension fund to recharacterize a
portion of its dividends as unrelated business taxable income unless the
percentage computed is at least 5%.
A REIT will be treated as a "pension held REIT" if the REIT is
predominantly held by tax-exempt pension funds and if the REIT would fail to
satisfy the 5/50 Rule discussed above, see "--Requirements for
Qualification--Organizational Requirements," if the shares of the REIT held by
such tax-exempt pension funds were not treated as held directly by their
respective beneficiaries. A REIT is predominantly held by tax-exempt pension
funds if at least one tax-exempt pension fund holds more than 25% (measured by
value) of the REIT's shares, or if one or more tax-exempt pension funds (each
of which owns more than 10% (measured by value) of the REIT's shares) own in
the aggregate more than 50% (measured by value) of the REIT's shares. The
Company believes that it will not be treated as a pension-held REIT. However,
because the shares of the Company will be publicly traded, no assurance can be
given that the Company is not or will not become a pension-held REIT.
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
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any Excess Inclusion income derived by the Company from REMIC Residual
Interests that is allocable to shares of the Company held by Disqualified
Organizations. Any such tax would be deductible by the Company against its
income that is not Excess Inclusion income.
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 Shares on behalf of Disqualified Organizations. Consequently, a
brokerage firm that holds Common Shares 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."
TAXATION OF NON-U.S. SHAREHOLDERS. The rules governing United States
federal income taxation of nonresident alien individuals, foreign corporations,
foreign partnerships, foreign trusts and estates and other foreign shareholders
(collectively, "Non-U.S. Shareholders") are highly complex, and the following
discussion is intended only as a summary of such rules. PROSPECTIVE NON-U.S.
SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE THE IMPACT
OF UNITED STATES FEDERAL, STATE, AND LOCAL INCOME TAX LAWS ON AN INVESTMENT IN
COMMON SHARES, INCLUDING ANY REPORTING REQUIREMENTS.
In general, Non-U.S. Shareholders are subject to regular United States
income tax with respect to their investment in Common Shares in the same manner
as a U.S. Shareholder if such investment is "effectively connected" with the
Non-U.S. Shareholder's conduct of a trade or business in the United States. A
corporate Non-U.S. Shareholder that receives income with respect to its
investment in Common Shares that is (or is treated as) effectively connected
with the conduct of a trade or business in the United States also may be
subject to the 30% branch profits tax imposed by the Code, which is payable in
addition to regular United States corporate income tax. The following
discussion addresses only the United States taxation of Non-U.S. Shareholders
whose investment in Common Shares is not effectively connected with the conduct
of a trade or business in the United States.
Distributions made by the Company that are not attributable to gain
from the sale or exchange by the Company of United States real property
interests and that are not designated by the Company as capital gain dividends
will be treated as ordinary income dividends to the extent made out of current
or accumulated earnings and profits of the Company. Generally, such ordinary
income dividends will be subject to United States withholding tax at the rate
of 30% on the gross amount of the dividends paid unless reduced or eliminated
by an applicable United States income tax treaty. The Company expects to
withhold United States income tax at the rate of 30% on the gross amount of any
such dividends paid to a Non-U.S. Shareholder unless a lower treaty rate
applies and the Non-U.S. Shareholder has filed an IRS Form 1001 with the
Company certifying the Non-U.S. Shareholder's entitlement to treaty benefits.
Distributions made by the Company in excess of its current and
accumulated earnings and profits will be treated first as a tax-free return of
capital to each Non-U.S. Shareholder, reducing the adjusted basis which such
Non-U.S. Shareholder has in his Common Shares for U.S. tax purposes by the
amount of such distribution (but not below zero), with distributions in excess
of a Non-U.S. Shareholder's adjusted basis in his shares being treated as gain
from the sale or exchange of such shares, the tax treatment of which is
described below. If it cannot be determined at the time a distribution is made
whether or not such distribution will be in excess of the Company's
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current and accumulated earnings and profits, the distribution will be subject
to withholding at the rate applicable to a dividend distribution. However, the
Non-U.S. Shareholder may seek a refund from the IRS of any amount withheld if
it is subsequently determined that such distribution was, in fact, in excess of
the Company's then current and accumulated earnings and profits.
If the Company derives Excess Inclusion income from REMIC Residual
Interests, the portion of the dividends paid to Non-U.S. Shareholders that is
allocable to the Excess Inclusion income may not be eligible for exemption from
the 30% withholding tax or a reduced treaty rate. In addition, the U.S.
Treasury Department has been authorized to issue regulations regarding
issuances by a REIT of Common Shares in Non-REMIC Transactions. If 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 not be eligible for exemption from the 30% withholding tax or a reduced
treaty rate. See "--Taxation of Taxable U.S. Shareholders."
As long as the Company continues to qualify as a REIT, distributions
made by the Company that are attributable to gain from the sale or exchange by
the Company of United States real property interests will be taxed to a
Non-U.S. Shareholder under the Foreign Investment in Real Property Tax Act of
1980 ("FIRPTA"). Under FIRPTA, such distributions are taxed to a Non-U.S.
Shareholder as if such distributions were gains "effectively connected" with
the conduct of a trade or business in the United States. Accordingly, a
Non-U.S. Shareholder will be taxed on such distributions at the same capital
gain rates applicable to U.S. Shareholders (subject to any applicable
alternative minimum tax and a special alternative minimum tax in the case of
non-resident alien individuals). Distributions subject to FIRPTA also may be
subject to the 30% branch profits tax in the case of a corporate Non-U.S.
Shareholder that is not entitled to treaty relief or exemption. The Company
will be required to withhold tax from any distribution to a Non-U.S.
Shareholder that could be designated by the Company as a capital gain dividend
in an amount equal to 35% of the gross distribution. The amount of tax
withheld is fully creditable against the Non-U.S. Shareholder's FIRPTA tax
liability, and if such amount exceeds the Non-U.S. Shareholder's federal income
tax liability for the applicable taxable year, the Non-U.S. Shareholder may
seek a refund of the excess from the IRS. In addition, if the Company
designates prior distributions as capital gain dividends, subsequent
distributions, up to the amount of such prior distributions, will be treated as
capital gain dividends for purposes of withholding.
Gain recognized by a Non-U.S. Shareholder upon the sale or exchange of
Common Shares generally will not be subject to United States taxation unless
the Common Shares constitute a "United States real property interest" within
the meaning of FIRPTA. The Common Shares will not constitute a "United States
real property interest" so long as the Company is a "domestically controlled
REIT." A "domestically controlled REIT" is a REIT in which at all times during
a specified testing period less than 50% in value of its shares is held
directly or indirectly by Non-U.S. Shareholders. However, because the shares
of Common Shares will be publicly traded, no assurance can be given that the
Company is or will continue to be a "domestically-controlled REIT."
Notwithstanding the foregoing, gain from the sale or exchange of Common Shares
not otherwise subject to FIRPTA will be taxable to a Non-U.S. Shareholder if
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 such case, the nonresident alien individual
will be subject to a 30% United States withholding tax on the amount of such
individual's gain.
If the Company did not constitute a "domestically-controlled REIT,"
gain arising from the sale or exchange by a Non-U.S. Shareholder of Common
Shares would be subject to United States taxation under FIRPTA as a sale of a
"United States real property interest" only if the selling Non-U.S.
Shareholder's interest in the Company exceeded 5% at any time during the five
years preceding the sale or exchange. If gain on the sale or exchange of
Common Shares was subject to taxation under FIRPTA, the Non-U.S. Shareholder
would be subject to regular United States 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), and the purchaser of the Common Shares
(including the Company in a redemption transaction) would be required to
withhold and remit to the IRS 10% of the purchase price. Additionally, in such
case, distributions on the Common Shares to the extent
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they represent a return of capital or capital gain from the sale of the shares,
rather than dividends, would be subject to a 10% withholding tax.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
The Company will report to its U.S. Shareholders and to the IRS the
amount of dividends paid during each calendar year and the amount of tax
withheld, if any, with respect thereto. Under the backup withholding rules, a
U.S. Shareholder may be subject to backup withholding at the rate of 31% on
dividends paid unless such U.S. Shareholder (i) is a corporation or falls
within certain other exempt categories and, when required, can demonstrate this
fact, or (ii) provides a taxpayer identification number, certifies as to no
loss of exemption from backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules. A U.S. Shareholder
who does not provide the Company with his correct taxpayer identification
number also may be subject to penalties imposed by the IRS. Any amount paid as
backup withholding will be creditable against the U.S. Shareholder's federal
income tax liability. In addition, the Company may be required to withhold a
portion of any capital gain distributions made to U.S. Shareholders who fail to
certify their non-foreign status to the Company. See "--Taxation of Non-U.S.
Shareholders."
Additional issues may arise pertaining to information reporting and
backup withholding with respect to Non-U.S. Shareholders, and Non-U.S.
Shareholders should consult their tax advisors with respect to any such
information reporting and backup withholding requirements.
POSSIBLE LEGISLATIVE OR OTHER ACTIONS AFFECTING TAX CONSEQUENCES
Prospective holders should recognize that the present federal income
tax treatment of the Company may be modified by future legislative, judicial or
administrative actions or decisions at any time, which may be retroactive in
effect, and, as a result, any such action or decision may affect investments
and commitments previously made. The rules dealing with federal income
taxation are constantly under review by Persons involved in the legislative
process and by the IRS and the Treasury Department, resulting in statutory
changes as well as promulgation of new, or revisions to existing, regulations
and revised interpretations of established concepts. No prediction can be made
as to the likelihood of passage of any new tax legislation or other provisions
either directly or indirectly affecting the Company or its shareholders.
Revisions in federal income tax laws and interpretations thereof could
adversely affect the tax consequences of an investment in the Common Shares.
The Company 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 Shares.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
the prohibited transaction provisions of section 4975 of the Code that may be
relevant to a prospective purchaser. 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 employee benefit plans subject to Title I of
ERISA, other retirement plans and individual retirement accounts ("IRAs")
subject to the prohibited transaction provisions of Section 4975 of the Code,
as well as 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
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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 SHARES 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 SHARES BY SUCH PLAN OR IRA.
EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS, AND IRAS
Each fiduciary of a pension, profit-sharing, or other employee benefit
plan (a "Plan") subject to Title I of ERISA should consider carefully whether
an investment in the Common Shares is consistent with his fiduciary
responsibilities under ERISA. In particular, the fiduciary requirements of
Part 4 of Title I of ERISA require a Plan's investment to be (i) prudent and in
the best interests of the Plan, its participants, and its beneficiaries, (ii)
diversified in order to minimize the risk of large losses, unless it is clearly
prudent not to do so, and (iii) authorized under the terms of the Plan's
governing documents (provided the documents are consistent with ERISA). In
determining whether an investment in the Common Shares is prudent for purposes
of ERISA, the appropriate fiduciary of a Plan should consider all of the facts
and circumstances, including whether the investment is reasonably designed, as
a part of the Plan's portfolio for which the fiduciary has investment
responsibility, to meet the objectives of the Plan, taking into consideration
the risk of loss and opportunity for gain (or other return) from the
investment, the diversification, cash flow, and funding requirements of the
Plan's portfolio. A fiduciary also should take into account the nature of the
Company's business, the management of the Company, the length of the Company's
operating history, the fact that certain investment assets may not have been
identified yet, and the possibility of the recognition of UBTI.
The fiduciary of an IRA or of a qualified retirement plan not subject
to Title I of ERISA because it is a governmental or church plan or because it
does not cover common law employees (a "Non-ERISA Plan") should consider that
such an IRA or Non-ERISA Plan may only make investments that are authorized by
the appropriate governing documents and under applicable state law.
Fiduciaries of Plans and Persons making the investment decision for an
IRA or other Non-ERISA Plan should consider the application of the prohibited
transaction provisions of ERISA and the Code in making their investment
decision. A "party in interest" or "disqualified Person" with respect to a
Plan or with respect to a Plan or IRA subject to Code section 4975 other than a
fiduciary acting as such is subject to (i) an initial 15% excise tax on the
amount involved in any prohibited transaction involving the assets of the plan
or IRA and (ii) an excise tax equal to 100% of the amount involved if any
prohibited transaction is not timely corrected. If the disqualified Person who
engages in the transaction is the individual on behalf of whom an IRA is
maintained (or his beneficiary), the IRA will lose its tax-exempt status and
its assets will be deemed to have been distributed to such individual in a
taxable distribution (and no excise tax will be imposed) on account of the
prohibited transaction. In addition, a fiduciary who permits a Plan to engage
in a transaction that the fiduciary knows or should know is a prohibited
transaction may be liable to the Plan for any loss the Plan incurs as a result
of the transaction or for any profits earned by the fiduciary in the
transaction.
STATUS OF 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
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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.
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, 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.
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 Shares, 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 Shares 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.
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 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 Shares are 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 Shares 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 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 Declaration of Trust on the transfer of the
Company's shares will not result in the failure of the Common Shares to be
"freely transferable." The Company also is not aware of any other facts or
circumstances limiting the transferability of the Common Shares other than
those enumerated in the Plan Asset Regulations as those not affecting free
transferability. However no assurance can be given that the DOL or the United
States Department of Treasury will not reach a contrary conclusion.
Assuming that the Common Shares 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 Shares, the
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Common Shares 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 Shares.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND REAL ESTATE INVESTMENTS
The following discussion describes a number of legal considerations
involved in the acquisition of Mortgage Loans or the foreclosure and sale of
defaulted Mortgage Loans (whether individually or as part of a series of MBS).
It generally summarizes certain legal aspects of Mortgage Loans and real
estate. Because certain of 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.
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 (the borrower) conveys title to
the real property to the grantee (the lender), generally with a power of sale,
until such time as the debt is repaid. The mortgagee's authority under a
mortgage, the trustee's authority under a deed of trust and the grantee's
authority under a deed to secure debt are governed by the express provisions of
the related instrument, the law of the state in which the real property is
located, certain federal laws and, in some deed of trust transactions, the
directions of the beneficiary.
INTERESTS IN REAL PROPERTY
The interests in real property typically covered by a mortgage, deed
of trust or deed to secure debt is most often the fee simple estate in land and
improvements. However, such instruments may encumber other interests in real
property such as a tenant's interest in the lease of land or improvements, or
both, and the leasehold estate created by such lease. An instrument covering
an interest in real property other than the fee estate requires special
provisions in the instrument creating such interest or in the mortgage, deed of
trust or deed to secure debt, to protect the mortgagee against termination of
such interest before the mortgage, deed of trust or deed to secure debt is
paid.
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LEASES AND RENTS
Mortgage Loans 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 Loan. 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
mortgagee 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 Loan 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 Loan are judicial foreclosure, involving court
proceedings, and non-judicial foreclosure pursuant to a power of sale granted
in the mortgage instrument. Other foreclosure procedures are available in some
states, such as strict foreclosure, but they are either infrequently used or
available only in limited circumstances.
JUDICIAL FORECLOSURE. A judicial foreclosure proceeding is conducted
in a court having jurisdiction over the mortgaged property. Generally, the
action is initiated by the service of legal pleadings upon all parties having a
subordinate interest of record in the real property and all parties in
possession of the property, under leases or otherwise, whose interests are
subordinate to the Mortgage Loan. 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
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judgment of foreclosure and appoints a referee or other officer to conduct a
public sale of the mortgaged property, the proceeds of which are used to
satisfy the judgment. Such sales are made in accordance with procedures that
vary from state to state.
PUBLIC SALE. A third party may be unwilling to purchase a mortgaged
property at a public sale following judicial foreclosure because of the
difficulty in determining the value of such property at the time of sale, due
to, among other things, redemption rights which may exist and the possibility
of physical deterioration of the property during the foreclosure proceedings.
For these reasons, it is common for the lender to purchase the mortgaged
property for an amount equal to or less than the underlying debt and accrued
and unpaid interest plus the expenses of foreclosure. Generally, state law
controls the amount of foreclosure costs and expenses which may be recovered by
a lender. Thereafter, subject to the mortgagor's right in some states to remain
in possession during a redemption period, if applicable, the lender will become
the owner of the property and have both benefits and burdens of ownership of
the mortgaged property. For example, the lender will have the obligation to
pay debt service on any senior mortgages, to pay taxes, obtain casualty
insurance and make such repairs at its own expense as are necessary to render
the property suitable for sale. The costs of operating and maintaining a
commercial or multifamily residential property may be significant and may be
greater than the income derived from that property.
NON-JUDICIAL FORECLOSURE/POWER OF SALE. Foreclosure of a deed of
trust is generally accomplished by a non-judicial trustee's sale pursuant to a
power of sale typically granted in the deed of trust. A power of sale may also
be contained in any other type of mortgage instrument if applicable law so
permits. A power of sale under a deed of trust allows a non-judicial public
sale to be conducted generally following a request from the beneficiary/lender
to the trustee to sell the property upon default by the borrower and after
notice of sale is given in accordance with the terms of the mortgage and
applicable state law. The borrower or junior lienholder may then have the
right, during a reinstatement period required in some states, to cure the
default by paying the entire actual amount in arrears (without regard to the
acceleration of the indebtedness), plus the lender's expenses incurred in
enforcing the obligation. In other states, the borrower or the junior
lienholder is not provided a period to reinstate the loan, but has only the
right to pay off the entire debt to prevent the foreclosure sale. Generally,
state law governs the procedure for public sale, the parties entitled to
notice, the method of giving notice and the applicable time periods.
EQUITABLE LIMITATIONS ON ENFORCEABILITY OF CERTAIN PROVISIONS. United
States courts have traditionally imposed general equitable principles to limit
the remedies available to lenders in foreclosure actions. These principles are
generally designed to relieve borrowers from the effects of mortgage defaults
perceived as harsh or unfair. Relying on such principles, a court may alter
the specific terms of a loan to the extent it considers necessary to prevent or
remedy an injustice, undue oppression or overreaching, or may require the
lender to undertake affirmative actions to determine the cause of the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's and have required that lenders reinstate loans or recast payment
schedules in order to accommodate borrowers who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose in the case of a non-monetary default, such as a failure to
adequately maintain the mortgaged property or an impermissible further
encumbrance of the mortgaged property.
Even if the lender is successful in the foreclosure action and is able
to take possession of the property, the costs of operating and maintaining a
commercial or multi-family property may be significant and may be greater than
the income derived from that property. The costs of management and operation
of those mortgaged properties which are hotels, motels, restaurants, nursing
homes, convalescent homes or hospitals may be particularly significant because
of the expertise, knowledge and with respect to nursing or convalescent homes,
regulatory compliance, required to run such operations and the effect which
foreclosure and a change in ownership may have with respect to consent
requirements and on the public's and the industry's (including franchisors')
perception of the quality of such operations. The lender also will commonly
obtain the services of a real estate broker and pay the broker's commission in
connection with the sale or lease of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property. Moreover, because of
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the expenses associated with acquiring, owning and selling a mortgaged
property, a lender could realize an overall loss on a Mortgage Loan even if the
mortgaged property is sold at foreclosure, or resold after it is acquired
through foreclosure, for an amount equal to the full outstanding principal
amount of the loan plus accrued interest.
The holder of a junior mortgage that forecloses on a mortgaged
property does so subject to senior mortgages and any other prior liens, and may
be obliged to keep senior Mortgage Loans current in order to avoid foreclosure
of its interest in the property. In addition, if the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause contained in a
senior mortgage, the junior mortgagee could be required to pay the full amount
of the senior mortgage indebtedness or face foreclosure.
POST-SALE REDEMPTION. In a majority of states, after sale pursuant to
a deed of trust or foreclosure of a mortgage, the borrower and foreclosed
junior lienors are given a statutory period in which to redeem the property.
In some states, statutory redemption may occur only upon payment of the
foreclosure sale price. In other states, redemption may be permitted if the
former borrower pays only a portion of the sums due. In some states, the
borrower retains possession of the property during the statutory redemption
period. The effect of a statutory right of redemption is to diminish the
ability of the lender to sell the foreclosed property because the exercise of a
right of redemption would defeat the title of any purchaser through a
foreclosure. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
ANTI-DEFICIENCY LEGISLATION. Any commercial or multi-family
residential Mortgage Loans acquired by the Company are likely to be nonrecourse
loans, as to which recourse in the case of default will be limited to the
property and such other assets, if any, that were pledged to secure the
Mortgage Loan. However, even if a Mortgage Loan by its terms provides for
recourse to the borrower's other assets, a lender's ability to realize upon
those assets may be limited by state law. For example, in some states a lender
cannot obtain a deficiency judgment against the borrower following foreclosure
or sale under a deed of trust or by non-judicial means. Other statutes may
require the lender to exhaust the security afforded under a mortgage before
bringing a personal action against the borrower. In certain other states, the
lender has the option of bringing a personal action against the borrower on the
debt without first exhausting such security; however, in some of those states,
the lender, 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).
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Under the laws applicable in many states, "foreclosure" on cooperative
shares is accomplished by a sale in accordance with the provisions of Article 9
of the UCC and the security agreement relating to the shares. Article 9 of the
UCC requires that a sale be conducted in a "commercially reasonable" manner,
which may be dependent upon, among other things, the notice given to the debtor
and the method, manner, time, place and terms of the sale. Article 9 of the
UCC provides that the proceeds of the sale will be applied first to pay the
costs and expenses of the sale and then to satisfy the indebtedness secured by
the lender's security interest. A recognition agreement, however, generally
provides that the lender's right to reimbursement is subject to the right of
the cooperative to receive sums due under the proprietary leases.
BANKRUPTCY LAWS
Operation of the Bankruptcy Code and related state laws may interfere
with or affect the ability of a lender to realize upon collateral and/or to
enforce a deficiency judgment. For example, under the Bankruptcy Code,
virtually all actions (including foreclosure actions and deficiency judgment
proceedings) to collect a debt are automatically stayed upon the filing of the
bankruptcy petition and, often, no interest or principal payments are made
during the course of the bankruptcy case. The delay and the consequences
thereof caused by such automatic stay can be significant. Also, under the
Bankruptcy Code, the filing of a petition in bankruptcy by or on behalf of a
junior lien or may stay the senior lender from taking action to foreclose out
such junior lien.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards protective of the lender are met, the amount and terms of a Mortgage
Loan secured by a lien on property of the debtor may be modified under certain
circumstances. For example, the outstanding amount of the loan may be reduced
to the then-current value of the property (with a corresponding partial
reduction of the amount of lender's security interest) pursuant to a confirmed
plan or lien avoidance proceeding, thus leaving the lender a general unsecured
creditor for the difference between such value and the outstanding balance of
the loan. Other modifications may include the reduction in the amount of each
scheduled payment, by means of a reduction in the rate of interest and/or an
alteration of the repayment schedule (with or without affecting the unpaid
principal balance of the loan), and/or by an extension (or shortening) of the
term to maturity.
Federal bankruptcy law may also have the effect of interfering with or
affecting the ability of the secured lender to enforce the borrower's
assignment of rents and leases related to the mortgaged property. Under
section 362 of the Bankruptcy Code, the lender will be stayed from enforcing
the assignment, and the legal proceedings necessary to resolve the issue could
be time-consuming, with resulting delays in the lender's receipt of the rents.
In addition, the Bankruptcy Code has been amended to provide that a lender's
perfected pre-petition security interest in leases, rents and hotel revenues
continues in the post-petition leases, rents and hotel revenues, unless a
bankruptcy court orders to the contrary "based on the equities of the case."
In a bankruptcy or similar proceeding, action may be taken seeking the
recovery as a preferential transfer of any payments made by the mortgagor under
the related Mortgage Loan to the owner of such Mortgage Loan. Payments on
long-term debt may be protected from recovery as preferences if they are
payments in the ordinary course of business made on debts incurred in the
ordinary course of business. Whether any particular payment would be protected
depends upon the facts specific to a particular transaction.
A trustee in bankruptcy, in some cases, may be entitled to collect its
costs and expenses in preserving or selling the mortgaged property ahead of
payment to the lender. In certain circumstances, a debtor in bankruptcy may
have the power to grant liens senior to the lien of a mortgage, and analogous
state statutes and general principles of equity may also provide a mortgagor
with means to halt a foreclosure proceeding or sale and to force a
restructuring of a Mortgage Loan on terms a lender would not otherwise accept.
Moreover, the laws of certain states also give priority to certain tax liens
over the lien of a mortgage or deed of trust. Under the Bankruptcy Code, if
the court finds that actions of the mortgagee have been unreasonable, the lien
of the related mortgage may be subordinated to the claims of unsecured
creditors.
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The Company's acquisition of real property, particularly REO Property,
may be affected by many of the considerations applicable to Mortgage Loan
lending. For example, the Company's acquisition of certain property at
foreclosure sale could be affected by a borrower's post-sale right of
redemption. In addition, the Company's ability to derive income from real
property will generally be dependent on its receipt of rent payments under
leases of the related property. The ability to collect rents may be impaired
by the commencement of a bankruptcy proceeding relating to a lessee under such
lease. Under the Bankruptcy Code, the filing of a petition in bankruptcy by or
on behalf of a lessee results in a stay in bankruptcy against the commencement
or continuation of any state court proceeding for past due rent, for
accelerated rent, for damages or for a summary eviction order with respect to a
default under the lease that occurred prior to the filing of the lessee's
petition. In addition, the Bankruptcy Code generally provides that a trustee
or debtor-in-possession may, subject to approval of the court, (i) assume the
lease and retain it or assign it to a third party or (ii) reject the lease. If
the lease is assumed, the trustee or debtor-in-possession (or assignee, if
applicable) must cure any defaults under the lease, compensate the lessor for
its losses and provide the lessor with "adequate assurance" of future
performance. Such remedies may be insufficient, and any assurances provided to
the lessor may, in fact, be inadequate. If the lease is rejected, the lessor
will be treated as an unsecured creditor with respect to its claim for damages
for termination of the lease. The Bankruptcy Code also limits a lessor's
damages for lease rejection to the rent reserved by the lease (without regard
to acceleration) for the greater of one year, or 15%, not to exceed three
years, of the remaining term of the lease.
DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS
Notes and mortgages may contain provisions that obligate the borrower
to pay a late charge or additional interest if payments are not timely made,
and in some circumstances, may prohibit prepayments for a specified period
and/or condition prepayments upon the borrower's payment of prepayment fees or
yield maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges that a lender may collect from a borrower for
delinquent payments. Certain states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. In
addition, the enforceability of provisions that provide for prepayment fees or
penalties upon an involuntary prepayment is unclear under the laws of many
states.
The Company may invest in Mortgage Loans which contain a
"debt-acceleration" clause, which permits the lender to accelerate the full
debt upon a monetary or non-monetary default of the borrower. The courts of
most states will enforce clauses providing for acceleration in the event of a
material payment default after giving effect to any appropriate notices. The
equity courts of any state, however, may refuse to foreclose a mortgage or deed
of trust when an acceleration of the indebtedness would be inequitable or
unjust or the circumstances would render the acceleration unconscionable.
Furthermore, in some states, the borrower may avoid foreclosure and reinstate
an accelerated loan by paying only the defaulted amounts and the costs and
attorneys' fees incurred by the lender in collecting such defaulted payments.
State courts also are known to apply various legal and equitable
principles to avoid enforcement of the forfeiture provisions of installment
contracts. For example, a lender's practice of accepting late payments from
the borrower may be deemed a waiver of the forfeiture clause. State courts
also may impose equitable grace periods for payment of arrearage or otherwise
permit reinstatement of the contract following a default. Not infrequently, if
a borrower under an installment contract has significant equity in the
property, equitable principles will be applied to reform or reinstate the
contract or to permit the borrower to share the proceeds upon a foreclosure
sale of the property if the sale price exceeds the debt.
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
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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 Mortgage Loan. In certain
circumstances, a lender could determine to abandon a contaminated mortgaged
property as collateral for its Mortgage 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 Mortgage Loans secured by the
property. Moreover, under certain circumstances, liability under CERCLA may be
joint and several (i.e., any liable party may be obligated to pay the entire
cleanup costs regardless of its relative contribution to the contamination).
The Asset Conservation, Lender Liability and Deposit Insurance Act of
1996 (the "1996 Lender Liability Act") provides for a safe harbor for secured
lenders from CERCLA liability even though the lender forecloses and sells the
real estate securing the Mortgage 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
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these materials can increase the cost of operating a property and thus diminish
its value. In a few states, transfers of some types of properties are
conditioned upon cleanup of contamination prior to transfer. In these cases, a
lender that becomes the owner of a property through foreclosure, deed in lieu
of foreclosure or otherwise, may be required to clean up the contamination
before selling or otherwise transferring the property.
Beyond statute-based environmental liability, there exist common law
causes of action (for example, actions based on nuisance or on toxic tort
resulting in death, personal injury or damage to property) related to hazardous
environmental conditions on a property.
SUPERLIEN LAWS. Under the laws of many states, contamination of a
property may give rise to a lien on the property for clean-up costs. In
several states, such a lien has priority over all existing liens, including
those of existing mortgages. In these states, the lien of a mortgage may lose
its priority to such a "superlien."
ADDITIONAL CONSIDERATIONS. The cost of remediating environmental
contamination at a property can be substantial. To reduce the likelihood of
exposure to such losses, the Company will not acquire title to a mortgaged
property or take over its operation unless, based on an environmental site
assessment prepared by a qualified environmental consultant, it has made the
determination that it is appropriate to do so. The Company expects that it
will organize a special purpose subsidiary to acquire any environmentally
contaminated real property.
ENVIRONMENTAL SITE ASSESSMENTS. In addition to possibly allowing a
lender to qualify for the innocent landowner defense (see discussion under
"--Environmental Risks--CERCLA" above), environmental site assessments can be a
valuable tool in anticipating, managing and minimizing environmental risk. They
are commonly performed in many commercial real estate transactions.
Environmental site assessments vary considerably in their content and
quality. Even when adhering to good professional practices, environmental
consultants will sometimes not detect significant environmental problems
because an exhaustive environmental assessment would be far too costly and
time-consuming to be practical. Nevertheless, it is generally helpful in
assessing and addressing environmental risks in connection with commercial real
estate (including multi-family properties) to have an environmental site
assessment of a property because it enables anticipation of environmental
problems and, if agreements are structured appropriately, can allow a party to
decline to go forward with a transaction.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 ("Title V") provides that state usury limitations shall not
apply to certain types of residential (including multi-family) first Mortgage
Loans originated by certain lenders after March 31, 1980. Title V authorized
any state to reimpose interest rate limits by adopting, before April 1, 1983, a
law or constitutional provision that expressly rejects application of the
federal law. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on Mortgage Loans covered by Title V. Certain states have taken action
to reimpose interest rate limits and/or to limit discount points or other
charges.
AMERICANS WITH DISABILITIES ACT
Under Title III of the 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
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such requirements on a foreclosing lender who succeeds to the interest of the
borrower as owner or landlord. Furthermore, since the "readily achievable"
standard may vary depending on the financial condition of the owner or
landlord, a foreclosing lender who is financially more capable than the
borrower of complying with the requirements of the ADA may be subject to more
stringent requirements than those to which the borrower is subject.
GROUND LEASE RISKS
Mortgage Loans may be secured by a mortgage on a ground lease.
Leasehold mortgages are subject to certain risks not associated with Mortgage
Loans secured by a fee estate. The most significant of these risks is that the
ground lease creating the leasehold estate could terminate, leaving the
leasehold mortgagee without its security. The ground lease may terminate if,
among other reasons, the ground lessee breaches or defaults in its obligations
under the ground lease or there is a bankruptcy of the ground lessee or ground
lessor. This risk may be minimized if the ground lease contains certain
provisions protective of the mortgagee, but the ground leases that secure
Mortgage Loans may not contain some of these protective provisions.
DUE ON SALE AND DUE ON ENCUMBRANCE
Certain of the Mortgage Loans may contain due on sale and due on
encumbrance clauses. These clauses generally provide that the lender may
accelerate the maturity of the Mortgage Loan if the mortgagor sells or
otherwise transfers or encumbers the mortgaged property. The enforceability of
due on sale clauses has been subject of legislation or litigation in many
states and, in some cases, the enforceability of these clauses has been limited
or denied. However, with respect to certain loans, the Garn-St. Germain
Depository Institutions Act of 1982 preempts state constitutional, statutory
and case law that prohibits the enforcement of due on sale clauses and permits
lenders to enforce these clauses in accordance with their terms subject to
certain limited exceptions.
SUBORDINATE FINANCING
When a mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and
the senior loan does not, a mortgagor may be more likely to repay sums due on
the junior loan than those on the senior loan. Second, acts of the senior
lender that prejudice the junior lender can cause the senior lender to lose its
priority. For example, if the mortgagor and the senior lender agree to
increase the principal amount of or the interest rate payable on the senior
loan, the senior lender may lose its priority to the extent any existing junior
is harmed or the mortgagor is additionally burdened. Third, if the mortgagor
defaults on the senior loan and/or any junior loan or loans, the existence of
junior loans and the action taken by junior lenders can impair the security
available to the senior lender and can interfere with or delay the taking of
action by the senior lender.
ACCELERATION ON DEFAULT
Some of the Mortgage Loans may include "Debt Acceleration" clauses,
which permit the lender to accelerate the full debt upon a monetary or
nonmonetary default of the mortgagor. The courts of all states will enforce
clauses providing for acceleration in the event of a material payment default
after giving effect to any appropriate notices. Such courts, however, may
refuse to foreclose on a mortgage or deed of trust when an acceleration of the
indebtedness would be inequitable or unjust under the circumstances or would
render the acceleration unconscionable. Furthermore, in some states, the
mortgagor may avoid foreclosure and reinstate an accelerated Mortgage Loan by
paying only the defaulted amounts and the costs and attorneys' fees incurred by
the lender in collecting such defaulted payments.
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CERTAIN LAWS AND REGULATIONS; TYPES OF MORTGAGED PROPERTY
The real property securing the Mortgage Loans will be subject to
compliance with various federal, state and local statutes and regulations.
Failure to comply (together with an inability to remedy any such failure) could
result in material diminution in the value of the mortgaged properties which
could, together with the possibility of limited alternative uses for a
particular property (e.g., a nursing home or convalescent home or hospital),
result in the failure to realize the full principal amount of the related
Mortgage Loan. Mortgages on properties which are owned by a mortgagor under a
condominium form of ownership are subject to declarations, bylaws and other
regulations of the condominium association. Mortgaged properties which are
hotels or motels may present additional risks in that hotels and motels are
typically operated pursuant to franchise, management and operating agreements
which may be terminated by the operator, and the transferability of the hotel's
operating liquor and other licenses to the entity acquiring the hotel either
through purchases or foreclosure is subject to the peculiarities of local law
requirements. In addition, mortgaged properties which are multifamily
residential properties may be subject to rent control laws, which could impact
the future cash flows of such properties.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act"), a mortgagor who enters military service
after the origination of such mortgagor's Mortgage Loan (including a mortgagor
who is in reserve status and is called to active duty after origination of the
Mortgage Loan), may not be charged interest (including fees and charges) above
an annual rate of 6% during the period of such mortgagor's active duty status,
unless a court orders otherwise upon application of the lender. Because the
Relief Act applies to mortgagors who enter military service after origination
of the related Mortgage Loan, no information can be provided as to the number
of Mortgage Loans that may be affected by the Relief Act. Application of the
Relief Act would adversely affect, for an indeterminate period of time, the
ability of any servicer to collect full amounts of interest on certain Mortgage
Loans. In addition, the Relief Act imposes limitations that would impair the
ability of a servicer to foreclosure on an affected Mortgage Loan during the
mortgagor's period of active duty status, and, under certain circumstances,
during an additional three month period thereafter.
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DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
GENERAL
The Declaration of Trust provides that the Company may issue up to
250,000,000 shares of beneficial interest of the Company, par value $.01 per
share, consisting of 200,000,000 Common Shares and 50,000,000 Preferred Shares.
Upon completion of this Offering and the Private Placement, 16,675,100 Common
Shares will be issued and outstanding (assuming no exercise of the
Underwriters' over-allotment option) and no Preferred Shares will be issued or
outstanding.
Both the Texas REIT Act and the Declaration of Trust provide that no
shareholder of the Company will be personally liable for any debt, act,
omission or obligation incurred by the Company or its Trust Managers.
Conducting business in other states, however, may give rise to shareholder
liability in those states that may not recognize the limited liability afforded
shareholders under the Texas REIT Act. For this reason, the Company may hold
assets or conduct business in states other than Texas through wholly owned
subsidiaries of the Company, if, among other reasons, it determines that there
would exist in that state a significant risk of shareholder liability if the
assets were owned or the business conducted directly by the Company. The
Company will use such subsidiaries to the fullest extent it can in those states
where the law is unclear regarding limited shareholder liability in an effort
to minimize the possibility of shareholder liability.
In addition, the Bylaws provide that the Company will indemnify each
shareholder against any claim or liability to which the shareholder may become
subject by reason of being or having been a shareholder, and that the Company
will reimburse each shareholder for all legal and other expenses reasonably
incurred by such shareholder in connection with any such claim or liability.
Further, the Company may, if it deems necessary, include a provision in its
contracts which provides that shareholders assume no personal liability for
obligations entered into on behalf of the Company. However, with respect to
tort claims, contractual claims where liability is not so negated, claims for
taxes and certain statutory liability, the shareholders may, in some
jurisdictions, be personally liable to the extent such claims are not paid by
the Company. Because the Company will carry public liability insurance which
it believes is adequate for tort claims, any risk of personal liability to
shareholders is limited to situations in which the Company's unencumbered
assets plus its insurance coverage would be insufficient to satisfy the claims
against the Company and its shareholders.
COMMON SHARES
VOTING RIGHTS. Subject to the provisions of the Declaration of Trust
regarding Beneficial Ownership or Constructive Ownership in excess of the
Aggregate Share Ownership Limit and to such preferential rights as may be
granted by the Board of Trust Managers in connection with the future issuance
of Preferred Shares, each outstanding Common Share entitles the holder to one
vote on all matters submitted to a vote of shareholders, including the election
of Trust Managers. There is no cumulative voting in the election of Trust
Managers, which means that the holders of a majority of the outstanding Common
Shares can elect all of the Trust Managers then standing for election.
DIVIDENDS. Subject to the provisions of the Declaration of Trust
regarding Beneficial Ownership or Constructive Ownership in excess of the
Aggregate Share Ownership Limit and to such preferential rights as may be
granted by the Board of Trust Managers in connection with the future issuance
of Preferred Shares, holders of Common Shares are entitled to receive ratably
such dividends, in cash, property or Shares, as may be declared from time to
time by the Board of Trust Managers. The Company is prohibited from declaring
or paying any dividend when the Company is unable to pay its debts as they
become due in the usual course or when the payment of such dividend would
result in the Company becoming unable to pay its debts as they become due. See
"Dividend and Distribution Policy."
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LIQUIDATION RIGHTS. Subject to the provisions of the Declaration of
Trust regarding the Aggregate Share Ownership Limit, in the event of any
liquidation, dissolution or winding-up of the affairs of the Company, holders
of Common Shares will be entitled to share ratably in the assets of the Company
remaining after provision for liabilities to creditors and payment of
liquidation preferences to holders of Preferred Shares.
OTHER TERMS. Holders of Common Shares have no redemption, preference,
conversion, exchange or preemptive rights to subscribe to any securities of the
Company. All outstanding Common Shares will be fully paid and nonassessable.
MEETINGS OF SHAREHOLDERS. The Bylaws provide that annual meetings of
shareholders, commencing with the 1999 annual meeting, will be held no later
than the last day of May of each year. Special meetings of the shareholders
may be called by the Trust Managers, any officer of the Company or the holders
of at least 10% of all of the Shares entitled to vote at the meetings.
PREFERRED SHARES
The Board of Trust Managers is empowered to issue Preferred Shares
from time to time in one or more series, without shareholder approval, and with
respect to each series to determine, subject to limitations prescribed by law,
(i) the number of shares constituting such series, (ii) the dividend rate on
the shares of each series, whether such dividends shall be cumulative and the
relation of such dividends to the dividends payable on any other class of
shares, (iii) whether the shares of each series shall be redeemable and the
terms thereof, (iv) whether the shares will be convertible into Common Shares
and the terms thereof, (v) the amount per share payable on each series or other
rights of holders of such shares on liquidation or dissolution of the Company,
(vi) the voting rights, if any, of shares of each series, and (vii) generally
any other rights and privileges not in conflict with the Declaration of Trust
or the Texas REIT Act for each series and any qualifications, limitations or
restrictions thereof.
Because the Trust Managers have the power to establish the preferences
and rights of each class or series of Preferred Shares, it may afford the
holders in any series or class of Preferred Shares dividend rights,
preferences, powers and rights, voting or otherwise, senior to the rights of
holders of Common Shares. Issuance of a series of Preferred Shares also could,
depending on the terms of such series, either impede or facilitate the
completion of a merger, tender offer or other takeover attempt. Although the
Board of Trust Managers is required to make a determination as to the best
interest of the shareholders of the Company when issuing Preferred Shares, the
Board of Trust Managers could act in a manner that would discourage an
acquisition attempt or other transaction that some, or a majority, of the
shareholders might believe to be in the best interest of the Company or in
which shareholders might receive a premium for their shares over the
then-prevailing market price. The authorized Preferred Shares are available
for issuance without further action by the Company's shareholders, unless such
action is required by applicable law or the rules of any stock exchange on
which the Common Shares may then be listed.
REGISTRATION RIGHTS
The Company has agreed that, upon the demand of AMRESCO, it will file
and use its best efforts to have declared effective a resale registration
statement covering the resale of the Common Shares sold in the Private
Placement. The Company has agreed with AMRESCO that it will keep such resale
registration statement effective until such time as sales may be made in
reliance on Rule 144(k) under the Securities Act. See "Private Placement."
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, among other
things, not more than 50% in value of its outstanding Shares may be owned,
directly or indirectly, by five or fewer individuals (as defined in the Code to
include certain entities) during the last half of a taxable year, and such
Shares must be beneficially owned by 100 or more Persons during at least 335
days of a taxable year of 12 months, or during a proportionate part of a
shorter taxable year. See "Federal Income Tax Consequences--Requirements for
Qualification."
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Because the Board of Trust Managers believes it is essential for the
Company to continue to qualify as a REIT, the Declaration of Trust, subject to
certain exceptions, provides that no holder may own, or be deemed to own by
virtue of the attribution provisions of the Code, more than 9.8% (the
"Aggregate Share Ownership Limit") of the total outstanding Shares. The Trust
Managers may waive the Aggregate Share Ownership Limit. Any Transfer of Shares
that would (i) create a direct or indirect ownership of Shares in excess of the
Aggregate Share Ownership Limit, (ii) result in the Shares being owned by fewer
than 100 Persons, (iii) result in the Company being "closely held" within the
meaning of Section 856(h) of the Code, or (iv) result in the disqualification
of the Company as a REIT, shall be null and void.
If any Transfer of Shares (whether or not such Transfer is the result
of a transaction entered into through the facilities of any national securities
exchange or automated inter-dealer quotation system) occurs which, if
effective, would result in any Person becoming the Beneficial Owner or
Constructive Owner of Shares in violation of the Aggregate Share Ownership
Limit: (i) then that number of Shares the Beneficial Ownership or Constructive
Ownership of which otherwise would cause such Person to violate the Aggregate
Share Ownership Limit, (rounded to the nearest whole Share) will be
automatically, without any further action on the part of any Person, deemed to
be transferred to a Charitable Trust for the benefit of a Charitable
Beneficiary, effective as of the close of business on the business day prior to
the date of such Transfer, and such Person shall acquire no rights in such
Shares; or (ii) if the Transfer to the Charitable Trust described above would
not be effective for any reason to prevent the violation of the Aggregate Share
Ownership Limit, then the Transfer of that number of Shares that otherwise
would cause any Person to violate the Aggregate Share Ownership Limit, shall be
void ab initio, and the intended transferee shall acquire no rights in such
Shares.
Upon any purported Transfer or other event that would result in a
Transfer of Shares to a Charitable Trust, such Shares will be deemed to have
been transferred to the trustee of a Charitable Trust for the exclusive benefit
of one or more Charitable Beneficiaries. Such Transfer to the trustee shall be
deemed to be effective as of the close of business on the business day prior to
the purported Transfer or other event that results in the Transfer to the
Charitable Trust. The trustee will be appointed by the Company and will be a
Person unaffiliated with the prohibited owner. Each Charitable Beneficiary
will be designated by the Company as provided below.
Shares held by a trustee of a Charitable Trust will be issued and
outstanding Shares of the Company. The prohibited owner will have no rights in
the Shares held by the trustee. The prohibited owner will not benefit
economically from ownership of any Shares held in the Charitable Trust by the
trustee, shall have no rights to dividends or other distributions and will not
possess any rights to vote or other rights attributable to the Shares held in
the Charitable Trust.
The trustee of the Charitable Trust will have all voting rights and
rights to dividends or other distributions with respect to Shares held in the
Charitable Trust, which rights will be exercised for the exclusive benefit of
the Charitable Beneficiary. Any dividend or other distribution paid prior to
the discovery by the Company that Shares have been transferred to the trustee
will be paid with respect to such Shares to the trustee upon demand and any
dividend or other distribution authorized but unpaid shall be paid when due to
the trustee. Any dividends or distributions so paid over to the trustee will
be held in trust for the benefit of the Charitable Beneficiary for distribution
at such times as may be determined by the trustee. The prohibited owner will
have no voting rights with respect to Shares held in the Charitable Trust and,
subject to Texas law, effective as of the date that Shares have been
transferred to the trustee, the trustee will have the authority (at the
trustee's sole discretion) (i) to rescind as void any vote cast by a prohibited
owner prior to the discovery by the Company that Shares have been transferred
to the trustee and (ii) to recast such vote in accordance with the desires of
the trustee acting for the benefit of the Charitable Beneficiary.
Within 20 days of receiving notice from the Company that Shares have
been Transferred to the Charitable Trust, the trustee of the Charitable Trust
will sell the Shares held in the Charitable Trust to a Person, designated by
the trustee, whose ownership of the Shares will not violate the Aggregate Share
Ownership Limit. Upon such sale, the interest of the Charitable Beneficiary in
the Shares sold will terminate and the trustee will distribute the net
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proceeds of the sale to the prohibited owner and to the Charitable Beneficiary.
The prohibited owner will receive the lesser of (i) the price paid by the
prohibited owner for the Shares or, if the prohibited owner did not give value
for the Shares in connection with the event causing the Shares to be held in
the Charitable Trust (e.g., in the case of a gift, devise or other such
transaction), the Market Price of the Shares on the day of the event causing
the Shares to be held in the Charitable Trust and (ii) the price per Share (net
of costs of sales) received by the trustee from the sale or other disposition
of the Shares held in the Charitable Trust. Any net sales proceeds in excess
of the amount payable to the prohibited owner shall be immediately paid to the
Charitable Beneficiary. If, prior to the discovery by the Company that Shares
have been Transferred to the trustee, such Shares are sold by a prohibited
owner, then (i) such Shares will be deemed to have been sold on behalf of the
Charitable Trust and (ii) to the extent that the prohibited owner received an
amount for such Shares that exceeds the amount that such prohibited owner was
entitled to receive, such excess shall be paid to the Trustee upon demand.
Shares Transferred to the trustee will be deemed to have been offered
for sale to the Company, or its designee, at a price per Share equal to the
lesser of (i) the price per Share in the transaction that resulted in such
Transfer to the Charitable Trust (or, in the case of a devise or gift, the
Market Price at the time of such devise or gift) and (ii) the Market Price on
the date the Company, or its designee, accepts such offer. The Company will
have the right to accept such offer until the Trustee has sold the Shares held
in the Charitable Trust. Upon such a sale to the Company, the interest of the
Charitable Beneficiary in the Shares sold will terminate and the Trustee will
distribute all net sales proceeds of the sale to the prohibited owner.
By written notice to the Trustee, the Company will designate one or
more nonprofit organizations to be the Charitable Beneficiary of the interest
in the Charitable Trust such that (i) Shares held in the Charitable Trust would
not violate the Aggregate Share Ownership Limit in the hands of such Charitable
Beneficiary and (ii) each such organization must fit within the definition of a
Charitable Beneficiary set forth in the Declaration of Trust.
All certificates representing Common Shares will bear a legend
referring to the restrictions described above.
Any Person who acquires or attempts or intends to acquire Beneficial
Ownership or Constructive Ownership of Shares that will or may violate or any
Person who would have owned Shares that resulted in a transfer to the
Charitable Trust, must immediately give written notice to the Company of such
event, or in the case of such a proposed or attempted transaction, give at
least 15 days prior written notice, and must provide to the Company such other
information as the Company may request in order to determine the effect, if
any, of such Transfer on the Company's status as a REIT.
The Aggregate Share Ownership Limit may have the effect of precluding
acquisition of control of the Company unless the Board of Trust Managers
determines that maintenance of REIT status is no longer in the best interest of
the Company. See "Certain Provisions of Texas Law and of the Declaration of
Trust and Bylaws."
AMRESCO has agreed not to offer, sell, offer to sell, contract to sell,
pledge, grant any option to purchase or otherwise sell or dispose of the Common
Shares acquired by it pursuant to the Private Placement for a period of two
years from the closing of this Offering without the prior written consent of
Prudential Securities Incorporated, on behalf of the Underwriters, so long as
the Manager or another member of the AMRESCO Group continues to serve as manager
of the Company during such period. In addition, the Trust Managers and
executive officers of the Company have each agreed for a period of 180 days from
the closing of this Offering, not to offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose of (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of any
option to purchase or other sale or disposition) Common Shares or any
securities convertible into or exchangeable or exercisable therefor to any
unaffiliated third party without the prior written consent of Prudential
Securities Incorporated on behalf of the Underwriters. See "Shares Available
for Future Sale."
DIVIDEND REINVESTMENT AND SHARE PURCHASE PLAN
The Company intends to implement a dividend reinvestment and share
purchase plan whereby shareholders may automatically reinvest their dividends
and make additional cash purchases of the Common Shares. The details
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of such plan will be sent to the Company's shareholders following the adoption
thereof by the Board of Trust Managers.
CERTAIN PROVISIONS OF TEXAS LAW AND
OF THE DECLARATION OF TRUST AND BYLAWS
The following paragraphs summarize certain provisions of Texas law and
the Declaration of Trust and Bylaws. The summary does not purport to be
complete and reference is made to Texas law and the Declaration of Trust and
Bylaws for complete information. Copies of the Declaration of Trust and Bylaws
have been filed with the Commission as exhibits to the Registration Statement
of which this Prospectus is a part.
Certain provisions of the Declaration of Trust and Bylaws could
discourage potential acquisition proposals and could delay or prevent a change
in control of the Company. These provisions are intended to enhance the
likelihood of continuity and stability in the composition of the Board of Trust
Managers and in the policies formulated by the Board of Trust Managers and to
discourage certain types of transactions that may involve an actual or
threatened change in control of the Company. These provisions are designed to
reduce the vulnerability of the Company to an unsolicited acquisition proposal
and to discourage certain tactics that may be used in proxy fights. However,
such provisions might discourage third parties from making tender offers for
the Shares. As a result, the Market Price of the Shares might not benefit from
any premium which might occur in anticipation of a threatened or actual change
in control. Such provisions also might have the effect of preventing changes in
the management of the Company.
BOARD OF TRUST MANAGERS
The Bylaws provide that the number of Trust Managers cannot be fewer
than two nor more than nine. Upon the closing of this Offering, the Board of
Trust Managers will consist of seven members. Trust Managers will hold office
until their successors are duly elected and qualified or until their death,
resignation or removal. Under the Texas REIT Act, the Trust Managers must be
natural Persons but do not need to be residents of Texas or shareholders of the
real estate investment trust unless the declaration of trust or bylaws of such
real estate investment trust so require. The Declaration of Trust and Bylaws
do not require that Trust Managers be residents of Texas or shareholders of the
Company.
REMOVAL OF TRUST MANAGERS
The Declaration of Trust and the Bylaws provide that a Trust Manager
may be removed at any time with or without cause by the vote of holders of
Shares representing two-thirds of the total votes authorized to be cast by
Shares then outstanding and entitled to vote thereon. Upon the resignation or
removal of any Trust Manager, or his otherwise ceasing to be a Trust Manager,
he must execute and deliver such documents as the remaining Trust Managers may
require for the conveyance of any Company property held in his name, must
account to the remaining Trust Managers as they require for all property which
he holds as Trust Manager and will thereupon be discharged as Trust Manager.
Upon the incapacity or death of any Trust Manager, his legal representative
must perform the acts set forth in the preceding sentence and the discharge
mentioned therein will run to such legal representative and to the
incapacitated Trust Manager or the estate of the deceased Trust Manager, as the
case may be.
STAGGERED BOARD
The Declaration of Trust provides that immediately after the closing
of this Offering, the Board of Trust Managers will be divided into three
classes, each class to consist as nearly as possible of one-third of the Trust
Managers. The term of office of one class of Trust Managers will expire each
year. The initial term of office of the Class I, Class II and Class III Trust
Managers will expire at the 1999, 2000 and 2001 annual meeting of shareholders,
respectively. Commencing with the 1998 annual meeting of shareholders, the
Trust Managers of the class elected at each annual meeting of shareholders will
hold office for a term of three years.
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The staggered board provision could have the effect of making the
removal of incumbent Trust Managers more time-consuming and difficult, which
could discourage a third party from making a tender offer or otherwise
attempting to obtain control of the Company, even though such an attempt might
be beneficial to the Company and its shareholders. At least two annual
meetings of shareholders, instead of one, will generally be required to effect
a change in a majority of the Board of Trust Managers. Thus, the staggered
board provision could increase the likelihood that incumbent Trust Managers
will retain their positions.
Further, holders of Common Shares have no right to cumulative voting
for the election of Trust Managers. Consequently, at each annual meeting of
shareholders, the holders of a majority of the outstanding Shares will be able
to elect all of the successors of the class of Trust Managers whose term
expires at the meeting.
BUSINESS COMBINATIONS
The Declaration of Trust requires that, except in certain
circumstances, a Business Combination (as defined below) between the Company
and a Related Person (as defined below) must be approved by the affirmative
vote of the holders of 80% of the outstanding Shares, including the vote of the
holders of not less than 50% of the Shares not owned by the Related Person.
The Declaration of Trust provides that a "Business Combination" is:
(i) any merger or consolidation, if and to the extent permitted by law, of the
Company or a subsidiary with or into a Related Person; (ii) any sale, lease,
exchange, mortgage, pledge, transfer or other disposition, of all or any
Substantial Part (as defined in the Declaration of Trust) of the total assets
of the Company as of the end of the last fiscal year, to or with a Related
Person; (iii) the issuance or transfer by the Company or a subsidiary (other
than by way of a pro rata dividend to all shareholders) of any securities of
the Company or a subsidiary to a Related Person; (iv) any reclassification of
securities (including a reverse share split) or recapitalization by the Company
that would increase the voting power of the Related Person; or (v) the adoption
of any plan or proposal for the liquidation or dissolution of the Company
proposed by or on behalf of a Related Person which involves any transfer of
assets or any other transaction in which the Related Person has any direct or
indirect interest (except proportionately as a shareholder); (vi) any series or
combination of transactions having, directly or indirectly, substantially the
same effect as the foregoing; and (vii) any agreement, contract or other
arrangement providing, directly or indirectly, for any of the foregoing.
A "Related Person" generally is defined in the Declaration of Trust to
include any individual, corporation, partnership or other Person and the
affiliates and associates of any such individual, corporation, partnership or
other Person which individually or together is the Beneficial Owner in the
aggregate of more than 50% of the Shares of the Company.
The 50% voting requirement referred to above will not be applicable if
the Business Combination is approved by the affirmative vote of holders of not
less than 90% of the outstanding Shares. Neither the 80% nor the 50% voting
requirements outlined above will apply if: (i) the Board of Trust Managers by a
vote of not less than 80% of the Trust Managers then holding office (a) have
expressly approved in advance the acquisition of Shares that caused the Related
Person to become a Related Person or (b) have expressly approved the Business
Combination prior to the date on which the Related Person involved in the
Business Combination became a Related Person; or (ii) the Business Combination
is solely between the Company and a corporation, 100% of the voting shares of
which is owned directly or indirectly by the Company; or (iii) the Business
Combination is proposed to be consummated within one year of the closing of a
Fair Tender Offer (as defined in the Declaration of Trust) by the Related
Person in which Business Combination the cash or the Fair Market Value (as
defined in the Declaration of Trust) of the property, securities or other
consideration to be received per Share by all remaining holders of Shares in
the Business Combination is not less than the price offered in the Fair Tender
Offer; or (iv) the Rights (as defined below) have become exercisable; or (v)
all of the following conditions have been met: (a) the Business Combination is
a merger or consolidation, closing of which is proposed to take place within
one year of the date of the transaction pursuant to which such Person became a
Related Person and the cash or Fair Market Value of the property, securities or
other consideration to be received per Share by all remaining holders of Shares
in the Business Combination is not less
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than the highest per Share price paid by the Related Person in acquiring any of
its holdings of Shares, determined as of the date of closing of such Business
Combination (a "Fair Price"); (b) the consideration to be received by such
holders is either cash or, if the Related Person has acquired the majority of
its holdings of Shares for a form of consideration other than cash, in the same
form of consideration with which the Related Person acquired such majority; (c)
after such Person has become a Related Person and prior to closing of such
Business Combination; (1) except as approved by a majority of the Independent
Trust Managers continuing in office, there has been no reduction in the annual
rate of dividends, if any, paid per Share on the Shares except any reduction
proportionate with any decline in the Company's net income, and (2) such
Related Person has not received the benefit, directly or indirectly, of any
loans, advances, guarantees, pledges or other financial assistance or any tax
credits or other tax advantages provided by the Company prior to the closing of
such Business Combination (other than in connection with financing a Fair
Tender Offer); and (d) a proxy statement that conforms in all respects with the
provisions of the Exchange Act is mailed to shareholders of the Company at
least 30 days prior to the closing of the Business Combination for the purpose
of soliciting shareholder approval of the Business Combination.
If a Person has become a Related Person and within one year after the
date (the "Acquisition Date") of the transaction pursuant to which the Related
Person became a Related Person (i) a Business Combination meeting all of the
requirements of clause (v) above regarding the applicability of the 80% voting
requirement has not been consummated and (ii) a Fair Tender Offer has not been
consummated and (iii) the Company has not been dissolved and liquidated, then,
in such event, the Beneficial Owner of each Share (not including Shares
beneficially owned by the Related Person) will have the right (individually a
"Right" and collectively the "Rights"), which may be exercised, subject to
certain conditions, commencing at the opening of business on the one-year
anniversary date of the Acquisition Date and continuing for a period of 90 days
thereafter (the "Exercise Period"), to sell to the Company one Share upon
exercise of such Right. At 5:00 p.m., Dallas, Texas time, on the last day of
the Exercise Period, each Right not exercised will become void, and, except as
otherwise provided in the Declaration of Trust, the certificates representing
Shares beneficially owned by a Beneficial Owner will no longer represent
Rights. The purchase price for a Share upon exercise of an accompanying Right
generally will be equal to the then-applicable Fair Price paid by the Related
Person pursuant to the exercise of the Right relating thereto.
The fair price provision is designed to prevent a purchaser from
utilizing two-tier pricing and similar tactics in an attempted takeover of the
Company, and it may have the overall effect of making it more difficult to
acquire and exercise control of the Company. The fair price provision may
provide the Trust Managers with enhanced ability to block any proposed
acquisition of the Company and to retain their positions in the event of a
takeover bid, even if their continued service for the Company would not be in
the best interest of the Company. In certain situations, the fair price
provision may require a Related Person to pay a higher price for the Shares or
structure the transaction differently than would be the case in the absence of
the fair price provision.
AMENDMENT TO THE DECLARATION OF TRUST
The Texas REIT Act and the Declaration of Trust require the
affirmative vote of the holders of at least two-thirds of the outstanding
Shares entitled to vote on the proposed amendment in order to amend the
Declaration of Trust, unless any class or series of Shares is entitled to vote
on the amendment as a class, in which case the amendment must be adopted on
receiving the affirmative vote of the holders of at least two-thirds of the
Shares within each series of outstanding Shares entitled to vote as a class and
of at least two-thirds of the total outstanding Shares entitled to vote on the
amendment, except that (i) the provision relating to the approval of Business
Combinations; (ii) the provision relating to the Aggregate Share Ownership
Limit; and (iii) the provision relating to the amendment of the Declaration of
Trust may not be amended or repealed, except by the affirmative vote of the
holders of at least 80% of the outstanding Shares.
AMENDMENT OF BYLAWS
Except as otherwise provided by applicable law or the Declaration of
Trust, the power to alter, amend or repeal the Bylaws or to adopt new Bylaws
will be vested in the Trust Managers and (to the extent not inconsistent
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with the Texas REIT Act and the Declaration of Trust and specified in the
notice of the meeting) the shareholders. Such action to amend the Bylaws may
be taken (i) with respect to all Bylaw provisions, by the affirmative vote of a
majority of the Trust Managers, or (ii)(a) with respect to the provisions
relating to the meetings of the shareholders, the provisions relating to the
Trust Managers, or the provision relating to the amendment of the Bylaws, by
the affirmative vote of the holders of two-thirds of the Shares entitled to
vote on the matter, or (b) with respect to all other Bylaws, by the affirmative
vote of the holders of a majority of the outstanding Shares entitled to vote on
the matter.
TERMINATION OF THE COMPANY
The Texas REIT Act and the Declaration of Trust provide that, subject
to the provisions of any class or series of Shares at the time outstanding, the
Company may be terminated at any meeting of the shareholders, by the
affirmative vote of two-thirds of all votes entitled to be cast on the matter.
SPECIAL MEETINGS OF THE SHAREHOLDERS
Under the Bylaws, special meetings of the shareholders may be called
by shareholders only if such shareholders hold outstanding Shares representing
at least 10% of all votes entitled to be cast on any issue proposed to be
considered at any such special meeting.
ADVANCE NOTICE OF TRUST MANAGER NOMINATIONS AND NEW BUSINESS
The Bylaws provide that (a) with respect to an annual meeting of
shareholders, nominations of Persons for election to the Board of Trust
Managers and the proposal of business to be considered by shareholders may be
made only (1) pursuant to the Company's notice of the meeting, (2) by the Board
of Trust Managers or, (3) 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, only the
business specified in the Company's notice of meeting may be brought before the
meeting of shareholders and nominations of Persons for election to the Board of
Trust Managers or (c) provided that the Board of Trust Managers has determined
that Trust Managers 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.
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF TEXAS LAW AND OF THE
DECLARATION OF TRUST AND BYLAWS
The business combination provisions and the staggered board provisions
of the Declaration of Trust 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 Shares or
otherwise be in their best interest.
TRANSFER AGENT AND REGISTRAR
The Company intends to appoint The Bank of New York as its transfer
agent and registrar for the Common Shares.
REPORTS TO SHAREHOLDERS
As stated in the Bylaws, the Company will furnish its shareholders
with annual reports containing audited financial statements and such other
periodic reports as it may determine to furnish or as may be required by law.
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SHARES AVAILABLE FOR FUTURE SALE
Upon completion of this Offering and the Private Placement, the
Company will have 16,675,100 Common Shares issued and outstanding (19,175,100
if the Underwriters' over-allotment option is exercised in full). After the
effective date of this Registration Statement, the Company intends that all of
the Common Shares issued in this Offering will be freely tradeable without
registration or other restrictions under the Securities Act, except for any
Common Shares purchased by an Affiliate of the Company.
The 1,675,000 (1,925,000 if the Underwriters' over-allotment option is
exercised in full) Common Shares sold in the Private Placement will be
"restricted securities" for purposes of Rule 144 under the Securities Act. See
"Private Placement." However, upon the demand of AMRESCO, the Company will
file and seek to have declared effective a resale registration statement
covering the sale of such shares in the public market. See "Description of
Shares of Beneficial Interest--Registration Rights" and "Private Placement."
Following expiration of the lock-up restrictions described in "Underwriting,"
assuming such resale registration statement is filed and declared effective,
these shares will be available for sale in the public market. If such resale
registration statement is not filed and declared effective, these shares will
be available for sale, following expiration of the lock-up restrictions
discussed in "Underwriting," pursuant to Rule 144 including the manner of sale
and volume limitations thereof. See "Private Placement."
In addition, the Company anticipates that it will file a registration
statement during 1998 with respect to the 2,501,265 Common Shares issuable
under the Share Option Plan and any Common Shares which may be issued in
connection with other incentive compensation arrangements thereby allowing such
shares to be transferred or resold without restriction under the Securities
Act (subject to the restrictions on transfer agreed to by the Company, Trust
Managers and executive officers of the Company, as described above). See
"Management of the Company--Share Option Plan" and "Management of the
Company--Share Options Outstanding."
In general, under Rule 144 under the Securities Act, as currently in
effect, as soon as one year has elapsed from the date of the closing of this
Offering any Affiliate of the Company purchasing shares in this Offering or in
the Private Placement will be entitled to sell a limited number of such shares
within any three-month period, 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 any
Common Shares which are Restricted Securities (as defined in Rule 144 under the
Securities Act) 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 90 days preceding a sale, such Person
would be entitled to sell such Common 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.
In addition, Rule 144A under the Securities Act, as currently in
effect, generally permits unlimited resales of certain Restricted Securities of
any issuer provided that the purchaser is an institution that owns or invests
on a discretionary basis at least $100 million in securities or is a registered
broker-dealer that owns and invests on a discretionary basis at least $10
million in securities. Rule 144A allows the existing shareholders of the
Company to sell their Common Shares which are Restricted Securities to such
institutions and registered broker-dealers without regard to any volume or
other restrictions. Unlike Rule 144, Restricted Securities sold under Rule 144A
to non- affiliates do not lose their status as Restricted Securities.
Notwithstanding the foregoing, AMRESCO has agreed not to offer, sell,
offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose of (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant any option to purchase or other sale or
disposition) any the Common Shares acquired by it pursuant to the Private
Placement for a period of two years from the closing of this Offering without
the prior written consent of Prudential Securities Incorporated, so long as the
Manager or another member of the AMRESCO Group continues to serve as manager of
the Company during such period. The Trust Managers and executive officers of
the Company have also agreed for a period of 180 days from the closing of this
Offering, not to offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise dispose of or transfer their Common Shares or
any securities convertible into or exchangeable or exercisable therefor to any
unaffiliated third party without the prior written consent of Prudential
Securities Incorporated, on behalf of the Underwriters.
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UNDERWRITING
The underwriters named below (the "Underwriters") for whom Prudential
Securities Incorporated, Credit Suisse First Boston, J.C. Bradford & Co.,
NationsBanc Montgomery Securities LLC and Piper Jaffray Inc. are acting as
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions contained in the underwriting agreement (the "Underwriting
Agreement"), to purchase from the Company the number of Common Shares set forth
below opposite their respective names:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
- ----------- ---------
<S> <C>
Prudential Securities Incorporated . . . . . .
Credit Suisse First Boston . . . . . . . . . .
J.C. Bradford & Co. . . . . . . . . . . . . . .
NationsBanc Montgomery Securities LLC . . . . .
Piper Jaffray Inc.. . . . . . . . . . . . . . .
----------
Total 15,000,000
==========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the Company
is obligated to sell, and the Underwriters are obligated to purchase, all of the
Common Shares offered hereby, if any are purchased.
The Underwriters, through the Representatives, have advised the Company
that they propose to offer the Common Shares initially at the public offering
price set forth on the cover page of this Prospectus; that the Underwriters may
allow to selected dealers a concession of $________ per Common Share; and that
such dealers may reallow a concession of $________ per Common Share to certain
other dealers. After the initial public offering, the public offering price and
the concessions may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 2,250,000 additional
Common Shares at the initial public offering price, less underwriting discounts
and commissions, as set forth on the cover page of this Prospectus. The
Underwriters may exercise such option solely for the purpose of covering
over-allotments incurred in the sale of the Common Shares offered hereby. To
the extent such option is exercised, each Underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage of
such additional shares as the number set forth next to such Underwriter's name
in the preceding table.
The Company and the Trust Managers and executive officers of the Company
have agreed not to offer, sell, offer to sell, contract to sell, pledge, grant
any option to purchase or otherwise sell or dispose of (or announce any offer,
sale, offer of sale, contract of sale, pledge, grant of any option to purchase
or other sale or disposition of) any Common Shares, or any securities
convertible into, or exchangeable or exercisable therefor, for a period of 180
days after the closing of this Offering, without the prior written consent of
Prudential Securities Incorporated on behalf of the Underwriters, except that
during such period, Common Shares may be issued upon the exercise of outstanding
Share Options and the Company may issue Share Options which are exercisable
after the 180th day after the closing of this Offering. Prudential Securities
Incorporated may, in its sole discretion, at any time and without notice,
release all or any portion of the Common Shares subject to such lock-up
agreements.
At the request of the Company, the Underwriters have reserved up to 5% of
the Common Shares offered hereby for sale at the initial public offering price
to Trust Managers, directors, officers and employees of the Company and members
of the AMRESCO Group. The number of Common Shares 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. To the extent any such shares are purchased by Trust Managers or
officers of the Company, they will be subject to the lock-up restrictions
described above.
Pursuant to the Private Placement, AMRESCO will purchase 1,675,000
(1,925,000 if the Underwriters' over-allotment option in this Offering is
separately exercised in full) Common Shares at a price equal to the initial
public offering price. See
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"Private Placement." As a result of this purchase, the AMRESCO Group will own
approximately 10% of the total Common Shares outstanding after the closing of
this Offering. AMRESCO has agreed not to offer, sell, offer to sell, contract
to sell, pledge, grant any option to purchase or otherwise sell or dispose of
(or announce any offer, sale, offer of sale, contract of sale, pledge, grant of
any option to purchase or other sale or disposition of) such Common Shares for
a period of two years from the closing of this Offering without the prior
written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, so long as the Manager or another member of the AMRESCO Group
continues to serve as manager of the Company during such period. In addition,
the Manager will receive options to purchase Common Shares pursuant to the
Company's Share Option Plan. See "Management of the Company--Share Options."
The Company and AMRESCO have agreed to indemnify the several
Underwriters against and contribute to losses arising out of certain
liabilities, including liabilities under the Securities Act.
The Representatives have informed the Company that the Underwriters do
not intend to confirm sales to any accounts over which they exercise
discretionary authority.
Prior to this Offering, there has been no public market for the Common
Shares. Consequently, the initial public offering price will be determined
through negotiations between the Company and the Representatives. Among the
factors to be considered in making such determination will be prevailing market
conditions, the Company's prospects and prospects for the industry in general,
the management of the Company and the market prices of securities for companies
in businesses similar to that of the Company.
In connection with this Offering, certain Underwriters (if any) and
selling group members, and their respective affiliates may engage in
transactions that stabilize, maintain or otherwise affect the market price of
the Common Shares. Such transactions may include stabilization transactions
effected in accordance with Rule 104 of Regulation M, pursuant to which such
Persons may bid for or purchase Common Shares for the purpose of stabilizing
the market price. The Underwriters also may create a short position for the
account of the Underwriters by selling more Common Shares in connection with
this Offering than they are committed to purchase from the Company, and in such
case may purchase Common Shares in the open market following completion of this
Offering to cover all or a portion of such short position, up to 2,250,000
shares, by exercising the Underwriters' over-allotment option referred to
above. In addition, Prudential Securities Incorporated, on behalf of the
Underwriters, may impose "penalty bids" under contractual arrangements with the
Underwriters whereby it may reclaim from an Underwriter (or dealer
participating in this Offering) for the account of the other Underwriters, the
selling concession with respect to the Common Shares that are distributed in
this Offering but subsequently purchased for the account of the Underwriters in
the open market. Any of the transactions described in this paragraph may
result in the maintenance of the price of the Common Shares at a level above
that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if any is
undertaken, it may be discontinued at any time.
PRIVATE PLACEMENT
The Company received a commitment from AMRESCO prior to the filing of
the Registration Statement of which this Prospectus is a part for the purchase,
in a private placement (the "Private Placement"), of up to 1,925,000 Common
Shares at the initial public offering price. AMRESCO will purchase 1,675,000
of such Common Shares simultaneously with the closing of this Offering. No
underwriting discounts or commissions will be paid on Common Shares purchased
in the Private Placement. Consummation of the Private Placement is contingent
only upon the closing of this Offering. Upon closing of the sale of any Common
Shares sold by the Company to the Underwriters pursuant to the Underwriters'
over-allotment option, AMRESCO will purchase a number of Common Shares, up to a
maximum of 250,000 Common Shares, equal to (i) the number of Common Shares
purchased by the Underwriters pursuant to the over-allotment option, divided by
2,250,000, multiplied by (ii) 250,000. Consummation of such purchase is
contingent only upon the closing of the sale of the shares purchased by the
Underwriters pursuant to the over-allotment option. The Common Shares sold in
the Private Placement will be sold without registration under the Securities
Act, in reliance on the exemption provided by Section 4(2) thereof.
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The Company has agreed that, upon the demand of AMRESCO, it will file
and use its best efforts to have declared effective a resale registration
statement covering the sale of the Common Shares purchased in the Private
Placement. These shares will be subject to certain lock-up restrictions as
described in "Underwriting" but will be available for public sale following
expiration of such restrictions.
LEGAL MATTERS
The validity of the Common Shares offered hereby will be passed upon
for the Company by Winstead Sechrest & Minick P.C., and certain legal matters
will be passed upon for the Underwriters by O'Melveny & Myers LLP, San
Francisco, California. In addition, the description of federal income tax
consequences contained in this Prospectus entitled "Federal Income Tax
Consequences" is based upon the opinion of Winstead Sechrest & Minick P.C.
EXPERTS
The balance sheet of AMRESCO Capital Trust included in this Prospectus
has been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing herein, and is included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
Copies of the Registration Statement of which this Prospectus forms a
part and the exhibits thereto are on file at the offices of the Securities and
Exchange Commission (the "Commission") in Washington, D.C., and may be obtained
at rates prescribed by the Commission upon request to the Commission and
inspected, without charge, at the offices of the Commission. The Company will
be subject to the informational requirements of the Exchange Act, and in
accordance therewith, will periodically file reports and other information with
the Commission. Such reports and other information can be inspected and copied
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at Seven World Trade Center, 13th Floor, New York, New York 10048, and
at 500 West Madison Street, Chicago, Illinois 60661. Copies of such material
can also be obtained from the Commission at prescribed rates through its Public
Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. The Commission maintains a Website that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The
address of the site is http://www.sec.gov.
The Company intends to furnish the holders of Common Shares with
annual reports containing financial statements audited by its independent
certified public accountants and with quarterly reports containing unaudited
financial statements for each of the first three quarters of each year.
GLOSSARY
There follows an abbreviated definition of certain terms used in this
Prospectus. Whenever used in this Prospectus, the following terms shall have
the meanings set forth below, unless the context indicates otherwise. The
singular shall include the plural and the masculine gender shall include the
feminine, and vice versa, as the context requires. In addition, the term
"Person" and its pronouns "he," "she," "him," and "her" as used in this
Prospectus shall include natural Persons of the masculine and feminine gender
and entities, including, without limitation, corporations, partnerships,
limited liability companies and trusts, unless the context indicates otherwise.
"75% of Assets Test" means the asset-based test requiring that on the
last day of each calendar quarter at least 75% of the Company's assets must
consist of Qualified REIT Real Estate Assets, government securities, cash
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and cash items, as described in "Federal Income Tax Consequences--Requirements
for Qualification as a REIT--Asset Tests."
"75% Gross Income Test" means the income-based test that the Company
must meet to qualify as a REIT described in "Federal Income Tax
Consequences--Requirements for Qualification--Income Tests."
"95% Gross Income Test" means the income-based test that the Company
must meet to qualify as a REIT described in "Federal Income Tax
Consequences--Requirements for Qualification--Income Tests."
"1997 Tax Act" means The Taxpayer Relief Act of 1997.
"ADA" means the Americans with Disabilities Act of 1990, as amended.
"Affiliates" means, when used with reference to a specified Person,
(i) any Person that directly or indirectly controls or is controlled by or is
under common control with the specified Person, (ii) any Person that is an
officer of, partner in or trustee of, or serves in a similar capacity with
respect to, the specified Person or of which the specified Person is an
officer, partner or trustee, or with respect to which the specified Person
serves in a similar capacity, and (iii) any Person that, directly or
indirectly, is the beneficial owner of 5% or more of any class of equity
securities of the specified Person or of which the specified Person is directly
or indirectly the owner of 5% or more of any class of equity securities;
provided, however, that the Company will not be treated as an Affiliate of the
Manager and its Affiliates.
"Agency Certificates" means GNMA Certificates, FNMA Certificates and
FHLMC Certificates.
"Aggregate Share Ownership Limit" means not more than 9.8% in value of
the aggregate of the outstanding Shares. The value of the outstanding Shares
shall be determined by the Board of Trust Managers in good faith, which
determination shall be conclusive for all purposes.
"AMCT" means AMRESCO Capital Trust, a Texas real estate investment
trust.
"AMRESCO" means AMRESCO, INC., a Delaware corporation.
"AMRESCO Capital" means AMRESCO Capital, L.P., a subsidiary of
AMRESCO.
"AMRESCO Group" means AMRESCO, together with its affiliated entities.
"AMRESCO Services" means AMRESCO Services, L.P., a subsidiary of
AMRESCO.
"Asset Portfolio" means a pool or portfolio of performing,
nonperforming or underperforming commercial, industrial, agricultural and/or
real estate loans.
"Beneficial Ownership" means ownership of Shares by a Person, whether
the interest in Shares is held directly or indirectly, and shall include
interests that would be treated as owned 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 the
correlative meanings.
"Board of Trust Managers" means the Board of Trust Managers of AMCT.
"Bridge Loan" means a Mortgage Loan used for temporary financing.
"Bylaws" means the Bylaws of AMCT.
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"Charitable Beneficiary" means one or more beneficiaries of the
Charitable Trust, provided that each such organization must be described in
Section 501(c)(3) of the Code and contributions to each such organization must
be eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of
the Code.
"Charitable Trust" means a trust that is the transferee of that number
of Common Shares the Beneficial Ownership or Constructive Ownership of which
otherwise would cause a Person to acquire or hold, directly or indirectly,
Common Shares in an amount that violates the Declaration of Trust, which trust
shall be for the exclusive benefit of one or more Charitable Beneficiaries.
"CMBS" means commercial or multifamily MBS.
"CMO Residuals" means Mortgage Derivative Securities issued by
agencies of the U.S. government or by private originators of, or investors in,
Mortgage Loans, including savings and loan associations, mortgage banks,
commercial banks, investment banks and special purpose subsidiaries of the
foregoing.
"CMOs" means debt obligations (bonds) that are collateralized by
Mortgage Loans or mortgage certificates other than Mortgage Derivative
Securities and Subordinated Interests. CMOs are structured so that principal
and interest payments received on the collateral are sufficient to make
principal and interest payments on the bonds. Such bonds may be issued by
United States government agencies or private issuers in one or more classes
with fixed or variable interest rates, maturities and degrees of subordination
that are characteristics designed for the investment objectives of different
bond purchasers.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Share Ownership Limit" means not more than 9.8% (in value or
in number of Shares, whichever is more restrictive) of the aggregate of the
outstanding Common Shares. The number and value of outstanding Common Shares
shall be determined by the Board of Trust Managers in good faith, which
determination shall be conclusive for all purposes.
"Common Shares" means AMCT's common shares of beneficial interest,
$.01 par value per share.
"Company" means either (i) AMCT, or (ii) AMCT collectively with its
affiliated entities (which does not include the Manager or any other member of
the AMRESCO Group), as the context may require.
"Construction Loan" means a Mortgage Loan the proceeds of which are to
be used to finance the costs of construction or rehabilitation of real
property.
"Constructive Ownership" means ownership of Shares by a Person,
whether the interest in Shares is held directly or indirectly, and shall
include interests that would be treated as owned through the application of
Section 318(a) of the Code, as modified by Section 856(d)(5) of the Code.
Constructive Ownership shall include ownership of convertible securities, which
are any securities of AMCT that are convertible into Shares. The terms
"Constructive Owner," "Constructively Owns" and "Constructively Owned" shall
have the correlative meanings.
"Correspondent Agreement" means the nonexclusive correspondent
agreement between Holliday Fenoglio Fowler and the Company.
"Credit Facility" means the secured credit facility to be entered into
by the Company and ______________.
"Declaration of Trust" means the Amended and Restated Declaration of
Trust of AMCT.
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"Distressed Mortgage Loans" means Subperforming Mortgage Loans and
Nonperforming Mortgage Loans.
"Distressed Real Estate" means REO Properties and other
underperforming or otherwise distressed real estate.
"Duff and Phelps" means Duff & Phelps Credit Rating Co.
"Excepted Holder" means a shareholder of the Company for whom an
Excepted Holder Limit is created by the Board of Trust Managers.
"Excepted Holder Limit" means, provided that the affected Excepted
Holder agrees to comply with the requirements established by the Board of Trust
Managers, the percentage limit established by the Board of Trust Managers.
"Excess Inclusion" has the meaning specified in Section 860E(c) of the
Code.
"Excess Shares" means the number of shares of beneficial interest in
the Company held by any Person or group of Persons in excess of 9.8% of the
outstanding shares.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fannie Mae" means the federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act (12 U.S.C., (S)1716 et seq.), formerly known as the
Federal National Mortgage Association.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"Fitch" means Fitch IBCA, Inc.
"Foreclosure Property" means real estate acquired at or in lieu of
foreclosure of the mortgage secured by such real estate or as a result of a
default under a lease of such real estate.
"Funds From Operations" or "FFO" means net income (computed in
accordance with GAAP) excluding gains or losses from debt restructuring and
sales of property, plus depreciation and amortization on real estate assets and
after adjustments for unconsolidated partnerships and joint ventures.
"GAAP" means generally accepted accounting principles.
"GNMA" means the Government National Mortgage Association.
"Guidelines" means general guidelines for the Company's investments,
borrowings and operations.
"Holliday Fenoglio Fowler" means Holliday Fenoglio Fowler, L.P., a
subsidiary of AMRESCO.
"Independent Trust Managers" means those members of the Board of Trust
Managers that are not affiliated, directly, or indirectly, with the Manager or
AMRESCO, whether by ownership of, ownership interest in, employment by, any
material business or professional relationship with, or serving as an officer
or Trust Manager of the Manager or AMRESCO or an Affiliated business entity of
the Manager or AMRESCO.
"Initial Assets" means those Mortgage Loans identified by the Company
which the Company intends to originate or acquire with a portion of the net
proceeds of this Offering.
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"Invested Portfolio" means, as of any given date, the portfolio of
real estate related assets in which the Company has invested as of such date.
"Investment Company Act" means the Investment Company Act of 1940, as
amended.
"Investment Grade Rating" means a rating at least equal to "BBB-" by
Standard & Poor's, "Baa3" by Moody's, "2" by NAIC, "BBB-" by Duff and Phelps or
"BBB-" by Fitch.
"IO" means MBS representing the right to receive interest only or a
disproportionately large amount of interest in relation to principal payments.
"IRS" means the Internal Revenue Service.
"ISO" means the qualified incentive share options.
"LIBOR" means the London InterBank Offering Rate in effect from time
to time.
"Loan to Value Ratios" means the percentage obtained by dividing the
principal amount of a Mortgage Loan by the appraised value of the mortgaged
property when the Mortgage Loan is originated.
"Management Agreement" means the agreement by and between the Company
and the Manager whereby the Manager agrees to perform certain services to the
Company in exchange for certain compensation.
"Manager" means AMREIT Managers, L.P., a Delaware limited partnership,
a subsidiary of AMRESCO.
"Market Price" on any day means, with respect to a class or series of
outstanding Shares, the closing price for such shares on such date.
"Master Servicer" means an entity acceptable to the Rating Agencies
that regularly engages in the business of Master Servicing.
"Master Servicing" means providing administrative and reporting
services to securitized pools of MBS.
"MBS" means mortgage-backed securities (including CMBS and RMBS).
"Mezzanine Loan" means a commercial real estate loan the repayment of
which is subordinated to a senior Mortgage Loan and which is secured either by
a second lien mortgage or a pledge of the ownership interests of the borrower.
Such loans can also take the form of a preferred equity investment in the
borrower.
"Moody's" means Moody's Investors Service, Inc.
"Mortgage Collateral" means mortgage pass-through securities or pools
of whole loans securing or backing a series of CMBS.
"Mortgage Derivative Securities" means mortgage securities that
provide for the holder to receive interest only, principal only, or interest
and principal in amounts that are disproportionate to those payable on the
underlying Mortgage Loans and may include other derivative instruments.
"Mortgage Loans" means, collectively, loans secured by real property
and Mezzanine Loans.
"NAIC" means the National Association of Insurance Commissioners.
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"NAREIT" means the National Association of Real Estate Investment
Trusts, Inc.
"Nasdaq" means the Nasdaq National Market.
"Net Income" means the taxable income of the Company.
"Net Leased Real Estate" means real estate that is net leased on a
long-term basis (ten years or more) to tenants who are typically responsible
for paying a majority of the costs of owning, operating, and maintaining the
leased property during the term of the lease, in addition to the payment of a
monthly rent to the landlord for the use and occupancy of the premises.
"Non-Economic Residual Interest" means CMO Residuals that are required
to report taxable income or loss but receive no cash flow from the underlying
Mortgage Loans.
"Nonperforming Mortgage Loans" means Mortgage Loans for which the
payment of principal and/or interest is more than 90 days delinquent.
"Non-REMIC Residual Interest" means a class of MBS that is not
designated as the residual interest in one or more REMICS.
"Offering" means the offering of Common Shares hereby.
"OID" means original issue discount.
"Participating Loan" means a Mortgage Loan that entitles the lender to
the receipt of interest based on a percentage of the mortgaged property's
revenues or cash flow, and/or any gain on sale of the property which
Participating Loan may be a Mezzanine Loan, Construction Loan, Bridge Loan or
other Mortgage Loan.
"Pass-Through Certificates" means securities (or interests therein)
other than Mortgage Derivative Securities and Subordinate Interests evidencing
undivided ownership interests in a pool of Mortgage Loans, the holders of which
receive a "pass-through" of the principal and interest paid in connection with
the underlying Mortgage Loans in accordance with the holders' respective
undivided interests in the pool. Pass-Through Certificates include Agency
Certificates, as well as other certificates evidencing interests in loans
secured by single-family properties.
"Permanent Mortgage Loans" means long-term senior Mortgage Loans.
"Person" means an individual, corporation, partnership, estate, trust
(including a trust qualified under Sections 401(a) or 501(c)(17) of the Code),
a portion of a trust permanently set aside for or to be used exclusively for
the purposes described in Section 642(c) of the Code, association, private
foundation within the meaning of Section 509(a) of the Code, joint stock
company or other entity and also includes a group as that term is used for
purposes of Section 13(d)(3) of the Exchange Act.
"PO" means classes of MBS representing the right to receive principal
only or a disproportionate amount of principal.
"Preferred Shares" means AMCT's preferred shares of beneficial
interest, $.01 par value per share.
"Private Placement" means the consummation of the transactions
described herein under the caption "Private Placement."
"Prospectus" means this Prospectus of the Company dated ___________,
1998, as the same may be amended or supplemented from time to time.
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"PSCC" means Prudential Securities Credit Corporation, an Affiliate of
Prudential Securities Incorporated, one of the Underwriters.
"Qualified Hedges" means bona fide interest rate swap or cap
agreements entered into by the Company to hedge variable-rate indebtedness only
that the Company incurred to acquire or carry Qualified REIT Real Estate Assets
and any futures and options, or other investments (other than Qualified REIT
Real Estate Assets) made by the Company to hedge its mortgage assets or
borrowings that have been determined by a favorable opinion of counsel to
generate qualified income for purposes of the 95% source of income test
applicable to REITS.
"Qualified REIT Real Estate Assets" means Mortgage Loans, real
property and other assets of the type described in Section 856(c)(6)(B) of the
Code.
"Qualified REIT Subsidiary" means a corporation whose stock is
entirely owned by AMCT at all times during such corporation's existence.
"Rating Agencies" means, with respect to securities of U.S. issuers,
any nationally recognized statistical rating organization, such as Standard &
Poor's and Moody's, and, with respect to non-U.S. issuers, any of the foregoing
or any equivalent organization operating in the jurisdiction where the issuer's
principal operations are located.
"REIT" means a real estate investment trust, as defined under Section
856 of the Code.
"REIT Provisions of the Code" means Sections 856 through 860 of the
Code.
"REIT Taxable Income" means Taxable Income, computed without regard to
the dividends paid deduction or any net capital gain.
"REMIC" means a real estate mortgage investment conduit.
"REMIC Residual Interest" means a class of MBS that is designated as
the residual interest in one or more REMICS.
"REO Property" means real estate acquired at foreclosure (or by deed
in lieu of foreclosure).
"Representatives" means each Underwriter that is acting as a
representative for the other Underwriters.
"Repurchase Agreement" means the reverse repurchase agreement to be
entered into by the Company and certain institutional lenders to provide the
Company up to $_________ to finance the purchase of CMBS.
"Residual Interests" means REMIC Residual Interests and non-REMIC
Residual Interests collectively.
"Restricted Securities" has the meaning set forth in Rule 144 under the
Securities Act.
"RMBS" means a series of one-to four-family residential MBS.
"Securities Act" means the Securities Act of 1933, as amended.
"Share Option Plan" means the share option plan adopted by the Company
in 1998.
"Share Ownership Limits" means the Aggregate or Common Share Ownership
Limit or the Excepted Holder Limit.
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"Shares" means the Common Shares and, solely to the extent
specifically required by law or as specifically provided in any resolution or
resolutions of the Trust Managers providing for the issuance of any particular
series of Preferred Shares, the Preferred Shares.
"Special Servicer" means an entity which services delinquent and/or
defaulted Mortgage Loans, including the oversight and management of the
resolution of such Mortgage Loans by modification, foreclosure, deed in lieu of
foreclosure or otherwise.
"Special Servicing" means the oversight and management of the
resolution of Mortgage Loans by workout or modification of loan provisions,
foreclosure, deed in lieu of foreclosure or otherwise, and to control decisions
with respect to the preservation of the collateral generally, including
property management and maintenance decisions.
"Special Servicing Rights" means rights to control the oversight and
management of the resolution of Mortgage Loans by workout or modification of
loan provisions, foreclosure, deed in lieu of foreclosure or otherwise, and to
control decisions with respect to the preservation of the collateral generally,
including property management and maintenance decisions.
"Standard & Poor's" means Standard & Poor's Rating Services, a
division of the McGraw-Hill Companies.
"Sub IOs" means an IO with characteristics of a Subordinated Interest.
"Subordinated Interests" means classes of MBS that are subordinated in
right of payments of principal and interest to more senior classes.
"Subperforming Mortgage Loans" means Mortgage Loans for which default
is likely or imminent or for which the borrower is making payments in
accordance with a forbearance plan.
"Targeted Investments" means the various types of real estate related
assets targeted to be invested in by the Company.
"Tax Counsel" means Winstead Sechrest & Minick P.C.
"Tax-Exempt Entity" means a qualified pension, profit sharing or other
employee retirement benefit plan, Keogh plan, bank commingled trust funds for
such plans, or IRA, and other similar entities intended to be exempt from
federal income taxation.
"Taxable Income" means for any year the taxable income of the Company
for such year (excluding any net income derived either from property held
primarily for sale to customers or from Foreclosure Property) subject to
certain adjustments provided in the REIT Provisions of the Code.
"TBCA" means the Texas Business Corporation Act.
"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 a constant maturity 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.
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"Texas REIT Act" means the Texas Real Estate Investment Trust Act,
found at Article 6138A of the Texas Revised Civil Statutes, as amended.
"Transfer" means any issuance, sale, transfer, gift, assignment,
devise or other disposition, as well as any other event that causes any Person
to acquire Beneficial Ownership or Constructive Ownership, or any agreement to
take any such actions or cause any such events, of Shares or the right to vote
or receive dividends on Shares, including (i) the granting or exercise of any
option (or any disposition of any option), (ii) any disposition of any
securities or rights convertible into or exchangeable for Shares or any
interest in Shares or any exercise of any such conversion or exchange right and
(iii) transfers of interests in other entities that result in changes in
Beneficial Ownership or Constructive Ownership of Shares; in each case, whether
voluntary or involuntary, whether owned of record, Constructively Owned or
Beneficially Owned and whether by operation of law or otherwise. The terms
"Transferring" and "Transferred" shall have the correlative meanings.
"Treasury Regulations" means the Federal Income Tax Regulations,
including Temporary Regulations, promulgated under the Code, as such
regulations may be amended from time to time (including corresponding
provisions of succeeding regulations).
"Trust Manager" means a member of the Board of Trust Managers.
"UBTI" means "unrelated trade or business income" as defined in
Section 512 of the Code.
"Underwriters" means the firms identified in this Prospectus as
underwriters of this Offering, for whom Prudential Securities Incorporated,
Credit Suisse First Boston, J.C. Bradford & Co., NationsBanc Montgomery
Securities LLC and Piper Jaffray Inc. are acting as Representatives.
"Warehouse Line" means the warehouse financing arrangement pursuant to
which _______________ has agreed to provide financing to the Company for the
origination or acquisition of Mortgage Loans.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
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Pages
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<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . F-2
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Notes to Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . F-4
</TABLE>
F-1
<PAGE> 126
AMRESCO CAPITAL TRUST
BALANCE SHEET
FEBRUARY 2, 1998
INDEPENDENT AUDITORS' REPORT
To the Shareholder of AMRESCO Capital Trust:
We have audited the accompanying balance sheet of AMRESCO Capital Trust (the
"Trust") as of February 2, 1998. This financial statement is the responsibility
of the Trust's management. Our responsibility is to express an opinion on this
balance sheet 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 balance sheet presents fairly, in all material respects,
the financial position of AMRESCO Capital Trust as of February 2, 1998, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Dallas, Texas
February 2, 1998
F-2
<PAGE> 127
AMRESCO CAPITAL TRUST
BALANCE SHEET
FEBRUARY 2, 1998
ASSETS
<TABLE>
<S> <C>
Cash $ 1,000
==========
SHAREHOLDER'S EQUITY
SHAREHOLDER'S EQUITY:
Preferred Shares, par value $.01 per share; 50,000,000 shares
authorized, none outstanding;
Common Shares, par value $.01 per share;
200,000,000 shares authorized; 100 shares
issued and outstanding $ 1
Additional paid-in-capital 999
----------
Total Shareholder's Equity $ 1,000
==========
</TABLE>
See accompanying notes to balance sheet.
F-3
<PAGE> 128
AMRESCO Capital Trust
Notes to Balance Sheet
February 2, 1998
NOTE 1--ORGANIZATION
AMRESCO Capital Trust (the "Trust") is a Texas real estate investment trust and
was initially capitalized through the sale of 100 Common Shares for $1,000 on
February 2, 1998. The Trust will seek to acquire primarily mortgage loans,
mortgage-backed securities, real estate and certain other real estate related
assets.
The Trust has had no operations to date other than matters relating to the
organization and start-up of the Trust. Accordingly, no statement of
operations is presented.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash - Cash includes cash on hand and deposits in banks. The Trust has no cash
equivalents.
Federal and State Income Taxes - The Trust will elect to be taxed as a real
estate investment trust under the Internal Revenue Code of 1986, as amended,
and generally will not be subject to federal and state taxes on its income to
the extent it distributes annually 95% of its predistribution taxable income to
shareholders and maintains its qualification as a real estate investment trust.
Income recognition - Income and expenses are to be recorded on the accrual
basis of accounting.
NOTE 3--TRANSACTIONS WITH AFFILIATES
The Trust intends to enter into a Management Agreement (the "Management
Agreement") with AMREIT Managers, L.P. (the "Manager"), an affiliate of
AMRESCO, Inc., ("AMRESCO") under which the Manager will manage its day-to-day
operations, subject to the direction and oversight of the Trust's Board of
Trust Managers. The Trust will pay the Manager quarterly base management
compensation and incentive compensation based on Funds From Operations of the
Trust in excess of a minimum return on equity.
NOTE 4--PUBLIC OFFERING OF COMMON SHARES
The Trust is in the process of filing a Registration Statement for the sale of
its common shares. Contingent upon the consummation of the public offering, the
Trust will be liable for organization and offering expenses in connection with
the sale of the shares offered. AMRESCO has committed to purchase 10% of the
Trust's common shares at the initial public offering price in a private
placement simultaneous with the closing of the public offering.
F-4
<PAGE> 129
NOTE 5--SHARE OPTION PLAN
The Trust intends to adopt a share option plan (the "Share Option Plan") that
will provide for the grant of both qualified incentive share options and
non-qualified share options, share appreciation rights and dividend equivalent
rights. Trust Managers, directors, officers and key employees of the Trust and
the Manager are eligible to participate in the Share Option Plan. The Share
Option Plan will authorize the grant of options to purchase an aggregate of up
to 15% of the Trust's outstanding common shares.
No options or rights have yet been granted under the Share Option Plan. The
Trust intends to grant options to the Manager to purchase 1,667,510 common
shares, effective on the closing of the public offering of Common Shares and
the execution of the Management Agreement. The fair value of the options cannot
be determined until the closing of the public offering.
F-5
<PAGE> 130
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY
ANY SECURITY OTHER THAN THE COMMON SHARES OFFERED BY THIS PROSPECTUS, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE COMMON
SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
SUMMARY TABLE OF CONTENTS
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<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Dividend and Distribution Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Management's Discussion and Analysis of Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . 32
Business and Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Management of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
The Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Federal Income Tax Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
ERISA Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Certain Legal Aspects of Mortgage Loans and Real Estate Investments . . . . . . . . . . . . . . . . . . . . . . . . 86
Description of Shares of Beneficial Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Certain Provisions of Texas Law and of the Declaration of Trust and Bylaws . . . . . . . . . . . . . . . . . . . . 100
Shares Available for Future Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
Private Placement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
<PAGE> 131
UNTIL ____________, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, 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.
15,000,000 SHARES
AMRESCO CAPITAL TRUST
COMMON SHARES OF BENEFICIAL INTEREST
PROSPECTUS
PRUDENTIAL SECURITIES INCORPORATED
CREDIT SUISSE FIRST BOSTON
J.C. BRADFORD & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
PIPER JAFFRAY INC.
_________________, 1998
<PAGE> 132
ITEM 30. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other
than underwriting discounts and commissions, payable by the Registrant in
connection with the sale of Common Shares being registered. All amounts are
estimates except the SEC registration fee and the NASD filing fee.
AMOUNT TO BE PAID
<TABLE>
<S> <C>
SEC Registration Fee $106,864
Nasdaq listing fee $ 50,000
-----------------
NASD filing fee $ 30,500
-----------------
Printing and engraving expenses $ *
-----------------
Legal fees and expenses $ *
-----------------
Accounting fees and expenses $ *
-----------------
Transfer agent and custodian fees $ *
-----------------
Miscellaneous $ *
-----------------
- ------------- -----------------
Total $ *
- ------------- -----------------
</TABLE>
* To be provided by amendment.
ITEM 32. SALES TO SPECIAL PARTIES
The securities described in Item 33(a) were issued to AMRESCO, Inc.,
in exchange for cash.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
Pursuant to the exemption provided by Section 4(2) of the Securities
Act, on February 2, 1998 the Company issued 100 Common Shares for an aggregate
purchase price of $1,000 to AMRESCO, Inc.
ITEM 34. INDEMNIFICATION OF TRUST MANAGERS AND OFFICERS.
The Declaration of Trust provides for the indemnification of the
directors and officers of the Company and the Manager and its employees,
officers, directors and controlling Persons to the fullest extent permitted by
the Texas REIT Act. The Texas REIT Act generally permits the indemnification
of a trust manager, officer, employee, or agent of the real estate investment
trust, who was, is or is threatened to be made a named defendant or respondent
in a proceeding because of the Person's affiliation with the real estate
investment trust only if that Person: (i) conducted himself in good faith;
(ii) reasonably believed: (a) in the case of conduct in his official capacity,
that his conduct was in the real estate investment trust's best interest; and
(b) in all other cases, that his conduct was at least not opposed to the real
estate investment trust's best interest; and (iii) in the case of any criminal
proceeding, had no reasonable cause to believe that his conduct was unlawful.
Furthermore, except to the extent permitted by the Texas REIT Act, such Person
may not be indemnified in respect of a proceeding (i) in which the Person is
found liable on the basis that personal benefit was improperly received by him,
whether or not the benefit resulted from an action taken in the Person's
official capacity; or (ii) in which the Person is found liable to the real
estate investment trust.
II-1
<PAGE> 133
If, in connection with a proceeding against the real estate investment
trust, such Person is found liable to the real estate investment trust or is
found liable on the basis that personal benefit was improperly received by the
Person, the indemnification (i) is limited to reasonable expenses actually
incurred by the Person in connection with the proceeding, and (ii) shall not be
made to a Person that has been found liable for willful or intentional
misconduct in the performance of his duty to the real estate investment trust.
The Texas REIT Act also provides that the real estate investment trust
may indemnify Persons who are not or were not officers, employees, or agents of
the real estate investment trust but who are or were serving at the request of
the real estate investment trust as a trust manager, director, officer,
partner, venturer, proprietor, trustee, employee, agent or similar functionary
of another real estate investment trust or of a foreign or domestic
corporation, partnership, or other enterprise to the same extent that it may
identify its own trust managers, officers, employees, or agents.
Pursuant to the Texas REIT Act and the Declaration of Trust, no Trust
Manager will be liable for any act, omission, loss, damage or expense arising
from his or her duty to a real estate investment trust, except for such trust
manager's own willful misfeasance, willful malfeasance or gross negligence.
Under the Texas REIT Act, a trust manager is not subject to any liabilities
imposed by law upon trust managers of a real estate investment trust nor liable
for any claims or damages that may result from his acts in the discharge of any
duty imposed or power conferred upon him by the real estate investment trust,
if, in the exercise of ordinary care, he acted in good faith and in reliance
upon information, opinions, reports or statements, including financial
statements and other financial data, concerning the real estate investment
trust or another Person, that were prepared or presented by: (i) one or more
officers or employees of the real estate investment trust, other than the real
estate investment trust manager; (ii) legal counsel, public accountants,
investment bankers, or other Persons as to matters the trust manager reasonably
believes are within the Person's professional or expert competence; or (iii) a
committee of the trust managers of which the trust manager is not a member.
The Company has obtained directors' and officers' liability insurance
coverage in the aggregate amount of approximately $10 million. Directors' and
officers' insurance insures (i) the officers and Trust Managers of the Company
from any claim arising out of an alleged wrongful act by the Trust Managers and
officers of the Company in their respective capacities as Trust Managers and
officers of the Company, and (ii) the Company, to the extent that the Company
has indemnified the Trust Managers and officers for such loss.
The Underwriting Agreement (Exhibit 1.1) also provides for the
indemnification by the Underwriters of the Company, its Trust Managers and
officers and Persons who control the Company within the meaning of Section 15
of the Securities Act with respect to certain liabilities, including
liabilities arising under the Securities Act.
ITEM 35. TREATMENT OF PROCEEDS FROM SHARES BEING REGISTERED
Not applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements included in the Prospectus are:
Balance sheet at February 2, 1998
Notes to Balance Sheet
II-2
<PAGE> 134
All schedules have been omitted because they are not applicable.
(b) Exhibits
*1.1 Form of Underwriting Agreement
3.1 Amended and Restated Declaration of Trust of the
Registrant
*3.2 Bylaws of the Registrant
*5.1 Opinion of Winstead Sechrest & Minick P.C.
*8.1 Opinion of Winstead Sechrest & Minick P.C.
*10.1 Management Agreement between the Registrant and
AMRESCO Capital Trust Managers, L.P.
*10.2 Share Option Plan
23.1 Consent of Deloitte & Touche LLP
*23.2 Consent of Winstead Sechrest & Minick P.C. (included
in Exhibits 5.1 and 8.1)
24.1 Power of Attorney (included on page II-4)
*99.1 Consents to be named as a trust manager pursuant to
Rule 438
* To be filed by amendment.
ITEM 37. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing of this Offering certificates in such denominations
and registered in such names as required by the Underwriter to permit prompt
delivery to each purchaser.
Insofar as indemnification by Registrant for liabilities arising under
the Securities Act may be permitted to trust managers, officers and controlling
Person of the Registrant pursuant to the provisions referenced in Item 34 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the 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 trust manager,
officer, or controlling Person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such trust manager, 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 Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) That for purposes of determining any liability under the
Securities Act, the information omitted from the 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, 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> 135
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-11 and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized, in Dallas, Texas, on the 3rd day of
February, 1998.
AMRESCO CAPITAL TRUST
By:
-------------------------------------
Mark D. Gibson,
President and Chief Executive Officer
POWER OF ATTORNEY
EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY CONSTITUTES AND
APPOINTS MARK D. GIBSON AND ROBERT L. ADAIR III, AND EACH OF THEM, ACTING
ALONE, AS HIS TRUE AND LAWFUL ATTORNEY-IN-FACT AND AGENT, WITH FULL POWERS OF
SUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE AND STEAD, IN ANY AND ALL
CAPACITIES, TO SIGN AND TO FILE ANY AND ALL AMENDMENTS, INCLUDING
POST-EFFECTIVE AMENDMENTS AND ANY REGISTRATION STATEMENTS FILED PURSUANT TO
RULE 462(B), TO THIS REGISTRATION STATEMENT WITH THE SECURITIES AND EXCHANGE
COMMISSION, GRANTING TO SAID ATTORNEY-IN-FACT POWER AND AUTHORITY TO PERFORM
ANY OTHER ACT ON BEHALF OF THE UNDERSIGNED REQUIRED TO BE DONE IN CONNECTION
THEREWITH.
PURSUANT TO REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<S> <C> <C>
Chairman of the Board February 3, 1998
- --------------------------------------
Robert L. Adair III
Trust Manager, President and February 3, 1998
- -------------------------------------- Chief Executive Officer
Mark D. Gibson (Principal Executive Officer)
Executive Vice President and February 3, 1998
- -------------------------------------- Chief Financial Officer
Thomas J. Andrus (Principal Financial and
Accounting Officer)
Trust Manager February 3, 1998
- --------------------------------------
Robert H. Lutz, Jr.
</TABLE>
II-4
<PAGE> 136
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
*1.1 Form of Underwriting Agreement
3.1 Declaration of Trust of the Registrant, as amended
*3.2 Bylaws of the Registrant
*5.1 Opinion of Winstead Sechrest & Minick P.C.
*8.1 Opinion of Winstead Sechrest & Minick P.C.
*10.1 Management Agreement between the Registrant and
AMRESCO Capital Trust Managers, L.P.
*10.2 Share Option Plan
23.1 Consent of Deloitte & Touche LLP
*23.2 Consent of Winstead Sechrest & Minick P.C. (included
in Exhibits 5.1 and 8.1)
24.1 Power of Attorney (included on page II-4)
*99.1 Consents to be named as a trust manager pursuant to
Rule 438
</TABLE>
* To be filed by amendment.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
DECLARATION OF TRUST
OF
AMRESCO CAPITAL TRUST
The undersigned, acting as the Trust Managers of a real estate
investment trust under the Texas Real Estate Investment Trust Act, as amended
(the "Texas REIT Act"), hereby adopt the following Amended and Restated
Declaration of Trust (this "Declaration of Trust").
ARTICLE I
The name of the trust (the "Trust") is "AMRESCO Capital Trust." An
assumed name certificate setting forth such name has been filed in the manner
prescribed by law.
ARTICLE II
The Trust is formed pursuant to the Texas REIT Act and has the
following as its purpose and powers:
To purchase, hold, lease, manage, sell, exchange, develop, subdivide
and improve real property and interests in real property, and in
general, to carry on any other business and do any other acts in
connection with the foregoing and to have and exercise all powers
conferred by the laws of the State of Texas upon real estate
investment trusts formed under the Texas REIT Act, and to do any or
all of the things hereafter set forth to the same extent as natural
persons might or could do. The term "real property" and the term
"interests in real property" for the purposes stated herein shall not
include severed mineral, oil or gas royalty interests.
The Trust shall have all of the powers granted to real estate
investment trusts by the Texas REIT Act (including, without
limitation, the power to lend money for its trust purposes, invest and
reinvest its funds, and to take and hold real and personal property as
security for the payment of funds so loaned or invested) and all other
powers necessary or appropriate to promote, effect and attain the
purposes for which the Trust is organized.
<PAGE> 2
ARTICLE III
The address of the Trust's initial principal office and place of
business is 700 North Pearl Street, Suite 2400, Dallas, Texas 75201. The
address of the Trust's registered office is 700 North Pearl Street, Suite 2400,
Dallas, Texas 75201 and the name of its registered agent at that address is
Michael L. McCoy, Esq.
ARTICLE IV
The names and business mailing addresses of the initial Trust Managers
are as follows:
<TABLE>
<CAPTION>
Name Mailing Address
- ---- ---------------
<S> <C>
Robert L. Adair III 700 North Pearl Street
Suite 2400, LB 342
Dallas, Texas 75201-7424
Robert H. Lutz, Jr. 700 North Pearl Street
Suite 2400, LB 342
Dallas, Texas 75201-7424
Mark D. Gibson 700 North Pearl Street
Suite 2400, LB 342
Dallas, Texas 75201-7424
</TABLE>
ARTICLE V
The period of the Trust's duration is perpetual. The Trust may be
sooner terminated by the vote of the holders of at least a two-thirds (2/3)
majority of the voting power of the outstanding Shares.
ARTICLE VI
The Trust Managers shall manage the money or property received for the
issuance of Shares for the benefit of the shareholders of the Trust.
-2-
<PAGE> 3
Subject to any express limitations contained in this Declaration of
Trust or in the Bylaws of the Trust (the "Bylaws"), (a) the business and
affairs of the Trust shall be managed under the direction of the Board of Trust
Managers (the "Board") and (b) the Board shall have full, exclusive and
absolute power, control and authority over any and all property of the Trust.
The Board may take any action as in its sole judgment and discretion is
necessary or appropriate to conduct the business and affairs of the Trust.
This Declaration of Trust shall be construed with the presumption in favor of
the grant of power and authority to the Board. Any construction of this
Declaration of Trust or determination made in good faith by the Board
concerning its powers and authority hereunder shall be conclusive. The
enumeration and definition of particular powers of the Trust Managers included
in this Declaration of Trust or in the Bylaws shall in no way be limited or
restricted by reference to or inference from the terms of this or any other
provision of this Declaration of Trust or the Bylaws or construed or deemed by
inference or otherwise in any manner to exclude or limit the powers conferred
upon the Board or the Trust Manager under the general laws of the State of
Texas or any other applicable laws.
The Board, without any action by the shareholders of the Trust, shall
have and may exercise, on behalf of the Trust, without limitation, the power to
adopt, amend and repeal Bylaws; to elect officers in the manner prescribed in
the Bylaws; to solicit proxies from holders of Shares; and to do any other acts
and deliver any other documents necessary or appropriate to the foregoing
powers.
The number of Trust Managers initially shall be three (3), which
number may be increased or decreased pursuant to the Bylaws. The names and
addresses of the Trust Managers who shall serve until the first annual meeting
of shareholders and until their successors are duly elected and qualified are:
<TABLE>
<CAPTION>
Name Mailing Address
- ---- ---------------
<S> <C>
Robert L. Adair III 700 North Pearl Street
Suite 2400, LB 342
Dallas, Texas 75201-7424
Robert H. Lutz, Jr. 700 North Pearl Street
Suite 2400, LB 342
Dallas, Texas 75201-7424
Mark D. Gibson 700 North Pearl Street
Suite 2400, LB 342
Dallas, Texas 75201-7424
</TABLE>
-3-
<PAGE> 4
The Trust Managers may increase the number of Trust Managers and fill any
vacancy, whether resulting from an increase in the number of Trust Managers or
otherwise, on the Board prior to the first annual meeting of shareholders in
the manner provided in the Bylaws.
Immediately after the Initial Public Offering, the Board shall be
divided into three (3) classes, each class to consist as nearly as possible of
one-third (1/3) of the Trust Managers. The term of office of one (1) class of
Trust Managers shall expire each year. The initial term of office of the Class
I, Class II and Class III Trust Managers shall expire at the 1999, 2000 and
2001 annual meeting of shareholders, respectively. Commencing with the 1998
annual meeting of shareholders, the Trust Managers of the class elected at each
annual meeting of shareholders shall hold office for a term of three (3) years.
Notwithstanding the foregoing or any other provisions of this Article VI, if no
successor Trust Manager is elected, the existing Trust Manager shall remain in
office, and his term shall be extended, until the Trust Managers' successor is
elected.
The Trust Managers for the class of Trust Managers whose term is
expiring at such annual meeting shall be elected at the annual meeting of the
shareholders by the affirmative vote of the holders of a majority of the Shares
outstanding and entitled to vote for the election of Trust Managers. A Trust
Manager may be removed by the vote of the holders of two-thirds (2/3) of the
outstanding Shares at a special meeting of the shareholders called for such
purpose or as otherwise provided in the Bylaws. Cumulative voting for the
election of Trust Managers is prohibited.
Each Trust Manager shall serve until his successor is elected and
qualified or until his death, retirement, resignation or removal. In the event
of any increase or decrease in the authorized number of Trust Managers, each
Trust Manager then serving as such shall nevertheless continue as a Trust
Manager until the expiration of his current term, or his prior death,
retirement, resignation or removal. Any Trust Manager may resign by written
notice to the Board, effective upon execution and delivery to the Trust of such
written notice or upon any future date specified in the notice. Subject to the
rights of the holders of one (1) or more classes or series of Preferred Shares
to elect one (1) or more Trust Managers, a Trust Manager may be removed at any
time, only for cause, at a meeting of the shareholders, by the affirmative vote
of the holders of not less than two-thirds (2/3) of the Shares then outstanding
and entitled to vote generally in the election of Trust Managers.
Notwithstanding anything herein to the contrary, at all times (except
during a period not to exceed sixty (60) days following the death, resignation,
incapacity or removal from office of a Trust Manager prior to expiration of the
Trust Manager's term of office), a majority of the Board shall be comprised of
persons who are not affiliated with any officers or employees of the Trust or
Affiliates of (i) any subsidiary of the Trust
-4-
<PAGE> 5
or (ii) any partnership which is an Affiliate of the Trust (each such Person
serving on the Board being an "Independent Trust Manager"). Amendment or
repeal of this provision shall require the affirmative vote of two-thirds (2/3)
of the Trust Managers or two-thirds (2/3) of the outstanding Shares entitled to
vote on the matter.
ARTICLE VII
The aggregate number of Shares of beneficial interest which the Trust
shall have authority to issue is two hundred million (200,000,000) common
shares, par value $.01 per share ("Common Shares"), and fifty million
(50,000,000) preferred shares, par value $.01 per share ("Preferred Shares").
All of the Common Shares shall be equal in all respects to every other such
Common Share, and shall have no preference, conversion, exchange or preemptive
rights.
The Trust may issue one (1) or more series of Preferred Shares, each
such series to consist of such number of Shares as shall be determined by
resolution of the Trust Managers creating such series. The Preferred Shares of
each such series shall have such designations, preferences, conversion,
exchange or other rights, participations, voting powers, options, restrictions,
limitations, special rights or relations, limitations as to dividends,
qualifications or terms, or conditions of redemption thereof, as shall be
stated and expressed by the Trust Managers in the resolution or resolutions
providing for the issuance of such series of Preferred Shares pursuant to the
authority to do so which is hereby expressly vested in the Trust Managers.
Except as otherwise specifically provided in any resolution or
resolutions of the Trust Managers providing for the issuance of any particular
series of Preferred Shares, the number of Shares of any such series so set
forth in such resolution or resolutions may be increased or decreased (but not
below the number of Shares of such series then outstanding) by a resolution or
resolutions likewise adopted by the Trust Managers.
Except as otherwise specifically provided in any resolution or
resolutions of the Trust Managers providing for the issuance of any particular
series of Preferred Shares, Preferred Shares redeemed or otherwise acquired by
the Trust shall assume the status of authorized but unissued Preferred Shares
and shall be unclassified as to series and may thereafter, subject to the
provisions of this Article VII and to any restrictions contained in any
resolution or resolutions of the Trust Managers providing for the issuance of
any such series of Preferred Shares, be reissued in the same manner as other
authorized but unissued Preferred Shares.
-5-
<PAGE> 6
Except as otherwise specifically provided in any resolution or
resolutions of the Trust Managers providing for the issuance of any particular
series of Preferred Shares, holders of Preferred Shares shall have no
preemptive rights.
Except as otherwise specifically required by law or this Declaration
of Trust or as specifically provided in any resolution or resolutions of the
Trust Managers providing for the issuance of any particular series of Preferred
Shares, the exclusive voting power of the Trust shall be vested in the Common
Shares. Each Common Share entitles the holder thereof to one vote at all
meetings of the shareholders of the Trust.
ARTICLE VIII
The Trust shall issue Shares only for a tangible or intangible benefit
to the Trust, including cash, promissory notes, services performed, contracts
for services to be performed or other securities of the Trust.
ARTICLE IX
The Trust will not commence business until it has received for the
issuance of Shares consideration of at least $1,000 value, consisting of any
tangible or intangible benefit to the Trust, including cash, promissory notes,
services performed, contracts for services to be performed or other securities
of the Trust.
ARTICLE X
The Trust shall not engage in any activities beyond the scope of the
purpose of a REIT formed pursuant to the Texas REIT Act, as such purpose is set
forth in Article II hereof and in the Texas REIT Act.
ARTICLE XI
(a) The affirmative vote of the holders of not less than 80% of
the outstanding Shares, including the affirmative vote of the holders of not
less than 50% of the outstanding Shares not owned, directly or indirectly, by
any Related Person, shall be required for the approval or authorization of any
Business Combination; provided, however, that the 50% voting requirement
referred to above shall not be applicable if the Business Combination is
approved by the affirmative vote of the holders of not less than 90% of the
outstanding Shares; provided further, that neither the 80% voting requirement
nor the 50% voting requirement referred to above shall be applicable if:
(i) The Trust Managers by a vote of not less than 80% of
the Trust Managers then holding office (A) have expressly approved in
advance the
-6-
<PAGE> 7
acquisition of the Shares that caused the Related Person to become a
Related Person or (B) have expressly approved the Business Combination
prior to the date on which the Related Person involved in the Business
Combination become a Related Person;
(ii) The Business Combination is solely between the Trust
and another corporation, partnership or other entity, 100% of the
voting stock or interests of which is owned directly or indirectly by
the Trust;
(iii) The Business Combination is proposed to be
consummated within one (1) year of the consummation of a Fair Tender
Offer by the Related Person in which Business Combination the cash or
Fair Market Value of the property, securities or other consideration
to be received per Share by all remaining holders of Shares in the
Business Combination is not less than the price offered in the Fair
Tender Offer;
(iv) All of conditions (A) through (D) of this
subparagraph (iv) of Article XI shall have been met: (A) if and to the
extent permitted by law, the Business Combination is a merger or
consolidation, consummation of which is proposed to take place within
one (1) year of the date of the transaction pursuant to which such
Person became a Related Person and the cash or Fair Market Value of
the property, securities or other consideration to be received per
Share by all remaining holders of Shares in the Business Combination
is not less than the Fair Price; (B) the consideration to be received
by such holders is either cash or, if the Related Person shall have
acquired the majority of its holdings of Shares for a form of
consideration other than cash, in the same form of consideration with
which the Related Person acquired such majority; (C) after such Person
has become a Related Person and prior to consummation of such Business
Combination: (1) there shall have been no reduction in the annual rate
of dividends, if any, paid per Share on the Shares (adjusted as
appropriate for recapitalizations and for Share splits, reverse Share
splits and Share dividends), except any reduction in such rate that is
made proportionately with any decline in the Trust's net income for
the period for which such dividends are declared, and, except as
approved by a majority of the Continuing Trust Managers, and (2) such
Related Person shall not have received the benefit, directly or
indirectly (except proportionately as a shareholder), of any loans,
advances, guarantees, pledges or other financial assistance or any tax
credits or other tax advantages provided by the Trust prior to the
consummation of such Business Combination (other than in connection
with financing a Fair Tender Offer); and (D) a proxy statement that
conforms in all respects with the provisions of the Securities
Exchange Act of 1934 (the "Exchange Act") and the rules and
regulations thereunder (or any subsequent provisions replacing the
Exchange Act or the
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rules or regulations thereunder) shall be mailed to holders of the
Shares at least thirty (30) days prior to the consummation of the
Business Combination for the purpose of soliciting shareholder
approval of the Business Combination; or
(v) The Rights (as defined in paragraph (b) of this
Article XI) shall have become exercisable.
(b) If a Person has become a Related Person and within one year
after the date (the "Acquisition Date") of the transaction pursuant to which
the Related Person became a Related Person (x) a Business Combination meeting
all of the requirements of subparagraph (iv) of the proviso to paragraph (a) of
this Article XI regarding the applicability of the 80% voting requirement shall
not have been consummated, (y) a Fair Tender Offer shall not have been
consummated and (z) the Trust shall not have been dissolved and liquidated,
then, in such event the Beneficial Owner of each Share (not including Shares
Beneficially Owned by the Related Person) shall have the right (individually a
"Right" and collectively the "Rights"), which may be exercised subject to the
provisions of paragraph (d) of this Article XI, commencing at the opening of
business on the one-year anniversary date of the Acquisition Date and
continuing for a period of ninety (90) days thereafter, subject to extensions
as provided in paragraph (d) of this Article XI (the "Exercise Period"), to
sell to the Trust on the terms set forth herein one (1) Share upon exercise of
such Right. Within five (5) Business Days after the commencement of the
Exercise Period, the Trust shall notify the Beneficial Owners of the
commencement of the Exercise Period, specifying therein the terms and
conditions for exercise of the Rights. During the Exercise Period, each
certificate representing Shares Beneficially Owned (a "Certificate") shall also
represent the number of Rights equal to the number of Shares represented
thereby and the surrender for Transfer of any number of Shares represented
thereby and the surrender for Transfer of any Certificate shall also constitute
the Transfer of the Rights represented by such Shares. At 5:00 P.M., Dallas,
Texas time, on the last day of the Exercise Period, each Right not exercised
shall become void, all rights in respect thereof shall cease as of such time
and the Certificates shall no longer represent Rights.
(c) The purchase price for a Share upon exercise of an
accompanying Right shall be equal to the then-applicable Fair Price paid by the
Related Person (plus, as an allowance for interest, an amount equal to the
prime rate of interest of NationsBank of Texas, N.A., or such other bank as may
be selected by the Trust Managers from time to time, as in effect from time to
time from the Acquisition Date until the date of the payment for such Share but
less the amount of any cash and the Fair Market Value of any property or
securities distributed with respect to such Shares as dividends or otherwise
during such time period), pursuant to the exercise of the Right relating
thereto. In the event the Related Person shall have acquired any of its
holdings of the
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<PAGE> 9
Shares for a form of consideration other than cash, the value of such other
consideration shall be the Fair Market Value thereof.
(d) Notwithstanding the foregoing in paragraph (b) of this Article
XI, the Exercise Period will be deferred in the event (a "Deferral Event") that
the Trust is otherwise prohibited under applicable law from repurchasing Shares
pursuant to the Rights. In the event the Exercise Period is deferred, or if at
any time the Trust reasonably anticipates that a Deferral Event will exist, the
Trust will, as soon as practicable, notify the Beneficial Owners. If at the
end of any fiscal quarter the Deferral Event ceases to exist, notice shall be
given to the Beneficial Owners of the commencement of the deferred Exercise
Period, which Exercise Period shall commence no sooner than fifteen (15) days
nor more than forty-five (45) days from the date of such notice and which shall
continue in effect for a period of time equal in duration to the previously
unexpired portion of the Exercise Period. Notwithstanding any other provision
of this Declaration of Trust to the contrary, during the Exercise Period
(including during the existence of any Deferral Event), neither the Trust nor
any subsidiary may declare or pay any dividend or make any distribution on its
Shares or to its shareholders (other than dividends or distributions payable in
its Shares or, in the case of any subsidiary, dividends payable to the Trust)
or purchase, redeem or otherwise acquire or retire for value, or permit any
subsidiary to purchase or otherwise acquire for value, any Shares if, upon
giving effect to such dividend, distribution, purchase, redemption, or other
acquisition or retirement, the aggregate amount expended for all such purposes
(the amount expended for such purposes, if other than in cash, to be determined
by a majority of the Continuing Trust Managers, whose determination shall be
conclusive) would prejudice the ability of the Trust to satisfy its maximum
obligation to purchase Shares upon exercise of the Rights; provided, however,
that the Trust may declare and pay dividends during the Exercise Period if, but
only to the extent, necessary to maintain the Trust's status as a real estate
investment trust in accordance with Sections 856 through 860 of the Code and
applicable Treasury Regulations.
(e) Rights may be exercised upon surrender to the Trust's
principal Transfer agent (the "Transfer Agent") at its principal office, or
such other office as may be determined from time to time by the Trust Managers,
of the Certificate or Certificates evidencing the Shares to be tendered for
purchase by the Trust, together with the form on the reverse thereof completed
and duly signed in accordance with the instructions thereon. In the event that
a Beneficial Owner shall tender a Certificate which represents greater than the
number of Shares which the Beneficial Owner elects to require the Trust to
purchase upon exercise of the Rights, the Beneficial Owner shall designate on
the reverse side of such Certificate the number of Shares to be sold from such
Certificate. The Transfer Agent shall thereupon issue a new Certificate or
Certificates for the balance of the number of Shares not sold to the Trust,
which new
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<PAGE> 10
Certificate or Certificates shall also represent Rights for an equivalent
number of Shares.
(f) The affirmative vote of the holders of not less than 80% of
the outstanding Shares, including the affirmative vote of the holders of not
less than 50% of the outstanding Shares not owned, directly or indirectly, by
any Related Person (such 50% voting requirement shall not be applicable if such
amendment, alteration, change, repeal or rescission is approved by the
affirmative vote of not less than 90% of the outstanding Shares) shall be
required to amend, alter, change, repeal or rescind, or adopt any provisions
inconsistent with this Article XI.
ARTICLE XII
The Board may authorize the issuance from time to time of Shares of
any class or series, whether now or hereafter authorized, or securities or
rights convertible into Shares of any class or series, whether now or hereafter
authorized, for consideration consisting of any tangible or intangible benefit
to the Trust (including, without limitation, cash, property, services
performed, contracts for services to be performed or other securities of the
Trust) as the Board may deem advisable (or without consideration in the case of
a Share split or Share dividend), subject to such restrictions or limitations
and exceptions, if any, as may be set forth in this Declaration of Trust, the
Bylaws or the Texas REIT Act.
The Board may from time to time authorize and declare to shareholders
such dividends or distributions, in cash or other assets of the Trust or in
securities of the Trust or from any other source as the Board in its discretion
shall determine. The Board shall endeavor to authorize and declare such
dividends and distributions as shall be necessary for the Trust to qualify as a
real estate investment trust under the Code; however, shareholders shall have
no right to any dividend or distribution unless and until authorized and
declared by the Board. The exercise of the powers and rights of the Board
pursuant to this Article XII shall be subject to the provisions of any class or
series of Shares at the time outstanding. Notwithstanding any other provision
in this Declaration of Trust, no determination shall be made by the Board nor
shall any transaction be entered into by the Trust which would cause any Shares
or other beneficial interest in the Trust not to constitute "transferable
shares" or "transferable certificates of beneficial interest" under Section
856(a)(2) of the Code or which would cause any distribution to constitute a
preferential dividend as described in Section 562(c) of the Code.
The Trust Managers may from time to time authorize, and the Trust may
make distributions on its outstanding Shares in cash, in property or in its
Shares, except that no distribution shall be made if (i) after giving effect to
the distribution, the Trust would
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be insolvent or (ii) the distribution exceeds the surplus of the Trust, except
as set forth in the Texas REIT Act.
All Shares shall be personal property entitling the shareholders only
to those rights provided in this Declaration of Trust. The shareholders shall
have no interest in the property of the Trust and shall have no right to compel
any partition, dividend or distribution of the Trust or of the property of the
Trust. The death of a shareholder shall not terminate the Trust. The Trust is
entitled to treat as shareholders only those Persons in whose names Shares are
registered as holders of Shares on the beneficial interest ledger of the Trust.
The Trust may, without the consent or approval of any shareholder,
issue fractional Shares, eliminate a fraction of a Share by rounding up or down
to a full Share, arrange for the disposition of a fraction of a Share by the
Person entitled to it, or pay cash for the fair value of a fraction of a Share.
ARTICLE XIII
A holder of Shares, an owner of any beneficial interest in Shares, or
a subscriber for Shares whose subscription has been accepted is not under an
obligation to the Trust or to its obligees, with respect to the Shares, other
than the obligation to pay to the Trust the full amount of the consideration
for which the Shares were or are to be issued; with respect to any contractual
obligation of the Trust, on the basis that the Beneficial Owner, owner, or
subscriber is or was the alter ego of the Trust, or otherwise or on the basis
of actual fraud or constructive fraud, a sham to perpetrate a fraud, or other
similar theory, unless the obligee demonstrates that the Beneficial Owner,
owner or subscriber caused the Trust to be used for the purpose of perpetrating
and did perpetrate an actual fraud on the obligee primarily for the direct
personal benefit of the Beneficial Owner, owner or subscriber; or, with respect
to any obligation of the Trust, on the basis of the failure of the Trust to
observe any formality, including the failure to comply with any requirement of
the Texas REIT Act, this Declaration of Trust or the Bylaws or to observe any
requirement prescribed by the Texas REIT Act, this Declaration of Trust or the
Bylaws for acts taken by the Trust, its Trust Managers or its shareholders.
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ARTICLE XIV
(a) The Trust shall indemnify every Indemnitee against all
judgments, penalties (including excise and similar taxes), fines, amounts paid
in settlement and reasonable expenses actually incurred by the Indemnitee in
connection with any Proceeding in which he was, is or is threatened to be named
defendant or respondent, or in which he was or is a witness without being named
a defendant or respondent, by reason, in whole or in part, of his serving or
having served, or having been nominated or designated to serve, in any of the
capacities that qualify the named defendant or respondent as an Indemnitee, to
the fullest extent that indemnification is permitted by Texas law in accordance
with the Bylaws. An Indemnitee shall be deemed to have been found liable in
respect of any claim, issue or matter only after the Indemnitee shall have been
so adjudged by a court of competent jurisdiction after exhaustion of all
appeals therefrom. Reasonable expenses shall include, without limitation, all
court costs and all fees and disbursements of attorneys for the Indemnitee.
(b) Without limitation of this paragraph (b) of Article XIV and in
addition to the indemnification provided for in this paragraph (b) of Article
XIV, the Trust shall indemnify every Indemnitee against reasonable expenses
incurred by such Person in connection with any Proceeding in which he is a
witness or a named defendant or respondent because he served in any of the
capacities referred to in paragraph (a) of this Article XIV, if such Person has
been wholly successful, on the merits or otherwise, in defense of the
Proceeding.
(c) Reasonable expenses (including court costs and attorneys'
fees) incurred by an Indemnitee who was or is a witness or was, is or is
threatened to be made a named defendant or respondent in a Proceeding shall be
paid or reimbursed by the Trust at reasonable intervals in advance of the final
disposition of such Proceeding after receipt by the Trust of a written
affirmation from the Indemnitee of his good faith belief that he has met the
standard of conduct necessary for indemnification under this Article XIV and a
written undertaking by or on behalf of such Indemnitee to repay the amount paid
or reimbursed by the Trust if it shall ultimately be determined that he is not
entitled to be indemnified by the Trust as authorized in this Article XIV.
Such written undertaking shall be an unlimited general obligation of the
Indemnitee but need not be secured and it may be accepted without reference to
financial ability to make repayment. Notwithstanding any other provision of
this Article XIV, the Trust may pay or reimburse expenses incurred by an
Indemnitee in connection with his appearance as a witness or other
participation in a Proceeding at a time when he is not named a defendant or
respondent in the Proceeding.
(d) The indemnification provided by this Article XIV shall (i) not
be deemed exclusive of, or to preclude, any other rights to which those seeking
indemnification
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may at any time be entitled under the Bylaws, any law, agreement or vote of
shareholders or disinterested Trust Managers, or otherwise, or under any policy
or policies of insurance purchased and maintained by the Trust on behalf of any
Indemnitee, both as to action in his Official Capacity and as to action in any
other capacity, (ii) continue as to a Person who has ceased to be in the
capacity by reason of which he was an Indemnitee with respect to matters
arising during the period he was in such capacity and (iii) inure to the
benefit of the heirs, executors and administrators of such a Person.
(e) The provisions of this Article XIV (i) are for the benefit of,
and may be enforced by, each Indemnitee of the Trust, the same as if set forth
in their entirety in a written instrument duly executed and delivered by the
Trust and such Indemnitee and (ii) constitute a continuing offer to all
present and future Indemnities. The Trust, by its adoption of this Declaration
of Trust, (i) acknowledges and agrees that each Indemnitee has relied upon and
will continue to rely upon the provisions of this Article XIV in becoming, and
serving in any of the capacities that qualify the named defendant or respondent
as an Indemnitee, (ii) waives reliance upon, and all notices of acceptance of,
such provisions by such Indemnities and (iii) acknowledges and agrees that no
present or future Indemnitee shall be prejudiced in his right to enforce the
provisions of this Article XIV in accordance with their terms by any act or
failure to act on the part of the Trust.
(f) No amendment, modification or repeal of this Article XIV or
any provision of this Article XIV shall in any manner terminate, reduce or
impair the right of any past, present or future Indemnities to be indemnified
by the Trust, nor the obligation of the Trust to indemnify any such
Indemnities, under and in accordance with the provisions of this Article XIV as
in effect immediately prior to such amendment, modification or repeal with
respect to claims arising from or relating to matters occurring, in whole or in
part, prior to such amendment, modification or repeal, regardless of when such
claims may be asserted.
(g) If the indemnification provided in this Article XIV is either
(i) insufficient to cover all costs and expenses incurred by any Indemnitee as
a result of such Indemnitee being made or threatened to be made a defendant or
respondent in a Proceeding by reason of his holding or having held a position
that qualifies the named defendant or respondent as an Indemnitee or (ii) not
permitted by Texas law, the Trust shall indemnify, to the fullest extent that
indemnification is permitted by Texas law, every Indemnitee with respect to all
costs and expenses incurred by such Indemnitee as a result of such Indemnitee
being made or threatened to be made a defendant or respondent in a Proceeding
by reason of his holding or having held a position that qualifies the defendant
as an Indemnitee.
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(h) The indemnification provisions contained in this Article XIV
may be amended only by the affirmative vote of the holders of at least
two-thirds (2/3) of the outstanding Shares.
ARTICLE XV
No Trust Manager or officer of the Trust shall be liable to the Trust
for any act, omission, loss, damage or expense arising from the performance of
his duty under the Trust save only for his own willful misfeasance, willful
malfeasance or gross negligence. In discharging their duties to the Trust,
Trust Managers and officers of the Trust shall be entitled to rely upon experts
and other matters as provided in the Texas REIT Act.
ARTICLE XVI
(a) (i) From and after the Initial Public Offering, no
Person, other than an Excepted Holder, shall Beneficially or
Constructively Own Shares in excess of the Aggregate Share Ownership
Limit, no Person, other than an Excepted Holder, shall Beneficially or
Constructively Own Common Shares in excess of the Common Share
Ownership Limit and no Excepted Holder shall Beneficially or
Constructively Own Shares in excess of the Excepted Holder Limit for
such Excepted Holder.
(ii) No Person shall Beneficially or Constructively Own
Shares to the extent that such Beneficial or Constructive Ownership of
Shares would result in the Trust being "closely held" within the
meaning of Section 856(h) of the Code (without regard to whether the
ownership interest is held during the last half of a taxable year), or
otherwise failing to qualify as a REIT (including, but not limited to,
Beneficial or Constructive Ownership that would result in the Trust
owning (actually or Constructively) an interest in a tenant that is
described in Section 856(d)(2)(B) of the Code if the income derived by
the Trust from such tenant would cause the Trust to fail to satisfy
any of the gross income requirements of Section 856(c) of the Code).
(iii) Notwithstanding any other provisions contained
herein, any Transfer of Shares (whether or not such Transfer is the
result of a transaction entered into through the facilities of the
NYSE or any other national securities exchange or automated
inter-dealer quotation system) that, if effective, would result in
Shares being Beneficially Owned by less than one hundred (100) Persons
(determined under the principles of Section 856(a)(5) of the Code)
shall be void ab initio and the intended transferee shall acquire no
rights in such Shares.
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(b) If any Transfer of Shares (whether or not such Transfer is the
result of a transaction entered into through the facilities of the NYSE or any
other national securities exchange or automated inter-dealer quotation system)
occurs which, if effective, would result in any Person Beneficially or
Constructively Owning Shares in violation of paragraphs (a)(i) or (ii) of this
Article XVI,
(i) then that number of Shares the Beneficial or
Constructive Ownership of which otherwise would cause such Person to
violate paragraphs (a)(i) or (ii) of this Article XVI, (rounded to the
nearest whole Share) shall be automatically, without any further
action on the part of any Person, deemed to be Transferred to a
Charitable Trust for the benefit of a Charitable Beneficiary,
effective as of the close of business on the Business Day prior to the
date of such Transfer, and such Person shall acquire no rights in such
Shares; or
(ii) if the Transfer to the Charitable Trust described in
paragraph (b)(i) of this Article XVI, would not be effective for any
reason to prevent the violation of paragraphs (a)(i) or (ii) of this
Article XVI, then the Transfer of that number of Shares that otherwise
would cause any Person to violate paragraphs (a)(i) or (ii) of this
Article XVI, shall be void ab initio, and the intended transferee
shall acquire no rights in such Shares.
(c) If the Board or any duly authorized committee thereof shall at
any time determine in good faith that a Transfer or other event has taken place
that results in a violation of paragraph (a) of this Article XVI, or that a
Person intends to acquire or has attempted to acquire Beneficial or
Constructive Ownership of any Shares in violation of paragraph (a) of this
Article XVI (whether or not such violation is intended), the Board or a
committee thereof shall take such action as it deems advisable to refuse to
give effect to or to prevent such Transfer or other event, including, without
limitation, causing the Trust to redeem Shares, refusing to give effect to such
Transfer on the books of the Trust or instituting Proceedings to enjoin such
Transfer or other event; provided, however that any Transfer or attempted
Transfer or other event in violation of paragraph (a) of this Article XVI shall
automatically result in the Transfer to the Charitable Trust described above,
and, where applicable, such Transfer (or other event) shall be void ab initio
as provided above irrespective of any action (or non-action) by the Board or a
committee thereof.
(d) Any Person who acquires or attempts or intends to acquire
Beneficial or Constructive Ownership of Shares that will or may violate
paragraph (a) of this Article XVI or any Person who would have owned Shares
that resulted in a Transfer to the Charitable Trust pursuant to the provisions
of paragraph (b) of this Article XVI, shall immediately give written notice to
the Trust of such event, or in the case of such
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a proposed or attempted transaction, give at least fifteen (15) days prior
written notice, and shall provide to the Trust such other information as the
Trust may request in order to determine the effect, if any, of such Transfer on
the Trust's status as a REIT.
(e) (i) From and after the Initial Public Offering, every
Beneficial or Constructive Owner of more than 5% (or such lower percentage as
required by the Code or the Treasury Regulations promulgated thereunder) of the
outstanding Shares, within thirty (30) days after the end of each taxable year,
shall give written notice to the Trust stating the name and address of such
owner, the number of Shares and other Shares Beneficially Owned and a
description of the manner in which such Shares are held. Each such owner shall
provide to the Trust such additional information as the Trust may request in
order to determine the effect, if any, of such Beneficial Ownership on the
Trust's status as a REIT and to ensure compliance with the Aggregate Share
Ownership Limit; and
(ii) each Person who is a Beneficial or
Constructive Owner of Shares and each Person (including the shareholder of
record) who is holding Shares for a Beneficial or Constructive Owner shall
provide to the Trust such information as the Trust may request, in good faith,
in order to determine the Trust's status as a REIT and to comply with
requirements of any taxing authority or governmental authority or to determine
such compliance.
(f) Subject to paragraph (k) of this Article XVI, nothing
contained in this Article XVI or Article XVII shall limit the authority of the
Board to take such other action as it deems necessary or advisable to protect
the Trust and the interests of its shareholders in preserving the Trust's
status as a REIT.
(g) In the case of an ambiguity in the application of any of the
provisions of this Article XVI or Article XVII, the Board shall have the power
to determine the application of the provisions of this Article XVI or Article
XVII with respect to any situation based on the facts known to it. In the
event this Article XVI or Article XVII requires an action by the Board and this
Declaration of Trust fails to provide specific guidance with respect to such
action, the Board shall have the power to determine the action to be taken so
long as such action is not contrary to the provisions of this Article XVI or
Article XVII.
(h) (A) Subject to paragraph (a)(i) of this Article XVI, the Board
in its sole discretion, may exempt a Person from the Aggregate Share
Ownership Limit and the Common Share Ownership Limit, as the case may
be, and may establish or increase an Excepted Holder Limit for such
Person if:
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(i) the Board obtains such representations and
undertakings from such Person as are reasonably necessary to
ascertain that no individual's Beneficial or Constructive
Ownership of such Shares will violate paragraph (a)(ii) of
this Article XVI;
(ii) such Person does not and represents that it will
not own, actually or Constructively, an interest in a tenant
of the Trust (or a tenant of any entity owned or controlled by
the Trust) that would cause the Trust to own, actually or
Constructively, more than a 9.8% interest (as set forth in
Section 856(d)(2)(B) of the Code) in such tenant and the Board
obtains such representations and undertakings from such Person
as are reasonably necessary to ascertain this fact (for this
purpose, a tenant from whom the Trust (or an entity owned or
controlled by the Trust) derives (and is expected to continue
to derive) a sufficiently small amount of revenue such that,
in the opinion of the Board, rent from such tenant would not
adversely affect the Trust's ability to qualify as a REIT,
shall not be treated as a tenant of the Trust); and
(iii) such Person agrees that any violation or attempted
violation of such representations or undertakings (or other
action which is contrary to the restrictions contained in this
Article XVI) will result in such Shares being automatically
Transferred to a Charitable Trust in accordance with this
Article XVI or Article XVII.
(B) Prior to granting any exception pursuant to paragraph
(h)(A) of this Article XVI, the Board may require a ruling from the
Internal Revenue Service, or an opinion of counsel, in either case in
form and substance satisfactory to the Board in its sole discretion,
as it may deem necessary or advisable in order to determine or ensure
the Trust's status as a REIT. Notwithstanding the receipt of any
ruling or opinion, the Board may impose such conditions or
restrictions as it deems appropriate in connection with granting such
exception.
(C) Subject to paragraph (a)(ii) of this Article XVI, an
underwriter which participates in a public offering or a private
placement of Shares (or securities convertible into or exchangeable
for Shares) may Beneficially or Constructively Own Shares (or
securities convertible into or exchangeable for Shares) in excess of
the Aggregate Share Ownership Limit, the Common Share Ownership Limit
or both such limits, but only to the extent necessary to facilitate
such public offering or private placement.
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(D) The Board may only reduce the Excepted Holder Limit for an
Excepted Holder: (i) with the written consent of such Excepted Holder
at any time or (ii) pursuant to the terms and conditions of the
agreements and undertakings entered into with such Excepted Holder in
connection with the establishment of the Excepted Holder Limit for
that Excepted Holder. No Excepted Holder Limit shall be reduced to a
percentage that is less than the Common Share Ownership Limit.
(i) The Board may from time to time increase the Common Share
Ownership Limit and the Aggregate Share Ownership Limit.
(j) Each certificate for Shares shall bear substantially the
following legend:
The Shares represented by this certificate are subject to
restrictions on Beneficial and Constructive Ownership and Transfer for
the purpose of the Trust's maintenance of its status as a Real Estate
Investment Trust (a "REIT") under the Internal Revenue Code of 1986,
as amended (the "Code"). Subject to certain further restrictions and
except as expressly provided in the Trust's Declaration of Trust, (i)
no Person may Beneficially or Constructively Own Common Shares in
excess of 9.8% (in value or number of Shares) of the outstanding
Common Shares unless such Person is an Excepted Holder (in which case
the Excepted Holder Limit shall be applicable); (ii) no Person may
Beneficially or Constructively Own Shares in excess of 9.8% of the
value of the total outstanding Shares, unless such Person is an
Excepted Holder (in which case the Excepted Holder Limit shall be
applicable); (iii) no Person may Beneficially or Constructively Own
Shares that would result in the Trust being "closely held" under
Section 856(h) of the Code or otherwise cause the Trust to fail to
qualify as a REIT; and (iv) no Person may Transfer Shares if such
Transfer would result in Shares being owned by fewer than one hundred
(100) Persons. Any Person who Beneficially or Constructively Owns or
attempts to Beneficially or Constructively Own Shares which cause or
will cause a Person to Beneficially or Constructively Own Shares in
excess or in violation of the above limitations must immediately
notify the Trust. If any of the restrictions on Transfer or ownership
are violated, the Shares represented hereby will be automatically
Transferred to a Trustee of a Charitable Trust for the benefit of one
(1) or more Charitable Beneficiaries. In addition, upon the
occurrence of certain events, attempted Transfers in violation of the
restrictions described above may be void ab initio. All capitalized
terms in this legend have the meanings defined in the Trust's
Declaration of Trust, as the same may be amended from time to time, a
copy of which, including the restrictions on Transfer
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and ownership, will be furnished to each holder of Shares on request
and without charge.
Instead of the foregoing legend, the certificate may state that the
Trust will furnish a full statement about certain restrictions on
transferability to a shareholder on request and without charge.
(k) Nothing in this Article XVI, in Article XVII or elsewhere in
this Declaration of Trust shall preclude the settlement of any transaction in
securities entered into through the facilities of the NYSE or any other
national securities exchange or automated inter-dealer quotation system.
(l) The affirmative vote of the holders of not less than 80% of
all outstanding Shares entitled to vote in the election of Trust Managers,
considered for purposes of this Article XVI as one (1) class, shall be required
to amend, alter, change, repeal or rescind any provision of this Article XVI or
to adopt any provisions inconsistent with this Article XVI.
ARTICLE XVII
(a) Upon any purported Transfer or other event described in
paragraph (b) of Article XVI that would result in a Transfer of Shares to a
Charitable Trust, such Shares shall be deemed to have been Transferred to the
Trustee as Trustee of a Charitable Trust for the exclusive benefit of one (1)
or more Charitable Beneficiaries. Such Transfer to the Trustee shall be deemed
to be effective as of the close of business on the Business Day prior to the
purported Transfer or other event that results in the Transfer to the
Charitable Trust pursuant to paragraph (b) of Article XVI. The Trustee shall
be appointed by the Trust and shall be a Person unaffiliated with the
Prohibited Owner. Each Charitable Beneficiary shall be designated by the Trust
as provided in paragraph (f) of this Article XVII.
(b) Shares held by the Trustee shall be issued and outstanding
Shares of the Trust. The Prohibited Owner shall have no rights in the Shares
held by the Trustee. The Prohibited Owner shall not benefit economically from
ownership of any Shares held in the Charitable Trust by the Trustee, shall have
no rights to dividends or other distributions and shall not possess any rights
to vote or other rights attributable to the Shares held in the Charitable
Trust.
(c) The Trustee shall have all voting rights and rights to
dividends or other distributions with respect to Shares held in the Charitable
Trust, which rights shall be exercised for the exclusive benefit of the
Charitable Beneficiary. Any dividend or other distribution paid prior to the
discovery by the Trust that Shares have been Transferred
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to the Trustee shall be paid with respect to such Shares to the Trustee upon
demand and any dividend or other distribution authorized but unpaid shall be
paid when due to the Trustee. Any dividends or distributions so paid over to
the Trustee shall be held in trust for the benefit of the Charitable
Beneficiary for distribution at such times as may be determined by the Trustee.
The Prohibited Owner shall have no voting rights with respect to Shares held in
the Charitable Trust and, subject to Texas law, effective as of the date that
Shares have been Transferred to the Trustee, the Trustee shall have the
authority (at the Trustee's sole discretion) (i) to rescind as void any vote
cast by a Prohibited Owner prior to the discovery by the Trust that Shares have
been Transferred to the Trustee and (ii) to recast such vote in accordance with
the desires of the Trustee acting for the benefit of the Charitable
Beneficiary. Notwithstanding the provisions of this Article XVII, until the
Trust has received notification that Shares have been Transferred into a
Charitable Trust, the Trust shall be entitled to rely on its Share Transfer and
other shareholder records for purposes of preparing lists of shareholders
entitled to vote at meetings, determining the validity and authority of proxies
and otherwise conducting votes of shareholders.
(d) Within twenty (20) days of receiving notice from the Trust
that Shares have been Transferred to the Charitable Trust, the Trustee of the
Charitable Trust shall sell the Shares held in the Charitable Trust to a
Person, designated by the Trustee, whose ownership of the Shares will not
violate the ownership limitations set forth in paragraph (a) of Article XVI.
Upon such sale, the interest of the Charitable Beneficiary in the Shares sold
shall terminate and the Trustee shall distribute the net proceeds of the sale
to the Prohibited Owner and to the Charitable Beneficiary as provided in this
paragraph (d) of Article XVII. The Prohibited Owner shall receive the lesser
of (i) the price paid by the Prohibited Owner for the Shares or, if the
Prohibited Owner did not give value for the Shares in connection with the event
causing the Shares to be held in the Charitable Trust (e.g., in the case of a
gift, devise or other such transaction), the Market Price of the Shares on the
day of the event causing the Shares to be held in the Charitable Trust and (ii)
the price per Share (net of costs of sales) received by the Trustee from the
sale or other disposition of the Shares held in the Charitable Trust. Any net
sales proceeds in excess of the amount payable to the Prohibited Owner shall be
immediately paid to the Charitable Beneficiary. If, prior to the discovery by
the Trust that Shares have been Transferred to the Trustee, such Shares are
sold by a Prohibited Owner, then (i) such Shares shall be deemed to have been
sold on behalf of the Charitable Trust and (ii) to the extent that the
Prohibited Owner received an amount for such Shares that exceeds the amount
that such Prohibited Owner was entitled to receive pursuant to this paragraph
(d), such excess shall be paid to the Trustee upon demand.
(e) Shares Transferred to the Trustee shall be deemed to have been
offered for sale to the Trust, or its designee, at a price per Share equal to
the lesser of (i) the
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price per Share in the transaction that resulted in such Transfer to the
Charitable Trust (or, in the case of a devise or gift, the Market Price at the
time of such devise or gift) and (ii) the Market Price on the date the Trust,
or its designee, accepts such offer. The Trust shall have the right to accept
such offer until the Trustee has sold the Shares held in the Charitable Trust
pursuant to paragraph (d) of this Article XVII. Upon such a sale to the Trust,
the interest of the Charitable Beneficiary in the Shares sold shall terminate
and the Trustee shall distribute all net sales proceeds of the sale to the
Prohibited Owner.
(f) By written notice to the Trustee, the Trust shall designate
one (1) or more nonprofit organizations to be the Charitable Beneficiary of the
interest in the Charitable Trust such that (i) Shares held in the Charitable
Trust would not violate the restrictions set forth in paragraph (a) of Article
XVI in the hands of such Charitable Beneficiary and (ii) each such organization
must fit within the definition of a Charitable Beneficiary set forth in
paragraph (e) of Article XXVI.
(g) The Trust is authorized specifically to seek equitable relief,
including injunctive relief, to enforce the provisions of Article XVI and this
Article XVII.
(h) No delay or failure on the part of the Trust or the Board in
exercising any right hereunder shall operate as a waiver of any right of the
Trust or the Board as the case may be, except to the extent specifically waived
in writing.
ARTICLE XVIII
Upon resolution adopted by the Trust Managers, the Trust shall be
entitled to purchase, directly or indirectly, its own Shares, provided that
following such repurchase the Trust would continue to be able to pay its debts
as they become due in the ordinary course of its business.
ARTICLE XIX
(a) There shall be an annual or a special meeting of the
shareholders, to be held on proper notice at such time (after the delivery of
the annual report) and convenient location as shall be determined by or in the
manner prescribed in the Bylaws, for the election of the Trust Managers, if
required, and for the transaction of any other business within the powers of
the Trust. Except as otherwise provided in this Declaration of Trust, special
meetings of shareholders may be called in the manner provided in the Bylaws and
Texas REIT Act. If there are no Trust Managers, the officers of the Trust
shall promptly call a special meeting of the shareholders entitled to vote for
the election of successor Trust Managers. Any meeting may be adjourned and
reconvened as the Trust Managers determine or as provided in the Bylaws.
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(b) Subject to the provisions of any class or series of Shares
then outstanding, the shareholders shall be entitled to vote only on the
following matters: (i) election of Trust Managers as provided in Article VI
and the removal of Trust Managers as provided in Article VI, (ii) amendment or
repeal of the Independent Trust Manager provision in Article VI, (iii)
amendment of this Declaration of Trust as provided in Article XX (iv)
termination of the Trust as provided in Article XXI, (v) merger or
consolidation of the Trust, or the sale or disposition of substantially all of
the Trust Property, as provided in Article XI and (vi) such other matters with
respect to which the Board has adopted a resolution declaring that a proposed
action is advisable and directing that the matter be submitted to the
shareholders for approval or ratification. Except with respect to the
foregoing matters, no action taken by the shareholders at any meeting shall in
any way bind the Board.
(c) Except as may be provided by the Board in setting the terms of
any series of Shares pursuant to Article VII or as may otherwise be provided by
contract, no holder of Shares shall, as such holder, (i) have any preemptive
right to purchase or subscribe for any additional Shares of the Trust or any
other security of the Trust which it may issue or sell or (ii) except as
expressly required by the Texas REIT Act have any right to require the Trust to
pay him the fair value of his Shares in an appraisal or similar Proceeding.
(d) Except with respect to Articles VI, XI, XX and XXI,
notwithstanding any provision of law permitting or requiring any action to be
taken or authorized by the affirmative vote of the holders of a greater number
of votes, any such action shall be effective and valid if taken or authorized
by the affirmative vote of the holders of Shares entitled to cast a majority of
all the votes entitled to be cast on the matter.
(e) The submission of any action to the shareholders for their
consideration shall first be approved by the Board.
(f) The Bylaws may provide that any action required or permitted
to be taken by the shareholders may be taken without a meeting by the written
consent of the shareholders entitled to cast a sufficient number of votes to
approve the matter as required by statute, this Declaration of Trust or the
Bylaws, as the case may be.
ARTICLE XX
This Declaration of Trust may be amended from time to time by the
affirmative vote of the holders of at least two-thirds (2/3) of the outstanding
Shares entitled to vote on the proposed amendment, except that (i) Article XI
(relating to the approval of Business Combinations); (ii) Article XVI (relating
to the Aggregate Share Ownership Limit, Common Share Ownership Limit and
Excepted Holder Limit) and (iii) this
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Article XX may not be amended or repealed, and provisions inconsistent
therewith and herewith may not be adopted, except by the affirmative vote of
the holders of at least 80% of the outstanding Shares. All rights and powers
conferred by this Declaration of Trust on shareholders, Trust Managers and
officers are granted subject to the shareholders' reserved right to amend this
Declaration of Trust.
ARTICLE XXI
(a) Subject to the provisions of any class or series of Shares at
the time outstanding, the Trust may be terminated at any meeting of
shareholders, by the affirmative vote of two-thirds (2/3) of all the votes
entitled to be cast on the matter. Upon the termination of the Trust:
(i) The Trust shall carry on no business except for the
purpose of winding up its affairs.
(ii) The Trust Managers shall proceed to wind up the
affairs of the Trust and all of the powers of the Trust Managers under
this Declaration of Trust shall continue, including the powers to
fulfill or discharge the Trust's contracts, collect its assets, sell,
convey, assign, exchange, Transfer or otherwise dispose of all or any
part of the remaining property of the Trust to one (1) or more Persons
at public or private sale for consideration which may consist in whole
or in part of cash, securities or other property of any kind,
discharge or pay its liabilities and do all other acts appropriate to
liquidate its business.
(iii) After paying or adequately providing for the
payment of all liabilities, and upon receipt of such releases,
indemnities and agreements as they deem necessary for their
protection, the Trust may distribute the remaining property of the
Trust among the shareholders so that after payment in full or the
setting apart for payment of such preferential amounts, if any, to
which the holders of any Shares at the time outstanding shall be
entitled, the remaining property of the Trust shall, subject to any
participating or similar rights of Shares at the time outstanding, be
distributed ratably among the holders of Common Shares at the time
outstanding.
(b) After termination of the Trust, the liquidation of its
business and the distribution to the shareholders as herein provided, a
majority of the Trust Managers shall execute and file with the Trust's records
a document certifying that the Trust has been duly terminated, and the Trust
Managers shall be discharged from all liabilities and duties hereunder, and the
rights and interests of all shareholders shall cease.
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ARTICLE XXII
If any provision of this Declaration of Trust or any application of
any such provision is determined to be invalid by any federal or state court
having jurisdiction over the issue, 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. This Declaration of Trust may be executed in one or more counterparts,
each of which shall be deemed to be an original and all of which shall be
deemed to be one and the same instrument.
ARTICLE XXIII
This Declaration of Trust is executed by the undersigned Trust
Managers and delivered in the State of Texas with reference to the laws
thereof, and the rights of all parties and the validity, construction and
effect of every provision hereof shall be subject to and construed according to
the laws of the State of Texas without regard to conflicts of laws provisions
thereof.
ARTICLE XXIV
In this Declaration of Trust, unless the context otherwise requires,
words used in the singular or in the plural include both the plural and
singular and words denoting any gender include all genders. The title and
headings of different parts are inserted for convenience and shall not affect
the meaning, construction or effect of this Declaration of Trust. In defining
or interpreting the powers and duties of the Trust and its Trust Managers and
officers, reference may be made by the Trust Managers or officers, to the
extent appropriate and not inconsistent with the Code or the Texas REIT Act.
ARTICLE XXV
The provisions of this Declaration of Trust shall be subject to all
valid and applicable laws, including, without limitation, the Texas REIT Act
and the Code as now or hereafter amended, and in the event that any of the
provisions of this Declaration of Trust are found to be inconsistent with or
contrary to any such valid laws, the latter shall be deemed to control and this
Declaration of Trust shall be deemed modified accordingly, and, as so modified,
shall continue in full force and effect.
ARTICLE XXVI
For purposes of this Declaration of Trust, the following terms shall
have the following meanings:
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(a) "Aggregate Share Ownership Limit" shall mean not more than
9.8% in value of the aggregate of the outstanding Shares. The value of the
outstanding Shares shall be determined by the Board in good faith, which
determination shall be conclusive for all purposes.
(b) "Beneficial Ownership" shall mean ownership of Shares by a
Person, whether the interest in Shares is held directly or indirectly, and
shall include interests that would be treated as owned 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 the correlative meanings.
(c) "Business Combination" shall mean (i) any merger or
consolidation, if and to the extent permitted by law, of the Trust or a
subsidiary, with or into a Related Person, (ii) any sale, lease, exchange,
mortgage, pledge, Transfer or other disposition, of all or any Substantial Part
of the assets of the Trust and its subsidiaries (taken as a whole) (including,
without limitation, any voting securities of a subsidiary) to or with a Related
Person, (iii) the issuance or Transfer by the Trust or a subsidiary of the
Trust (other than by way of a pro rata distribution to all shareholders) of any
securities of the Trust or a subsidiary of the Trust to a Related Person, (iv)
any reclassification of securities (including any reverse Share split) or
recapitalization by the Trust, the effect of which would be to increase the
voting power (whether or not currently exercisable) of the Related Person, (v)
the adoption of any plan or proposal for the liquidation or dissolution of the
Trust proposed by or on behalf of a Related Person which involves any Transfer
of assets, or any other transaction, in which the Related Person has any direct
or indirect interest (except proportionately as a shareholder), (vi) any series
or combination of transactions having, directly or indirectly, the same or
substantially the same effect as any of the foregoing and (vii) any agreement,
contract or other arrangement providing, directly or indirectly, for any of the
foregoing.
(d) "Business Day" shall mean any day, other than a Saturday
or Sunday, that is neither a legal holiday nor a day on which banking
institutions in the State of Texas or the State of New York are authorized or
required by law, regulation or executive order to close.
(e) "Charitable Beneficiary" shall mean one (1) or more
beneficiaries of the Charitable Trust, provided that each such organization
must be described in Section 501(c)(3) of the Code and contributions to each
such organization must be eligible for deduction under each of Sections
170(b)(1)(A), 2055 and 2522 of the Code.
(f) "Charitable Trust" shall mean any trust provided for in
Article XVI.
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(g) "Closing Price" on any date shall mean the last sale price
for such Shares, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, for such Shares,
in either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the NYSE or,
if such Shares are not listed or admitted to trading on the NYSE, as reported
on the principal consolidated transaction reporting system with respect to
securities listed on the principal national securities exchange on which such
Shares are listed or admitted to trading or, if such Shares are not listed or
admitted to trading on any national securities exchange, the last quoted price,
or, if not so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by Nasdaq or, if such system is no longer
in use, the principal other automated quotation system that may then be in use
or, if such Shares are not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker making
a market in such Shares selected by the Board, in the event that no trading
price is available for such Shares, the Fair Market Value of Shares, as
determined in good faith by the Board.
(h) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
(i) "Common Share Ownership Limit" shall mean not more than
9.8% (in value or in number of Shares, whichever is more restrictive) of the
aggregate of the outstanding Common Shares. The number and value of
outstanding Common Shares shall be determined by the Board in good faith, which
determination shall be conclusive for all purposes.
(j) "Constructive Ownership" shall mean ownership of Shares by
a Person, whether the interest in Shares is held directly or indirectly, and
shall include interests that would be treated as owned through the application
of Section 318(a) of the Code, as modified by Section 856(d)(5) of the Code.
Constructive Ownership shall include ownership of convertible securities, which
are any securities of the Trust that are convertible into Shares. The terms
"Constructive Owner, " "Constructively Owns" and "Constructively Owned" shall
have the correlative meanings.
(k) "Continuing Trust Manager" shall mean (i) any Trust
Manager who is not affiliated with a Related Person and who was a Trust Manager
immediately prior to the time that the Related Person became a Related Person,
and (ii) any other Trust Manager who is not affiliated with the Related Person
and is recommended either by a majority of the Persons described in clause (i)
hereof or by Persons described in this clause (ii) who are then Trust Managers
to succeed a Person described in either the said clause (i) or clause (ii) as a
Trust Manager.
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(l) "Declaration of Trust" shall mean this First Amendment to
Declaration of Trust as filed for record with the County Clerk of Dallas
County, Texas, and any amendments thereto.
(m) "Excepted Holder" shall mean a shareholder of the Trust
for whom an Excepted Holder Limit is created by paragraph (h) of Article XVI or
by the Board pursuant to paragraph (h) of Article XVI.
(n) "Excepted Holder Limit" shall mean, provided that the
affected Excepted Holder agrees to comply with the requirements established by
the Board pursuant to paragraph (h) of Article XVI, and subject to adjustment
pursuant to paragraph (h) of Article XVI, the percentage limit established by
the Board pursuant to paragraph (h) of Article XVI.
(o) "Fair Market Value" shall mean (i) in the case of
securities, the highest closing sale price during the 30-day period immediately
preceding the date in question of such security on the Composite Tape for
NYSE-Listed Stocks, or, if such security is not quoted on the Composite Tape,
on the New York Stock Exchange, or, if such security is not listed on such
Exchange, on the principal United States securities exchange registered under
the Exchange Act on which such security is listed, or, if such security is not
listed on any such exchange, the highest closing bid quotation with respect to
such security during the 30-day period preceding the date in question on the
Nasdaq or any system then in use, or if no such quotations are available, the
Fair Market Value on the date in question of such security as reasonably
determined by an independent appraiser selected by a majority of the Continuing
Trust Managers (or, if there are no Continuing Trust Managers, as reasonably
determined by Prudential Securities Incorporated) in good faith; and (ii) in
the case of property other than cash or stock, the Fair Market Value of such
property on the date in question as reasonably determined by an independent
appraiser selected by a majority of the Continuing Trust Managers (or, if there
are no Continuing Trust Managers, by Prudential Securities Incorporated) in
good faith. In each case hereunder in which an independent appraiser is to be
selected to determine Fair Market Value, (i) in the event (x) there are no
Continuing Trust Managers and (y) Prudential Securities Incorporated is unable
or elects not to serve as such appraiser or (ii) in the event there are
Continuing Trust Managers that do not select an independent appraiser within
ten (10) Business Days of a request for such appointment made by a Related
Person, such independent appraiser may be selected by such Related Person.
(p) "Fair Price" shall mean the highest per-Share price
(which, to the extent not paid in cash, shall equal the Fair Market Value of
any other consideration paid), with appropriate adjustments for
recapitalizations and for Share splits, reverse
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Share splits and Share dividends, paid by a Person in acquiring any of its
holdings of the Shares.
(q) "Fair Tender Offer" shall mean a bona fide tender offer
for all of the Shares outstanding (and owned by Persons other than a Related
Person if the tender offer is made by the Related Person), whether or not such
offer is conditional upon any minimum number of Shares being tendered, in which
the aggregate amount of cash or the Fair Market Value of any securities or
other property to be received by all holders who tender their Shares for each
Share so tendered shall be at least equal to the then applicable Fair Price
paid by a Related Person or paid by the Person making the tender offer if such
Person is not a Related Person. In the event that at the time such tender
offer is commenced the terms and conduct thereof are not directly regulated by
Section 14(d) or 13(e) of the Exchange Act and the general rules and
regulations promulgated thereunder, then the terms of such tender offer
regarding the time such offer is held open and regarding withdrawal rights
shall conform in all respects with such terms applicable to tender offers
regulated by either of such Sections of the Exchange Act. A Fair Tender Offer
shall not be deemed to be "consummated" until Shares are purchased and payment
in full has been made for all duly tendered Shares.
(r) "Indemnitee" shall mean (i) any present or former Trust
Manager or officer of the Trust, (ii) any Person who while serving in any of
the capacities referred to in clause (i) hereof served at the Trust's request
as a Trust Manager, director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another real estate investment trust
or foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other enterprise and (iii) any
Person nominated or designated by (or pursuant to authority granted by) the
Trust Managers or any committee thereof to serve in any of the capacities
referred to in clauses (i) or (ii) hereof.
(s) "Initial Public Offering" shall mean the initial sale of
Common Shares to the public pursuant to the Trust's first effective
registration statement for such Common Shares filed under the Securities Act of
1933, as amended.
(t) "Market Price" on any day shall mean, with respect to any
class or series of outstanding Shares, the closing price for such Shares on
such date.
(u) "Nasdaq" shall mean the Nasdaq National Market.
(v) "NYSE" shall mean the New York Stock Exchange.
(w) "Official Capacity" shall mean (i) when used with respect
to a Trust Manager, the office of Trust Manager of the Trust and (ii) when used
with respect to
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a Person other than a Trust Manager, the elective or appointive office of the
Trust held by such Person or the employment or agency relationship undertaken
by such Person on behalf of the Trust, but in each case does not include
service for any other real estate investment trust or foreign or domestic
corporation or any partnership, joint venture, sole proprietorship, trust,
employee benefit plan or other enterprise.
(x) "Other consideration to be received" shall include,
without limitation, Shares retained by its existing public shareholders in the
event of a Business Combination in which the Trust is the surviving entity.
(y) "Person" shall mean an individual, corporation,
partnership, estate, trust (including a trust qualified under Sections 401(a)
or 501(c)(17) of the Code), a portion of a trust permanently set aside for or
to be used exclusively for the purposes described in Section 642(c) of the
Code, association, private foundation within the meaning of Section 509(a) of
the Code, joint stock company or other entity and also includes a group as that
term is used for purposes of Section 13(d)(3) of the Exchange Act and a group
to which an Excepted Holder Limit applies.
(z) "Proceeding" shall mean any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative,
arbitrative or investigative, any appeal in such an action, suit or proceeding,
and any inquiry or investigation that could lead to such an action, suit or
proceeding.
(aa) "Prohibited Owner" shall mean, with respect to any
purported Transfer, any Person who, but for the provisions of Article XVI,
would Beneficially or Constructively Own Shares, and if appropriate in the
context, shall also mean any Person who would have been the record owner of
Shares that the Prohibited Owner would have so owned.
(ab) "REIT" shall mean a real estate investment trust within
the meaning of Section 856 of the Code.
(ac) "Related Person" shall mean and include any individual,
corporation, partnership or other person (as defined in Section 13(d)(3) of the
Exchange Act), and the "Affiliates" and "Associates" (as defined in Rule 12b-2
of the Exchange Act) of any such individual, corporation, partnership or other
person which individually or together is the "Beneficial Owner" (as defined in
Rule 13d-3 of the Exchange Act) in the aggregate of more than 50% of the
Shares, other than the Trust or any employee benefit plan(s) sponsored by the
Trust.
(ad) "Shares" shall mean, unless otherwise specified in this
Declaration of Trust, the Common Shares and, solely to the extent specifically
required by law or as
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specifically provided in any resolution or resolutions of the Trust Managers
providing for the issuance of any particular series of Preferred Shares, to the
Preferred Shares.
(ae) "Substantial Part" shall mean more than 35% of the book
value of the total assets of the Trust and its subsidiaries (taken as a whole)
as of the end of the quarter ending prior to the time the determination is
being made.
(af) "Transfer" shall mean any issuance, sale, Transfer, gift,
assignment, devise or other disposition, as well as any other event that causes
any Person to acquire Beneficial or Constructive Ownership, or any agreement to
take any such actions or cause any such events, of Shares or the right to vote
or receive dividends on Shares, including (i) the granting or exercise of any
option (or any disposition of any option), (ii) any disposition of any
securities or rights convertible into or exchangeable for Shares or any
interest in Shares or any exercise of any such conversion or exchange right and
(iii) Transfers of interests in other entities that result in changes in
Beneficial or Constructive Ownership of Shares; in each case, whether voluntary
or involuntary, whether owned of record, Constructively or Beneficially Owned
and whether by operation of law or otherwise. The terms "Transferring" and
"Transferred" shall have the correlative meanings.
(ag) "Treasury Regulations" shall mean the Federal Income Tax
Regulations, including Temporary Regulations, promulgated under the Code, as
such regulations may be amended from time to time (including corresponding
provisions of succeeding regulations).
(ah) "Trust" includes any domestic or foreign predecessor of
the Trust in a merger, consolidation or other transaction in which the
liabilities of the predecessor are Transferred to the Trust by operation of law
and in any other transaction in which the Trust assumes the liabilities of the
predecessor but does not specifically exclude liabilities that are the subject
of Article XI.
(ai) "Trust Manager" shall mean any natural Person, who need
not be a resident of the State of Texas or a shareholder of the Trust, that
controls, operates, disposes, invests, reinvests and manages the Trust estate
and, whether included in the foregoing or not, possesses all powers necessary
or appropriate to effect any or all of the purposes for which the Trust is
organized.
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(aj) "Trustee" shall mean the Person unaffiliated with the
Trust and a Prohibited Owner, that is appointed by the Trust to serve as
Trustee of the Charitable Trust.
[Remainder of page intentionally left blank.]
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IN WITNESS WHEREOF, the undersigned Trust Managers do hereby execute
this Declaration of Trust effective as of the 30th day of January, 1998.
/s/ ROBERT L. ADAIR III
--------------------------------------
Robert L. Adair III
/s/ ROBERT H. LUTZ, JR.
--------------------------------------
Robert H. Lutz, Jr.
/s/ MARK D. GIBSON
--------------------------------------
Mark D. Gibson
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EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
To the Board of Trust Managers and Shareholder of
AMRESCO Capital Trust
Dallas, Texas
We consent to the use in this Registration Statement relating to 15,000,000
Common Shares of Beneficial Interest of AMRESCO Capital Trust on Form S-11 of
our report dated February 2, 1998 appearing in the Prospectus, which is a part
of this Registration Statement, and to the references to us under the heading
"Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 3, 1998
