As filed with the Securities and Exchange Commission on September 17, 1998
Registration No. 333-47411
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. THREE
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------------------------------
CNL HEALTH CARE PROPERTIES, INC.
(Exact Name of Registrant as Specified in Charter)
400 East South Street
Orlando, Florida 32801
Telephone: (407) 650-1000
(Address of Principal executive offices)
James M. Seneff, Jr.
Chief Executive Officer
400 East South Street
Orlando, Florida 32801
Telephone: (407) 650-1000
(Name, Address and Telephone
Number of Agent for Service)
COPIES TO:
THOMAS H. McCORMICK, ESQUIRE
THOMAS J. PLOTZ, ESQUIRE
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the registration statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
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>
CNL HEALTH CARE PROPERTIES, INC. PROSPECTUS
Shares of Common Stock
$2,500,000 -- Minimum
Minimum Purchase -- 250 Shares ($2,500)
100 Shares ($1,000) for IRAs and Keogh and Pension Plans
(Minimum purchase may be higher in certain states)
CNL HEALTH CARE PROPERTIES, INC. (the "Company") is a Maryland
corporation which intends to qualify for federal income tax purposes as a real
estate investment trust (a "REIT"). The Company may sell up to 15,500,000 shares
of common stock (the "Shares"), including 500,000 Shares pursuant to the
Company's reinvestment plan, for a maximum of $155,000,000. The Company has been
formed primarily to acquire real estate properties (the "Properties") related to
health care and seniors' housing facilities (the "Health Care Facilities")
located across the United States. The Health Care Facilities may include,
congregate living, assisted living and skilled nursing facilities, continuing
care retirement communities and life care communities, and medical office
buildings and walk-in clinics. The Properties will be leased on a long term,
"triple-net" basis to operators of the Health Care Facilities. Under the
Company's triple-net leases, the tenant generally will be responsible for
property costs associated with ongoing operations, including repairs,
maintenance, property taxes, utilities, and insurance.
There are material risks associated with an investment in the Company
(see "Risk Factors" at Page 9), including the following:
o The Company currently owns no Properties, and investors, therefore,
will not have any opportunity to evaluate the Properties that the
Company will acquire.
o If the Company raises only $2,500,000 from sales of Shares, it will
acquire no more than two medical office buildings or walk-in clinics,
and will have reduced diversification of its investments. Reduced
diversification will increase the potential adverse effect on the
Company from an underperforming tenant or an underperforming facility
type. In the event it raises only $2,500,000 from sales of Shares,
the Company will not provide mortgage financing (the "Mortgage
Loans ").
o The Company will rely on CNL Health Care Advisors, Inc. (the "Advisor")
with respect to all investment decisions, subject to approval by the
Board of Directors in certain circumstances. The Advisor and its
Affiliates have no previous experience in investing in health care
Properties, which could result in the Company's failure to meet its
investment objectives.
o The Advisor and its Affiliates are or will be engaged in other
activities that will result in conflicts of interest with the services
that the Advisor will provide to the Company, and could take actions
that are more favorable to such other entities than to the Company. Any
such conflicts could have a negative impact on the Company's financial
performance and, consequently, on Distributions.
o There is currently no public trading market for the Shares, and there
is no assurance that one will develop. Although the Company currently
intends to seek listing on a national securities exchange or over-the
counter market of its common stock ( "Listing ") within five to ten
years from the date the offering commences, Listing does not assure
liquidity. If the Shares are not listed within ten years of
commencement of the offering, as to which there can be no assurance,
the Company will commence the orderly sale of its assets and the
distribution of the proceeds.
o The Company has not obtained a financing commitment and may be unable
to do so on satisfactory terms. The failure to obtain financing may
impede the acquisition of Properties and the making of Mortgage Loans
and equipment financing ("Secured Equipment Leases"). Because no
proceeds from the sale of Shares will be used to fund Secured Equipment
Leases, the Secured Equipment Lease program is dependent upon the
Company obtaining financing.
o In addition to general market and economic conditions, the Company is
subject to risks arising out of government regulation of the health
care industry, which may reduce the value of the Company's investments
and the amount of revenues the Company receives from tenants. Certain
of the Company's tenants may be dependent upon government
reimbursements and certain other of the Company's tenants, to the
extent that they are not dependent upon government reimbursements, may
be dependent on their success in attracting senior citizens with
sufficient independent means to pay for the tenants' services.
o The Company may, without the approval of a majority of the Independent
Directors, incur debt totalling up to 300% of the value of the net
assets of the Company, including debt to make Distributions to
stockholders in order to maintain its status as a REIT. The Company
may not be able to meet its debt service obligations, and, to the
extent that such obligations cannot be met, the Company may lose its
investment in any Properties that secure underlying indebtedness on
which the Company has defaulted.
o The Company may not qualify or remain qualified as a REIT for federal
income tax purposes, which could result in subjecting the Company to
federal income tax on its taxable income at regular corporate rates,
thereby reducing the amount of funds available for paying Distributions
to stockholders.
o The Company anticipates that it will pay substantial fees to
Affiliates of the Company and estimates that approximately 9% of the
proceeds from the sale of Shares will be paid in fees and expenses to
Affiliates of the Company for services and as reimbursement for
Organizational and Offering Expenses incurred on behalf of the
Company. The amount of proceeds that will be available to purchase
Properties and to make Mortgage Loans will be decreased as a result of
such payments.
Of the proceeds from the sale of Shares, approximately 84% will be used
to acquire Properties and make Mortgage Loans, and approximately 9% will be paid
in fees and expenses to Affiliates of the Company for their services and as
reimbursement for Organizational and Offering Expenses incurred on behalf of the
Company; the balance will be used to pay other expenses of the offering.
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.
Price to Selling Proceeds to
Public Commissions(1) Company(2)(3)
-------- -------------- -------------
Per Share $ 10.00 $ 0.75 $ 9.25
Total Minimum $ 2,500,000 $ 187,500 $ 2,312,500
Total Maximum(4) $155,000,000 $11,625,000 $143,375,000
(footnotes on following page)
CNL SECURITIES CORP.
September , 1998
<PAGE>
(1) CNL Securities Corp. (the "Managing Dealer ") will receive Selling
Commissions of 7.5% on sales of Shares, subject to reduction in certain
circumstances. The Managing Dealer, which is an Affiliate of the
Company, may engage other broker-dealers that are members of the
National Association of Securities Dealers, Inc. or other entities
exempt from broker-dealer registration (collectively, the "Soliciting
Dealers ") to sell Shares and reallow to them commissions of up to 7%
with respect to Shares which they sell. The amounts indicated for
Selling Commissions assume that reduced Selling Commissions are not
paid in connection with the purchase of any Shares and do not include a
0.5% marketing support and due diligence expense reimbursement fee
payable to the Managing Dealer, all or a portion of which may be
reallowed to certain Soliciting Dealers, with prior written approval
from, and in the sole discretion of, the Managing Dealer. See "The
Offering-- Plan of Distribution" for a description of the marketing
support and due diligence expense reimbursement fee payable to the
Managing Dealer. The Company also will issue to the Managing Dealer a
warrant (the "Soliciting Dealer Warrants ") to purchase one share of
common stock for every 25 Shares sold, to be exercised, if at all,
during the five-year period commencing with the date the offering
begins (the "Exercise Period "), at a price of $12.00 per share. All or
any part of such Soliciting Dealer Warrants may be reallowed to certain
Soliciting Dealers with prior written approval from, and in the sole
discretion of, the Managing Dealer, unless prohibited by federal or
state securities laws. See "Summary of Articles of Incorporation and
Bylaws-- Description of Capital Stock-- Soliciting Dealer Warrants" and
"The Offering-- Plan of Distribution."
(2) Before deducting (i) Organizational and Offering Expenses of the
Company estimated to be 3% of gross offering proceeds computed at
$10.00 per Share sold ( "Gross Proceeds ") and (ii) the marketing
support and due diligence expense reimbursement fee. Organizational and
Offering Expenses exclude Selling Commissions and the marketing support
and due diligence reimbursement fee.
(3) In addition, assuming 15,500,000 Shares, including 500,000 Shares
available to stockholders participating in the Company's Reinvestment
Plan, are sold and 600,000 Soliciting Dealer Warrants are issued to the
Managing Dealer, $480 of additional proceeds will be raised, and
assuming all such warrants are exercised at the exercise price of
$12.00 per share, a total of $7,200,000 of additional proceeds will be
raised. No Selling Commissions or marketing support and due diligence
expense reimbursement fee will be paid in connection with the issuance
of the Soliciting Dealer Warrants or the shares issuable upon the
exercise thereof.
(4) Includes 500,000 Shares which may be issued pursuant to the Company's
Reinvestment Plan. Those stockholders who elect to participate in the
Reinvestment Plan will have their Distributions reinvested in
additional Shares.
NEITHER THE ATTORNEY GENERAL OF THE STATE OF NEW YORK NOR THE ATTORNEY
GENERAL OF THE STATE OF NEW JERSEY OR THE BUREAU OF SECURITIES OF THE STATE OF
NEW JERSEY HAS PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
All subscription funds for Shares will be deposited in an
interest-bearing escrow account with SouthTrust Asset Management Company of
Florida, N.A., which will act as the escrow agent for this offering, until
subscription funds for the Company's Shares total $2,500,000. Subscription funds
will be released from escrow to the Company to be used for Company purposes
within approximately 30 days after the minimum is reached. No sale of Shares
shall be completed until at least five business days after the date on which the
subscriber receives a copy of this Prospectus. No Shares will be sold unless
subscriptions for at least 250,000 Shares ($2,500,000) have been obtained within
one year after the initial date of this Prospectus. In no event will
subscription funds be held in escrow for longer than one year, and any refunds
of subscriptions due to the failure of the Company to reach the required minimum
shall be returned promptly with interest. Pursuant to the requirements of the
Commissioner of Securities of the State of Pennsylvania, subscriptions from
Pennsylvania residents may not be released from escrow, or included in
determining whether the $2,500,000 minimum for the Company has been reached,
until subscriptions for Shares totalling at least $7,775,000 have been received
from all sources. The offering of Shares will terminate no later than
___________, 1999 (one year after the initial date of this Prospectus), unless
the Company elects to extend it to a date no later than ___________, 2000 (two
years after the initial date of this Prospectus), in states that permit such
extension.
CALIFORNIA, FLORIDA AND IOWA INVESTORS: California, Florida and Iowa
investors will have the right to withdraw their subscription funds if
subscriptions for at least $2,500,000 have not been accepted by the Company
within six months after the initial offer of Shares pursuant to this Prospectus
and the Company elects at that time to continue the offering beyond that date.
The Company will promptly notify California, Florida and Iowa investors if the
Company so elects to continue the offering, and such investors must exercise
their right to withdraw within 10 days of such notice by delivering written
notice to the Company of their intention to exercise such right. The
subscription funds of withdrawing California, Florida and Iowa investors will be
returned promptly along with such investors' pro rata share of interest earned
thereon net of any escrow fees.
PENNSYLVANIA INVESTORS: Because the minimum offering is less than
$15,500,000, all Pennsylvania investors are cautioned to evaluate carefully the
Company's ability fully to accomplish its stated objectives and to inquire as to
the current dollar volume of subscriptions for the Shares.
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THIS OFFERING TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN
ANY STATE IN WHICH SUCH OFFER OR SALE WOULD BE UNLAWFUL, AND NO SUBSCRIPTION
WILL BE ACCEPTED FROM ANY PERSON WHO DOES NOT MEET THE SUITABILITY STANDARDS SET
FORTH HEREIN. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER
SHALL CREATE, UNDER ANY CIRCUMSTANCES, AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. IF, HOWEVER, ANY
MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED,
THIS PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY.
iii
<PAGE>
THE USE OF FORECASTS IN THIS OFFERING IS PROHIBITED. ANY
REPRESENTATIONS TO THE CONTRARY, AND ANY PREDICTIONS, WRITTEN OR ORAL, AS TO THE
AMOUNT OR CERTAINTY OF ANY PRESENT OR FUTURE CASH BENEFIT OR TAX CONSEQUENCE
WHICH MAY FLOW FROM AN INVESTMENT IN THIS COMPANY IS PROHIBITED.
Until ___________, 1998 (90 days after the initial date of this
Prospectus), 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 unsold allotments or
subscriptions.
iv
<PAGE>
TABLE OF CONTENTS
TABLE OF CONTENTS..........................................................v
SUMMARY....................................................................2
CNL Health Care Properties, Inc.......................................2
Summary Risk Factors..................................................2
Investment Objectives and Policies....................................4
Business..............................................................4
Estimated Use of Proceeds.............................................4
Conflicts of Interest.................................................4
Management............................................................5
Management Compensation...............................................5
Summary of Reinvestment Plan..........................................6
Description of Shares.................................................6
Distribution Policy...................................................7
Prior Performance of Affiliates.......................................8
Tax Status Of The Company.............................................8
The Offering..........................................................8
Definitions...........................................................10
RISK FACTORS...............................................................10
Investment Risks......................................................10
Insufficient Offering Proceeds....................................10
Lack of Diversification...........................................10
Possible Delays in Investment.....................................10
Inexperience of Management........................................11
Reliance on Advisor and Board of Directors;
No Management Rights for Stockholders..........................11
Effects of Governing Documents
and Maryland Law on Potential Takeovers........................11
Leverage..........................................................11
Conflicts of Interest.............................................12
Competing Demands on Officers and Directors.......................12
Potential Impact of Advisor's Compensation
on Investment Decisions........................................12
Property Development by Affiliates................................12
The Company May Invest with Affiliates of the Advisor.............12
No Independent Review of the Company or the Prospectus
by Managing Dealer.............................................12
No Separate Counsel for the Company, Affiliates and
Investors......................................................12
Lack of Liquidity of Shares.......................................12
Potential for Dilution............................................12
Lack of Control by the Company over Joint Ventures................12
Lack of Control of Property Management............................13
Mortgage Loans....................................................13
Unfavorable Real Estate Market Conditions May
Impact Operations.........................................13
Interest Rate Fluctuations May Adversely Affect
Mortgage Loans............................................13
Delays in Liquidating Defaulted Mortgage Loans...............13
Possible Noncompliance with Regulations......................14
Secured Equipment Leases..........................................14
Default by Lessee............................................14
Possible Noncompliance with Regulations......................14
Tax Risks....................................................14
No Operating History..............................................14
v
<PAGE>
Impact of Inflation...............................................14
Majority Stockholder Vote Binding on All Stockholders.............15
Broad Discretion of the Board of Directors in Management
of the Company's Operations....................................15
Restrictions on Transfer Relating to REIT Status..................15
Limited Liability of Officers and Directors.......................16
Possible Effect of ERISA..........................................16
Insufficient Working Capital......................................16
Distributions Funded by Borrowings May Constitute
Return of Capital..............................................16
Real Estate and Financing Risks.......................................16
An Unspecified Property Offering..................................16
Inability of Potential Investors to Evaluate
Tenants and Properties....................................16
No Limitation on Number of Properties of a Particular
Facility Type.............................................17
No Assurance of Obtaining Suitable Investments...............17
No Opportunity to Evaluate Procedures for Resolving
Conflicts of Interest.....................................17
Lack of Control Over Properties Under Construction................18
Ground Lease Property Risks.......................................18
Impasse or Conflicts with Joint Venture Partner...................18
Impasse with Joint Venture Partner...........................18
Divergent Interests of Joint Venture Partner.................18
Limitations on the Ability of the Company to Liquidate............18
Inability to Control the Sale of Certain Properties...............19
Real Property Investments.........................................19
Lack of Control Over Market and Business Conditions..........19
Multiple Property Leases or Mortgage Loans with
Individual Tenants or Borrowers...........................20
Inability to Re-lease Properties.............................20
Lack of Adequate Insurance...................................20
Health Care Facilities............................................20
Reliance on Government Reimbursement.........................20
Dependence on Attracting Senior Citizens with Ability
to Pay....................................................20
Effects of Cost Control and Other Health Care Reform
Measures..................................................21
Constraints of Government Regulation of Health Care
Industry..................................................21
Limitations on Alternative Uses of Company Properties........21
Impact of Adverse Trends..........................................21
Investment Barriers Imposed by Certificate of Need Laws in
Certain States.................................................21
Potential Adverse Impact of Competitors...........................22
Possible Environmental Liabilities................................22
Possible Lack of Ability to Obtain the Line of Credit and
Permanent Financing............................................22
Unspecified Secured Equipment Leases..............................22
Tax Risks.............................................................22
REIT Qualification................................................22
Secured Equipment Lease Treatment.................................23
Effect of REIT Disqualification...................................23
Effect of Distribution Requirements...............................23
Restrictions on Maximum Share Ownership...........................23
Other Tax Liabilities.............................................24
Changes in Tax Laws...............................................24
SUITABILITY STANDARDS AND HOW TO SUBSCRIBE.................................24
vi
<PAGE>
Suitability Standards.................................................24
How to Subscribe......................................................24
ESTIMATED USE OF PROCEEDS..................................................27
MANAGEMENT COMPENSATION....................................................28
CONFLICTS OF INTEREST......................................................35
Prior and Future Programs.............................................35
Competition to Acquire Properties and Invest
in Mortgage Loans..................................................37
Sales of Properties...................................................37
Joint Investment With An Affiliated Program...........................38
Competition for Management Time.......................................38
Compensation of the Advisor...........................................39
Relationship with Managing Dealer.....................................39
Legal Representation..................................................40
Certain Conflict Resolution Procedures................................40
SUMMARY OF REINVESTMENT PLAN...............................................41
General...............................................................41
Investment of Distributions...........................................42
Participant Accounts, Fees, and Allocation of Shares..................42
Reports to Participants...............................................43
Election to Participate or Terminate Participation....................43
Federal Income Tax Considerations.....................................43
Amendments and Termination............................................44
REDEMPTION OF SHARES.......................................................44
BUSINESS...................................................................45
General...............................................................45
Site Selection and Acquisition of Properties..........................51
Standards for Investment in Properties................................54
Description of Properties.............................................55
Description of Property Leases........................................57
Joint Venture Arrangements............................................61
Mortgage Loans........................................................62
Management Services...................................................63
Borrowing.............................................................63
Sale of Properties, Mortgage Loans and Secured
Equipment Leases...................................................65
Competition...........................................................66
Regulation of Mortgage Loans and Secured
Equipment Leases...................................................66
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OF THE COMPANY......................................66
Liquidity and Capital Resources.......................................68
Results of Operations.................................................68
MANAGEMENT.................................................................68
General...............................................................68
Fiduciary Responsibility of the Board of Directors....................69
Directors and Executive Officers......................................69
Independent Directors.................................................73
Committees of the Board of Directors..................................73
Compensation of Directors and Executive Officers......................73
Management Compensation...............................................74
vii
<PAGE>
THE ADVISOR AND THE ADVISORY AGREEMENT.....................................74
The Advisor...........................................................74
The Advisory Agreement................................................74
PRIOR PERFORMANCE INFORMATION..............................................77
INVESTMENT OBJECTIVES AND POLICIES.........................................86
General...............................................................86
Certain Investment Limitations........................................86
viii
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DISTRIBUTION POLICY........................................................93
General...............................................................93
Distributions.........................................................93
SUMMARY OF THE ARTICLES OF INCORPORATION
AND BYLAWS..............................................................94
General...............................................................94
Description of Capital Stock..........................................94
Board of Directors....................................................98
Stockholder Meetings..................................................99
Advance Notice for Stockholder Nominations for
Directors and Proposals of New Business............................99
Amendments to the Articles of Incorporation...........................99
Mergers, Combinations, and Sale of Assets.............................100
Control Share Acquisitions............................................100
Termination of the Company and REIT Status............................101
Restriction of Ownership..............................................101
Responsibility of Directors...........................................103
Limitation of Liability and Indemnification...........................103
Removal of Directors..................................................105
Inspection of Books and Records.......................................105
Restrictions on "Roll-Up" Transactions................................106
FEDERAL INCOME TAX CONSIDERATIONS..........................................108
Introduction..........................................................108
Taxation of the Company...............................................109
Taxation of Stockholders..............................................118
State and Local Taxes.................................................125
Characterization of Property Leases...................................125
Characterization of Secured Equipment Leases..........................126
Investment in Joint Ventures..........................................128
REPORTS TO STOCKHOLDERS....................................................129
THE OFFERING...............................................................131
General...............................................................131
Plan of Distribution..................................................132
Subscription Procedures...............................................137
Escrow Arrangements...................................................140
ERISA Considerations..................................................142
Determination of Offering Price.......................................145
SUPPLEMENTAL SALES MATERIAL................................................145
LEGAL OPINION..............................................................146
EXPERTS....................................................................146
ADDITIONAL INFORMATION.....................................................146
DEFINITIONS................................................................146
Form of Reinvestment Plan .......................................Appendix A
Financial Information............................................Appendix B
Prior Performance Tables.........................................Appendix C
Subscription Agreement...........................................Appendix D
ix
<PAGE>
SUMMARY
THIS SECTION SUMMARIZES CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS AND IS INTENDED FOR QUICK REFERENCE ONLY. THIS IS NOT A COMPLETE
DESCRIPTION OF THE INVESTMENT. POTENTIAL STOCKHOLDERS MUST READ AND EVALUATE THE
FULL TEXT OF THIS PROSPECTUS AND ALL SUPPORTING DOCUMENTS ATTACHED AS APPENDICES
HERETO IN ORDER TO EVALUATE AN INVESTMENT IN THE COMPANY. THE FOLLOWING SUMMARY
THEREFORE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THIS
PROSPECTUS AND THE SUPPORTING DOCUMENTS. CAPITALIZED TERMS NOT OTHERWISE DEFINED
HEREIN SHALL HAVE THE MEANINGS SET FORTH IN THE "DEFINITIONS" SECTION OF THE
PROSPECTUS.
CNL HEALTH CARE PROPERTIES, INC.
CNL Health Care Properties, Inc. (the "Company") is a Maryland
corporation which intends to qualify for federal income tax purposes as a real
estate investment trust (a "REIT"). The Company's address is 400 East South
Street, Orlando, Florida 32801, telephone (407) 650-1000 or toll free (800)
522-3863.
<PAGE>
The Company has been formed primarily to acquire real estate properties
(the "Properties") related to health care and seniors' housing facilities (the
"Health Care Facilities") located across the United States. The Health Care
Facilities may include congregate living, assisted living and skilled nursing
facilities, continuing care retirement communities and life care communities,
and medical office buildings and walk-in clinics. The Properties will be leased
on a long-term (generally, 10 to 20 years, plus renewal options for an
additional 10 to 20 years), "triple-net" basis, which means that the tenant
generally will be responsible for repairs, maintenance, property taxes,
utilities, and insurance. The Company expects to structure the leases of its
Properties to provide for payment of base annual rent with (i) automatic fixed
increases in base rent or (ii) increases in the base rent based on increases in
consumer price indices, over the term of the lease. The Company also may offer
mortgage financing (the "Mortgage Loans") to operators of Health Care Facilities
secured by real estate owned by the borrower. However, because it prefers to
focus on investing in Properties, which have the potential to appreciate, the
Company currently expects to provide Mortgage Loans in the aggregate principal
amount of approximately 5% to 10% of the Company's total assets. The Company
expects that the interest rate and terms (generally, 10 to 20 years) of the
Mortgage Loans will be similar to those of its leases. To a lesser extent, the
Company also may offer furniture, fixtures and equipment ("Equipment") financing
to operators of Health Care Facilities through loans or direct financing leases
(collectively, the "Secured Equipment Leases"). The aggregate outstanding
principal amount of Secured Equipment Leases is not expected to exceed 10% of
the Company's total assets. See "Business" for a description of the types of
Properties that may be selected by CNL Health Care Advisors, Inc. (the
"Advisor"), the Property selection and acquisition processes, and the nature of
the Mortgage Loans and Secured Equipment Leases. The Company has not yet
acquired any Properties, made any Mortgage Loans or entered into any Secured
Equipment Leases, nor have any Properties, Mortgage Loans or Secured Equipment
Leases been identified for investment.
The Company intends to borrow money to acquire Properties, Mortgage
Loans, and Secured Equipment Leases (collectively, the "Assets"), and to pay
certain fees. The Company plans to obtain a revolving line of credit (the "Line
of Credit") initially in an amount up to $45,000,000. The Line of Credit may be
increased at the discretion of the Board of Directors. In addition to the Line
of Credit, the Company may obtain other financing (i) to acquire Assets, (ii) to
pay fees to the Advisor in consideration for negotiating Secured Equipment
Leases, (iii) to pay a fee to the Advisor in the amount of 4.5% of any permanent
financing obtained, excluding amounts to fund Secured Equipment Leases, for
identifying the Properties, structuring the terms of the acquisition and leases
of the Properties and structuring the terms of the Mortgage Loans and (iv) to
refinance outstanding amounts under the Line of Credit (the "Permanent
Financing"). The Board of Directors anticipates that the Permanent Financing
will be obtained from a bank at a competitive interest rate and that the
aggregate amount of the Permanent Financing will not exceed 30% of the Company's
total assets. However, in accordance with the Company's Articles of
Incorporation, the aggregate maximum amount the Company may borrow is 300% of
Net Assets. In general, Net Assets are the Company's total assets (other than
intangibles), calculated at cost, less total liabilities. The Company is engaged
in preliminary discussions with potential lenders but has not yet obtained a
commitment letter for the Line of Credit or any Permanent Financing, and may not
be able to obtain the Line of Credit or the Permanent Financing on satisfactory
terms. The Company may repay the Line of Credit with offering proceeds, working
capital or with Permanent Financing. The Line of Credit and Permanent Financing
will be used to acquire Assets and are the only source of funds for making
Secured Equipment Leases. The Board of Directors may elect to encumber Assets in
connection with any borrowing.
The Board of Directors may determine to engage in future offerings of
the Company's common stock ("Common Stock") of up to the number of unissued
authorized shares of Common Stock available following the completion of this
offering. The Company currently anticipates listing the shares of Common Stock
of the Company, including the shares offered hereby (the "Shares"), on a
national securities exchange or over-the-counter market ("Listing") within five
to ten years after the commencement of this offering. If the Company's Common
Stock is listed, the Company automatically will become a perpetual life entity.
Under the Company's Articles of Incorporation, if Listing does not occur by
December 31, 2008, the Company will undertake, outside the ordinary course of
business and consistent with its objective of qualifying as a REIT, the orderly
Sale of the Company's assets, the distribution of Net Sales Proceeds of such
Sales to stockholders and the limitation of its activities to those related to
its orderly liquidation, unless the stockholders owning a majority of the Shares
elect to amend the Articles of Incorporation to extend the duration of the
Company. See "Risk Factors -- Real Estate and Financing Risks" for a complete
discussion of risks relating to future disposition of the Company's assets. As a
perpetual life entity following Listing, the Company would not be required to
dissolve and return capital to stockholders. If Listing occurs, in order to
liquidate their investment, stockholders would have to sell their Shares in the
market on which the Shares are traded. Listing is no assurance of liquidity. See
"Risk Factors -- Investment Risks" for a discussion of risks associated with the
lack of liquidity of the Shares and with borrowing. In addition, following
Listing the Company intends to reinvest proceeds from Sales of assets rather
than distribute such proceeds to stockholders.
SUMMARY RISK FACTORS
The "Risk Factors" section discusses in detail the more important risks
associated with an investment in the Company, including risks associated with an
investment in a real estate investment trust such as the Company, risks
associated with an investment in real estate such as the Properties, risks
associated with the Mortgage Loans, risks associated with Secured Equipment
Leases, risks associated with borrowing and tax risks.
These risks include:
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o Because the Company currently owns no Properties, stockholders will not
have any opportunity to evaluate the Properties that the Company will
acquire.
o If the Company raises only $2,500,000 from sales of Shares, the Company
will acquire no more than two medical office buildings or walk-in
clinics, and will have reduced diversification of its investments.
Reduced diversification will increase the potential adverse effect on
the Company from an underperforming tenant or an underperforming
facility type. In the event it raises only $2,500,000 from sales of
Shares, the Company will not make Mortgage Loans.
o The Company will rely on the Advisor which, together with the Board of
Directors, will have responsibility for the management of the Company
and its investments, subject to the ability of the stockholders to
elect the Directors. The Advisor and its Affiliates have no previous
experience in investing in health care Properties. In addition, the
experience of certain of the Directors of the Company with acquiring
and leasing Health Care Facilities is limited. The inexperience of the
Advisor and the limited experience of certain of the Directors in
investing in health care Properties could result in the Company's
failure to make investments that meet the Company's investment
objectives.
o The services to be performed by the Advisor and its Affiliates for the
Company in connection with the offering, the selection and acquisition
of the Properties, the making of Mortgage Loans and Secured Equipment
Leases and the general operation of the Company will result in
conflicts of interest. The resolution of any such conflicts in favor of
entities other than the Company could have a negative effect on the
Company's financial performance, and consequently, on Distributions.
o The Board of Directors will have significant flexibility regarding the
Company's operations, including, for example, the ability to issue
additional Shares and dilute stockholders' equity interests and the
ability to change the compensation of the Advisor and to employ and
compensate Affiliates. The Board of Directors can take such actions
solely on its own authority and without stockholder approval.
o The Company may make investments that will not appreciate in value over
time, such as building only Properties, with the land owned by a
third-party, and Mortgage Loans.
o Stockholders who must sell their Shares will not be able to sell them
quickly because it is not anticipated that there will be a public
market for the Shares in the near term, and there can be no assurance
that Listing will occur.
o The Company has not obtained a commitment for the Line of Credit or
Permanent Financing, and may be unable to do so on satisfactory terms,
thereby affecting its ability to acquire Properties or make Mortgage
Loans or Secured Equipment
Leases.
o In addition to general market and economic conditions, the Company is
subject to risks arising out of government regulation of the health
care industry, which may reduce the value of the Company's investments
and the amount of revenues the Company receives from tenants. Certain
of the Company's tenants may be dependent upon government
reimbursements and certain other of the Company's tenants, to the
extent that they are not dependent upon government reimbursements, may
be dependent on their success in attracting senior citizens with
sufficient independent means to pay for the tenants' services..
o The amount of revenues the Company will receive from tenants, lessees
and borrowers cannot be predicted.
o The Company may, without the approval of a majority of the Independent
Directors, incur debt totalling up to 300% of the value of Net Assets
of the Company, including debt to make Distributions to stockholders in
order to maintain its status as a REIT. There can be no assurance that
the Company will be able to meet its debt service obligations,
including interest costs which may be substantial.
o The Company may, in connection with any borrowing, use Assets to secure
the repayment of indebtedness. There is no limit on the amount of
Assets that can be used as security for the repayment of indebtedness,
and a default in the payment of any such secured indebtedness may
result in foreclosure and the loss of the Company's investment in the
Assets.
o Tenants, lessees or borrowers may default, resulting in decreased
income.
o The vote of stockholders owning at least a majority but less than all
of the Shares will bind all of the stockholders as to matters such as
the election of Directors and amendment of the Company's governing
documents.
o Restrictions on ownership of more than 9.8% of the shares of the
Company's Common Stock by any single stockholder or certain related
stockholders may have the effect of inhibiting a change in control of
the Company even if such a change is in the interest of a majority of
the stockholders.
o The Company may not qualify or remain qualified as a REIT for federal
income tax purposes, which could result in subjecting the Company to
federal income tax on its taxable income at regular corporate rates,
thereby reducing the amount of funds available for paying Distributions
to stockholders.
o The Company anticipates that it will pay substantial fees to Affiliates
of the Company and estimates that approximately 9% of the proceeds from
the sale of Shares will be paid in
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fees and expenses to Affiliates of the Company for services and as
reimbursement for Organizational and Offering Expenses incurred on
behalf of the Company. The amount of proceeds that will be available to
purchase Properties and to make Mortgage Loans will be decreased as a
result of such payments.
INVESTMENT OBJECTIVES AND POLICIES
The Company's primary investment objectives are to preserve, protect,
and enhance the Company's assets while (i) making Distributions commencing in
the initial year of Company operations; (ii) obtaining fixed income through the
receipt of base rent, and increasing the Company's income (and Distributions)
and providing protection against inflation through automatic fixed increases in
base rent or increases in the base rent based on increases in consumer price
indices, over the terms of the leases, and obtaining fixed income through the
receipt of payments from Mortgage Loans and Secured Equipment Leases; (iii)
qualifying and remaining qualified as a REIT for federal income tax purposes;
and (iv) providing stockholders of the Company with liquidity of their
investment within five to ten years after commencement of the offering, either
in whole or in part, through (a) Listing, or (b) the commencement of the orderly
sale of the Company's assets, and distribution of the proceeds thereof (outside
the ordinary course of business and consistent with its objective of qualifying
as a REIT).
The Company intends to meet these objectives by following certain
investment policies discussed herein, as summarized on the preceding pages. See
"Business - General," "Business - Site Selection and Acquisition of Properties,"
"Business - Description of Leases," and "Investment Objectives and Policies" for
a more complete description of the manner in which the structure of the
Company's business will facilitate the Company's ability to meet its investment
objectives. There can be no assurance that these objectives will be met. The
Company's investment objectives are subject to review by the Independent
Directors and may not be changed without the approval of stockholders owning a
majority of the shares of outstanding Common Stock.
BUSINESS
The Company intends to capitalize on the growing real estate needs in
the health care and seniors' housing industries primarily by acquiring
Properties and leasing them to health care operators on a long-term (generally
10 to 20 years, plus renewal options for an additional 10 to 20 years),
"triple-net" basis. With regard to housing for seniors, there are three major
contributors to growth and the attraction of capital, according to the National
Investment Conference for the Senior Living and Long Term Care Industries in
1996. They are (i) demographics, (ii) the limited supply of new product, and
(iii) the investment community's increased understanding of the industry.
Although the Company believes the growth will continue for a long while,
overbuilding is unlikely due to the favorable demographics, the increase in
public awareness of the industry, the preference of seniors for obtaining care
in non-institutional settings and the cost savings realized in a
non-institutional environment.
Management believes that other changes and trends in the health care
industry will create opportunities for growth of seniors' housing facilities,
including (i) the growth of operators serving specific health care niches, (ii)
the consolidation of providers and facilities through mergers, integration of
physician practices, and elimination of duplicative services, (iii) the
pressures to reduce the cost of providing quality health care, (iv) more
dual-income and single-parent households leaving fewer family members available
for in-home care of aging parents and necessitating more senior care facilities,
and (v) an anticipated increase in the number of insurance companies and health
care networks offering privately funded long-term care insurance.
ESTIMATED USE OF PROCEEDS
The Company will use the proceeds of the sale of the Shares to acquire
Properties, to make Mortgage Loans, and to pay expenses relating to the
organization of the Company and the sale of the Shares. In light of current
market conditions, management of the Company and the Advisor have estimated a
purchase price of $1,000,000 to $30,000,000 for each Property. See "Business --
General." If only 250,000 Shares ($2,500,000) are sold, the Company will acquire
no more than two medical office buildings or walk-in clinics. If 15,000,000
Shares ($150,000,000) are sold, the Company could own or finance between four
and 126 Properties depending on the types of Properties. Assuming an average
purchase price of $10,000,000 per Property, based on the Company's present
expectation of the prices of Properties in which it will most likely invest, and
assuming maximum Gross Proceeds of $150,000,000 are raised, excluding amounts
received for Shares issued pursuant to the Company's Reinvestment Plan, the
Company would acquire or finance approximately 12 Properties with the net
proceeds from this offering. In addition, the Company has registered (i) an
offering of an additional 500,000 Shares ($5,000,000) available only to
stockholders who receive a copy of this Prospectus and who elect to participate
in the Company's reinvestment plan (the "Reinvestment Plan") and (ii) an
additional 600,000 shares of Common Stock issuable upon the exercise, at an
exercise price of $12.00 per share, of the Soliciting Dealer Warrants. See
"Estimated Use of Proceeds" and "Business -- General" for a more detailed
description of the anticipated use of offering proceeds. Management cannot
estimate the number of Mortgage Loans that may be entered into. The Company may
provide Mortgage Loans in the aggregate principal amount of approximately 5% to
10% of the Company's total assets. The Company may also use the proceeds of the
Line of Credit and the Permanent Financing to acquire Assets. Secured Equipment
Leases will be funded solely from borrowings.
CONFLICTS OF INTEREST
All of the officers of the Company (some of whom are also Directors of
the Company) are also officers or directors of the Advisor and will experience
conflicts of interest in their management of the Company. These arise
principally from their
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involvement in other activities that will conflict with those of the Company and
include matters related to (i) allocation of new investments and management time
and services between the Company and various other entities, (ii) the timing and
terms of the investment in or sale of an Asset, (iii) development of Company
Properties by Affiliates, (iv) investments with Affiliates of the Advisor, (v)
compensation of the Advisor, (vi) the Company's relationship with the Managing
Dealer, which is an Affiliate of the Company and the Advisor, and (vii) the fact
that the Company's securities and tax counsel also serves as securities and tax
counsel for certain Affiliates of the Company, and that neither the Company nor
the stockholders will have separate counsel.
The Directors of the Company who are independent of the Advisor (the
"Independent Directors") are responsible for monitoring the activities of the
Advisor and must approve all of the Advisor's actions that involve a potential
conflict other than certain such actions specifically permitted by the Articles
of Incorporation. Directors who are independent of the Advisor are those who
have not, within the last two years, been associated, directly or indirectly,
with the Advisor or its Affiliates through (i) ownership of an interest therein,
(ii) employment thereby, (iii) service as an officer or director therefor, (iv)
service as a director on the boards of directors of more than three REITs
advised by the Advisor, (v) performance of services other than as a director for
the Company or (vi) a material business relationship with the Advisor or any of
its Affiliates. Although Independent Directors may serve as directors of three
REITs advised by the Advisor, the Company does not anticipate that it will share
Independent Directors with other REITs advised by the Advisor. The "Conflicts of
Interest" section discusses in more detail the more significant of these
potential conflicts of interest, as well as the procedures that have been
established to resolve a number of these potential conflicts.
The Company has established certain conflict resolution procedures
relating to (i) transactions between the Company and the Advisor or its
Affiliates, (ii) certain future offerings, and (iii) allocation of investments
among certain affiliated entities. See "Conflicts of Interest -- Certain
Conflict
Resolution Procedures."
MANAGEMENT
The Company has retained the Advisor, a Florida corporation organized
in July 1997, to provide management, advisory and administrative services to the
Company. Pursuant to an advisory agreement with the Company, the Advisor will
handle the day-to-day operations of the Company, select the Company's real
estate investments, and administer its Secured Equipment Lease program. The five
members of the Board of Directors will oversee the management of the Company.
Three of the Directors of the Company are independent of the Advisor and have
responsibility for reviewing its performance. The Directors are elected to the
Board of Directors annually by the stockholders.
All of the officers and directors of the Advisor also are officers or
Directors of the Company. The Advisor will have responsibility for (i) selecting
the Properties that the Company will acquire, formulating and evaluating the
terms of each proposed acquisition, and arranging for the acquisition of the
Property by the Company, (ii) identifying potential lessees for the Properties
and potential borrowers for the Mortgage Loans, and formulating, evaluating, and
negotiating the terms of each lease of a Property and each Mortgage Loan, (iii)
locating and identifying potential lessees and formulating, evaluating, and
negotiating the terms of each Secured Equipment Lease, and (iv) negotiating the
terms of any borrowing by the Company, including the Line of Credit and the
Permanent Financing. All of the foregoing actions are subject to approval by the
Board of Directors. The Advisor also will have the authority, subject to
approval by a majority of the Board of Directors, including a majority of the
Independent Directors, to select assets for Sale in keeping with the Company's
investment objectives and based on an analysis of economic conditions both
nationally and in the vicinity of the assets being considered for Sale.
See "Management" and "The Advisor and the Advisory Agreement" for a
description of the business backgrounds of the individuals responsible for the
management of the Company and the Advisor, as well as for a description of the
services that the Advisor will provide.
MANAGEMENT COMPENSATION
The Advisor, the Managing Dealer, and other Affiliates of the Advisor
will receive compensation for services they will perform for the Company and
also will receive expense reimbursements from the Company for expenses they pay
on behalf of the Company. The following paragraphs summarize the more
significant items of compensation and reimbursement. See "Management
Compensation" for a complete description.
Organizational Stage.
Selling Commissions and Marketing Support and Due Diligence
Expense Reimbursement Fee. In connection with the formation of the Company and
the offering of the Shares, the Managing Dealer will receive Selling Commissions
of 7.5% (a maximum of $11,250,000 if 15,000,000 Shares are sold), and a
marketing support and due diligence expense reimbursement fee of 0.5% (a maximum
of $750,000 if 15,000,000 Shares are sold), of the total amount raised from the
sale of Shares, computed at $10.00 per Share sold ("Gross Proceeds"). The
Managing Dealer in turn may reallow Selling Commissions of up to 7% on Shares
sold, and all or a portion of the 0.5% marketing support and due diligence
expense reimbursement fee, to certain Soliciting Dealers who are not Affiliates
of the Company, with prior written approval from, and in the sole discretion of,
the Managing Dealer.
Soliciting Dealer Warrants. The Company will issue to the
Managing Dealer one Soliciting Dealer Warrant for every 25 Shares sold through
this offering, up to a maximum of 600,000
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Soliciting Dealer Warrants to purchase an equivalent number of shares of Common
Stock. The Soliciting Dealer Warrants will be issued quarterly commencing 60
days after the date on which the Shares are first sold pursuant to this
offering. All or any part of such Soliciting Dealer Warrants may be reallowed to
certain Soliciting Dealers with prior written approval from, and in the sole
discretion of, the Managing Dealer, unless prohibited by federal or state
securities laws. Each Soliciting Dealer Warrant will entitle the holder to
purchase one share of Common Stock from the Company for $12.00 during the
Exercise Period; provided however, that Soliciting Dealer Warrants will not be
exercisable until one year from the date of issuance. Holders of Soliciting
Dealer Warrants may not exercise the Soliciting Dealer Warrants to the extent
such exercise would jeopardize the Company's status as a REIT. See "Summary of
Articles of Incorporation and Bylaws -- Description of Capital Stock --
Soliciting Dealer Warrants."
Acquisition Stage.
Acquisition Fees. For identifying the Properties, structuring
the terms of the acquisition and leases of the Properties and structuring the
terms of the Mortgage Loans, the Advisor will receive a fee equal to 4.5% of
Gross Proceeds, loan proceeds from Permanent Financing and amounts outstanding
on the Line of Credit, if any, at the time of Listing, but excluding that
portion of the Permanent Financing used to finance Secured Equipment Leases
(collectively, "Total Proceeds") ($6,750,000 if 15,000,000 Shares are sold and
up to an additional $2,025,000 if Permanent Financing equals $45,000,000),
payable as Acquisition Fees.
Operational Stage.
Asset Management Fee. For managing the Properties and the
Mortgage Loans, the Advisor will be entitled to receive a monthly Asset
Management Fee of one-twelfth of .60% of the Company's Real Estate Asset Value
(generally, the total amount invested in the Properties, exclusive of
Acquisition Fees and Acquisition Expenses) and the total outstanding principal
amount of the Mortgage Loans, as of the end of the preceding month.
Secured Equipment Lease Servicing Fee. For negotiating Secured
Equipment Leases and supervising the Secured Equipment Lease program, the
Advisor will be entitled to receive from the Company a one-time Secured
Equipment Lease Servicing Fee of 2% of the purchase price of the Equipment that
is the subject of a
Secured Equipment Lease.
Liquidation Stage.
Deferred, Subordinated Real Estate Disposition Fee. Prior to
Listing, the Advisor may receive a real estate disposition fee of 3% of the
gross sales price of one or more Properties for providing substantial services
in connection with the Sale, which will be deferred and subordinated until the
stockholders have received Distributions equal to the sum of an aggregate,
annual, cumulative, noncompounded 8% return on their Invested Capital, (the
"Stockholders' 8% Return") plus 100% of the stockholders' aggregate Invested
Capital. In general, the stockholders' investment in the Company ("Invested
Capital") is the number of shares of Common Stock they own, multiplied by the
offering price per share, reduced by the portion of all prior Distributions
received by stockholders from the sale of assets of the Company and by any
amounts paid by the Company to repurchase shares pursuant to the redemption
plan. Upon Listing, if the Advisor has accrued but not been paid such real
estate disposition fee, then for purposes of determining whether the
subordination conditions have been satisfied, stockholders will be deemed to
have received a Distribution in an amount equal to the total number of shares of
Common Stock outstanding multiplied by the average closing price of the shares
over a period of 30 days during which the Shares are traded, with such period
beginning 180 days after Listing. See "The Advisor and The Advisory Agreement --
The Advisory Agreement."
Deferred, Subordinated Share of Net Sales Proceeds from the
Sale of Assets. A deferred, subordinated share of Net Sales Proceeds will be
paid to the Advisor from the Sale of assets of the Company in an amount equal to
10% of Net Sales Proceeds. This amount will be subordinated and paid only after
the stockholders have received Distributions equal to the sum of 100% of the
stockholders' aggregate Invested Capital plus the Stockholders' 8% Return.
Payment of certain fees is subject to conditions and restrictions or to
change under certain specified circumstances. The Advisor and its Affiliates
also may receive reimbursement for out-of-pocket expenses that they incur on
behalf of the Company, subject to certain expense limitations, and a
subordinated incentive fee if Listing occurs.
SUMMARY OF REINVESTMENT PLAN
The Company has established the Reinvestment Plan pursuant to which
stockholders may elect to have their cash Distributions from the Company
automatically reinvested in Shares. See "Summary of Reinvestment Plan," "Federal
Income Tax Considerations -- Taxation of Stockholders," and the form of
Reinvestment Plan accompanying this Prospectus as Appendix A for more specific
information about the Reinvestment Plan. Expenses incurred in connection with
the Reinvestment Plan, including Selling Commissions and marketing support and
due diligence expense reimbursement fees, will be paid by the Company. No
Soliciting Dealer Warrants will be issued in connection with Shares issued
pursuant to the Company's Reinvestment Plan. A person who becomes a stockholder
otherwise than by participating in this offering may purchase Shares through the
Reinvestment Plan only after receipt of a separate prospectus relating solely to
the Reinvestment Plan.
DESCRIPTION OF SHARES
A stockholder's investment will be recorded on the books of the
Company. The Company will provide, upon the request of any stockholder wishing
to transfer his or her Shares, a transfer form to be completed and executed by
the stockholder and returned
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to the Company. The Company will not issue share certificates other than to
stockholders who make a written request to the Company.
Any stockholder who has held Shares for at least one year may request
that the Company redeem for cash all or a significant portion of such Shares.
The full amount of the proceeds from the sale of Shares under the Reinvestment
Plan attributable to any calendar quarter will be used, at the sole option of
the Company, to redeem Shares presented for redemption during such quarter. In
addition, the Company may, at its discretion, use up to $100,000 per calendar
quarter of the proceeds of any public offering of its common stock for
redemptions. Any amount of offering proceeds which is available for redemptions,
but which is unused, may be carried over to the next succeeding calendar quarter
for use in addition to the amount of offering proceeds and net proceeds from the
sale of Shares under the Reinvestment Plan that would otherwise be available for
redemptions. There can be no assurance that there will be sufficient funds
available to permit the Company to redeem all Shares presented for redemption.
See "Redemption of Shares."
An annual meeting of stockholders will be held each year for the
election of the Directors. Other business matters may be presented at the annual
meeting or at special stockholder meetings. Each Share is entitled to one vote
on each matter to be voted on by stockholders, including the election of the
Directors. Stockholders who do not vote with the majority of Shares entitled to
vote on questions presented nonetheless will be bound by the majority vote.
Stockholder approval is required under Maryland law and the Company's
Articles of Incorporation and Bylaws for certain types of transactions.
Generally, the Articles of Incorporation and Bylaws may be amended upon a
majority vote of stockholders. Stockholders holding a majority of the Shares
must approve a merger or a sale or other disposition of substantially all of the
Company's assets other than in the ordinary course of business. Stockholders
objecting to the terms of a merger, sale, or other disposition of substantially
all of the Company's assets have the right to petition a court for the appraisal
and payment of the fair value of their Shares in certain instances. The
affirmative vote of a majority of the Shares outstanding and entitled to vote is
required to approve the voluntary dissolution of the Company.
In order to facilitate compliance with certain restrictions imposed on
REITs by the Internal Revenue Code of 1986, as amended (the "Code"), the
Articles of Incorporation generally restrict direct or indirect ownership
(applying certain attribution rules) of more than 9.8% of the outstanding shares
of Common Stock by one Person, as defined in the Articles of Incorporation. See
"Summary of the Articles of Incorporation and Bylaws -- Restriction on
Ownership."
For a more complete description of the Shares and the capital structure
of the Company, please refer to the "Summary of the Articles of Incorporation
and Bylaws -- Description of Capital Stock" section of the Prospectus.
DISTRIBUTION POLICY
Consistent with the Company's objective of qualifying as a REIT, the
Company expects to calculate and declare Distributions monthly during the
offering period, monthly during any subsequent offering and quarterly otherwise,
and make Distributions quarterly commencing not later than the close of the
first full calendar quarter after the first release of funds from escrow to the
Company. The Board of Directors, in its discretion, will determine the amount of
the Distributions made by the Company, which amount will depend primarily on net
cash from operations. The Company intends to increase Distributions in
accordance with increases in net cash from operations. Consistent with the
Company's objective of qualifying as a REIT, the Company expects to distribute
at least 95% of its real estate investment trust taxable income, although the
Board of Directors, in its discretion, may increase that percentage as it deems
appropriate. If the cash available to the Company is insufficient to make
Distributions, the Company may obtain the needed cash by borrowing funds,
issuing new securities, or selling assets. These methods of obtaining
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cash could affect future Distributions by increasing operating costs or reducing
income. In such an event, it is possible that the Company could pay
Distributions in excess of its earnings and profits and, accordingly, that such
Distributions could constitute a return of capital for federal income tax
purposes, although such Distributions would not reduce stockholders' aggregate
Invested Capital.
PRIOR PERFORMANCE OF AFFILIATES
The "Prior Performance Information" section of this Prospectus contains
a narrative discussion of the public and private real estate programs sponsored
by Affiliates of the Company and of the Advisor during the past ten years,
including one unlisted public REIT and 18 public limited partnerships formed to
invest in restaurants leased on a "triple-net" basis to operators of restaurant
chains and one unlisted public REIT formed to invest in hotels and restaurants
on a "triple-net" basis. As of June 30, 1998, these entities, which invest in
restaurant properties but do not invest in health care facilities, had purchased
1,033 fast-food, family-style and casual dining restaurant properties. Based on
an analysis of the operating results of the 91 real estate limited partnerships
and two unlisted public REITs in which principals of the Company have served,
individually or with others, as general partners or officers and directors, the
Company believes that each of such entities has met, or currently is in the
process of meeting, its principal investment objectives. However, none of the
REITs or public or private real estate limited partnerships sponsored by
Affiliates of the Company has invested in properties in the health care
industry. Certain statistical data relating to the two unlisted, public REITs
and the public limited partnerships, the offerings of which became fully
subscribed between January 1993 and December 1997, are contained in Appendix C
- -- Prior Performance Tables.
TAX STATUS OF THE COMPANY
The Company will make the election under Section 856(c) of the Internal
Revenue Code of 1986, as amended (the "Code"), to be taxed as a REIT under the
Code beginning with its taxable year ending December 31, 1998. As a REIT for
federal income tax purposes, the Company generally will not be subject to
federal income tax on income that it distributes to its stockholders. Under the
Code, REITs are subject to numerous organizational and operational requirements,
including a requirement that they distribute at least 95% of their taxable
income, as figured on an annual basis. Based upon representations made by
officers of the Company with respect to relevant factual matters, upon the
existing Code provisions, rules and regulations promulgated thereunder
(including proposed regulations) and reported administrative and judicial
interpretations thereof, upon the independent review by counsel of such
documents as counsel deemed relevant in the circumstances and upon the
assumption that the Company will operate in the manner described in this
Prospectus, the Company's counsel, Shaw Pittman Potts & Trowbridge, has advised
the Company that, in its opinion, commencing with the Company's taxable year
ending December 31, 1998, the Company will be organized in conformity with the
requirements for qualification as a REIT, and the Company's proposed method of
operation will enable it to meet the requirements for qualification as a REIT.
However, the Company's ability to qualify and remain qualified as a REIT is
dependent upon actual operating results and future actions by and events
involving the Company and others, and no assurance can be given that the actual
results of the Company's operations and future actions and events will enable
the Company to satisfy in any given year the requirements for qualification and
taxation as a REIT.
If the Company fails to qualify for taxation as a REIT in any taxable
year, it will be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates and
will not be permitted to qualify for treatment as a REIT for federal income tax
purposes for four years following the year during which qualification is lost.
See "Risk Factors -- Tax Risks" and "Federal Income Tax Considerations." Even if
the Company qualifies as a REIT for federal income tax purposes, it may be
subject to certain federal, state, and local taxes on its income and property
and to federal income and excise taxes on its undistributed income. See "Federal
Income Tax Considerations."
THE OFFERING
A minimum of 250,000 Shares ($2,500,000) and a maximum of 15,000,000
($150,000,000) Shares in the Company will be offered at a price of $10.00 per
Share. The Company also has registered an offering of an additional 500,000
Shares ($5,000,000) that are available only to stockholders who receive a copy
of this Prospectus and elect to participate in the Reinvestment Plan. Any
participation in such plan subsequent to this offering must be made pursuant to
solicitation under a separate prospectus. See "Summary of Reinvestment Plan."
The Board of Directors may determine to engage in future offerings of Common
Stock of up to the number of unissued authorized shares of Common Stock
available following the completion of this offering.
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The Shares are being offered by the Managing Dealer and other
broker-dealers that are members of the National Association of Securities
Dealers, Inc. or exempt from broker-dealer registration (the "Soliciting
Dealers") on a "best efforts" basis, which means that no one is guaranteeing
that any minimum number of Shares will be sold. Both the Company and the Advisor
are Affiliates of the Managing Dealer. See "The Offering -- Plan of
Distribution."
Until subscription funds for the Company total $2,500,000, the funds
will be held in escrow by SouthTrust Asset Management Company of Florida, N.A.,
and interest earned on such funds will accrue to the benefit of subscribers. No
Shares will be sold unless subscriptions for at least 250,000 Shares
($2,500,000) have been obtained within one year after the date of this
Prospectus. Pursuant to the requirements of the Commissioner of Securities of
the State of Pennsylvania, subscriptions from Pennsylvania residents may not be
released from escrow, or included in determining whether the $2,500,000 minimum
for the
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Company has been reached, until subscriptions for Shares totalling at least
$7,775,000 have been received from all sources. If such minimum amount is sold,
the Company may, in its sole discretion, and without prior notice to the
subscribers, elect to extend the offering for up to an additional one year
thereafter (in states that permit such an extension). See "The Offering."
A minimum investment of 250 Shares ($2,500) is required. IRAs, Keogh
plans, and pension plans must make a minimum investment of at least 100 Shares
($1,000). For Minnesota investors only, IRAs and qualified plans must make a
minimum investment of 200 Shares ($2,000). Following an initial subscription for
at least the required minimum investment, any stockholder may make additional
purchases in increments of one Share. See "The Offering -- General," "The
Offering -- Subscription Procedures," and "Summary of Reinvestment Plan."
DEFINITIONS
This Prospectus includes simplified terms and definitions to make the
Prospectus easier to understand. These simplified terms and definitions do not
include all of the details of the terms, however, and stockholders therefore
should review the "Definitions" section for a more complete understanding.
RISK FACTORS
The purchase of Shares involves significant risks and therefore is
suitable only for persons who understand the possible consequences of an
investment in the Company and who are able to bear the risk of loss of their
investment. Prospective stockholders should consider the following risks in
addition to other information describing an investment in the Shares set forth
elsewhere in this Prospectus.
INVESTMENT RISKS
Insufficient Offering Proceeds. The offering is on a best efforts basis
and is conditioned on the sale of at least 250,000 Shares. Because this offering
will be made on a best efforts basis, the potential profitability of the Company
and its ability to diversify its investments, both geographically and by type of
Properties purchased, will be limited by the amount of funds at its disposal.
For example, if minimum Gross Proceeds of $2,500,000 are raised, the Company
will be able to acquire no more than two medical office buildings or walk-in
clinics and will make no Mortgage Loans. There can be no assurance that the
Company will sell the minimum number of Shares.
Lack of Diversification. Based on the estimated purchase price of each
Health Care Facility ranging from $1,000,000 to $30,000,000, the Company
anticipates owning or financing with the net proceeds of this offering, between
four and 126 Properties, depending on the types of Properties. Assuming an
average purchase price of $10,000,000 per Property, based on the Company's
present expectation of the prices of Properties in which it will most likely
invest, and assuming maximum Gross Proceeds of $150,000,000 are raised,
excluding amounts received for Shares issued pursuant to the Company's
Reinvestment Plan, the Company would acquire or finance approximately 12
Properties with the net proceeds from this offering. Depending on the purchase
price of each Health Care Facility, the Company may not be able to achieve
diversification by tenant, facility type or geographic location. Lack of
diversification will increase the potential adverse effect on the Company of a
single under-performing tenant, an under-performing facility type or a depressed
geographic region.
Possible Delays in Investment. To the extent consistent with the
Company's objective of qualifying as a REIT, the offering proceeds may remain
uninvested for up to the later of two years from the initial date of this
Prospectus or one year after termination of the offering, although it is
expected that substantially all net offering
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proceeds will be invested prior to the end of such period. See "Prior
Performance Information" for a summary description of the investment experience
of Affiliates and the Advisor in prior CNL programs, which is not necessarily
indicative of the rate at which the proceeds of this offering will be invested.
An extended offering period and the inability of the Advisor to find
suitable Properties may result in delays in investment of Company funds in
Properties and in the receipt of a return from real property investments.
Revenues received by the Company pending investment in Properties or
making Mortgage Loans will be limited to the rates of return available on
short-term, highly liquid investments with appropriate safety of principal.
These rates of return, which affect the amount of cash available to make
Distributions to the stockholders, are expected to be lower than the Company
would receive under its Property leases or Mortgage Loans. Further, to the
extent consistent with the Company's objective of qualifying as a REIT, any
funds of the Company required to be invested in Properties and Mortgage Loans
and not so invested or reserved for Company purposes within the later of two
years from the initial date of this Prospectus, or one year after the
termination of the offering, will be distributed pro rata to the then
stockholders of the Company in accordance with the Articles of Incorporation.
Inexperience of Management. None of the prior programs organized by
Affiliates of the Company has invested in Health Care Facilities. While certain
Directors and officers of the Company have experience in investing in Health
Care Facilities, the lack of experience of the majority of the Company's
management team and the Advisor and its Affiliates in purchasing, leasing and
selling Health Care Facilities may adversely affect the Company's results of
operations.
Reliance on Advisor and Board Of Directors; No Management Rights for
Stockholders. The Advisor, with approval from the Board of Directors, will be
responsible for the daily management of the Company, including all acquisitions,
dispositions, and financings. Stockholders will have no right or power to take
part in the management of the Company, except through the exercise of their
voting rights for Directors. Thus, no prospective stockholder should purchase
any of the Shares offered hereby unless the prospective stockholder is willing
to entrust all aspects of the management of the Company to the Advisor and the
Board of Directors.
The Advisor may be terminated by the Board of Directors, with or
without cause, but only subject to payment and release from all guarantees and
other obligations incurred in connection with its role as Advisor. In addition,
the Advisor has the right to assign the Advisory Agreement to one of its
Affiliates, subject to the approval of a majority of the Directors. In such
event, the stockholders will not be able to vote on the new Advisor and there
can be no assurance that the new Advisor will perform satisfactorily. See
"Management Compensation." Also see "Conflicts of Interests" for a discussion of
the potential for realization by the Advisor and its Affiliates of substantial
commissions, fees, compensation, and other income and for a discussion of
various other conflicts of interest.
Effects of Governing Documents and Maryland Law on Potential Takeovers.
Certain provisions of the Company's Articles of Incorporation, including the
ownership limitations, transfer restrictions and ability to issue preferential
preferred stock, may have the effect of preventing, delaying or discouraging
takeovers of the Company by third parties. Certain other provisions of the
Company's Articles of Incorporation, which exempt the Company from the
application of Maryland's Business Combinations Statute and Control Share
Acquisition Statute, may have the effect of facilitating (i) business
combinations between the Company and beneficial owners of 10% or more of the
voting power of the outstanding voting stock of the Company and (ii) the
acquisition by any person of shares entitled to exercise or direct the exercise
of 20% or more of the total voting power of the Company. Because the Company
will not be subject to the provisions of the Business Combinations Statute and
the Control Share Acquisition Statute, it may be more difficult for stockholders
of the Company to prevent or delay business combinations with large stockholders
or acquisitions of substantial blocks of voting power by such stockholders or
other persons, should the ownership restrictions be waived, modified or
completely removed. Such business combinations or acquisitions of voting power
could cause the Company to fail to qualify as a REIT. See " -- Tax Risks --
Effect of REIT Disqualification," " -- Tax Risks -- Restrictions on Maximum
Ownership," "Summary of the Articles of Incorporation and Bylaws -- General,"
"Summary of the Articles of Incorporation and Bylaws -- Mergers, Combinations,
and Sale of Assets," "Summary of the Articles of Incorporation and Bylaws --
Control Share Acquisitions" and "Summary of the Articles of Incorporation and
Bylaws -- Restriction of Ownership."
Leverage. The Company may borrow money to acquire Assets,
to preserve its status as a REIT or for other corporate purposes.
The Board of Directors anticipates that the Company will obtain a revolving
Line of Credit up to $45,000,000 in order to provide financing for the
acquisition of Assets and may also obtain, in addition to the Line of Credit,
Permanent Financing. Permanent Financing may, but is not expected to, exceed 30%
of the Company's total assets. The Line of Credit may be increased at the
discretion of the Board of Directors. The Company may repay the Line of Credit
with offering proceeds, working capital or Permanent Financing. The maximum
amount the Company may borrow, however, is 300% of the Company's Net Assets. The
use of borrowing may present an element of risk in the event that the cash flow
from the Company's real estate and other investments is insufficient to meet its
debt obligations. In addition, lenders to the Company may seek to impose
restrictions on future borrowings, Distributions and operating policies of the
Company. If Assets are mortgaged or pledged as collateral to secure payment of
indebtedness and the Company is unable to meet its debt obligations, the Assets
could be transferred to the lender, with a consequent loss of income and asset
value to the Company. There is no limit on the amount of Assets that may be used
as security for the repayment of indebtedness.
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Conflicts of Interest. The Company will be subject to conflicts of
interest arising out of its relationship to the Advisor and its Affiliates,
including the material conflicts discussed below. See "Conflicts of Interest"
for a further discussion of the conflicts of interest between the Company and
the Advisor and its Affiliates and the Company's policies to reduce or eliminate
certain potential conflicts.
Competing Demands on Officers and Directors. All of the officers of the
Company (some of whom are also Directors of the Company) are also officers and
directors of the Advisor and will experience conflicts in their management of
the Company. In addition, the officers and certain Directors of the Company and
the officers and directors of the Advisor have management responsibilities for
Affiliates of the Company and the Advisor, including entities that may in the
future invest in the same types of assets in which the Company will invest. See
"Management -- Directors and Executive Officers." Further, Independent Directors
may serve as directors of up to three REITS advised by the Advisor. Accordingly,
the officers and Directors will share their management time and services among
those entities and the Company, will not devote all of their attention to the
Company, and could take actions that are more favorable to such other entities
than to the Company.
Potential Impact of Advisor's Compensation on Investment Decisions.
Investment in or Sale of an Asset by the Company may result in the immediate
realization by the Advisor of substantial commissions, fees and other
compensation. Although the Board of Directors of the Company must approve such
transactions, the Advisor's recommendation to the Board may be affected more by
the impact of the transaction on the Advisor's compensation than by the impact
on the Company's operating results or financial condition. None of the
agreements between the Company and the Advisor pursuant to which the Advisor
will perform services and receive compensation was the result of arms-length
negotiations.
Property Development by Affiliates. Properties acquired by the Company
may require development prior to use of the Property by a tenant. Affiliates of
the Company may serve as developer and if so, the Affiliates would receive the
development fee that would otherwise be paid to an unaffiliated developer. The
Board of Directors, including the Independent Directors, must approve employing
an Affiliate of the Company to serve as a developer. There is a risk, however,
that the Company would acquire Properties that require development so that an
Affiliate would receive the development fee.
The Company May Invest with Affiliates of the Advisor. The Company may
invest in Joint Ventures with another program sponsored by the Advisor or its
Affiliates. Although the Board of Directors, including the Independent
Directors, must approve each such investment, investment recommendations with
respect to such Joint Ventures may be affected by the Advisor's relationship
with one or more of the co-venturers and may be more beneficial to the other
programs than to the Company.
No Independent Review of the Company or the Prospectus by Managing
Dealer. The Managing Dealer is an Affiliate of the Company and will not make an
independent review of the Company and the offering. Accordingly, investors do
not have the benefit of such independent review.
No Separate Counsel for the Company, Affiliates and Investors. Each of
the Company, its Affiliates and investors may have interests which conflict with
one another, but none of them currently has the benefit of separate counsel.
Lack of Liquidity of Shares. Stockholders may not be able to sell their
Shares promptly at a desired price; therefore, the Shares should be considered
as a long-term investment only. Currently there is no public market for the
Shares. The Board of Directors, with or without the consent of the stockholders,
may apply for Listing if the Board of Directors (including a majority of
Independent Directors) determines Listing to be in the best interests of the
stockholders. There can be no assurance, however, that the Company will apply
for Listing, that any such application will be made before the passage of a
significant period of time, that any application will be accepted or, even if
accepted, that a public trading market will develop. In any event, the Articles
of Incorporation provide that the Company will not apply for Listing before the
completion or termination of this offering. If Listing occurs, the business of
the Company may continue indefinitely without any specific time limitation by
which the Company must distribute Net Sales Proceeds to the stockholders. In
that case, the stockholders would be dependent upon the sale of their Shares for
the return of their investment in the Company. There can be no assurance that
the price a stockholder would receive in a sale on an exchange or in the
over-the-counter market will be representative of the value of the assets owned
by the Company or that it will equal or exceed the amount a stockholder paid for
the Shares. In the event Listing occurs, Shares may be sold only through the
national securities exchange or the over-the-counter market on which the Shares
are listed.
Potential for Dilution. Stockholders have no preemptive rights.
Therefore, in the event the Company (i) commences a subsequent public offering
of Shares or securities convertible into Shares or (ii) otherwise issues
additional Shares, including Shares issuable upon exercise of the Soliciting
Dealer Warrants, investors purchasing Shares in this offering who do not
participate in the future stock issuances will experience dilution in the
percentage of their equity investment in the Company. Although the Board of
Directors has not yet determined whether it will engage in future offerings or
other issuances of Shares, it may do so if it is determined to be in the best
interests of the Company.
Lack of Control by the Company over Joint Ventures. Subject
to the approval of the Independent Directors, the Company may
enter into a Joint Venture or general partnership with an
unaffiliated party to purchase a Property, and the Joint Venture
or general partnership agreement relating to that Joint Venture
or partnership may provide that the Company will share management
control of the Joint Venture with the unaffiliated party. Even
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in the event the Joint Venture or general partnership agreement provides that
the Company will have sole management control of the Joint Venture, such
agreement may be ineffective as to a third party who has no notice of the
agreement, and the Company therefore may be unable to control fully the
activities of such Joint Venture. In the event that the Company enters into a
Joint Venture with another program sponsored by an Affiliate, it is anticipated
that the Company will not have sole management control of the Joint Venture.
Lack of Control of Property Management. The Company uses "triple-net"
leases and, therefore, day-to-day management of the Properties will be the
responsibility of the tenants of the Properties. The Company has not yet entered
into any lease arrangements with specific tenants and does not intend to do so
until such time as one or more Properties suitable for purchase by the Company
have been identified. In general, the Company intends to enter into leasing
agreements only with operators having substantial prior experience in the
operation of Health Care Facilities, but there can be no assurance that the
Company will be able to make such arrangements because, as of the date of this
Prospectus, the Company had not entered into any arrangements that create a
reasonable probability that the Company will purchase any Properties. There can
be no assurance that the Company's tenants will manage the Properties
successfully.
Mortgage Loans.
Unfavorable Real Estate Market Conditions May Impact
Operations. To the extent that the Company makes Mortgage Loans, the results of
the Company's operations will be affected, to the extent there are defaults on
such loans, by various factors, many of which are beyond the control of the
Company. The factors include local and other economic conditions affecting real
estate values and interest rate levels. The results of the Company's operations
from making Mortgage Loans would depend on, among other things, the level of
interest income generated by the Mortgage Loans, the market value of Mortgage
Loans and the supply of and demand for Mortgage Loans. No assurance can be given
that the values of the properties securing the Mortgage Loans will remain at the
levels existing on the dates of origination of the Mortgage Loans.
Interest Rate Fluctuations May Adversely Affect Mortgage
Loans. Fluctuations in interest rates may adversely affect the Company to the
extent it invests in fixed-rate, long-term Mortgage Loans. In this situation, if
interest rates rise, the Mortgage Loans will yield a return lower than
then-current market rates. If interest rates decrease, the Company will be
adversely affected to the extent that Mortgage Loans are prepaid, because the
Company will not be able to make new Mortgage Loans at the previously higher
interest rate.
Delays in Liquidating Defaulted Mortgage Loans. Even assuming
that the mortgaged properties underlying Mortgage Loans held by the Company
provide adequate security for the Mortgage Loans, substantial delays could be
encountered in connection with the liquidation of defaulted Mortgage Loans, with
corresponding delays in the receipt of related proceeds by the Company. An
action to foreclose on a mortgaged property securing a Mortgage Loan is
regulated by state statutes and rules and is subject to many of the delays and
expenses of other lawsuits if defenses or counterclaims are interposed.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a non-judicial sale of a mortgaged property. In the event of
default by a mortgagor, these restrictions, among other things, may impede the
ability of the Company to foreclose on or sell the mortgaged property or to
obtain proceeds sufficient to repay all amounts due on the related Mortgage
Loan.
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Possible Noncompliance with Regulations. The Mortgage Loans
may also be subject to regulation by federal, state and local authorities and
subject to various laws and judicial and administrative decisions. The Company
may determine not to make Mortgage Loans in any jurisdiction in which it
believes the Company has not complied in all material respects with applicable
requirements. Such a determination could have a negative effect on the Company's
operating results. See "Business -- Mortgage Loans." See also "-- Real Estate
and Financing Risks."
Secured Equipment Leases.
Default by Lessee. In the event that a lessee defaults on a
Secured Equipment Lease, the Company may not be able to sell the subject
Equipment at a price that would enable the Company to recover its costs
associated with such Equipment.
Possible Noncompliance with Regulations. The Secured Equipment
Lease program may also be subject to regulation by federal, state and local
authorities and subject to various laws and judicial and administrative
decisions. The Company may determine not to operate the Secured Equipment Lease
program in any jurisdiction in which it believes the Company has not complied in
all material respects with applicable requirements. Such a determination could
have a negative effect on the Company's operating results.
Tax Risks. In addition, there are certain federal
income tax risks associated with the Secured Equipment Lease
program. See "-- Tax Risks."
No Operating History. The Company has recently been formed, is in the
development stage and has no previous performance history. The lack of operating
history makes it impossible to predict the Company's future performance based on
past results.
Impact of Inflation. Inflation may impact the value of some of the
Company's investments. For example, a substantial rise in inflation over the
term of an investment in Mortgage Loans and Secured Equipment Leases may reduce
the Company's actual return on those investments, if they do not otherwise
provide for adjustments based upon inflation. Investments in Properties may also
be adversely affected by inflation, although leases with percentage rent
provisions may not be so affected because inflation could cause those provisions
to be triggered earlier
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than they would otherwise become effective, and leases with automatic increases
in base rent may be sufficient to protect against the effects of inflation.
Majority Stockholder Vote Binding on All Stockholders. Stockholders may
take certain actions, including approving amendments to the Articles of
Incorporation and Bylaws, by a vote of a majority of the Shares outstanding and
entitled to vote. All actions taken, if approved by the holders of the requisite
number of Shares, would be binding on all stockholders. Certain of these
provisions may discourage or make it more difficult for another party to acquire
control of the Company or to effect a change in the operation of the Company.
Broad Discretion of the Board of Directors in Management of the
Company's Operations. The Board of Directors has overall authority to conduct
the Company's operations. This authority includes significant flexibility. For
example, the Board of Directors can (i) prevent the ownership, transfer, and/or
accumulation of Shares in order to protect the status of the Company as a REIT,
or, as otherwise deemed by the Board of Directors, to be in the best interests
of the stockholders (see "Summary of the Articles of Incorporation and Bylaws --
Restriction of Ownership"); (ii) issue additional Shares without obtaining
stockholder approval, which could result in dilution to existing stockholders;
(iii) change the compensation of the Advisor, and employ and compensate
Affiliates; (iv) direct the Company's investments toward investments that will
not appreciate over time, such as building only Properties, with the land owned
by a third-party, and Mortgage Loans, and (v) establish and change minimum
creditworthiness standards with respect to tenants.
Restrictions on Transfer Relating to REIT Status. The Articles of
Incorporation generally restrict direct or indirect ownership (applying certain
attribution rules) of more than 9.8% of the outstanding Common Stock or 9.8% of
any series of outstanding Preferred Stock by one Person (as defined in the
Articles of Incorporation). In the event the ownership, transfer, acquisition or
change in the corporate structure of the Company would jeopardize the Company's
REIT status, such ownership, transfer, acquisition or change in the corporate
structure of the Company would be void as to the purported transferee or owner
and the purported transferee or owner would not have or acquire any rights to
the Common Stock. See "Summary of the Articles of Incorporation and Bylaws --
Restriction of Ownership."
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Limited Liability of Officers and Directors. The Articles of
Incorporation and Bylaws provide that an officer or Director's liability to the
Company, its stockholders, or third parties for monetary damages may be limited.
Generally, the Company is obligated under the Articles of Incorporation and the
Bylaws to indemnify its officers and Directors against certain liabilities
incurred in connection with their services in such capacities. The Company will
execute indemnification agreements with each officer and Director which will
indemnify the officer or Director for any such liabilities that he or she
incurs. Such indemnification agreements could limit the legal remedies available
to the Company and the stockholders against the Directors and officers of the
Company. See "Summary of the Articles of Incorporation and Bylaws -- Limitation
of Director and Officer Liability."
Possible Effect of ERISA. The Company believes that the assets of the
Company will not be deemed, under ERISA, to be "plan assets" of any Plan that
invests in the Shares, although it has not requested an opinion of Counsel to
that effect. If the assets of the Company were deemed to be "plan assets" under
ERISA (i) it is not clear that the exemptions from the "prohibited transaction"
rules under ERISA would be available for the Company's transactions, and (ii)
the prudence standards of ERISA would apply to investments made by the Company
(and might not be met). ERISA makes plan fiduciaries personally responsible for
any losses resulting to the plan from any breach of fiduciary duty and the Code
imposes nondeductible excise taxes on prohibited transactions. If such excise
taxes were imposed on the Company, the amount of funds available to make
Distributions to stockholders would be reduced.
Insufficient Working Capital. There can be no assurance that the
Company will have sufficient working capital. The lack of working capital may
cause the Company to be unable to pay certain expenses or loan payments due on
Permanent Financing which could result in a default under such loans. The
Company has not established any policy regarding a minimum amount of working
capital that it will maintain. As of June 30, 1998, the Company had
stockholder's equity of $200,000.
Distributions Funded by Borrowings May Constitute Return of Capital.
The Company may incur indebtedness if necessary to satisfy the requirement that
the Company distribute at least 95% of its real estate investment trust taxable
income or otherwise, as is necessary or advisable to assure that the Company
maintains its qualification as a REIT for federal income tax purposes. In such
an event, it is possible that the Company could make Distributions in excess of
its earnings and profits and, accordingly, that such Distributions could
constitute a return of capital for federal income tax purposes, although such
Distributions would not reduce stockholders' aggregate Invested Capital.
REAL ESTATE AND FINANCING RISKS
An Unspecified Property Offering.
Inability of Potential Investors to Evaluate Tenants and
Properties. Although the Company has established certain criteria for evaluating
operators and particular Properties proposed for investment by the Company, the
Company has not set fixed minimum standards relating to creditworthiness of
tenants. Therefore, the Board of Directors has flexibility in assessing
potential tenants. In addition, as of the date of this Prospectus, the Company
has not entered into any arrangements that create a reasonable probability that
the Company will purchase any Properties. Accordingly, this is an unspecified
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property offering, and prospective investors therefore have no information to
assist them in evaluating the merits of any Property to be purchased or
developed by the Company. See "Business -- Standards for Investment in
Properties" and "Business -- General" for a description of these criteria and
the types of Properties in which the Company intends to invest.
No Limitation on Number of Properties of a Particular Facility
Type. There is no limit on the number of Properties of a particular facility
type which the Company may acquire, and the Company is not obligated to invest
in more than one type of facility. The Board of Directors, however, including a
majority of the Independent Directors, will review the Company's Properties and
potential investments in terms of geographic, facility type or operator
diversification.
No Assurance of Obtaining Suitable Investments. No assurance
can be given that the Company will be successful in obtaining suitable
investments on financially attractive terms or that, if investments are made,
the objectives of the Company will be achieved.
No Opportunity to Evaluate Procedures for Resolving Conflicts
of Interest. The Advisor or its Affiliates from time to time may acquire
properties on a temporary basis with the intention of subsequently transferring
the properties to one or more of the CNL Group, Inc. ("CNL") programs, including
the Company,
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although the Company has adopted guidelines to minimize such conflicts. See
"Conflicts of Interest -- Acquisition of Properties." Potential investors will
not have the opportunity to evaluate the manner in which these conflicts of
interest are
resolved.
Lack of Control Over Properties Under Construction. The Company intends
to acquire sites on which a particular Property to be owned by the Company is to
be built as well as existing Properties (including Properties which require
renovation). To the extent that the Company acquires a Property on which
improvements are to be constructed or completed or renovations are to be made,
the Company may be subject to certain risks in connection with the developer's
ability to control construction costs, and the timing of completion of
construction, or to build in conformity with plans, specifications, and
timetables. The Company's agreements with the developer will provide certain
safeguards designed to minimize these risks. Further, in the event of a default
by a developer, the Company generally will have the right to require the tenant
to repurchase the Property that is under development at a pre-established price
designed to reimburse the Company for all costs incurred by the Company in
connection with the acquisition and development of the Property. There can be no
assurance, however, that under such circumstances, the tenant will have
sufficient funds to fulfill its obligations. See "Business -- Site Selection and
Acquisition of Properties."
Ground Lease Property Risks. If the Company invests in ground lease
Properties, the Company will not own or, except to the extent of rights set
forth in any assignment of lease or tripartite agreement that the Company may
enter into, have a leasehold interest in the underlying land. Thus, with respect
to ground lease Properties, the Company will have no economic interest in the
land or building at the expiration of the lease on the underlying land, although
it generally will retain partial ownership of, and will have the right to
remove, any equipment that the Company may own in the building. The Company will
not share in any appreciation of the land associated with any ground lease
Property. The Company, however, will share in appreciation of the income stream
derived from the lease.
Impasse or Conflicts with Joint Venture Partner.
Impasse with Joint Venture Partner. In the event that the
Company enters into a Joint Venture, there will be a potential risk of impasse
in certain joint venture decisions since the approval of the Company and of each
co-venturer is required for certain decisions. In any Joint Venture with an
affiliated program, however, the Company will have the right to buy the other
co-venturer's interest or to sell its own interest on specified terms and
conditions in the event of an impasse regarding a Sale. Under such
circumstances, it is possible that neither party will have the funds necessary
to consummate the transaction. See "Business -- Joint Venture Arrangements." In
addition, the Company may experience difficulty in locating a third party
purchaser for its Joint Venture interest and in obtaining a favorable sale price
for such Joint Venture interest.
Divergent Interests of Joint Venture Partner. Investments in
Joint Ventures may involve the risk that the Company's co-venturer may have
economic or business interests or goals which, at a particular time, are
inconsistent with the interests or goals of the Company, that such co-venturer
may be in a position to take action contrary to the Company's instructions,
requests, policies or objectives, or that such co-venturer may experience
financial difficulties. Among other things, actions by a co-venturer might
subject property owned by the Joint Venture to liabilities in excess of those
contemplated by the terms of the joint venture agreement or to other adverse
consequences.
Limitations on the Ability of the Company to Liquidate. Unless Listing
occurs within ten years after the commencement of the offering (December 31,
2008), the Company will undertake, to the extent consistent with the Company's
objective of qualifying as a REIT, the orderly Sale of the Company's assets, the
distribution of the Net Sales Proceeds of such Sales to stockholders, and will
engage only in activities related to its orderly liquidation unless the
stockholders elect otherwise. Neither the Advisor nor the Board of Directors may
be able to control the timing of Sales due to market conditions, and there can
be no assurance that the Company will be able to sell its assets so as to return
stockholders' aggregate Invested Capital, to generate a profit for the
stockholders, or to fully satisfy its debt obligations. Invested Capital, in the
aggregate, will be returned to stockholders upon disposition of the Properties
only if the Properties are sold for more than their original purchase price,
although return of capital, for federal income tax purposes, is not necessarily
limited to stockholder distributions following Sales of Properties. See "Federal
Income Tax Considerations." In the event that a purchase money obligation is
taken in partial payment of the sales price of a Property, the proceeds of the
Sale will be realized over a period of years. Further, entering into Mortgage
Loans with terms of 10 to 20 years and Secured Equipment Leases with terms of
seven years may cause any intended liquidation of the Company to be delayed
beyond the time of disposition of the Properties and until such time as the
Mortgage Loans and Secured Equipment Leases expire or are sold.
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Inability to Control the Sale of Certain Properties. Certain tenants
are expected to have the right to purchase the Property from the Company,
commencing a specified number of years after the date of the lease, which may
lessen the ability of the Advisor and the Board of Directors to freely control
the Sale of the Property. The leases also generally will provide the tenant with
a right of first refusal on any proposed sale provisions. See "Business --
Description of Leases -- Right of Tenant to Purchase." A tenant will have no
obligation to purchase the Property it leases.
Real Property Investments.
Lack of Control Over Market and Business Conditions.
The value of Properties such as those to be acquired by the
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Company, the ability of the tenants to pay rent on a timely basis, the amount of
the rent and the ability of borrowers to make Mortgage Loan payments on a timely
basis may be adversely affected by certain changes in general or local economic
or market conditions, increased costs of energy, increased costs of food or
other products, increased costs and shortages of labor, competitive factors,
fuel shortages, quality of management, limited alternative uses for the
building, changing consumer habits, condemnation or uninsured losses, changing
demographics, changing traffic patterns, inability to remodel outmoded
buildings, voluntary termination by a tenant of its obligations under a lease,
bankruptcy of a tenant or borrower, and other factors. Neither the Company nor
the Board of Directors can control these factors.
Multiple Property Leases or Mortgage Loans with Individual
Tenants or Borrowers. Tenants may lease more than one Property and borrowers may
enter into more than one Mortgage Loan. Events such as the default or financial
failure of a tenant or borrower therefore could cause one or more Properties to
become vacant under certain circumstances. Vacancies would reduce the cash
receipts of the Company and, at least until the Company is able to re-lease any
such Properties, could decrease their ultimate resale value. The value of the
Company's Properties will depend principally upon the value of the leases of the
Properties. Minor defaults by a tenant or borrower may continue for some time
before the Advisor or Board of Directors determines that it is in the interest
of the Company to evict the tenant or foreclose on the property of the borrower.
Inability to Re-lease Properties. If a Property becomes
vacant, the Company may be unable either to re-lease the Property for the rent
due under the prior lease or to re-lease the Property without incurring
additional expenditures relating to the Property. The Company could experience
delays in enforcing its rights against, and collecting rents (and, under certain
circumstances, real estate taxes and insurance costs) due from, a defaulting
tenant.
Lack of Adequate Insurance. If the Company, as lessor, incurs
any liability which is not fully covered by insurance, the Company would be
liable for such amounts, and returns to the stockholders could be reduced. See
"Business -- Description of Property Leases -- Insurance, Taxes, Maintenance,
and Repairs" for a description of the types of insurance that the leases of the
Properties will require the tenant to obtain.
The inability of tenants to make lease payments or of borrowers to make
Mortgage Loan payments as a result of any of these factors could result in a
decrease in the amount of cash available to make Distributions to the
stockholders.
Health Care Facilities.
Reliance on Government Reimbursement. A significant portion of
the revenue of the Company's tenants and borrowers, particularly those operating
skilled nursing facilities, may be derived from governmentally funded programs,
such as Medicaid and Medicare. Although the Company does not anticipate that
lease and Mortgage Loan payments will be linked to the level of government
reimbursement received by the operators, to the extent that changes in
government funding programs adversely affect the operators or the revenues
received by such operators, such changes could adversely affect the ability of
such operators to make lease and loan payments to the Company and/or the amount
of such payments if and to the extent they are based on gross revenues. Failure
of tenants and borrowers to make their lease and loan payments, and/or
reductions in such payments, would have a direct and material adverse effect on
the Company's operations.
Medicaid, which is a medical assistance program for persons with few
assets and minimal income operated by individual states with the financial
participation of the federal government, provides a significant source of
revenue for skilled nursing facilities. The method of reimbursement under
Medicaid varies from state to state, but is typically based on per diem or per
diagnosis rates. The Medicaid program is subject to change and is affected by
state and federal budget shortfalls and funding restrictions which may
materially decrease rates of payment or delay payment. There is no assurance
that Medicaid payments will remain constant or be sufficient to cover costs
allocable to Medicaid patients. While Medicare, the federal health program for
the aged and certain chronically disabled individuals, is not anticipated to be
a major source of revenue for the types of Health Care Facilities in which the
Company expects to invest or make Mortgage Loans, the Company has reserved the
right to invest in or make Mortgage Loans to other types of Health Care
Facilities that are substantially dependent on Medicare funding. Like the
Medicaid program, the Medicare program is highly regulated and subject to
frequent and substantial changes, many of which may result in reduced levels of
payment for a substantial portion of health care services. In addition to
pressures from providers of government reimbursement, the Company may experience
pressures from private payors attempting to control health care costs, and
reimbursement from private payors eventually may decrease to levels approaching
those of government payors.
Dependence on Attracting Senior Citizens with Ability to Pay.
Certain of the Health Care Facilities which the Company intends to own or
finance, in particular, assisted living facilities, are dependent on their
ability to attract senior citizens with the ability to pay for the services they
receive. While a portion of the fees payable by residents of Health Care
Facilities may be reimbursed by government and private payors, many are
substantially dependent on the ability of the residents and their families to
pay directly. In addition, certain payors, such as Medicare, limit the number of
days for which payment will be made in certain settings, such as skilled nursing
facilities, and all payors limit the types of services for which payment will be
made and/or the amount paid for each particular service. Inflation or other
circumstances could affect the ability of such residents to continue to pay for
the services they receive. Although the Company does not anticipate that base
lease and Mortgage Loan payments to it will be linked to the fees or rates
received by the operators, certain leases and Mortgage Loans may
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provide that the Company will receive a percentage of the fees or rates charged
by the operator to residents. To the extent that residents of Health Care
Facilities are unable to pay fees owed to the facilities' operators, such
inability could adversely affect the ability of such operators to make base
lease and loan payments and could have a material adverse impact on the amount
of lease and loan payments the Company receives in excess of base amounts.
Effects of Cost Control and Other Health Care Reform Measures.
The health care industry is facing various challenges, including increased
government and private payor pressure on health care providers to control costs
and the vertical and horizontal consolidation of health care providers. The
pressure to control health care costs has intensified in recent years as a
result of the national health care reform debate and has continued as Congress
attempts to slow the rate of growth of federal health care expenditures as part
of its effort to balance the federal budget. Similar debates are ongoing at the
state level in many states. The Company believes that government and private
efforts to contain and reduce health care costs will continue. These trends are
likely to lead to reduced or slower growth in reimbursement for services
provided by some of the Company's tenants and borrowers. The Company cannot
predict whether governmental reforms will be adopted and, if adopted, whether
the implementation of these reforms will have a material adverse effect on the
Company's financial condition or results of operations.
Constraints of Government Regulation of Health Care Industry.
The health care industry is highly regulated by federal, state and local
licensing requirements, facility inspections, reimbursement policies,
regulations concerning capital and other expenditures, certification
requirements and other laws, regulations and rules. The failure of any tenant or
borrower to comply with such laws, requirements and regulations could affect
such tenant's or borrower's ability to operate the Health Care Facilities owned
by the Company or to which the Company makes Mortgage Loans. Health care
operators are subject to federal and state laws and regulations that govern
financial and other arrangements between health care providers. These laws
prohibit certain direct and indirect payments or fee-splitting arrangements
between health care providers that are designed to induce or encourage the
referral of patients to, or the recommendation of, a particular provider for
medical products and services. They also require compliance with a variety of
safety, health and other requirements relating to the design and conditions of
the licensed facility and quality of care provided.
These regulations may also enable the regulatory agency to place liens on the
Property which may be senior to the Company's secured position. Possible
sanctions for violation of these laws and regulations include loss of licensure
or certification, the imposition of civil monetary and criminal penalties and
potential exclusion from the Medicare and Medicaid programs.
Because this area of the law currently is subject to intense scrutiny,
additional laws and regulations may be enacted or adopted that could require
changes in the design of the Properties and certain operations of the Company's
tenants and borrowers. For example, a tenant's loss of licensure or
Medicare/Medicaid certification could result in the Company having to obtain
another tenant for the affected health care facility. In addition, a tenant may
be required to make significant modifications to the Property and may not have
the financial ability to do so. No assurances can be given that the Company
could contract with another tenant on a timely basis or on acceptable terms and
a failure to do so could have an adverse effect on the Company's financial
condition or results of operations.
Limitations on Alternative Uses of Company Properties. The
Company anticipates that some of the Properties in which it invests may be
special purpose Properties that could not be readily converted into general
residential, retail or office use. Transfers of operations of health care
facilities often are subject to regulatory approvals not required for transfers
of other types of commercial operations and other types of real estate. Thus, if
the operation of any of the Company's Properties becomes unprofitable for its
operator due to competition, age of improvements or other factors such that the
tenant becomes unable to meet its obligations under the lease, the liquidation
value of the Property may be substantially less than would be the case if the
Property were readily adaptable to other uses. The receipt of liquidation
proceeds could be delayed by the approval process of any state agency necessary
for the transfer of the Property. Should such events occur, the Company's income
and funds available for distribution could be adversely affected.
Impact of Adverse Trends. The success of the future operations of the
Company's Properties will depend largely on each operator's ability to adapt to
dominant trends in the health care and seniors' housing industry, including
greater competitive pressures, increased consolidation, industry overbuilding,
increased regulation and reform, changing demographics, availability of labor,
price levels, and general economic conditions. See "Business -- General" for a
description of the size and nature of the health care and seniors' housing
industry and current trends in the industry. The inability of the operators of
the Company's Properties to adapt to dominant trends could adversely impact the
Company's income and funds available for distribution.
Investment Barriers Imposed by Certificate of Need Laws in Certain
States. Certain states regulate the supply of certain types of Health Care
Facilities, such as skilled nursing facilities, through Certificate of Need
Laws. A Certificate of Need typically is a written statement issued by a state
regulatory agency evidencing a community's need for a new, converted, expanded
or otherwise significantly modified health care facility or service which is
regulated pursuant to the state's statutes. These restrictions may create
barriers to entry or expansion and may limit the availability of Properties for
acquisition or development by the Company. In addition, the Company may invest
in Properties which cannot be replaced if they become obsolete unless such
replacement is approved or exempt
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under a Certificate of Need Law.
Potential Adverse Impact of Competitors. The Company anticipates that
it will compete with other REITs, real estate partnerships, health care
providers and other investors, including, but not limited to banks and insurance
companies, many of which will have greater financial resources than the Company,
in the acquisition, leasing and financing of Health Care Facilities. The Company
may also compete with Affiliates for Mortgage Loans and borrowers. Further,
non-profit entities are particularly attracted to investments in health care
facilities because of their ability to finance acquisitions through the issuance
of tax-exempt bonds, providing non-profit entities with a relatively lower cost
of capital as compared to for-profit purchasers. In addition, in certain states
health care facilities owned by non-profit entities are exempt from taxes on
real property. There can be no assurance that the Company will be able to
identify suitable investments or that it will be able to consummate investments
on commercially reasonable terms.
In addition, the Health Care Facilities in which the Company will
invest are highly competitive, and it is anticipated that any Property acquired
by the Company could compete with other health care facilities in the vicinity.
There can be no assurance that the Company will be able to compete effectively
in any market that it enters. The inability by the Company to compete
successfully would have a negative impact on the Company's financial condition
and results of operations. In addition, due to the highly competitive
environment, it is possible that the markets in which the Company acquires
Properties will be subject to over-building.
Possible Environmental Liabilities. Under various federal and state
environmental laws and regulations, a current or previous owner or operator of
real estate may be required to investigate and clean up certain hazardous or
toxic substances, asbestos-containing materials, or petroleum product releases
affecting the property and surrounding areas, and may be held liable to a
governmental entity or to third parties for property damage and for
investigation and cleanup costs incurred by such parties in connection with the
contamination. In addition, some environmental laws create a lien on the
contaminated site in favor of the government for damages and costs it incurs in
connection with the contamination. The presence of contamination or the failure
to remediate contaminations on its Properties may adversely affect the Company's
ability to sell or lease the Properties or to borrow using the Properties as
collateral. At certain Properties, such as skilled nursing facilities, medical
office buildings and walk-in clinics, some environmental and bio-medical
hazardous wastes and products will be used and generated in the course of normal
operations of the facility. While the leases will provide that the tenant is
solely responsible for any environmental hazards created during the term of the
lease, the Company or operator of a site may be liable under common law to third
parties for damages and injuries resulting from environmental contamination
emanating from the site.
All of the Properties will be acquired by the Company subject to Phase
I environmental assessments, which generally involve inspection of site
conditions without invasive testing such as sampling or analysis of soil,
groundwater or other media or conditions, or satisfactory Phase II environmental
assessments, which generally involve testing of soil, groundwater or other media
and conditions. The Board of Directors and the Advisor may determine the Company
will acquire a Property in which Phase I or Phase II environmental assessment
indicates that a problem exists and has not been resolved at the time the
Property is acquired provided that the seller has (i) agreed in writing to
indemnify the Company and/or (ii) established in escrow cash funds equal to a
predetermined amount greater than the estimated costs to remediate the problem.
There can be no assurance, however, that any seller will be able to pay under an
indemnity obtained by the Company or that the amount in escrow will be
sufficient to pay all remediation costs. Further, no assurances can be given
that all environmental liabilities have been identified or that no prior owner,
operator or current occupant has created an environmental condition not known to
the Company. Moreover, no assurances can be given that (i) future laws,
ordinances or regulations will not impose any material environmental liability
or (ii) the current environmental condition of the Properties will not be
affected by tenants and occupants of the Properties, by the condition of land or
operations in the vicinity of the Properties or by third parties unrelated to
the Company. The imposition on the Company of environmental liabilities could
have an adverse effect on the Company's financial condition or results of
operations.
Possible Lack of Ability to Obtain the Line of Credit and Permanent
Financing. The Company intends to obtain the Line of Credit and may also obtain
Permanent Financing. The Company is engaged in preliminary discussions with
potential lenders but has not yet obtained a commitment for the Line of Credit
or any Permanent Financing, and there is no assurance that the Company will be
able to obtain either the Line of Credit or any Permanent Financing on
satisfactory terms. In the event the Company is unable to obtain a commitment
for the Line of Credit or Permanent Financing, the Company will not enter into
any Secured Equipment Leases.
Unspecified Secured Equipment Leases. The Company, as of the date of
this Prospectus, has not entered into any arrangements that create a reasonable
probability that the Company will extend a Secured Equipment Lease to a
particular operator, and therefore prospective stockholders have no information
to assist them in evaluating the merits of the Secured Equipment Lease program
or of any Secured Equipment Lease. No assurance can be given that the Company
will be successful in identifying suitable operators or negotiating Secured
Equipment Leases on financially attractive terms or that lessees will fulfill
their obligations under Secured Equipment Leases.
TAX RISKS
REIT Qualification. The Company intends to operate so as to
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qualify and remain qualified as a REIT for federal income tax purposes,
commencing with its taxable year ending December 31, 1998. A qualified REIT
generally is not taxed at the corporate level on income it currently distributes
to its stockholders, so long as it distributes at least 95% of its real estate
investment trust taxable income. See "Federal Income Tax Considerations --
Taxation of the Company." The Company expects to qualify as a REIT initially,
but no assurance can be given that it will so qualify or that it will continue
to qualify in the future. In this regard, based on certain representations and
assumptions, the Company will receive an opinion of tax counsel to the Company
("Counsel") to the effect that the Company will be organized in conformity with
the requirements for qualification as a REIT, and that the Company's proposed
method of operation will enable it to meet the requirements for qualification as
a REIT for federal income tax purposes. Qualification as a REIT, however,
involves the application of highly technical and complex Code provisions as to
which there are only limited judicial and administrative interpretations.
Certain facts and circumstances which may be wholly or partially beyond the
Company's control may affect its ability to qualify on an ongoing basis as a
REIT. In addition, no assurance can be given that future legislation, new
regulations, administrative interpretations or court decisions will not
significantly change the tax laws (or the application thereof) with respect to
qualification as a REIT for federal income tax purposes or the federal income
tax consequences of such qualification. The opinion of Counsel is not binding on
the Internal Revenue Service ("IRS") or the courts.
Secured Equipment Lease Treatment. In order to qualify as a REIT for
federal income tax purposes, not more than 25% of the Company's total assets may
be represented by personal property, or loans secured by personal property on
certain testing dates. In addition, loans secured by personal property made to
each borrower must represent less than 5% of the Company's total assets on such
testing dates. Counsel is of the opinion, based on the assumptions that (i) the
Secured Equipment Leases are made on substantially the same terms and conditions
described in "Business -- General" and (ii) as represented by the Company, each
of the Secured Equipment Leases will have a term that equals or exceeds the
useful life of the Equipment subject to the lease, that the Secured Equipment
Leases will be treated as loans secured by personal property for federal income
tax purposes. The ability of the Company to qualify as a REIT may be impacted by
a determination that the Secured Equipment Leases are financing arrangements,
under which the lessees acquire ownership of the equipment for federal income
tax purposes. If the Secured Equipment Leases are treated as true leases, the
Company may be unable to satisfy the income tests for REIT qualification.
The Company believes that the value of the Secured Equipment Leases
together with any personal property owned by the Company, will in the aggregate
represent less than 25% of the Company's total assets and that the value of the
Secured Equipment Leases entered into with any particular lessee will represent
less than 5% of the Company's total assets. Counsel has relied on the
representations of the Company regarding such values in rendering its opinion as
to the qualification of the Company as a REIT. If the Company fails to satisfy
the 25% test or the 5% test either at the time of the offering or on any
subsequent testing date, the Company will fail to qualify (or cease to qualify,
as the case may be) as a REIT for federal income tax purposes. In addition, if,
contrary to the opinion of Counsel, the Secured Equipment Leases are not treated
as loans, but are instead treated as leases for federal income tax purposes,
income from the Secured Equipment Leases will generally not satisfy either the
95% or the 75% gross income tests for REIT qualification. See "Federal Income
Tax Considerations -- Taxation of the Company," and "-- Characterization of the
Secured Equipment Leases."
Effect of REIT Disqualification. If, in any taxable year, the Company
were to fail to qualify as a REIT for federal income tax purposes, it would not
be allowed a deduction for dividends to stockholders in computing taxable income
and would be subject to federal income tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate rates. In addition,
unless entitled to relief under certain statutory provisions, the Company would
be disqualified from treatment as a REIT for federal income tax purposes for the
four taxable years following the year during which REIT qualification is lost.
The additional tax liability resulting from the failure to so qualify would
significantly reduce the amount of funds available to make Distributions to
stockholders. Distributions to stockholders generally would be taxable as
ordinary income to the extent of current and accumulated earnings and profits
and, subject to certain limitations, would be eligible for the corporate
dividends received deduction. Although the Company intends to operate in a
manner designed to permit it to qualify as a REIT for federal income tax
purposes, it is possible that future economic, market, legal, tax, or other
events or circumstances could cause it to fail to so qualify. See "Federal
Income Tax Considerations -- Taxation of the Company."
Effect of Distribution Requirements. The Company may be required, under
certain circumstances, to accrue as income for tax purposes interest, rent and
other items treated as earned for tax purposes but not yet received. In
addition, the Company may be required not to accrue as expenses for tax purposes
certain items which actually have been paid or certain of the Company's
deductions might be disallowed by the IRS. In any such event, the Company could
fail to qualify as a REIT or have taxable income in excess of cash available for
distribution. If the Company has taxable income in excess of cash available for
distribution, the Company could be required to borrow funds or liquidate
investments on unfavorable terms in order to meet the distribution requirement
applicable to a REIT. See "Federal Income Tax Considerations -- Taxation of the
Company -- Distribution Requirements."
Restrictions on Maximum Share Ownership. In order for the Company to
qualify as a REIT, no more than 50% of the value of the outstanding equity
securities may be owned, directly or indirectly (applying certain attribution
rules), by five or fewer individuals (or certain entities) at any time during
the last half of the Company's taxable year. To ensure that the Company
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will not fail to qualify as a REIT under this test, the Company's Articles of
Incorporation include certain provisions restricting the accumulation of Shares.
These restrictions may (i) discourage a change of control of the Company; (ii)
deter individuals and entities from making tender offers for Shares, which
offers may be attractive to stockholders; or (iii) limit the opportunity for
stockholders to receive a premium for their Shares in the event a stockholder is
making purchases of Shares in order to acquire a block of Shares.
Other Tax Liabilities. Even if the Company qualifies as a REIT for
federal income tax purposes, it may be subject to certain federal, state and
local taxes on its income and property. See "Federal Income Tax Considerations
- -- State and Local Taxes." Any such income or property tax liabilities would
reduce the amount of funds available for paying distributions to stockholders.
Changes in Tax Laws. The discussions of the federal income tax aspects
of the offering are based on current law, including the Code, the Regulations
issued thereunder, certain administrative interpretations thereof, and court
decisions. Consequently, future events that modify or otherwise affect those
provisions may result in treatment for federal income tax purposes of the
Company and the stockholders that is materially and adversely different from
that described in this Prospectus, both for taxable years arising before and
after such events. There is no assurance that future legislation and
administrative interpretations will not be retroactive in effect.
SUITABILITY STANDARDS AND HOW TO SUBSCRIBE
SUITABILITY STANDARDS
The Shares offered hereby are suitable only as a long-term investment
for persons of adequate financial means who have no need for liquidity in this
investment. Initially, there is not expected to be any public market for the
Shares, which means that it may be difficult to sell Shares. See "Summary of the
Articles of Incorporation and Bylaws -- Restrictions on Ownership" for a
description of the transfer requirements. As a result, the Company has
established suitability standards which require investors to have either (i) a
net worth (exclusive of home, furnishings, and personal automobiles) of at least
$45,000 and an annual gross income of at least $45,000, or (ii) a net worth
(exclusive of home, furnishings, and personal automobiles) of at least $150,000.
The Company's suitability standards also require that a potential investor (i)
can reasonably benefit from an investment in the Company based on such
investor's overall investment objectives and portfolio structuring, (ii) is able
to bear the economic risk of the investment based on the prospective
stockholder's overall financial situation, and (iii) has apparent understanding
of (a) the fundamental risks of the investment, (b) the risk that such investor
may lose the entire investment, (c) the lack of liquidity of the Company's
shares, (d) the background and qualifications of the Advisor, and (e) the tax
consequences of the investment. In addition, under the laws of the States of
Ohio and Pennsylvania, an investor's investment in the Shares may not exceed 10%
of such investor's net worth (exclusive of home, furnishings, and personal
automobiles).
The foregoing suitability standards must be met by the investor who
purchases the Shares. If the investment is being made for a fiduciary account
(such as an IRA, Keogh Plan, or corporate pension or profit-sharing plan), the
beneficiary, the fiduciary account, or any donor or grantor that is the
fiduciary of the account who directly or indirectly supplies the investment
funds must meet such suitability standards.
Investors should read carefully the requirements in connection with
resales of Shares as set forth in the Articles of Incorporation and as
summarized under "Summary of the Articles of Incorporation and Bylaws --
Restriction of Ownership."
In purchasing Shares, custodians or trustees of employee pension
benefit plans or IRAs may be subject to the fiduciary duties imposed by the
Employee Retirement Income Security Act of 1974 ("ERISA") or other applicable
laws and to the prohibited transaction rules prescribed by ERISA and related
provisions of the Code. See "Federal Income Tax Considerations -- Retirement
Plan Stockholders." In addition, prior to purchasing Shares, the trustee or
custodian of an employee pension benefit plan or an IRA should determine that
such an investment would be permissible under the governing instruments of such
plan or account and applicable law. For information regarding "unrelated
business taxable income," see "Federal Income Tax Considerations -- Taxation of
Stockholders -- Tax-Exempt Stockholders."
In order to ensure adherence to the suitability standards described
above, requisite suitability standards must be met, as set forth in the
Subscription Agreement in the form attached hereto as Appendix D. In addition,
Soliciting Dealers who sell Shares have the responsibility to make every
reasonable effort to determine that the purchase of Shares is a suitable and
appropriate investment for an investor. In making this determination, the
Soliciting Dealers will rely on relevant information provided by the investor,
including information as to the investor's age, investment objectives,
investment experience, income, net worth, financial situation, other
investments, and any other pertinent information. See "The Offering --
Subscription Procedures." Executed Subscription Agreements will be maintained in
the Company's records for six years.
HOW TO SUBSCRIBE
An investor who meets the suitability standards described above may
subscribe for Shares by completing and executing the Subscription Agreement and
delivering it to a Soliciting Dealer, together with a check for the full
purchase price of the Shares subscribed for, payable to "SouthTrust Asset
Management Company of Florida, N.A., Escrow Agent." See "The Offering --
Subscription Procedures." Certain Soliciting Dealers who have "net capital," as
defined in the applicable federal securities regulations, of $250,000 or more
may instruct their customers to make their checks for Shares subscribed for
payable directly to
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the Soliciting Dealer. Care should be taken to ensure that the Subscription
Agreement is filled out correctly and completely. Partnerships, individual
fiduciaries signing on behalf of trusts, estates, and in other capacities, and
persons signing on behalf of corporations and corporate trustees may be required
to obtain additional documents from Soliciting Dealers. Any subscription may be
rejected by the Company in whole or in part, regardless of whether the
subscriber meets the minimum suitability standards.
Certain Soliciting Dealers may permit investors who meet the
suitability standards described above to subscribe for Shares by telephonic
order to the Soliciting Dealer. This procedure may not be available in certain
states. See "The Offering -- Subscription Procedures" and "The Offering -- Plan
of Distribution."
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A minimum investment of 250 Shares ($2,500) is required. IRAs, Keogh
plans, and pension plans must make a minimum investment of at least 100 Shares
($1,000). For Minnesota investors, IRAs and qualified plans must make a minimum
investment of 200 Shares ($2,000) and, for Iowa investors, IRAs and qualified
plans must make a minimum investment of 250 Shares ($2,500). Following an
initial subscription for at least the required minimum investment, any investor
may make additional purchases in increments of one Share. See "The Offering --
General," "The Offering -- Subscription Procedures," and "Summary of
Reinvestment Plan."
-26-
<PAGE>
ESTIMATED USE OF PROCEEDS
The table set forth below summarizes certain information relating to
the anticipated use of offering proceeds by the Company, assuming that 250,000
Shares and 15,000,000 Shares are sold. The Company estimates that 84% of Gross
Proceeds will be available for the purchase of Properties and the making of
Mortgage Loans, and approximately 9% of Gross Proceeds will be paid in fees and
expenses to Affiliates of the Company for their services and as reimbursement
for Organizational and Offering Expenses incurred on behalf of the Company; the
balance will be used to pay other expenses of the offering. While the estimated
use of proceeds set forth in the table below is believed to be reasonable, this
table should be viewed only as an estimate of the use of proceeds that may be
achieved.
<TABLE>
<CAPTION>
Minimum Offering (1) Maximum Offering (1) (2)
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C>
GROSS PROCEEDS TO THE COMPANY (3).......................... $2,500,000 100.0% $150,000,000 100.0%
100.0%
Less:
Selling Commissions to CNL
Securities Corp. (3)................................. 187,500 7.5% 11,250,000 7.5%
Marketing Support and Due Diligence
Expense Reimbursement Fee to
CNL Securities Corp. (3)............................. 12,500 0.5% 750,000 0.5%
Organizational and Offering Expenses (4)................ 75,000 3.0% 4,500,000 3.0%
---------- ----- ----------- -----
NET PROCEEDS TO THE COMPANY................................ 2,225,000 89.0% 133,500,000 89.0%
Less:
Acquisition Fees to the Advisor (5) .................... 112,500 4.5% 6,750,000 4.5%
Acquisition Expenses (6)................................ 12,500 0.5% 750,000 0.5%
Initial Working Capital Reserve ........................ (7)
---------- ----- ----------- -----
(7)
CASH PAYMENT FOR PURCHASE OF PROPERTIES
AND THE MAKING OF MORTGAGE LOANS
BY THE COMPANY (8)...................................... $2,100,000 84.0% $126,000,000 84.0%
========== ===== ============ =====
</TABLE>
- -----------------------------------
FOOTNOTES:
(1) Excludes the purchase of 20,000 shares of Common Stock by the Advisor in
exchange for its $200,000 investment in the Company. The Advisor may, but
is not required to, purchase additional Shares of the Company.
(2) Excludes 500,000 Shares that may be sold pursuant to the Reinvestment Plan
and 600,000 shares that may be sold upon exercise of the Soliciting Dealer
Warrants.
(3) Gross Proceeds of the offering are calculated as if all Shares are sold at
$10.00 per Share and do not take into account any reduction in Selling
Commissions. See "The Offering-- Plan of Distribution" for a description of
the circumstances under which Selling Commissions may be reduced, including
commission discounts available for purchases by registered representatives
or principals of the Managing Dealer or Soliciting Dealers, certain
Directors and officers and certain investment advisers. Selling Commissions
are calculated assuming that reduced commissions are not paid in connection
with the purchase of any Shares. The Shares are being offered to the public
through CNL Securities Corp., which will receive Selling Commissions of
7.5% on all sales of Shares and will act as Managing Dealer. The Managing
Dealer is an Affiliate of the Advisor. Other broker-dealers may be engaged
as Soliciting Dealers to sell Shares and reallowed Selling Commissions of
up to 7%, with respect to Shares which they sell. In addition, all or a
portion of the marketing support and due diligence expense reimbursement
fee may be reallowed to certain Soliciting Dealers for expenses incurred by
them in selling the Shares, including reimbursement for bona fide expenses
incurred in connection with due diligence activities, with prior written
approval from, and in the sole discretion of, the Managing Dealer. See "The
Offering - Plan of Distribution" for a more complete description of this
fee. The Company also will issue to the Managing Dealer, a Soliciting
Dealer Warrant to purchase one share of Common Stock for every 25 Shares
sold, to be exercised, if at all, during the Exercise Period, at a price of
$12.00 per share. All or any part of such Soliciting Dealer Warrants may be
reallowed to certain Soliciting Dealers with prior written approval of, and
in the sole discretion of, the Managing Dealer, unless prohibited by
federal or state securities laws. See "Summary of Articles of Incorporation
and Bylaws-- Description of Capital Stock -- Soliciting Dealer Warrants"
and "The Offering-- Plan of Distribution."
(4) Organizational and Offering Expenses include legal, accounting, printing,
escrow, filing, registration, qualification, and other expenses of the
organization of the Company and the offering of the Shares, but exclude
Selling Commissions and the marketing support and due diligence expense
reimbursement fee. The Advisor will pay all Organizational and Offering
Expenses which exceed 3% of Gross Proceeds. The Organizational and Offering
Expenses paid by the Company in connection with the formation of the
Company, together with the 7.5% Selling Commissions and 0.5% marketing
support and due diligence expense reimbursement fee incurred by the Company
will not exceed 13% of the proceeds raised in connection with this
offering.
(5) Acquisition Fees include all fees and commissions paid by the Company to
any person or entity in connection with the selection or acquisition of any
Property or the making of any Mortgage Loan, including to Affiliates or
nonaffiliates. Acquisition Fees do not include Acquisition Expenses.
-27-
<PAGE>
(6) Represents Acquisition Expenses that are neither reimbursed to the Company
nor included in the purchase price of the Properties, and on which rent is
not received, but does not include certain expenses associated with
Property acquisitions that are part of the purchase price of the
Properties, that are included in the basis of the Properties, and on which
rent is received. Acquisition Expenses include any and all expenses
incurred by the Company, the Advisor, or any Affiliate of the Advisor in
connection with the selection or acquisition of any Property or the making
of any Mortgage Loan, whether or not acquired or made, including, without
limitation, legal fees and expenses, travel and communication expenses,
costs of appraisals, nonrefundable option payments on property not
acquired, accounting fees and expenses, taxes, and title insurance, but
exclude Acquisition Fees. The expenses that are attributable to the seller
of the Properties and part of the purchase price of the Properties is
anticipated to range between 1% and 2% of Gross Proceeds.
(7) Because leases generally will be on a "triple-net" basis, it is not
anticipated that a permanent reserve for maintenance and repairs will be
established. However, to the extent that the Company has insufficient funds
for such purposes, the Advisor may, but is not required to, contribute to
the Company an aggregate amount of up to 1% of the net offering proceeds
available to the Company for maintenance and repairs. The Advisor also may,
but is not required to, establish reserves from offering proceeds,
operating funds, and the available proceeds of any Sales.
(8) Offering proceeds designated for investment in Properties or the making of
Mortgage Loans temporarily may be invested in short-term, highly liquid
investments with appropriate safety of principal. The Company may, at its
discretion, use up to $100,000 per calendar quarter of offering proceeds
for redemptions of Shares. See "Redemption of Shares."
MANAGEMENT COMPENSATION
The table below summarizes the types, recipients, methods of
computation, and estimated amounts of all compensation, fees, reimbursements and
distributions to be paid directly or indirectly by the Company to the Advisor
and its Affiliates, exclusive of any distributions to which the Advisor or its
Affiliates may be entitled by reason of their purchase and ownership of Shares.
The table excludes estimated amounts of compensation relating to any Shares
issued pursuant to the Company's Reinvestment Plan and the Soliciting Dealer
Warrants. See "The Advisor and the Advisory Agreement." For information
concerning compensation to the Directors, see "Management."
A maximum of 15,000,000 Shares ($150,000,000) may be sold. An
additional 500,000 Shares ($5,000,000) may be sold to stockholders who receive a
copy of this Prospectus and who purchase Shares through the Reinvestment Plan.
An additional 600,000 shares ($7,200,000) of Common Stock also may be sold to
the Managing Dealer or certain Soliciting Dealers who exercise Soliciting Dealer
Warrants at an exercise price of $12.00 per share during the Exercise Period for
such shares.
The following arrangements for compensation and fees to the Advisor and
its Affiliates were not determined by arm's-length negotiations. See "Conflicts
of Interest." There is no item of compensation and no fee that can be paid to
the Advisor or its Affiliates under more than one category.
-28-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Type of
Compensation Estimated
and Recipient Method of Computation Maximum Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Organizational Stage
- ------------------------------------------------------------------------------------------------------------------------------------
Selling Commissions Selling Commissions of 7.5% per Share on all Shares sold, subject to Selling Commisssions of $187,500 if
to Managing Dealer and reduction under certain circumstances as described in "The Offering - 250,000 Shares are sold; $11,250,000
Soliciting Dealers Plan of Distribution." Soliciting Dealers may be reallowed if 15,000,000 Shares are sold.
Selling Commissions of up to 7% with respect to Shares they sell. In
addition, the Managing Dealer will receive one Soliciting Dealer Warrant for
every 25 Shares sold, all or a portion of which may be reallowed to
Soliciting Dealers, with prior written approval from, and in the sole
discretion of, the Managing Dealer. See "The Offering - Plan of
Distribution."
- ------------------------------------------------------------------------------------------------------------------------------------
Marketing support and Expense allowance of 0.5% of Gross Proceeds to the Managing Dealer, all $12,500 if 250,000 Shares are
due diligence expense or a portion of which may be reallowed to Soliciting Dealers with prior sold; $750,000 if 15,000,000
reimbursement fee to written approval from, and in the sole discretion of, the Managing Dealer. Shares are sold.
Managing Dealer and The Managing Dealer will pay all sums attributable to bona fide due
Soliciting Dealers diligence expenses from this fee, in the Managing Dealer's sole discretion.
- ------------------------------------------------------------------------------------------------------------------------------------
Reimbursement to the Actual expenses incurred, except that the Advisor will pay all such Amount is not determinable at
Advisor and its expenses in excess of 3% of Gross Proceeds. The Organizational and this time, but will not exceed
Affiliates for Offering Expenses paid by the Company in connection with the formation 3% of Gross Proceeds, $75,000 if
Organizational and of the Company, together with the 7.5% Selling Commissions and 0.5% 250,000 Shares are sold;
Offering Expenses marketing support and due diligence expense reimbursement fee, incurred $4,500,000 if 15,000,000 Shares
by the Company will not exceed 13% of the proceeds raised in connections are sold.
with this offering.
- ------------------------------------------------------------------------------------------------------------------------------------
Acquisition Stage
- ------------------------------------------------------------------------------------------------------------------------------------
Acquisition Fee to 4.5% of Total Proceeds payable to the Advisor as Acquisition Fees. $112,500 if 250,000 Shares are
the Advisor sold plus $20,250 if Permanent
Financing equals $450,000;
$6,750,000 if 15,000,000 Shares
are sold plus $2,025,000 if
Permanent Financing equals
$45,000,000.
- ------------------------------------------------------------------------------------------------------------------------------------
Other Acquisition Any fees paid to Affiliates of the Advisor in connection with the Amount is not determinable at
Fees to Affiliates financing, development, construction or renovation of a Property. this time.
of the Advisor Such fees are in addition to 4.5% of Total Proceeds payable to the
Advisor as Acquisition Fees, and payment of such fees will be
subject to approval by the Board of Directors, including a majority
of the Independent Directors, not otherwise interested in the
transaction.
- ------------------------------------------------------------------------------------------------------------------------------------
-29-
<PAGE>
- ------------------------------------------------------------------------------------------------------------------------------------
Type of
Compensation Estimated
and Recipient Method of Computation Maximum Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Reimbursement of Reimbursement to the Advisor and its Affiliates for expenses actually Acquisition Expenses, which are
Acquisition Expenses incurred. based on a number of factors,
to the Advisor and including the purchase price of
its Affiliates the Properties, are not
The total of all Acquisition Fees and any Acquisition Expenses payable determinable at this time.
to the Advisor and its Affiliates shall be reasonable and shall not
exceed an amount equal to 6% of the Real Estate Asset Value of a
Property, or in the case of a Mortgage Loan, 6% of the funds
advanced, unless a majority of the Board of Directors, including a
majority of the Independent Directors not otherwise interested in
the transaction, approves fees in excess of this limit subject to
a determination that the transaction is commercially competitive,
fair and reasonable to the Company. Acquisition Fees shall be reduced
to the extent that, and if necessary to limit, the total compensation
paid to all persons involved in the acquisition of any Property to
the amount customarily charged in arms-length transactions by other
persons or entities rendering similar services as an ongoing public
activity in the same geographical location and for comparable
types of Properties, and to the extent that other acquisition fees,
finder's fees, real estate commissions, or other similar fees or
commissions are paid by any person in connection with the transaction.
"Real Estate Asset Value" means the amount actually paid or allocated
to the purchase, development, construction or improvement of a Property,
exclusive of Acquisition Fees and Acquisition Expenses.
- ------------------------------------------------------------------------------------------------------------------------------------
Operational Stage
- ------------------------------------------------------------------------------------------------------------------------------------
Asset Management Fee A monthly Asset Management Fee in an amount equal to one-twelfth of Amount is not determinable at
to the Advisor .60% of the Company's Real Estate Asset Value and the outstanding this time. The amount of the
principal amount of any Mortgage Loans, as of the end of the Asset Management Fee will depend
preceding month. Specifically, Real Estate Asset Value equals the upon, among other things, the
amount invested in the Properties wholly owned by the Company, cost of the Properties and the
determined on the basis of cost, plus, in the case of Properties amount invested in Mortgage
owned by any Joint Venture or partnership in which the Company is a Loans.
co-venturer or partner, the portion of the cost of such Properties
paid by the Company, exclusive of Acquisition Fees and Expenses. The
Asset Management Fee, which will not exceed fees which are competitive
for similar services in the same geographic area, may or may not be taken,
in whole or in part as to any year, in the sole discretion of the Advisor.
All or any portion of the Asset Management Fee not taken as to any fiscal
year shall be deferred without interest and may be taken in such other
fiscal year as the Advisor shall determine.
- ------------------------------------------------------------------------------------------------------------------------------------
Reimbursement to the Operating Expenses (which, in general, are those expenses relating to Amount is not determinable at
Advisor and Affiliates adminiatration of the Company on an ongoing basis) will be reimbursed this time.
for operating expenses by the Company. To the extent that Operating Expenses payable or
reimbursable by the Company, in any four consecutive fiscal quarters
(the "Expense Year"), exceed the greater of 2% of Average Invested
Assets or 25% of Net Income (the "2%/25% Guidelines"), the Advisor shall
reimburse the Company within 60 days after the end of the Expense Year
the amount by which the total Operating Expenses paid or incurred by the
Company exceed the 2%/25% Guidelines. "Average Invested Assets" means, for
a specified period, the average of the aggregate book value of the assets
of the Company invested, directly or indirectly, in equity interests in and
loans secured by real estate before reserves for depreciation or bad
debts or other similar non-cash reserves, computed by taking the average
of such values at the end of each month during such period. "Net Income"
means for any period, the total revenues applicable to such period,
less the total expenses applicable to such period excluding additions to
reserves for depreciation, bad debts, or other similar non-cash reserves;
provided, however, Net Income for purposes of calculating total allowable
Operating Expenses shall exclude the gain from the sale of the Company's assets.
-31-
<PAGE>
- ------------------------------------------------------------------------------------------------------------------------------------
Type of
Compensation Estimated
and Recipient Method of Computation Maximum Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred, subordinated A deferred, subordinated real estate disposition fee, payable upon Sale of Amount is not determinable
real estate one or more Properties, in an amount equal to the lesser of (i) one-half of at this time. The amount
disposition fee a Competitive Real Estate Commission, or (ii) 3% of the sales price of such of this fee, if it becomes
payable to the Advisor Property or Properties. Payment of such fee shall be made only if the payable, will depend upon
from a Sale or Sales Advisor provides a substantial amount of services in connection with the the price at which
of a Property not in Sale of a Property or Properties and shall be subordinated to receipt by the Properties are sold.
liquidation of the stockholders of Distributions equal to the sume of (i) their aggregate Stock-
Company holders' 8% Return and (ii) their aggregate Invested Capital. If, at the time
of a Sale, payment of the disposition fee is deferred because the subordination
conditions have not been satisfied, then the disposition fee shall be paid at
such later time as the subordination conditions are satisfied. Upon Listing,
if the Advisor has accrued but not been paid such real estate disposition
fee, then for purposes of determining whether the subordination conditions
have been satisfied, stockholders will be deemed to have received a
Distribution in the amount equal to the product of the total number of shares
of Common Stock outstanding and the average closing price of the shares over
a period, beginning 180 days after Listing, of 30 days during which the
shares are traded. "Stockholders' 8% Return," as of each date, means an
aggregate amount equal to an 8% cumulative,
noncompounded, annual return on Invested Capital.
- ------------------------------------------------------------------------------------------------------------------------------------
Subordinated Incentive At such time, if any, as Listing occurs, the Advisor shall be paid the Amount is not determinable
Fee payable to the Subordinated Incentive Fee in an amount equal to 10% of the amount by at this time.
Advisor at such time, which (i) the market value of the Company (as defined below) plus
if any, as Listing the total Distributions made to stockholders from the Company's inception
occurs until the date of Listing exceeds (ii) the sum of (A) 100% of Invested
Capital and (B) the total Distributions required to be made to the
stockholders in order to pay the Stockholders' 8% Return from inception
through the date the market value is determined. For purposes of calculating
the Subordinated Incentive Fee, the market value of the Company shall be the
average closing price or average of bid and asked price, as the case may be,
over a period of 30 days during which the shares of Common Stock are traded
with such period beginning 180 days after Listing. The Subordinated
Incentive Fee will be reduced by the amount of any prior payment to the
Advisor of a deferred, subordinated share of Net Sales
Proceeds from Sales of assets of the Company.
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred, subordinated A deferred, subordinated share equal to 10% of Net Sales Proceeds from Sales Amount is not determinable
share of Net Sales of assets of the Company payable after receipt by the stockholders of at this time.
Proceeds from Sales of Distributions equal to the sum of (i) the Stockholders' 8% Return and (ii)
assets of the Company 100% of Invested Capital. Following Listing, no share of Net Sales Proceeds
not in liquidation of will be paid to the Advisor.
the Company payable to
the Advisor
- ------------------------------------------------------------------------------------------------------------------------------------
Performance Fee Upon termination of the Advisory Agreement, if Listing has not occurred Amount is not determinable
payable to the Advisor and the Advisor has met applicable performance standards, the Advisor at this time.
shall be paid the Performance Fee in the amount equal to 10% of the
amount by which (i) the appraised value of the Company's assets on the
Termination Date, less any indebtedness secured by such assets, plus total
distributions paid to stockholders from the Company's inception through
the Termination Date, exceeds (ii) the sum of 100% of Invested Capital plus
an amount equal to the Stockholders' 8% Return from inception through the
Termination Date. The Performance Fee, to the extent payable at the time
of Listing, will not be payable in the event the Subordinated Incentive Fee
is paid.
-32-
<PAGE>
- ------------------------------------------------------------------------------------------------------------------------------------
Type of
Compensation Estimated
and Recipient Method of Computation Maximum Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Secured Equipment Lease A fee paid to the Advisor out of the proceeds of the Line of Credit Amount is not determinable at
Servicing Fee to the or Permanent Financing for negotiating Secured Equipment Leases this time.
Advisor and supervising the Secured Equipment Lease program equal to 2% of
the purchase price of the Equipment subject to each Secured Equipment
Lease and paid upon entering into such lease.
- ------------------------------------------------------------------------------------------------------------------------------------
Reimbursement to the Repayment by the Company of actual expenses incurred. Amount is not determinable at
Advisor and Affiliates this time.
for Secured Equipment
Lease servicing expenses
- ------------------------------------------------------------------------------------------------------------------------------------
Liquidation Stage
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred, subordinated A deferred, subordinated real estate disposition fee, payable upon Sale Amount is not determinable at
fee payable to the of one or more Properties, in an amount equal to the lesser of (i) one- this time. The amount of this
Advisor from a Sale or half of a Competitive Real Estate Commission, or (ii) 3% of the sales price fee, if it becomes payable,
Sales in liquidation of such Property or Properties. Payment of such fee shall be made only if will depend upon the price at
of the Company the Advisor provides a substantial amount of services in connection with the which Properties are sold.
Sale of a Property or Properties and shall be subordinated to receipt by the
stockholders of Distributions equal to the sum of (i) their aggregate
Stockholders' 8% Return and (ii) their aggregate Invested Capital. If, at
the time of a Sale, payment of the disposition fee is deferred because the
subordination conditions have not been satisfied, then the disposition fee
shall be paid at such later time as the subordination conditions are satisfied.
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred, subordinated A deferred, subordinated share equal to 10% of Net Sales Proceeds from Sales Amount is not determinable at
share of Net Sales of assets of the Company payable after receipt by the stockholders of this time.
Proceeds from Sales of Distributions equal to the sum of (i) the Stockholders' 8% Return and (ii)
assets of the Company 100% of Invested Capital. Following Listing, no share of Net Sales
in liquidation of the Proceeds will be paid to the Advisor.
Company payable to the
Advisor
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-34-
<PAGE>
CONFLICTS OF INTEREST
The Company will be subject to various conflicts of interest arising
out of its relationship to the Advisor and its Affiliates, as described below.
The following chart indicates the relationship between the Advisor and
those Affiliates that will provide services to the Company.
CNL Group, Inc. (1)
Subsidiaries, Affiliates and Strategic Business Units
-----------------------------------------------------
Capital Markets Retail
- --------------- ------
o CNL Securities Corp. (2) o Commercial Net Lease Realty, Inc. (4)
o CNL Investment Company
Corporate Services Restaurant
- ------------------ ----------
o CNL Corporate Services, Inc. (3) o CNL Fund Advisors, Inc.
o CNL Restaurant Services, Inc.
Hospitality
-----------
o CNL Real Estate Advisors, Inc.
o CNL Hotel Development Company
Health Care
-----------
o CNL Health Care Advisors, Inc. (5)
Financial Services
------------------
o CNL Financial Services, Inc.
o CNL Advisory Services, Inc.
Corporate Properties
--------------------
o CNL Corporate Properties, Inc.
- --------------------------
(1) James M. Seneff, Jr., Chairman of the Board and Chief Executive Officer
of the Company, shares ownership and voting control of CNL Group, Inc.
with Dayle L. Seneff, his wife.
(2) CNL Securities Corp. (a wholly-owned subsidiary of CNL Group, Inc.) has
served as managing dealer in the offerings for various CNL public and
private real estate programs, including the Company.
(3) CNL Corporate Services, Inc. (a wholly-owned subsidiary of CNL Group,
Inc.) and other Affiliates provide administrative and accounting
services for various CNL entities, including the Company.
(4) Commercial Net Lease Realty, Inc. is a REIT listed on the New York
Stock Exchange. Effective January 1, 1998, CNL Realty Advisors, Inc.
and Commercial Net Lease Realty, Inc. merged, at which time Commercial
Net Lease Realty, Inc. became self advised. James M. Seneff, Jr.
continues to hold the positions of Chief Executive Officer and Chairman
of the Board, and Robert A. Bourne continues to hold the position of
Vice Chairman of the Board of Commercial Net Lease Realty, Inc.
(5) CNL Health Care Advisors, Inc. (a wholly-owned subsidiary of CNL Group,
Inc.) provides management and advisory services to the Company pursuant
to the Advisory Agreement.
PRIOR AND FUTURE PROGRAMS
In the past, Affiliates of the Advisor have organized over 100 other
real estate investments, currently have other real estate holdings, and in the
future expect to form, offer interests in, and manage other real estate programs
in addition to the Company, and make additional real estate investments.
Although neither the Advisor nor its Affiliates currently own, operate, lease or
manage properties that would be suitable for the Company, future real estate
programs may involve Affiliates of the Advisor in the ownership, financing,
operation, leasing, and management of such properties.
-35-
<PAGE>
Certain public or private real estate programs affiliated with the
Advisor may in the future invest in health care properties, may purchase
properties concurrently with the Company and may lease properties to operators
who also lease or operate certain of the Company's Properties. Such other
programs may offer mortgage or equipment financing to the same or similar
entities as those targeted by the Company, thereby affecting the Company's
Mortgage Loan activities or Secured Equipment Lease program. Such conflicts
between the Company and affiliated programs may affect the value of the
Company's investments as well as its Net Income. The Company believes that the
Advisor has established guidelines to minimize such conflicts. See "Certain
Conflict Resolution Procedures" below.
-36-
<PAGE>
COMPETITION TO ACQUIRE PROPERTIES AND INVEST IN MORTGAGE LOANS
Affiliates of the Advisor may compete with the Company to acquire
health care properties or to invest in mortgage loans of a type suitable for
acquisition or investment by the Company and may be better positioned to make
such acquisitions or investments as a result of relationships that may develop
with various operators of Health Care Facilities. See "Business -- Site
Selection and Acquisition of Properties -- Interim Acquisitions." A purchaser
who wishes to acquire one or more of these properties or invest in one or more
mortgage loans may have to do so within a relatively short period of time,
occasionally at a time when the Company (due to insufficient funds, for example)
may be unable to make the acquisition or investment.
In an effort to address these situations and preserve the acquisition
and investment opportunities for the Company (and other entities with which the
Advisor or its Affiliates are affiliated), Affiliates of the Advisor maintain
lines of credit which enable them to acquire properties or make mortgage loans
on an interim basis. These properties and/or mortgage loans generally will be
purchased from Affiliates of the Advisor, at their cost or carrying value, by
one or more existing or future public or private programs formed by Affiliates
of the Advisor.
The Advisor could experience potential conflicts of interest in
connection with the negotiation of the purchase price and other terms of the
acquisition of a Property or investment in a Mortgage Loan, as well as the terms
of the lease of a Property or Mortgage Loan, due to its relationship with its
Affiliates and any business relationship of its Affiliates that may develop with
operators of Health Care Facilities. Consequently, the Advisor may negotiate
terms of acquisitions, investments or leases that may be more beneficial to
other entities than to the Company.
The Advisor or its Affiliates also may be subject to potential
conflicts of interest at such time as the Company wishes to acquire a property
or invest in a mortgage loan that also would be suitable for acquisition or
investment by an Affiliate of CNL. Affiliates of the Advisor serve as Directors
of the Company and, in this capacity, have a fiduciary obligation to act in the
best interest of the stockholders of the Company and, as general partners or
directors of CNL Affiliates, to act in the best interests of the investors in
other programs with investments that may be similar to those of the Company and
will use their best efforts to assure that the Company will be treated as
favorably as any such other program. See "Management Fiduciary Responsibility of
the Board of Directors." The Company has also developed procedures to resolve
potential conflicts of interest in the allocation of properties and mortgage
loans between the Company and certain of its Affiliates. See "Certain Conflict
Resolution Procedures" below.
The Company will supplement this Prospectus during the offering period
to disclose the acquisition of a Property at such time as the Advisor believes
that a reasonable probability exists that the Company will acquire the Property,
including an acquisition from the Advisor or its Affiliates. Based upon the
experience of management of the Company and the Advisor and the proposed
acquisition methods, a reasonable probability that the Company will acquire a
Property normally will occur as of the date on which (i) a commitment letter is
executed by a proposed lessee, (ii) a satisfactory credit underwriting for the
proposed lessee has been completed and (iii) a satisfactory site inspection has
been completed.
SALES OF PROPERTIES
A conflict also could arise in connection with the Advisor's
determination as to whether or not to sell a Property, since the interests of
the Advisor and the stockholders may differ as a result of their distinct
financial and tax positions and the compensation to which the Advisor or its
Affiliates may be entitled upon the Sale of a Property. See "Compensation of the
Advisor," below for a description of these compensation arrangements. In order
to resolve this potential conflict, the Board of Directors will be required to
approve each Sale of a Property.
-37-
<PAGE>
JOINT INVESTMENT WITH AN AFFILIATED PROGRAM
The Company may invest in Joint Ventures with another program sponsored
by the Advisor or its Affiliates if a majority of the Directors, including a
majority of the Independent Directors, not otherwise interested in the
transaction, determine that the investment in the Joint Venture is fair and
reasonable to the Company and on substantially the same terms and conditions as
those to be received by the co-venturer or co-venturers. Potential situations
may arise in which the interests of the co-venturer or co-venturers may conflict
with those of the Company. In addition, the Company and the co-venturer or
co-venturers may reach an impasse with regard to business decisions, such as the
purchase or sale of Property, in which the approval of the Company and each
co-venturer is required. In this event, none of the parties may have the funds
necessary to purchase the interests of the other co-venturers. The Company may
experience difficulty in locating a third party purchaser for its Joint Venture
interest and in obtaining a favorable sales price for such Joint Venture
interest. See "Risk Factors -- Impasse or Conflicts with Joint Venture Partner."
COMPETITION FOR MANAGEMENT TIME
The officers and directors of the Advisor and the officers and
Directors of the Company currently are engaged, and in the future will engage,
in the management of other business entities and properties and in other
business activities, including entities, properties and activities associated
with Affiliates. They will devote only as much of their time to the business of
the Company as they, in their judgment, determine is reasonably required, which
will be substantially less than their full time. These officers and directors of
the Advisor and officers and Directors of the Company may experience conflicts
of interest in allocating management time, services, and functions among the
Company and the various entities, investor programs (public or private), and any
other business ventures in which any of them are or may become involved.
Independent Directors may serve as directors of three REITs advised by the
Advisor; however, the Company does not anticipate that it will share Independent
Directors with other REITs advised by the Advisor.
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COMPENSATION OF THE ADVISOR
The Advisor will be engaged to perform various services for the Company
and will receive fees and compensation for such services. None of the agreements
for such services were the result of arm's-length negotiations. All such
agreements, including the Advisory Agreement, require approval by a majority of
the Board of Directors, including a majority of the Independent Directors, not
otherwise interested in such transactions, as being fair and reasonable to the
Company and on terms and conditions no less favorable than those which could be
obtained from unaffiliated entities. The timing and nature of fees and
compensation to the Advisor could create a conflict between the interests of the
Advisor and those of the stockholders. A transaction involving the purchase,
lease, or Sale of any Property, or the entering into or Sale of a Mortgage Loan
or a Secured Equipment Lease by the Company may result in the immediate
realization by the Advisor and its Affiliates of substantial commissions, fees,
compensation, and other income. Although the Advisory Agreement authorizes the
Advisor to take primary responsibility for all decisions relating to any such
transaction, the Board of Directors must approve all of the Company's
acquisitions and Sales of Properties and the entering into and Sales of Mortgage
Loans or Secured Equipment Leases. Potential conflicts may arise in connection
with the determination by the Advisor on behalf of the Company of whether to
hold or sell a Property, Mortgage Loan, or Secured Equipment Lease as such
determination could impact the timing and amount of fees payable to the Advisor.
See "The Advisor and the Advisory Agreement."
RELATIONSHIP WITH MANAGING DEALER
The Managing Dealer is CNL Securities Corp., an Affiliate of the
Company. Certain of the officers and Directors of the Company are also officers,
directors, and registered principals of the Managing Dealer. This relationship
may create conflicts in connection with the fulfillment by the Managing Dealer
of its due diligence obligations under the federal securities laws. Although the
Managing Dealer will examine the information in the Prospectus for accuracy and
completeness, the Managing Dealer is an Affiliate of the Company and will not
make an independent review of the Company and the offering. Accordingly, the
investors do not have the benefit of such independent review. Certain of the
Soliciting Dealers have made, or are expected to make, their own independent due
diligence investigations. The Managing Dealer is not prohibited from acting in
any capacity in connection with the offer and sale of securities offered by
entities that may have some or all investment objectives similar to those of the
Company and is expected to participate in other offerings sponsored by one or
more of the officers or Directors of the Company.
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LEGAL REPRESENTATION
Shaw Pittman Potts & Trowbridge, which serves as securities and tax
counsel to the Company in this offering, also serves as securities and tax
counsel for certain of its Affiliates, including other real estate programs, in
connection with other matters. In addition, certain members of the firm of Shaw
Pittman Potts & Trowbridge have invested as limited partners or stockholders in
prior programs sponsored by Affiliates of the Advisor in aggregate amounts which
do not exceed one percent of the amounts sold by any of these programs, and
members of the firm also may invest in the Company. Neither the Company nor the
stockholders will have separate counsel. In the event any controversy arises
following the termination of this offering in which the interests of the Company
appear to be in conflict with those of the Advisor or its Affiliates, other
counsel may be retained for one or both parties.
CERTAIN CONFLICT RESOLUTION PROCEDURES
In order to reduce or eliminate certain potential conflicts of
interest, the Articles of Incorporation contain a number of restrictions
relating to (i) transactions between the Company and the Advisor or its
Affiliates, (ii) certain future offerings, and (iii) allocation of properties,
mortgage loans and secured equipment leases among certain affiliated entities.
These restrictions include the following:
1. No goods or services will be provided by the Advisor or its
Affiliates to the Company except for transactions in which the Advisor or its
Affiliates provide goods or services to the Company in accordance with the
Articles of Incorporation, or, if a majority of the Directors (including a
majority of the Independent Directors) not otherwise interested in such
transactions approve such transactions as fair and reasonable to the Company and
on terms and conditions not less favorable to the Company than those available
from unaffiliated third parties.
2. The Company will not purchase or lease Properties in which the
Advisor or its Affiliates has an interest without the determination, by a
majority of the Directors (including a majority of the Independent Directors)
not otherwise interested in such transaction, that such transaction is
competitive and commercially reasonable to the Company and at a price to the
Company no greater than the cost of the asset to the Advisor or its Affiliate
unless there is substantial justification for any amount that exceeds such cost
and such excess amount is determined to be reasonable. In no event shall the
Company acquire any such asset at an amount in excess of its appraised value.
The Company will not sell or lease Properties to the Advisor or its Affiliates
unless a majority of the Directors (including a majority of the Independent
Directors) not interested in the transaction determine the transaction is fair
and reasonable to the Company.
3. The Company will not make any loans to Affiliates. Any loans to the
Company by the Advisor or its Affiliates must be approved by a majority of the
Directors (including a majority of the Independent Directors) not otherwise
interested in such transaction as fair, competitive, and commercially
reasonable, and no less favorable to the Company than comparable loans
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between unaffiliated parties. It is anticipated that the Advisor or its
Affiliates shall be entitled to reimbursement, at cost, for actual expenses
incurred by the Advisor or its Affiliates on behalf of the Company or Joint
Ventures in which the Company is a co-venturer, subject to the 2%/25% Guidelines
(2% of Average Invested Assets or 25% of Net Income) described under "The
Advisor and the Advisory Agreement - The Advisory Agreement."
4. Until completion of this offering, the Advisor and its Affiliates
will not offer or sell interests in any subsequently formed public program that
has investment objectives and structure similar to those of the Company and that
intends to (i) invest, on a cash and/or leveraged basis, in a diversified
portfolio of health care properties to be leased on a "triple-net" basis to
operators of Health Care Facilities, (ii) offer mortgage loans and (iii) offer
secured equipment leases. The Advisor and its Affiliates also will not purchase
a property or offer or invest in a mortgage loan or secured equipment lease for
any such subsequently formed public program that has investment objectives and
structure similar to the Company and that intends to invest on a cash and/or
leveraged basis primarily in a diversified portfolio of health care properties
to be leased on a "triple-net" basis to operators of Health Care Facilities
until substantially all (generally, 80%) of the funds available for investment
(Net Offering Proceeds) by the Company have been invested or committed to
investment. (For purposes of the preceding sentence only, funds are deemed to
have been committed to investment to the extent written agreements in principle
or letters of understanding are executed and in effect at any time, whether or
not any such investment is consummated, and also to the extent any funds have
been reserved to make contingent payments in connection with any Property,
whether or not any such payments are made.) The Advisor or its Affiliates in the
future may offer interests in one or more public or private programs organized
to purchase properties of the type to be acquired by the Company, to offer
Mortgage Loans and/or to offer Secured Equipment Leases.
5. The Board of Directors and the Advisor have agreed that, in the
event that an investment opportunity becomes available which is suitable for
both the Company and a public or private entity with which the Advisor or its
Affiliates are affiliated, for which both entities have sufficient uninvested
funds, then the entity which has had the longest period of time elapse since it
was offered an investment opportunity will first be offered the investment
opportunity. An investment opportunity will not be considered suitable for a
program if the requirements of Item 4 above could not be satisfied if the
program were to make the investment. In determining whether or not an investment
opportunity is suitable for more than one program, the Advisor and its
Affiliates will examine such factors, among others, as the cash requirements of
each program, the effect of the acquisition both on diversification of each
program's investments by types of health care facilities and geographic area,
and on diversification of the tenants of its properties (which also may affect
the need for one of the programs to prepare or produce audited financial
statements for a property or a tenant), the anticipated cash flow of each
program, the size of the investment, the amount of funds available to each
program, and the length of time such funds have been available for investment.
If a subsequent development, such as a delay in the closing of a property or a
delay in the construction of a property, causes any such investment, in the
opinion of the Advisor and its Affiliates, to be more appropriate for an entity
other than the entity which committed to make the investment, however, the
Advisor has the right to agree that the other entity affiliated with the Advisor
or its Affiliates may make the investment.
6. With respect to Shares owned by the Advisor, the Directors, or any
Affiliate, neither the Advisor, nor the Directors nor such Affiliate may vote or
consent on matters submitted to the stockholders regarding the removal of the
Advisor, Directors, or any Affiliate or any transaction between the Company and
any of them. In determining the requisite percentage in interest of Shares
necessary to approve a matter on which the Advisor, Directors, and any Affiliate
may not vote or consent, any Shares owned by any of them shall not be included.
Additional conflict resolution procedures are identified under "- Sales
of Properties," "- Joint Investment With An Affiliated Program," and "- Legal
Representation."
SUMMARY OF REINVESTMENT PLAN
The Company has adopted the Reinvestment Plan pursuant to which
stockholders may elect to have the full amount of their cash Distributions from
the Company reinvested in additional Shares of the Company. Each prospective
investor who wishes to participate in the Reinvestment Plan should consult with
such investor's Soliciting Dealer as to the Soliciting Dealer's position
regarding participation in the Reinvestment Plan. The following discussion
summarizes the principal terms of the Reinvestment Plan. The Reinvestment Plan
is attached hereto as Appendix A.
GENERAL
An independent agent (the "Reinvestment Agent"), which currently is MMS
Securities, Inc., will act on behalf of the participants in the Reinvestment
Plan (the "Participants"). The Reinvestment Agent at all times will be
registered as a broker-dealer with the Securities and Exchange Commission (the
"Commission") and each state securities commission. At any time that the Company
is engaged in an offering, including the offering described herein, the
Reinvestment Agent will invest all Distributions attributable to Shares owned by
Participants in Shares of the Company at the public offering price per Share,
which currently is $10.00 per Share. At anytime that the Company is not engaged
in an offering, and until Listing, the price per Share will be determined by (i)
quarterly appraisal updates performed by the Company based on a review of the
existing appraisal and lease of each Property, focusing on a re-examination of
the capitalization rate applied to the rental stream to be derived from that
Property; and (ii) a review of the outstanding Mortgage Loans and Secured
Equipment Leases focusing
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on a determination of present value by a re-examination of the capitalization
rate applied to the stream of payments due under the terms of each Mortgage Loan
and Secured Equipment Lease. The capitalization rate used by the Company and, as
a result, the price per Share paid by the Participants in the Reinvestment Plan
prior to Listing will be determined by the Advisor in its sole discretion. The
factors that the Advisor will use to determine the capitalization rate include
(i) its experience in selecting, acquiring and managing properties similar to
the Properties; (ii) an examination of the conditions in the market; and (iii)
capitalization rates in use by private appraisers, to the extent that the
Advisor deems such factors appropriate, as well as any other factors that the
Advisor deems relevant or appropriate in making its determination. The Company's
internal accountants will then convert the most recent quarterly balance sheet
of the Company from a "GAAP" balance sheet to a "fair market value" balance
sheet. Based on the "fair market value" balance sheet, the internal accountants
will then assume a sale of the Company's assets and the liquidation of the
Company in accordance with its constitutive documents and applicable law and
compute the appropriate method of distributing the cash available after payment
of reasonable liquidation expenses, including closing costs typically associated
with the sale of assets and shared by the buyer and seller, and the creation of
reasonable reserves to provide for the payment of any contingent liabilities.
All Shares available for purchase under the Reinvestment Plan either are
registered pursuant to this Prospectus or will be registered under the
Securities Act of 1933 through a separate prospectus relating solely to the
Reinvestment Plan. Until this offering has terminated, Shares will be available
for purchase out of the additional 500,000 Shares registered with the Commission
in connection with this offering. See "The Offering - Plan of Distribution."
After the offering has terminated, shares will be available from any additional
shares (not expected to exceed 500,000 Shares at any one time) which the Company
elects to register with the Commission for the Reinvestment Plan. The
Reinvestment Plan may be amended or supplemented by an agreement between the
Reinvestment Agent and the Company at any time, including but not limited to an
amendment to the Reinvestment Plan to add a voluntary cash contribution feature
or to substitute a new Reinvestment Agent to act as agent for the Participants
or to increase the administrative charge payable to the Reinvestment Agent, by
mailing an appropriate notice at least 30 days prior to the effective date
thereof to each Participant at his or her last address of record; provided, that
any such amendment must be approved by a majority of the Independent Directors
of the Company. Such amendment or supplement shall be deemed conclusively
accepted by each Participant except those Participants from whom the Company
receives written notice of termination prior to the effective date thereof.
Stockholders who have received a copy of this Prospectus and
participate in this offering can elect to participate in and purchase Shares
through the Reinvestment Plan at any time and would not need to receive a
separate prospectus relating solely to the Reinvestment Plan. A person who
becomes a stockholder otherwise than by participating in this offering may
purchase shares through the Reinvestment Plan only after receipt of a separate
prospectus relating solely to the Reinvestment Plan.
At any time that the Company is not engaged in an offering, the price
per Share purchased pursuant to the Reinvestment Plan shall be the fair market
value of the Shares based on quarterly appraisal updates of the Company's assets
until such time, if any, as Listing occurs. Upon Listing, the Shares to be
acquired for the Reinvestment Plan may be acquired either through such market or
directly from the Company pursuant to a registration statement relating to the
Reinvestment Plan, in either case at a per-Share price equal to the
then-prevailing market price on the national securities exchange or
over-the-counter market on which the Shares are listed at the date of purchase.
In the event that, after Listing occurs, the Reinvestment Agent purchases Shares
on a national securities exchange or over-the-counter market through a
registered broker-dealer, the amount to be reinvested shall be reduced by any
brokerage commissions charged by such registered broker-dealer. In the event
that such registered broker-dealer charges reduced brokerage commissions,
additional funds in the amount of any such reduction shall be left available for
the purchase of Shares. The Company is unable to predict the effect which such a
proposed listing would have on the price of the Shares acquired through the
Reinvestment Plan.
INVESTMENT OF DISTRIBUTIONS
Distributions will be used by the Reinvestment Agent, promptly
following the payment date with respect to such Distributions, to purchase
Shares on behalf of the Participants from the Company. All such Distributions
shall be invested in Shares within 30 days after such payment date. Any
Distributions not so invested will be returned to Participants.
At this time, Participants will not have the option to make voluntary
contributions to the Reinvestment Plan to purchase Shares in excess of the
amount of Shares that can be purchased with their Distributions. The Board of
Directors reserves the right, however, to amend the Reinvestment Plan in the
future to permit voluntary contributions to the Reinvestment Plan by
Participants, to the extent consistent with the Company's objective of
qualifying as a REIT.
PARTICIPANT ACCOUNTS, FEES, AND ALLOCATION OF SHARES
For each Participant, the Reinvestment Agent will maintain a record
which shall reflect for each fiscal quarter the Distributions received by the
Reinvestment Agent on behalf of such Participant. The Company shall be
responsible for all administrative charges and expenses charged by the
Reinvestment Agent. Any interest earned on such Distributions will be paid to
the Company to defray certain costs relating to the Reinvestment Plan. The
administrative charge for each fiscal quarter will be the lesser of 5% of the
amount reinvested for the Participant or $2.50, with a minimum charge of $0.50.
The maximum annual charge is $10.00.
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The Reinvestment Agent will use the aggregate amount of Distributions
to all Participants for each fiscal quarter to purchase Shares for the
Participants. If the aggregate amount of Distributions to Participants exceeds
the amount required to purchase all Shares then available for purchase, the
Reinvestment Agent will purchase all available Shares and will return all
remaining Distributions to the Participants within 30 days after the date such
Distributions are made. The purchased Shares will be allocated among the
Participants based on the portion of the aggregate Distributions received by the
Reinvestment Agent on behalf of each Participant, as reflected in the records
maintained by the Reinvestment Agent. The ownership of the Shares purchased
pursuant to the Reinvestment Plan shall be reflected on the books of the
Company.
Subject to the provisions of the Articles of Incorporation relating to
certain restrictions on and the effective dates of transfer, Shares acquired
pursuant to the Reinvestment Plan will entitle the Participant to the same
rights and to be treated in the same manner as those purchased by the
Participants in the offering. Accordingly, the Company will pay the Managing
Dealer Selling Commissions of 7.5% (subject to reduction under the circumstances
provided under "The Offering - Plan of Distribution") and a marketing support
and due diligence fee of 0.5%. The Company will also pay the Advisor Acquisition
Fees of 4.5% of the purchase price of the Shares sold pursuant to the
Reinvestment Plan until the termination of the offering. Thereafter, Acquisition
Fees will be paid by the Company only in the event that proceeds of the sale of
Shares are used to acquire Properties or to invest in Mortgage Loans. As a
result, aggregate fees payable to Affiliates of the Company will total between
8.0% and 12.5% of the proceeds of reinvested Distributions, up to 7.5% of which
may be reallowed to Soliciting Dealers.
The allocation of Shares among Participants may result in the ownership
of fractional Shares, computed to four decimal places.
REPORTS TO PARTICIPANTS
Within 60 days after the end of each fiscal quarter, the Reinvestment
Agent will mail to each Participant a statement of account describing, as to
such Participant, the Distributions reinvested during the quarter, the number of
Shares purchased during the quarter, the per Share purchase price for such
Shares, the total administrative charge paid by the Company on behalf of each
Participant (see "Participant Accounts, Fees, and Allocation of Shares" above),
and the total number of Shares purchased on behalf of the Participant pursuant
to the Reinvestment Plan. Until such time, if any, as Listing occurs, the
statement of account also will report the most recent fair market value of the
Shares, determined as described above. See "General" above.
Tax information for income earned on Shares under the Reinvestment Plan
will be sent to each participant by the Company or the Reinvestment Agent at
least annually.
ELECTION TO PARTICIPATE OR TERMINATE PARTICIPATION
Stockholders of the Company who purchase Shares in this offering may
become Participants in the Reinvestment Plan by making a written election to
participate on their Subscription Agreements at the time they subscribe for
Shares. Any other stockholder who receives a copy of this Prospectus or a
separate prospectus relating solely to the Reinvestment Plan and who has not
previously elected to participate in the Reinvestment Plan may so elect at any
time by written notice to the Board of Directors of such stockholder's desire to
participate in the Reinvestment Plan. Participation in the Reinvestment Plan
will commence with the next Distribution made after receipt of the Participant's
notice, provided it is received at least ten days prior to the record date for
such Distribution. Subject to the preceding sentence, the election to
participate in the Reinvestment Plan will apply to all Distributions
attributable to the fiscal quarter in which the stockholder made such written
election to participate in the Reinvestment Plan and to all fiscal quarters
thereafter, whether made (i) upon subscription or subsequently for stockholders
who participate in this offering, or (ii) upon receipt of a separate prospectus
relating solely to the Reinvestment Plan for stockholders who do not participate
in this offering. Participants will be able to terminate their participation in
the Reinvestment Plan at any time without penalty by delivering written notice
to the Board of Directors ten business days before the end of a fiscal quarter.
A Participant who chooses to terminate participation in the
Reinvestment Plan must terminate his or her entire participation in the
Reinvestment Plan and will not be allowed to terminate in part. If a Participant
terminates his or her participation the Reinvestment Agent will send him or her
a check in payment for any fractional Shares in his or her account based on the
then market price of the Shares and the record books of the Company will be
revised to reflect the ownership records of his or her whole Shares. There are
no fees associated with a Participant's terminating his or her interest in the
Reinvestment Plan. A Participant in the Reinvestment Plan who terminates his or
her interest in the Reinvestment Plan will be allowed to participate in the
Reinvestment Plan again upon receipt of the then current version of this
Prospectus or a separate current prospectus relating solely to the Reinvestment
Plan by notifying the Reinvestment Agent and completing any required forms.
The Board of Directors reserves the right to prohibit Qualified Plans
from participating in the Reinvestment Plan if such participation would cause
the underlying assets of the Company to constitute "plan assets" of Qualified
Plans. See "The Offering - ERISA Considerations."
FEDERAL INCOME TAX CONSIDERATIONS
Stockholders subject to federal taxation who elect to participate in
the Reinvestment Plan will incur a tax liability for Distributions allocated to
them even though they have elected not to receive their Distributions in cash
but rather to have their Distributions held pursuant to the Reinvestment Plan.
Specifically, stockholders will be treated as if they have received the
Distribution from the Company and then applied such
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Distribution to purchase Shares in the Reinvestment Plan. A stockholder
designating a Distribution for reinvestment will be taxed on the amount of such
Distribution as ordinary income to the extent such Distribution is from current
or accumulated earnings and profits, unless the Company has designated all or a
portion of the Distribution as a capital gain dividend. In such case, such
designated portion of the Distribution will be taxed as long-term capital gain.
AMENDMENTS AND TERMINATION
The Company reserves the right to renew, extend, or amend any aspect of
the Reinvestment Plan without the consent of stockholders, provided that notice
of the amendment is sent to Participants at least 30 days prior to the effective
date thereof. The Company also reserves the right to terminate the Reinvestment
Plan for any reason at any time by ten days' prior written notice of termination
to all Participants.
REDEMPTION OF SHARES
Prior to such time, if any, as Listing occurs, any stockholder who has
held Shares for not less than one year (other than the Advisor) may present all
or any portion equal to at least 25% of such Shares to the Company for
redemption at any time, in accordance with the procedures outlined herein. At
such time, the Company may, at its sole option, redeem such Shares presented for
redemption for cash to the extent it has sufficient funds available. There is no
assurance that there will be sufficient funds available for redemption and,
accordingly, a stockholder's Shares may not be redeemed. If the Company elects
to redeem Shares, the following conditions and limitations would apply. The full
amount of the proceeds from the sale of Shares under the Reinvestment Plan (the
"Reinvestment Proceeds") attributable to any calendar quarter will be used to
redeem Shares presented for redemption during such quarter. In addition, the
Company may, at its discretion, use up to $100,000 per calendar quarter of the
proceeds of any public offering of its common stock for redemptions. Any amount
of offering proceeds which is available for redemptions, but which is unused,
may be carried over to the next succeeding calendar quarter for use in addition
to the amount of offering proceeds and Reinvestment Proceeds that would
otherwise be available for redemptions. At no time during a 12-month period,
however, may the number of shares redeemed by the Company exceed 5% of the
number of shares of the Company's outstanding common stock at the beginning of
such 12-month period.
In the event there are insufficient funds to redeem all of the Shares
for which redemption requests have been submitted, the Company plans to redeem
the Shares in the order in which such redemption requests have been received. A
stockholder whose Shares are not redeemed due to insufficient funds can ask that
the request to redeem the Shares be honored at such time, if any, as there are
sufficient funds available for redemption. In such case, the redemption request
will be retained and such Shares will be redeemed before any subsequently
received redemption requests are honored. Alternatively, a stockholder whose
Shares are not redeemed may withdraw his or her redemption request. Stockholders
will not relinquish their Shares, until such time as the Company commits to
redeeming such Shares.
If the full amount of funds available for any given quarter exceeds the
amount necessary for such redemptions, the remaining amount shall be held for
subsequent redemptions unless such amount is sufficient to acquire an additional
Property (directly or through a Joint Venture) or to invest in additional
Mortgage Loans, or is used to repay outstanding indebtedness. In that event, the
Company may use all or a portion of such amount to acquire one or more
additional Properties, to invest in one or more additional Mortgage Loans or to
repay such outstanding indebtedness, provided that the Company (or, if
applicable, the Joint Venture) enters into a binding contract to purchase such
Property or Properties or invests in such Mortgage Loan or Mortgage Loans, or
uses such amount to repay outstanding indebtedness, prior to payment of the next
Distribution and the Company's receipt of requests for redemption of Shares.
A stockholder who wishes to have his or her Shares redeemed must mail
or deliver a written request on a form provided by the Company and executed by
the stockholder, its trustee or authorized agent, to the redemption agent (the
"Redemption Agent"), which is currently MMS Securities, Inc. The Redemption
Agent at all times will be registered as a broker-dealer with the Commission and
each state securities commission. Within 30 days following the Redemption
Agent's receipt of the stockholder's request, the Redemption Agent will forward
to such stockholder the documents necessary to effect the redemption, including
any signature guarantee the Company or the Redemption Agent may require. The
Redemption Agent will effect such redemption for the calendar quarter provided
that it receives the properly completed redemption documents relating to the
Shares to be redeemed from the stockholder at least one calendar month prior to
the last day of the current calendar quarter and has sufficient funds available
to redeem such Shares. The effective date of any redemption will be the last
date during a quarter during which the Redemption Agent receives the properly
completed redemption documents. As a result, the Company anticipates that,
assuming sufficient funds for redemption, the effective date of redemptions will
be no later than thirty days after the quarterly determination of the
availability of funds for redemption.
Upon the Redemption Agent's receipt of notice for redemption of Shares,
the redemption price will be on such terms as the Company shall determine. The
redemption price for Shares redeemed during an offering would equal the then
current offering price, which the Company anticipates will continue to be $10.00
per Share, until such time, if any, as Listing occurs, less a discount of 8.0%,
for a net redemption price of $9.20 per Share, which approximates the per Share
net proceeds received by the Company in the offering, after deducting selling
commissions of 7.5% and a 0.5% marketing support and due diligence fee payable
to the Managing Dealer and certain Soliciting Dealers in such offering.
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It is not anticipated that there will be a market for the Shares before
Listing occurs (although liquidity is not assured thereby). Accordingly, during
periods when the Company is not engaged in an offering, it is expected that the
purchase price for Shares purchased from stockholders will be determined by
reference to the following factors, as well as any others deemed relevant or
appropriate by the Company: (i) the price at which Shares have been purchased by
stockholders, either pursuant to the Reinvestment Plan or outside of the
Reinvestment Plan (to the extent the Company has information regarding the
prices paid for Shares purchased outside the Reinvestment Plan), (ii) the annual
statement of Share valuation provided to certain stockholders (see "Reports to
Stockholders"), and (iii) the price at which stockholders are willing to sell
their Shares. Shares purchased during any particular period of time therefore
may be purchased at varying prices. The Board of Directors will announce any
price adjustment and the time period of its effectiveness as part of its regular
communications with stockholders. Any Shares acquired pursuant to a redemption
will be retired and no longer available for issuance by the Company.
A stockholder may present fewer than all his or her Shares to the
Company for redemption, provided, however, that (i) the minimum number of Shares
which must be presented for redemption shall be at least 25% of his or her
Shares, and (ii) if such stockholder retains any Shares, he or she must retain
at least 250 Shares (100 Shares for an IRA, Keogh Plan or pension plan).
The Directors, in their sole discretion, may amend or suspend the
redemption plan at any time they determine that such amendment or suspension is
in the best interest of the Company. The Directors may suspend the redemption of
Shares if (i) they determine, in their sole discretion, that such redemption
impairs the capital or the operations of the Company; (ii) they determine, in
their sole discretion, that an emergency makes such redemption not reasonably
practical; (iii) any governmental or regulatory agency with jurisdiction over
the Company so demands for the protection of the stockholders; (iv) they
determine, in their sole discretion, that such redemption would be unlawful; (v)
they determine, in their sole discretion, that such redemption, when considered
with all other redemptions, sales, assignments, transfers and exchanges of
Shares in the Company, could cause direct or indirect ownership of Shares of the
Company to become concentrated to an extent which would prevent the Company from
qualifying as a REIT under the Code; or (vi) such other reasons as the
Directors, in their sole discretion, deem to be in the best interest of the
Company. For a discussion of the tax treatment of such redemptions, see "Federal
Income Tax Considerations -- Taxation of Stockholders." The redemption plan will
terminate, and the Company no longer shall accept Shares for redemption, if and
when Listing occurs. See "Risk Factors -- Investment Risks -- Lack of Liquidity
of Shares."
BUSINESS
GENERAL
The Company has been formed primarily to acquire Properties related to
Health Care Facilities located across the United States. The Health Care
Facilities may include congregate living, assisted living and skilled nursing
facilities, continuing care retirement communities and life care communities,
and medical office buildings and walk-in clinics. The Properties will be leased
on a long-term (generally, 10 to 20 years, plus renewal options for an
additional 10 to 20 years), "triple-net" basis to operators of Health Care
Facilities. "Triple-net" means that the tenant generally will be responsible for
repairs, maintenance, property taxes, utilities, and insurance. The Properties
may consist of land and building, the land underlying the building with the
building owned by the tenant or a third party, or the building only with the
land owned by a third party. The Company may provide Mortgage Loans to operators
of Health Care Facilities secured by real estate owned by the operators. To a
lesser extent, the Company also intends to offer Secured Equipment Leases to
operators of Health Care Facilities pursuant to which the Company will finance,
through loans or direct financing leases, the Equipment.
The Properties, which typically will be freestanding and will be
located across the United States, will be leased to operators of Health Care
Facilities to be selected by the Advisor and approved by the Board of Directors.
Each Property acquisition and Mortgage Loan will be submitted to the Board of
Directors for approval. The Company has not specified any percentage of Net
Offering Proceeds to be invested in any particular type of Health Care Facility.
It is anticipated that the Health Care Facilities will be leased to selected
national and regional operators.
The Company believes that demographic trends are significant when
looking at the potential for future growth in the health care industry.
According to 1995 data from the U.S. Census Bureau, the elderly population is
projected to more than double between now and the year 2050, to 80 million. As
illustrated below, most of this growth is expected to occur between 2010 and
2030 when the number of elderly is projected to grow by an average of 2.8%
annually.
Elderly Population Estimates
Date Over 85 Population (000) Over 65 Population (000)
---- ------------------------ ------------------------
July 1, 1996 3,747 33,872
July 1, 2000 4,259 34,709
July 1, 2005 4,899 36,166
July 1, 2010 5,671 39,408
July 1, 2015 6,193 45,567
July 1, 2020 6,460 53,220
July 1, 2025 7,046 61,952
July 1, 2030 8,455 69,379
July 1, 2035 10,910 73,434
July 1, 2040 13,552 75,233
July 1, 2045 16,285 76,521
July 1, 2050 18,223 78,859
Source: U.S. Bureau of Census
In addition to the growth in the number of elderly people, life
expectancies are increasing. Those 85 and over are the most rapidly growing
elderly age group. Between 1960 and 1994, this group grew 274%. During this same
period of time, the entire population of the United States grew 45 percent.
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Life Expectancy Trends
at Age 65 (in years)
Year Male Female
---- ---- ------
1965 12.9 16.3
1980 14.0 18.4
1985 14.4 18.6
1990 15.0 19.0
1991 15.1 19.1
1992* 15.2 19.3
1993* 15.1 19.0
1994* 15.3 19.0
1995** 15.4 19.2
1996** 15.4 19.2
1997** 15.5 19.3
1998** 15.5 19.3
1999** 15.6 19.3
* preliminary data
** estimated
Source: Social Security Administration Office of Programs: Data from
the Office of the Actuary
Based on information from the Economic and Statistic Administration of
the U.S. Department of Commerce, management believes that all of these trends
suggest that as more people live to the oldest ages, there may also be more who
face chronic, limiting illnesses or conditions. These conditions result in
people becoming dependent on others for help in performing the activities of
daily living. The U.S. General Accounting Office anticipates that the number of
older people needing assistance with activities of daily living will increase to
14 million by 2020, from 7 million in 1994.
Percent of Persons Needing Assistance with
Activities of Daily Living (ADLs)
Years of Age Percentage
------------ ----------
65-69 9%
70-74 11%
75-79 20%
80-84 31%
85+ 50%
Source: U.S. Bureau of Census, 1991 data
In addition to an aging population, according to 1996 data from the
U.S. Department of Commerce, a significant segment of the elderly population has
the financial resources to afford seniors' housing facilities, with people age
55 to 64 making a mean household income of $52,000 per year. The mean household
income for those age 65 and over is more than $29,000 per year. Management
believes that other changes and trends in the health care industry will create
opportunities for growth of seniors' housing facilities, including (i) the
growth of operators serving specific health care niches, (ii) the consolidation
of providers and facilities through mergers, integration of physician practices,
and elimination of duplicative services, (iii) the pressures to reduce the cost
of providing quality health care, (iv) more dual-income and single-parent
households leaving fewer family members available for in-home care of aging
parents and necessitating more senior care facilities, and (v) an anticipated
increase in the number of insurance companies and health care networks offering
privately funded long-term care insurance.
According to the National Center for Health Statistics, the health care
industry represents over 13.6% of the United States' gross domestic product
("GDP") with at least $988 billion in annual expenditures. The U.S. Department
of Health and Human Services expects this figure to rise to over 18% of the GDP
by 2000. According to the U.S. Census Bureau, U.S. health care construction
expenditures are estimated to be $16.4 billion per year and growing. With regard
to housing for seniors, there are three major contributors to growth and the
attraction of capital, according to the National Investment Conference for the
Senior Living and Long Term Care Industries in 1996. They are (i) demographics,
(ii) the limited supply of new product, and (iii) the investment community's
increased understanding of the industry. Although the Company believes the
growth will continue for a long while, overbuilding is unlikely due to the
favorable demographics, the increase in public awareness of the industry, the
preference of seniors for obtaining care in non-institutional settings and the
cost savings realized in a non-institutional environment.
Estimate of Effective Demand for Seniors' Housing Categories
Elderly Population with Income Over $25,000
Thousands of Beds
Base Independent Living Assisted Living Skilled Nursing
- ---- ------------------ --------------- ---------------
1996 826 427 524
849 457 567
2000
2005 887 492 619
2010 963 537 681
2015 1,108 597 752
2020 1,292 834
671
2025 1,507 778 957
2030 1,694 903 1,120
Source: Price Waterhouse, LLP for the National Investment Conference
for the Senior Living and Long Term Care Industries
The Company intends to capitalize on the growing real estate needs in
the seniors' housing and health care industries primarily by acquiring
Properties and leasing them to health care operators on a long-term (generally
10 to 20 years, plus renewal options for an additional 10 to 20 years),
"triple-net" basis. The Properties that the Company will acquire and lease are
expected to include one or more of the following types:
o Seniors' Housing, Which Includes Congregate Living and Assisted Living
Facilities. Congregate living communities offer a lifestyle choice,
including residential accommodations with access to services, such as
housekeeping, transportation, dining and social activities, for those
who wish to maintain their lifestyles independently. The fastest
growing segment of the seniors' housing industry is assisted living.
While skilled nursing facilities focus on more intensive care, assisted
living facilities provide housing for seniors that need assistance with
activities of daily living, such as grooming, dressing, bathing, and
eating. Assisted living facilities provide accommodations with limited
health care available when needed but do not have an institutional
feel. Certain assisted living facilities are also now specializing in
meeting the needs of Alzheimer's and dementia patients prior
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to the time that their condition warrants a nursing home setting or, in
some instances, in competition with what would otherwise be provided in
a nursing home setting. According to the U.S. Department of Health and
Human Services, at least 15%, and possibly as much as 70%, of the
patients in nursing homes could more appropriately be cared for in a
less institutional and more cost effective setting. In addition,
seniors' housing facilities include continuing care retirement
communities and life care communities which provide a full range of
long-term care services in one location, such as congregate living,
assisted living and skilled nursing facilities and home health care.
o Skilled Nursing Facilities. Skilled nursing facilities provide
extensive skilled nursing and other long term care services to patients
that may require full time medical observation, medication monitoring,
ventilation and intravenous therapies, sub-acute care, and
Alzheimer's/dementia care. Throughout much of the United States, the
supply of new skilled nursing facilities is limited by complex
Certificate of Need Laws or similar state licensing regulations as a
result of the National Health Planning and Resources Development Act of
1974, which require nursing home providers to obtain prior approval
from regulators before undertaking any major new construction or
renovation projects. As a result, the supply of skilled nursing
facilities is growing very slowly. Demand for skilled nursing
facilities is coming from a rapidly growing population
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over 75 years of age and the shift of sub-acute patients to lower cost
formats for treatment. Some states have eliminated Certificate of Need
Laws allowing the market to address the issue of supply and demand. If
trends such as this continue, it is probable that new skilled nursing
facilities will be constructed to meet the demand, thereby providing
potential development and investment opportunities for the Company.
o Medical Office Buildings. Medical office buildings, including doctors'
offices, special purpose facilities, such as diagnostic, cancer
treatment and outpatient centers, and walk-in clinics also provide
investment opportunities as more small physician practices consolidate
to save on the increasing costs of private practice and single purpose
medical facilities become more common.
Continuum of long-term care facilities*
<TABLE>
<CAPTION>
Retirement/Congregate
Living Assisted Living Skilled Nursing Facility Acute Care Hospitals
--------------------- --------------- ------------------------ --------------------
<S> <C>
Informal concierge, emergency 24-hour supervision, 24-hour medical care and protective Short-term acute medical
call system, housekeeping & personal assistance as oversight, medication management, care
maintenance, some group needed, emergency emergency response system, 3 meals
activities, food service response system, social per day, assistance with ADLs
and transportation activities, housekeeping
and maintenance, 3 meals
per day, transportation,
assistance with medication
and shopping
</TABLE>
* Interspersed throughout the continuum are visits to physicians offices,
physical therapy, occupational therapy, and other short-term necessary
health care services.
Legg Mason Wood Walker, Inc. in its industry analysis, Health Facility
REITs Substantial Growth Ahead (December 15, 1997), estimates that there is $584
billion worth of health care facilities in the United States. Management
believes, based on historical costs of property owned by publicly traded health
care REITs, only a small portion of health care facilities in the United States
are owned by REITs. Management believes that this fact, coupled with the health
care industry trends previously discussed, provides a significant investment
opportunity for the Company. The Company has not yet identified specific
properties or regions in which it will invest, however, and demographic trends
may vary depending on the properties and regions selected for investment. The
success of the future operations of the Company's Properties will depend largely
on each operator's ability to adapt to dominant trends in the health care and
seniors' housing industry in each specific region, including, among others,
greater competitive pressures, increased consolidation and changing
demographics. There can be no assurance that the operators of the Company's
Properties will be able to adapt to such trends.
Management intends to structure the Company's leases to require the
tenant to pay base annual rent with (i) automatic fixed increases in the base
rent or (ii) increases in the base rent based on increases in consumer price
indices, over the term of the lease. In an effort to provide regular cash flow
to the Company, the Company intends generally to structure its leases to provide
a minimum level of rent, with automatic increases in the minimum rent, which is
payable regardless of the amount of gross revenues at a particular Property. The
Company also will endeavor to maximize growth and minimize risks associated with
ownership and leasing of real estate that operates in this industry segment
through careful selection and screening of its tenants (as described in
"Standards for Investment" below) in order to reduce risks of default;
monitoring statistics relating to operators of Health Care Facilities and
continuing to develop relationships in the industry in order to reduce certain
risks associated with investment in real estate. See "Standards for Investment"
below for a description of the standards which the Board of Directors will
employ in selecting operators and particular Properties for investment.
Management expects to acquire Properties in part with a view to
diversification among facility type and in the geographic location of the
Properties. There are no restrictions on the types of Health Care Facilities in
which the Company may invest. In addition, there are no restrictions on the
geographic area or areas within the United States in which Properties acquired
by the Company may be located. It is anticipated that the Properties acquired by
the Company will be located in various states and regions within the United
States.
The Company also intends to provide Mortgage Loans to operators of
Health Care Facilities, or their affiliates, to enable them to acquire the land,
land and buildings or buildings. The Mortgage Loans will be secured by property
owned by the borrower. The Company expects that the interest rate and terms
(generally, 10 to 20 years) of the Mortgage Loans will be similar to those of
its leases.
To a lesser extent, the Company also intends to offer Secured Equipment
Leases to operators of Health Care Facilities. The Secured Equipment Leases will
consist primarily of leases of, and loans for the purchase of, Equipment. As of
the date of this Prospectus, the Company has neither identified any prospective
operators that will participate in such financing arrangements nor negotiated
any specific terms of a Secured Equipment Lease. The Company cannot predict
terms and conditions of the Secured Equipment Leases, although the Company
expects that the Secured Equipment Leases will (i) have terms that equal or
exceed the useful life of the subject Equipment (although such terms will not
exceed 7 years), (ii) in the case of the leases, include an option for the
lessee to acquire the subject Equipment at the end of the lease term for a
nominal fee, (iii) include a stated interest rate, and (iv) in the case of the
leases, provide that the Company and the lessees will each treat the Secured
Equipment Leases as loans secured by personal property for federal income tax
purposes. See "Federal Income Tax Considerations Characterization of Secured
Equipment Leases." In addition, the Company expects that each of the Secured
Equipment Leases will be secured by the Equipment to which it relates. Payments
received
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from lessees under Secured Equipment Leases will be treated as payments of
principal and interest. All Secured Equipment Leases will be negotiated by the
Advisor and approved by the Board of Directors including a majority of the
Independent Directors.
The Company will borrow money to acquire Assets and to pay certain
fees. The Company intends to encumber Assets in connection with the borrowing.
The Company plans to obtain a revolving Line of Credit initially in an amount up
to $45,000,000, and may, in addition, obtain Permanent Financing. The Line of
Credit may be increased at the discretion of the Board of Directors. The Board
of Directors anticipates that the aggregate amount of any Permanent Financing,
if obtained, shall not exceed 30% of the Company's total assets. In any event,
the Company's total borrowings will be limited to 300% of Net Assets . The
Permanent Financing would be used to acquire Assets, and pay a fee of 4.5% of
any Permanent Financing, excluding amounts to fund Secured Equipment Leases, as
Acquisition Fees, to the Advisor for identifying the Properties, structuring the
terms of the acquisition and leases of the Properties and structuring the terms
of the Mortgage Loans. The Line of Credit may be repaid with offering proceeds,
working capital or Permanent Financing. The Line of Credit and Permanent
Financing are the only source of funds for making Secured Equipment Leases and
for paying the Secured Equipment Lease Servicing Fee to the Advisor. The Company
has engaged in preliminary discussions with potential lenders but has not yet
received a commitment for the Line of Credit or any Permanent Financing and
there is no assurance that the Company will obtain the Line of Credit or any
Permanent Financing on satisfactory terms.
As of the date of this Prospectus, the Company had not entered into any
arrangements that create a reasonable probability that the Company will purchase
any Property or enter into any Mortgage Loan or Secured Equipment Lease.
Moreover, no Properties have been definitively selected for acquisition nor have
any Mortgage Loan borrowers or Secured Equipment Lease lessees or borrowers been
specifically identified.
The Company has undertaken to supplement this Prospectus during the
offering period to disclose the acquisition of Properties at such time as the
Company believes that a reasonable probability exists that any such Property
will be acquired by the Company. Based upon the experience and acquisition
methods of the Affiliates of the Company and the Advisor this normally will
occur, with regard to acquisition of Properties, as of the date on which (i) a
commitment letter is executed by a proposed lessee, (ii) a satisfactory credit
underwriting for the proposed lessee has been completed, and (iii) a
satisfactory site inspection has been completed. The initial disclosure of any
proposed acquisition, however, cannot be relied upon as an assurance that the
Company ultimately will consummate such proposed acquisition or that the
information provided concerning the proposed acquisition will not change between
the date of such supplement and the actual purchase or extension of financing.
The terms of any borrowing by the Company will also be disclosed by supplement
following receipt by the Company of an acceptable commitment letter from a
potential lender.
If the minimum number of 250,000 Shares ($2,500,000 in Gross Proceeds)
is sold, the Company will acquire no more than two medical office buildings or
walk-in clinics and will have reduced diversification of its investments.
Acquisition of a Property for a Health Care Facility generally involves an
investment in land and building ranging from approximately $1,000,000 to
$30,000,000, although higher or lower amounts for individual Properties are
possible. In light of current market conditions, if the maximum number of Shares
is sold, the Company could invest in approximately four to 126 Properties
depending on the types of Properties, and assuming an average purchase price of
$10,000,000 per Property, the Company would acquire or finance approximately 12
Properties with the net proceeds from this offering. In certain cases, the
Company may become a co-venturer in a Joint Venture that will own the Property.
In each such case, the Company's cost to purchase an interest in such Property
will be less than the total purchase price and the Company therefore will be
able to acquire interests in a greater number of Properties. The Company may
also borrow to acquire Assets. See "Business Borrowing." Management estimates
that 15% to 25% of the Company's investment will be for the cost of land and 75%
to 85% for the cost of buildings. See
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"Joint Venture Arrangements" below and "Risk Factors Investment Risks - Possible
Lack of Diversification." Management cannot estimate the number of Mortgage
Loans that may be entered into. The Company may also fund Mortgage Loans with
proceeds of the Line of Credit or Permanent Financing.
Although management cannot estimate the number of Secured Equipment
Leases that may be entered into, it expects to fund the Secured Equipment Lease
program from the proceeds of the Line of Credit or Permanent Financing in an
amount not to exceed 10% of the Company's total assets and management has
undertaken, consistent with its objective of qualifying as a REIT for federal
income tax purposes, to ensure that the total value of all Secured Equipment
Leases will not exceed 25% of the Company's total assets, and that Secured
Equipment Leases to a single lessee, in the aggregate, will not exceed 5% of
total assets.
SITE SELECTION AND ACQUISITION OF PROPERTIES
General. It is anticipated that the operators of Health Care Facilities
selected by the Advisor, and as approved by the Board of Directors, will have
personnel engaged in site selection and evaluation. In addition, due to rapid
expansion, some operators may outsource their site selection process to
consultants or developers for review or may rely on third party analyses. The
operators of Health Care Facilities and other parties generally conduct studies
which typically include such factors as population trends, hospital or other
medical facilities development, residential development, per capita or household
median income, per capita or household median age, and other factors. The
operators of the Health Care Facilities are expected to make their site
evaluations and analyses available to the Company.
The Board of Directors, on behalf of the Company, will elect to
purchase and lease Properties based principally on an examination and evaluation
by the Advisor of the potential value of the site, the financial condition and
business history of the proposed tenant, the demographics of the area in which
the property is located or to be located, the proposed purchase price and
proposed lease terms, geographic and market diversification, and potential
revenues expected to be generated by the business located on the property. The
Advisor also will perform an independent break-even analysis of the potential
profitability of a property using historical data and other data developed by
the Company and provided by the operator.
The Board of Directors will exercise its own judgment as to, and will
be solely responsible for, the ultimate selection of both tenants and
Properties. Therefore, some of the properties proposed and approved by an
operator may not be purchased by the Company.
In each Property acquisition, it is anticipated that the Advisor will
negotiate the lease agreement with the tenant. In certain instances, the Advisor
may negotiate an assignment of an existing lease, in which case the terms of the
lease may vary substantially from the Company's standard lease terms, if the
Board of Directors, based on the recommendation of the Advisor, determines that
the terms of an acquisition and lease of a Property, taken as a whole, are
favorable to the Company. It is expected that the structure of the long-term
"triple-net" lease agreements, which generally provide for monthly rental
payments with automatic fixed increases in base rent at specified times during
the lease terms or increases in the base rent based on increases in consumer
price indices over the term of the leases, will increase the value of the
Properties and provide an inflation hedge. See "Description of Leases" below for
a discussion of the anticipated terms of the Company's leases. In connection
with a Property acquisition, in the event the tenant does not enter into a
Secured Equipment Lease with the Company, the tenant will provide at its own
expense all Equipment necessary to operate the Company's Property as a Health
Care Facility. Generally, a tenant either pays cash or obtains a loan from a
third party to purchase such items. If the tenant obtains such a loan, the
tenant will own this personal property subject to the tenant's obligations under
its loan. In the experience of the Affiliates of the Company and the Advisor,
there may be rare circumstances in which a tenant defaults under such a loan, in
which event the lender may attempt to remove the personal property from the
building, resulting in the Property becoming inoperable until new Equipment can
be purchased and installed. In order to prevent repossession of this personal
property by the lender, and only on an interim basis in order to preserve the
value of a Property, the Company may elect (but only to the extent consistent
with the Company's objective of qualifying as a REIT) to use Company reserves to
purchase this personal property from the lender, generally at a discount for the
remaining unpaid balance under the tenant's loan. The Company then would expect,
consistent with the Company's objective of qualifying as a REIT, to resell the
personal property to a new tenant in connection with the transfer of the lease
to that tenant.
Some lease agreements will be negotiated to provide the tenant with the
opportunity to purchase the Property under certain conditions, generally either
at a price not less than fair market value (determined by appraisal or
otherwise) or through a right of first refusal to purchase the Property. In
either case, the lease agreements will
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provide that the tenant may exercise these rights only to the extent consistent
with the Company's objective of qualifying as a REIT. See "Sale of Properties,
Mortgage Loans and Secured Equipment Leases" below and "Federal Income Tax
Considerations Characterization of Leases."
The purchase of each Property will be supported by an appraisal of the
real estate prepared by an independent appraiser. The Advisor, however, will
rely on its own independent analysis and not on such appraisals in determining
whether or not to recommend that the Company acquire a particular property. The
purchase price of each such Property, plus any Acquisition Fees paid by the
Company in connection with such purchase, will not exceed the Property's
appraised value. (In connection with the acquisition of a Property which is to
be constructed or renovated, the comparison of the purchase price and the
appraised value of such Property ordinarily will be based on the "when
constructed" price and value of such Property.) It should be noted that
appraisals are estimates of value and should not be relied upon as measures of
true worth or realizable value. Each appraisal will be maintained in the
Company's records for at least five years and will be available for inspection
and duplication by any stockholder.
The titles to Properties purchased by the Company will be insured by
appropriate title insurance policies and/or abstract opinions consistent with
normal practices in the jurisdictions in which the Properties are located.
Construction and Renovation. In some cases, construction or renovation
will be required after the purchase contract has been entered into, but before
the total purchase price has been paid. In connection with the acquisition of
Properties that are to be constructed or renovated and as to which the Company
will own both the land and the building or building only, the Company generally
will advance funds for construction or renovation costs, as they are incurred,
pursuant to a development agreement with the developer. The developer may be the
tenant or an Affiliate of the Company. An Affiliate may serve as a developer and
enter into the development agreement with the Company if the transaction is
approved by a majority of the Directors, including a majority of the Independent
Directors. The Company believes that the ability to have an Affiliate capable of
serving as the developer provides the Company an advantage by enhancing its
relationship with key tenants and by giving it access to tenant opportunities at
an earlier stage of the development cycle. As a result, the Company believes it
will have a greater number of opportunities for investment presented to it than
it might otherwise have and it will be able to obtain better terms by
negotiating the terms of its investment at an earlier stage in the development
cycle when there are fewer competitive alternatives available to the tenant.
The developer will enter into all construction contracts and will
arrange for and coordinate all aspects of the construction or renovation of the
Property improvements. The developer will be responsible for the construction or
renovation of the building improvements, although it may employ co-developers or
sub-agents in fulfilling its responsibilities under the development agreement.
All general contractors performing work in connection with such building
improvements must provide a payment and performance bond or other satisfactory
form of guarantee of performance. All construction and renovation will be
performed or supervised by persons or entities acceptable to the Advisor. The
Company will be obligated, as construction or renovation costs are incurred, to
make the remaining payments due as part of the purchase price for the
Properties, provided that the construction or renovation conforms to definitive
plans, specifications, and costs approved by the Advisor and the Board of
Directors and embodied in the construction contract.
Under the terms of the development agreement, the Company generally
will advance its funds on a monthly basis to meet the construction draw requests
of the developer. The Company, in general, only will advance its funds to meet
the developer's draw requests upon receipt of an inspection report and a
certification of draw requests from an inspecting architect or engineer suitable
to the Company, and the Company may retain a portion of any advance until
satisfactory completion of the project. The certification generally must be
supported by color photographs showing the construction work completed as of the
date of inspection. The total amount of the funds advanced to the developer
(including the purchase price of the land plus closing costs and certain other
costs) generally will not exceed the maximum amount specified in the development
agreement. Such maximum amount will be based on the Company's estimate of the
costs of such construction or renovation.
In some cases, construction or renovation will be required before the
Company has acquired the Property. In this situation, the Company may have made
a deposit on the Property in cash or by means of a letter of credit. The
renovation or construction may be made by an Affiliate or a third party. The
Company may permit the proposed developer to arrange for a bank or another
lender, including an Affiliate, to provide construction financing to the
developer. In such cases, the lender may seek assurance from the Company that it
has sufficient funds to pay to the developer the full purchase price of the
Property upon completion of the construction or renovation. In the event that
the Company segregates funds as assurance to the lender of its ability to
purchase the Property, the funds will
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remain the property of the Company, and the lender will have no rights with
respect to such funds upon any default by the developer under the development
agreement or under the loan agreement with such lender, or if the closing of the
purchase of the Property by the Company does not occur for any reason, unless
the transaction is supported by a letter of credit in favor of the lender.
Under the development agreement, the developer generally will be
obligated to complete the construction or renovation of the building
improvements within a specified period of time from the date of the development
agreement, which generally will be between eight to 12 months. If the
construction or renovation is not completed within that time and the developer
fails to remedy this default within 10 days after notice from the Company, the
Company will have the option to grant the developer additional time to complete
the construction, to take over construction or renovation of the building
improvements, or to terminate the development agreement and require the
developer to purchase the Property at a price equal to the sum of (i) the
Company's purchase price of the land, including all fees, costs, and expenses
paid by the Company in connection with its purchase of the land, (ii) all fees,
costs, and expenses disbursed by the Company pursuant to the development
agreement for construction of the building improvements, and (iii) the Company's
"construction financing costs." The "construction financing costs" of the
Company is an amount equal to a return, at the annual percentage rate used in
calculating the minimum annual rent under the lease, on all Company payments and
disbursements described in clauses (i) and (ii) above.
The Company also generally will enter into an indemnification and put
agreement (the "Indemnity Agreement") with the developer. The Indemnity
Agreement will provide for certain additional rights to the Company unless
certain conditions are met. In general, these conditions are (i) the developer's
acquisition of all permits, approvals, and consents necessary to permit
commencement of construction or renovation of the building improvements within a
specified period of time after the date of the Indemnity Agreement (normally, 60
days), or (ii) the completion of construction or renovation of the building as
evidenced by the issuance of a certificate of occupancy, within a specified
period of time after the date of the Indemnity Agreement. If such conditions are
not met, the Company will have the right to grant the developer additional time
to satisfy the conditions or to require the developer to purchase the Property
from the Company at a purchase price equal to the total amount disbursed by the
Company in connection with the acquisition and construction or renovation of the
Property (including closing costs), plus an amount equal to the return described
in item (iii) of the preceding paragraph. Failure of the developer to purchase
the Property from the Company upon demand by the Company under the circumstances
specified above will entitle the Company to declare the developer in default
under the lease and to declare each guarantor in default under any guarantee of
the developer's obligations to the Company.
In certain situations where construction or renovation is required for
a Property, the Company will pay a negotiated maximum amount upon completion of
construction or renovation rather than providing financing to the developer,
with such amount to be based on the developer's actual costs of such
construction or renovation.
Affiliates of the Company also may provide construction financing to
the developer of a Property. In addition, the Company may purchase from an
Affiliate of the Company a Property that has been constructed or renovated by
the Affiliate. Any fees paid to Affiliates of the Company in connection with the
financing, construction or renovation of a Property acquired by the Company will
be considered Acquisition Fees and will be subject to approval by a majority of
the Board of Directors, including a majority of the Independent Directors, not
otherwise interested in the transaction. See "Management Compensation" and
"Conflicts of Interest - Certain Conflict Resolution Procedures." Any such fees
will be included in the cost of the Property and, therefore, will be included in
the calculation of base rent.
In all situations where construction or renovation of a Property is
required, the Company also will have the right to review the developer's books,
records, and agreements during and following completion of construction to
verify actual costs.
Interim Acquisitions. The Affiliates of the Advisor regularly may have
opportunities to acquire properties of a type suitable for acquisition by the
Company as a result of their relationships with various operators. See "General"
above. These acquisitions often must be made within a relatively short period of
time, occasionally at a time when the Company may be unable to make the
acquisition. In an effort to address these situations and preserve the
acquisition opportunities of the Company (and other Affiliates of the Advisor),
the Advisor and its Affiliates maintain lines of credit which enable them to
acquire these properties on an interim basis and temporarily own them for the
purpose of facilitating their acquisition by the Company (or other entities with
which the Company is affiliated). At such time as a Property acquired on an
interim basis is determined to be suitable for acquisition by the Company, the
interim owner of the Property will sell its interest in the Property to the
Company at a price equal to the lesser of its cost (which includes carrying
costs and, in instances in which an Affiliate of the Company has provided real
estate brokerage services in connection with the initial purchase of the
Property, indirectly includes fees paid to an Affiliate of the Company) to
purchase such interest in the Property or the Property's appraised value,
provided that a majority of Directors, including a majority of the Independent
Directors, determine that the acquisition is fair and reasonable to the Company.
See "Conflicts of Interest - Certain Conflict Resolution Procedures." Appraisals
of Properties acquired from such interim owners will be obtained in all cases.
Acquisition Services. Acquisition services performed by the Advisor may
include, but are not limited to, site selection and/or approval; review and
selection of tenants and negotiation of lease agreements and related documents;
monitoring Property
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acquisitions; and the processing of all final documents and/or procedures to
complete the acquisition of Properties and the commencement of tenant occupancy
and lease payments.
The Company will pay the Advisor a fee of 4.5% of the Total Proceeds as
Acquisition Fees. See "Management Compensation." The total of all Acquisition
Fees and Acquisition Expenses shall be reasonable and shall not exceed an amount
equal to 6% of the Real Estate Asset Value of a Property, or in the case of a
Mortgage Loan, 6% of the funds advanced, unless a majority of the Board of
Directors, including a majority of the Independent Directors, not otherwise
interested in the transaction approves fees in excess of these limits subject to
a determination that the transaction is commercially competitive, fair and
reasonable to the Company. The total of all Acquisition Fees payable to all
persons or entities will not exceed the compensation customarily charged in
arm's-length transactions by others rendering similar services as an ongoing
activity in the same geographical location and for comparable types of
properties.
The Advisor engages counsel to perform legal services, and such counsel
also may provide legal services to the Company in connection with the
acquisition of Properties. The legal fees payable to such counsel by the Company
will not exceed those generally charged for similar services.
STANDARDS FOR INVESTMENT IN PROPERTIES
Selection of Operators of Health Care Facilities. The selection of
operators of Health Care Facilities by the Advisor, as approved by the Board of
Directors, will be based on a number of factors which may include: an evaluation
of the operations of their health care facilities, the number of health care
facilities operated, the relationship of average revenue per available unit (or
bed) to the average capital cost per unit (or bed) for each health care facility
operated, the relative competitive position among the same types of health care
facilities offering similar services, market penetration, the relative financial
success of the operator in the geographic area in which the Property is located,
overall historical financial performance of the operator, and the management
capability of the operator. The operators of the Health Care Facilities are not
expected to be affiliated with the Advisor, the Company or any Affiliate.
Selection of Properties. In making investments in Properties, the
Advisor will consider relevant real property and financial factors, including
the condition, use, and location of the Property, income-producing capacity, and
the prospects for long-term appreciation. The Company will obtain an independent
appraisal for each Property it purchases. The proper location, design and
amenities are important to the success of a Property.
In selecting specific Properties, the Advisor, as approved by the Board
of Directors, will apply the following minimum standards.
1. Each Property will be in what the Advisor believes is a prime
location for that type of Property.
2. Base (or minimum) annual rent will provide a specified minimum
return on the Company's cost of purchasing and, if applicable, developing the
Property, and the lease also will generally provide for automatic fixed
increases in base rent at specified times during the lease term or increases in
the base rent based on increases in consumer price indices over the term of the
lease.
3. The initial lease term typically will be at least 10 to
20 years.
4. In general, the Company will not acquire a Property if the Board of
Directors, including a majority of the Independent Directors, determines that
the acquisition would adversely affect the Company in terms of geographic,
property type or chain diversification.
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DESCRIPTION OF PROPERTIES
Although the Advisor has not yet selected any Properties for
investment, it is expected that any Properties purchased by the Company will
conform generally to the following specifications of size, cost, and type of
land and buildings. The Company anticipates acquiring Properties related to
Health Care Facilities which may include, but will not be limited to, the
following types:
Congregate Living Facilities. Congregate living facilities are
primarily apartment buildings which contain a significant amount of common space
to accommodate dining, recreation, activities and other support services for
senior citizens. These properties range in size from 100 to 500 units with an
average size of approximately 225 units. Units include studios and one and two
bedrooms ranging in size from 450 square feet to over 1,500 square feet.
Residents generally pay a base rent for their housing which includes a meal
program. In addition, a menu of other services is provided at an additional
charge. The cost of congregate living facilities generally ranges from
$10,000,000 to $30,000,000.
Assisted Living Facilities. Assisted living facilities provide a
special combination of housing, supportive services, personalized assistance and
health care to their residents in a manner which is designed to respond to
individual needs. These facilities offer a lower-cost alternative to skilled
nursing facilities for those who do not require intensive nursing care. Industry
standards suggest that a person is suitable for an assisted living facility when
he or she needs assistance with three or fewer activities of daily living
("ADLs") on a daily basis. ADLs are activities such as eating, dressing,
walking, bathing, and bathroom use. Assisted living facilities also provide
assistance with instrumental activities of daily living ("IADLs"), such as
shopping, telephone use and money management. The level of care provided by
assisted living facilities has increased in recent years. With an increase in
demand for the lower-cost services they provide, assisted living
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facilities have begun to provide care for an increasing number of physical
disabilities, certain non-ambulatory conditions and early stages of specific
diseases, such as Alzheimer's disease, where intensive medical treatment is not
required.
Current industry practice generally is to build freestanding assisted
living facilities with an average of between 40 and 100 units, depending on such
factors as market forces, site constraints and program orientation. Current
economics place the size of the private living space of a unit in the range of
300 gross square feet for an efficiency unit to 750 square feet for a large one
bedroom unit. Units are typically private, allowing residents the same general
level of control over their units as residents of a rental apartment would
typically have. Common areas on the most recently developed assisted living
facilities may total as much as 30 to 40 percent of the gross square footage of
a facility. The cost of assisted living facilities generally ranges from
$8,000,000 to $15,000,000.
Skilled Nursing Facilities. In addition to housing, meals,
transportation, housekeeping, ADL and IADL care, skilled nursing facilities
provide comprehensive nursing and long term care to their residents. Skilled
nursing facilities accommodate persons who require varying levels of care. Many
skilled nursing facilities are capable of serving residents with intensive
needs. Some skilled nursing facilities specialize in certain types of disease
care, such as Alzheimer's or Dementia care. The cost of the care provided in
skilled nursing facilities is among the most expensive in the senior care
segment of the health care industry, providing potential for substantial revenue
generation. Based on discussions with executives with senior living/housing
firms and studies performed by health care industry associations, Price
Waterhouse, in a 1996 study it developed for institutional investors, estimated
that the total monthly cost per resident of a skilled nursing facility is
between $2,880 and $4,000. According to a 1997 study developed by NatWest
Securities for certain of its investors, the high demand for beds in skilled
nursing facilities, along with a restricted supply of new beds, has resulted in
high occupancy rates and minimal skilled nursing facility lease and mortgage
default rates.
Skilled nursing facilities are also generally freestanding, but are
typically more institutional in nature, allowing for efficient cleaning and
sterilization. The rooms in skilled nursing facilities are equipped with patient
monitoring devices and emergency call systems. Oxygen systems may also be
present. Both multiple floor and single floor designs are common. Individual
rooms in skilled nursing facilities may be as small as 100 square feet, with
common areas varying greatly in size. Skilled nursing facilities historically
have been located in close proximity to hospitals to facilitate doctors' visits.
Today, the location of these facilities is less important where rotational
visiting systems are in place and where more highly skilled nursing staffs are
responsible for functions that used to be handled by doctors. The cost of
skilled nursing facilities generally ranges from $5,000,000 to $10,000,000.
Continuing Care Retirement Communities. Congregate living facilities
sometimes have assisted living and/or skilled nursing facilities attached or
adjacent to their locations. When this occurs, the projects are often referred
to as continuing care retirement communities or life care communities. The
intent of continuing care retirement communities or life care communities is to
provide a continuum of care to the residents. In other words, as residents age
and their health care needs increase, they can receive the care they need
without having to move away from the "community" which has become their home.
Continuing care retirement communities typically operate on a fee-for-service
basis and the units are rented on a monthly basis to residents, while life care
centers generally charge an entrance fee that is partially refundable and covers
the cost of all of the residents' health care-related services, plus a monthly
maintenance fee. Continuing care retirement communities and life care
communities are the most expensive seniors' housing accommodations today with
prices for each facility generally ranging from $40,000,000 to over
$100,000,000.
Medical Office Buildings. Medical office buildings, including walk-in
clinics, are conventional office buildings with additional plumbing, mechanical
and electrical service amenities, which facilitate physicians and medical
delivery companies in the practice of medicine and delivery of health care
services. These facilities can range in size from 3,000 square feet (walk-in
clinic) up to 100,000 square feet (medical office building), with costs
generally ranging from $1,000,000 to $10,000,000. It is common for medical
office buildings to be located in close proximity to hospitals where physicians
have practice privileges. Walk-in clinics are normally placed in
retail/commercial locations to make accessibility convenient for patients and to
provide medical services in areas which are not close or convenient to hospitals
and larger physician practices.
Either before or after construction or renovation, the Properties to be
acquired by the Company will be one of a Health Care Facility operator's
approved designs. Prior to purchase of all Properties, other than those
purchased prior to completion of construction, the Company will receive a copy
of the certificate of occupancy issued by the local building inspector or other
governmental authority and all other governmental certificates or permits which
permit the use of the Property as a Health Care Facility, and shall receive a
certificate from the operator of the Health Care Facility to the effect that (i)
the Property is operational and in compliance with all required governmental
permits and certificates and (ii) the Property is in compliance with all of the
Health Care Facility operator's requirements, including, but not limited to,
building plans and specifications approved by the operator. The Company also
will receive a certificate of occupancy and all other required governmental
permits or certificates for each Property for which construction has not been
completed at the time of purchase, prior to the Company's payment of the final
installment of the purchase price for the Property.
Generally, Properties to be acquired by the Company will consist of
both land and building, although in a number of cases the Company may acquire
only the land underlying the building
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with the building owned by the tenant or a third party, and also may acquire the
building only with the land owned by a third party. In general, the Properties
will be freestanding and surrounded by paved parking areas and landscaping.
Although, buildings may be suitable for conversion to various uses through
modifications, some Properties may not be economically convertible to other
uses.
A tenant generally will be required by the lease agreement to make such
capital expenditures as may be reasonably necessary to refurbish buildings,
premises, signs, and equipment and maintain the leasehold in a manner that
allows operation for its intended purpose. These capital expenditures generally
will be paid by the tenant during the term of the lease.
DESCRIPTION OF PROPERTY LEASES
The terms and conditions of any lease entered into by the Company with
regard to a Property may vary from those described below. The Advisor in all
cases will use its best efforts to obtain terms at least as favorable as those
described below. If the Board of Directors determines, based on the
recommendation of the Advisor, that the terms of an acquisition and lease of a
Property, taken as a whole, are favorable to the Company, the Board of Directors
may, in its sole discretion, cause the Company to enter into leases with terms
which are substantially different than the terms described below, but only to
the extent consistent with the Company's objective of qualifying as a REIT. In
making such determination, the Advisor will consider such factors as the type
and location of the Property, the creditworthiness of the tenant, the purchase
price of the Property, the prior performance of the tenant, and the prior
business experience of management of the Company and the Company's Affiliates
with the operator.
General. In general, the leases are expected to be "triple-net" leases,
which means that the tenants generally will be required to pay for all repairs,
maintenance, property taxes, utilities, and insurance. The tenants also will be
required to pay for special assessments, sales and use taxes, and the cost of
any renovations permitted under the leases. The Company will be the lessor under
each lease except in certain circumstances in which it may be a party to a Joint
Venture which will own the Property. In those cases, the Joint Venture, rather
than the Company, will be lessor, and all references in this section to the
Company as lessor therefore should be read accordingly. See "Joint Venture
Arrangements" below.
Term of Leases. It presently is anticipated that Properties will be
leased for an initial term of 10 to 20 years with up to four, five-year renewal
options. The minimum rental payment under the renewal option generally is
expected to be greater than that due for the final lease year of the initial
term of the lease. Upon termination of the lease, the tenant will surrender
possession of the Property to the Company, together with any improvements made
to the Property during the term of the lease, except that for Properties in
which the Company owns only the building and not the underlying land, the owner
of the land may assume ownership of the building.
Computation of Lease Payments. During the initial term of the lease,
the tenant will pay the Company, as lessor, minimum annual rent equal to a
specified percentage of the Company's cost of purchasing the Property.
Typically, the leases will provide for automatic fixed increases in the minimum
annual rent or increases in the base rent based on increases in consumer price
indices at predetermined intervals during the term of the lease. In the case of
acquisition of Properties that are to be constructed or renovated pursuant to a
development agreement, the Company's costs of purchasing the Property will
include the purchase price of the land, including all fees, costs, and expenses
paid by the Company in connection with its purchase of the land, and all fees,
costs, and expenses disbursed by the Company for construction of building
improvements. See "Site Selection and Acquisition of Properties - Construction
and Renovation" above.
In the case of Properties in which the Company owns only the building,
the Company will structure its leases to have recovered its investment in the
building by the expiration of the lease.
Assignment and Sublease. In general, it is expected that no lease may
be assigned or subleased without the Company's prior written consent (which may
not be unreasonably withheld). A tenant may, however, assign or sublease a lease
to its corporate affiliate or subsidiary or to its successor by merger or
acquisition, if such assignee or subtenant agrees to operate the same type of
Health Care Facility on the premises, but only to the extent consistent with the
Company's objective of qualifying as a REIT. The leases will set forth certain
factors (such as the financial condition of the proposed tenant or subtenant)
that are deemed to be a reasonable basis for the Company's refusal to consent to
an assignment or sublease. In addition, the Company may refuse to permit any
assignment or sublease that would jeopardize the Company's continued
qualification as a REIT. The original tenant generally will remain fully liable,
however, for the performance of all tenant obligations under the lease following
any such assignment or sublease unless the Company agrees in writing to release
the original tenant from its lease obligations.
Alterations to Premises. A tenant generally will have the right,
without the prior written consent of the Company and at the tenant's own
expense, to make certain improvements, alterations or modifications to the
Property. Under certain leases, the tenant, at its own expense, may make certain
immaterial structural improvements (with a cost of up to $10,000) without the
prior consent of the Company. Certain leases may require the tenant to post a
payment and performance bond for any structural alterations with a cost in
excess of a specified amount.
Right of Tenant to Purchase. It is anticipated that if the Company
wishes at any time to sell a Property pursuant to a bona fide offer from a third
party, the tenant of that Property will have the right to purchase the Property
for the same price, and on the same terms and conditions, as contained in the
offer. In
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certain cases, the tenant also may have a right to purchase the Property seven
to 20 years after commencement of the lease at a purchase price equal to the
greater of (i) the Property's appraised value at the time of the tenant's
purchase, or (ii) a specified amount, generally equal to the Company's purchase
price of the Property, plus a predetermined percentage (generally, 15% to 20%)
of such purchase price. See "Federal Income Tax Considerations -
Characterization of Leases."
Substitution of Properties. Under certain leases, the tenant of a
Property, at its own expense and with the Company's prior written consent, may
be entitled to operate another form of approved Health Care Facility on the
Property as long as such approved Health Care Facility has an operating history
which reflects an ability to generate gross revenues and potential revenue
growth equal to or greater than that experienced by the tenant in operating the
original Health Care Facility.
In addition, it is anticipated that certain Property leases will
provide the tenant with the right, to the extent consistent with the Company's
objective of qualifying as a REIT, to offer the substitution of another property
selected by the tenant in the event that the tenant determines that the Health
Care Facility has become uneconomic (other than as a result of an insured
casualty loss or condemnation) for the tenant's continued use and occupancy in
its business operation and the tenant's board of directors has determined to
close and discontinue use of the Health Care Facility. The tenant's
determination that a Health Care Facility has become uneconomic is to be made in
good faith based on the tenant's reasonable business judgment after comparing
the results of operations of the Health Care Facility to the results of
operations at the majority of other health care facilities then operated by the
tenant. If either
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of these events occurs, the tenant will have the right to offer the Company the
opportunity to exchange the Property for another property (the "Substituted
Property") with a total cost for land and improvements thereon (including
overhead, construction interest, and other related charges) equal to or greater
than the cost of the Property to the Company.
Generally, the Company will have 30 days following receipt of the
tenant's offer for exchange of the Property to accept or reject such offer. In
the event that the Company requests an appraisal of the Substituted Property, it
will have at least ten days following receipt of the appraisal to accept or
reject the offer. If the Company accepts such offer, (i) the Substituted
Property will be exchanged for the Property in a transaction designed and
intended to qualify as a "like-kind exchange" within the meaning of section 1031
of the Internal Revenue Code of 1986, as amended (the "Code") with respect to
the Company and (ii) the lease of the Property will be amended to (a) provide
for minimum rent in an amount equal to the sum determined by multiplying the
cost of the Substituted Property by the Property lease rate and (b) provide for
lease renewal options sufficient to permit the tenant, at its option, to
continue its occupancy of the Substituted Property a specified number of years
from the date on which the exchange is made. The Company will pay the tenant the
excess, if any, of the cost of the Substituted Property over the cost of the
Property. If the substitution does not take place within a specified period of
time after the tenant makes the offer to exchange the Property for the
Substituted Property, either party thereafter will have the right not to proceed
with the substitution. If the Company rejects the Substituted Property offered
by the tenant, the tenant is generally required to offer at least three
additional alternative properties for the Company's acceptance or rejection. If
the Company rejects all Substituted Properties offered to it pursuant to the
lease, or otherwise fails or refuses to consummate a substitution for any reason
other than the tenant's failure to fulfill the conditions precedent to the
exchange, then the tenant will be entitled to terminate the lease on the date
scheduled for such exchange by purchasing the Property from the Company for a
price equal to the then-fair market value of the Property.
Neither the tenant nor any of its subsidiaries, licensees, or
sublicensees or any other affiliate will be permitted to use the original
Property as a health care facility or other business of the same type for at
least one year after the closing of the original Property. In addition, in the
event the tenant or any of its affiliates sells the Property within twelve
months after the Company acquires the Substituted Property, the Company will
receive, to the extent consistent with its objective of qualifying as a REIT,
from the proceeds of the sale the amount by which the selling price exceeds the
cost of the Property to the Company.
Insurance, Taxes, Maintenance, and Repairs. Tenants of Properties will
be required, under the terms of the leases, to maintain, for the benefit of the
Company and the tenant, insurance that is commercially reasonable given the
size, location and nature of the Property. All tenants, other than those tenants
with a substantial net worth, generally also will be required to obtain "rental
value" or "business interruption" insurance to cover losses due to the
occurrence of an insured event for a specified period, generally six to twelve
months. Additionally, all tenants will be required to maintain liability
coverage, including, where applicable, professional liability insurance. In
general, no lease will be entered into unless, in the opinion of the Advisor, as
approved by the Board of Directors, the insurance required by the lease
adequately insures the Property.
The leases are expected to require that the tenant pay all taxes and
assessments, maintenance, repair, utility, and insurance costs applicable to the
real estate and permanent improvements. Tenants will be required to maintain
such Properties in good order and repair. Such tenants generally will be
required to maintain the Property and repair any damage to the Property, except
damage occurring during the last 24 to 48 months of the lease term (as such
lease term may be extended), which in the opinion of the tenant renders the
Property unsuitable for occupancy, in which case the tenant will have the right
instead to pay the insurance proceeds to the Company and terminate the lease.
The tenant generally will be required to repair the Property in the
event that less than a material portion of the Property (for example, more than
20% of the building or more than 40% of the land) is taken for public or
quasi-public use. The Company's leases generally will provide that, in the event
of any condemnation of the Property that does not give rise to an option to
terminate the lease or in the event of any condemnation which does give rise to
an option to terminate the lease and the tenant elects not to terminate, the
Company will remit to the tenant the award from such condemnation and the tenant
will be required to repair and restore the Property. To the extent that the
award exceeds the estimated costs of restoring or repairing the Property, the
tenant is required to deposit such excess amount with the Company. Until a
specified time (generally, ten days) after the tenant has restored the premises
and all improvements thereon to the same condition as existed immediately prior
to such condemnation insofar as is reasonably possible, a "just and
proportionate" amount of the minimum annual rent will be abated from the date of
such condemnation. In addition, the minimum annual rent will be reduced in
proportion to the reduction in the then rental value of the premises or the fair
market value of the premises after the condemnation in comparison with the
rental value or fair market value prior to such condemnation.
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Events of Default. The leases generally are expected to provide that
the following events, among others, will constitute a default under the lease:
(i) the insolvency or bankruptcy of the tenant, provided that the tenant may
have the right, under certain circumstances, to cure such default, (ii) the
failure of the tenant to make timely payment of rent or other charges due and
payable under the lease, if such failure continues for a specified period of
time (generally, five to 30 days) after notice from the Company of such failure,
(iii) the failure of the tenant to comply with any of its other obligations
under the
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lease (for example, the discontinuance of operations of the leased Property) if
such failure continues for a specified period of time (generally, ten to 45
days), (iv) in cases where the Company enters into a development agreement
relating to the construction or renovation of a building, a default under the
development agreement or the Indemnity Agreement or the failure to establish the
minimum annual rent at the end of the development period, (v) in cases where the
Company has entered into other leases with the same tenant, a default under such
lease, (vi) loss of licensure, (vii) loss of Medicare or Medicaid Certification
and (viii) the forced removal of more than a specified number of patients as a
result of deficiencies in the care provided at, or physical condition of, the
facility.
Upon default by the tenant, the Company generally will have the right
under the lease and under most state laws to evict the tenant, re-lease the
Property to others, and hold the tenant responsible for any deficiency in the
minimum lease payments. Similarly, if the Company determined not to re-lease the
Property, it could sell the Property. (Unless required to do so by the lease or
its investment objectives, however, the Company does not intend to sell any
Property prior to five to ten years after the commencement of the lease on such
Property. See "Right of Tenant to Purchase" above.) In the event that a lease
requires the tenant to make a security deposit, the Company will have the right
under the lease to apply the security deposit, upon default by the tenant,
towards any payments due from the defaulting tenant. In general, the tenant will
remain liable for all amounts due under the lease to the extent not paid from a
security deposit or by a new tenant.
In the event that a tenant defaults under a lease with the Company, the
Company either will attempt to locate a replacement operator or will discontinue
operation of the Health Care Facility, the latter of which would require the
Company or the defaulting operator to arrange for an orderly transfer of the
residents to another qualified health care facility. The Company will have no
obligation to operate the Health Care Facilities and no operator of a Health
Care Facility will be obligated to permit the Company or a replacement operator
to operate the Health Care Facility.
JOINT VENTURE ARRANGEMENTS
The Company may enter into a Joint Venture to own and operate a
Property with various unaffiliated persons or entities or with another program
formed by the principals of the Company or the Advisor or their Affiliates, if a
majority of the Directors, including a majority of the Independent Directors,
not otherwise interested in the transaction determine that the investment in the
Joint Venture is fair and reasonable to the Company and on substantially the
same terms and conditions as those to be received by the co-venturer or
co-venturers. The Company may take more or less than a 50% interest in any Joint
Venture, subject to obtaining the requisite approval of the Directors. See "Risk
Factors - Real Estate and Financing Risks Impasse or Conflicts with Joint
Venture Partner."
Under the terms of each Joint Venture agreement, it is anticipated that
the Company and each joint venture partner would be jointly and severally liable
for all debts, obligations, and other liabilities of the Joint Venture, and the
Company and each joint venture partner would have the power to bind each other
with any actions they take within the scope of the Joint Venture's business. In
addition, it is expected that the Advisor or its Affiliates will be entitled to
reimbursement, at cost, for actual expenses incurred by the Advisor or its
Affiliates on behalf of the Joint Venture. Joint Ventures entered into to
purchase and hold a Property for investment generally will have an initial term
of 10 to 20 years (generally the same term as the initial term of the lease for
the Property in which the Joint Venture invests), and, after the expiration of
the initial term, will continue in existence from year to year unless terminated
at the option of either joint venturer or unless terminated by an event of
dissolution. Events of dissolution will include the bankruptcy, insolvency, or
termination of any co-venturer, sale of the Property owned by the Joint Venture,
mutual agreement of the Company and its joint venture partner to dissolve the
Joint Venture, and the expiration of the term of the Joint Venture. The Joint
Venture agreement typically will restrict each venturer's ability to sell,
transfer, or assign its joint venture interest without first offering it for
sale to its co-venturer. In addition, in any Joint Venture with another program
sponsored by the Advisor or its Affiliates, where such arrangements are entered
into for the purpose of purchasing and holding Properties for investment, in the
event that one party desires to sell the Property and the other party does not
desire to sell, either party will have the right to trigger dissolution of the
Joint Venture by sending a notice to the other party. The notice will establish
the price and terms for the sale or purchase of the other party's interest in
the Joint Venture to the other party. The Joint Venture agreement will grant the
receiving party the right to elect either to purchase the other party's interest
on the terms set forth in the notice or to sell its own interest on such terms.
The following paragraphs describe the allocations and distributions
under the expected terms of the joint venture agreement for any Joint Venture in
which the Company and its co-venturer each have a 50% ownership interest. In any
other case, the allocations and distributions are expected to be similar to
those described below, except that allocations and distributions which are
described below as being made 50% to each co-venturer will instead be made in
proportion to each co-venturer's respective ownership interest.
Under the terms of each joint venture agreement, operating profits and
losses generally will be allocated 50% to each co-venturer. Profits from the
sale or other disposition of Joint Venture property first will be allocated to
any co-venturers with negative capital account balances in proportion to such
balances until such capital accounts equal zero, and thereafter 50% to each
co-venturer. Similarly, losses from the sale or other disposition of Joint
Venture property first will be allocated to joint venture partners with positive
capital account balances in proportion to such balances until such capital
accounts equal zero, and thereafter 50% to each co-venturer. Notwithstanding any
other provisions in the Joint Venture agreement, income,
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gain, loss, and deductions with respect to any contributed property will be
shared in a manner which takes into account the variation between the basis of
such property and its fair market value at the time of contribution in
accordance with section 704(c) of the Code.
Net cash flow from operations of the Joint Venture generally will be
distributed 50% to each joint venture partner. Any liquidation proceeds, after
paying joint venture debts and liabilities and funding reserves for contingent
liabilities, will be distributed first to the joint venture partners with
positive capital account balances in proportion to such balances until such
balances equal zero, and thereafter 50% to each joint venture partner.
In order that the allocations of Joint Venture income, gain, loss, and
deduction provided in Joint Venture agreements may be respected for federal
income tax purposes, it is expected that any Joint Venture agreement (i) will
contain a "qualified income offset" provision, (ii) will prohibit allocations of
loss or deductions to the extent such allocation would cause or increase an
"Adjusted Capital Account Deficit," and (iii) will require (a) that capital
accounts be maintained for each joint venture partner in a manner which complies
with Treasury Regulation ss.1.704-1(b)(2)(iv) and (b) that distributions of
proceeds from the liquidation of a partner's interest in the Joint Venture
(whether or not in connection with the liquidation of the Joint Venture) be made
in accordance with the partner's positive capital account balance. See "Federal
Income Tax Considerations - Investment in Joint Ventures."
Prior to entering into any Joint Venture arrangement with any
unaffiliated co-venturer (or the principals of any unaffiliated co-venturer),
the Company will confirm that such person or entity has demonstrated to the
satisfaction of the Company that requisite financial qualifications are met.
The Company may acquire Properties from time to time by entering into a
limited partnership with sellers of such Properties pursuant to which the
seller, as owner, would receive partnership interests convertible at a later
date into Common Stock of the Company. The Company would be the general partner
of such a partnership. This structure would enable a property owner to transfer
property without incurring immediate tax liability, and therefore could allow
the Company to acquire Properties on more favorable terms than otherwise.
MORTGAGE LOANS
The Company may provide Mortgage Loans to operators of the Health Care
Facilities to enable them to acquire the land, buildings and land, or buildings.
The Mortgage Loans will be secured by such property.
Generally, management believes the interest rate and terms of these
transactions will be substantially the same as those of the Company's Property
leases. The borrower will be responsible for all of the expenses of owning the
property, as with the "triple-net" leases, including expenses for insurance and
repairs and maintenance. Management expects the Mortgage Loans will be fully
amortizing loans over a period of 10 to 20 years (generally, the same term as
the initial term of the Property leases), with payments of principal and
interest due monthly. In addition, management expects the interest rate charged
under the terms of the Mortgage Loan will be fixed over the term of the loan and
generally will be comparable to, or slightly lower than, lease rates charged to
tenants for the Properties.
The Company may combine leasing and financing in connection with a
Property. For example, it may make a Mortgage Loan with respect to the building
and lease the underlying land to the borrower. Management believes that the
combined leasing and financing structure provides the benefit of allowing the
Company to receive, on a fixed income basis, the return of its initial
investment in each financed building, which is generally a depreciating asset,
plus interest. At the same time, the Company retains ownership of the underlying
land, which may appreciate in value, thus providing an opportunity for a capital
gain on the sale of the land. In such cases, in which the borrower is also the
tenant under a Property lease for the underlying land, if the borrower does not
elect to exercise its purchase option to acquire the Property under the terms of
the lease, the building and improvements on the Property will revert to the
Company at the end of term of the lease, including any renewal periods. If the
borrower does elect to exercise its purchase option as the tenant of the
underlying land, the Company will generally have the option of selling the
Property at the greater of fair market value or cost plus a specified
percentage.
The Company will not make or invest in Mortgage Loans unless an
appraisal is obtained concerning the property that secures the Mortgage Loan. In
cases in which the majority of the Independent Directors so determine, and in
all cases in which the Mortgage Loan involves the Advisor, Directors, or
Affiliates, such appraisal must be obtained from an independent expert
concerning the underlying property. Such appraisal shall be maintained in the
Company's records for at least five years, and shall be available for inspection
and duplication by any stockholder. In addition to the appraisal, a mortgagee's
or owner's title insurance policy or commitment as to the priority of the
mortgage or condition of the title must be obtained.
Management believes that the criteria for investing in such Mortgage
Loans are substantially the same as those involved in the Company's investments
in Properties; therefore, the Company will use the same underwriting criteria as
described above in "Business - Standards for Investment in Properties." In
addition, the Company will not make or invest in Mortgage Loans on any one
property if the aggregate amount of all mortgage loans outstanding on the
property, including the loans of the Company, would exceed an amount equal to
85% of the appraised value of the property as determined by appraisal unless
substantial justification exists because of the presence of other underwriting
criteria. In no event shall mortgage indebtedness on any property exceed such
property's appraised value. For purposes of this limitation, the aggregate
amount of all mortgage
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loans outstanding on the property, including the loans of the Company, shall
include all interest (excluding contingent participation in income and/or
appreciation in value of the mortgaged property), the current payment of which
may be deferred pursuant to the terms of such loans, to the extent that deferred
interest on each loan exceeds 5% per annum of the principal balance of the loan.
Further, the Company will not make or invest in any Mortgage Loans that
are subordinate to any mortgage, other indebtedness or equity interest of the
Advisor, the Directors, or Affiliates of the Company. The Company currently
expects to provide Mortgage Loans in the aggregate principal amount of
approximately 5% to 10% of the Company's total assets.
MANAGEMENT SERVICES
The Advisor will provide management services relating to the Company,
the Properties, the Mortgage Loans, and the Secured Equipment Lease program
pursuant to an Advisory Agreement between it and the Company. Under this
agreement, the Advisor will be responsible for assisting the Company in
negotiating leases, Mortgage Loans and Secured Equipment Leases, collecting
rental, Mortgage Loan and Secured Equipment Lease payments, inspecting the
Properties and the tenants' books and records, and responding to tenant
inquiries and notices. The Advisor also will provide information to the Company
about the status of the leases, the Properties, the Mortgage Loans, the Line of
Credit, the Permanent Financing and the Secured Equipment Leases. In exchange
for these services, the Advisor will be entitled to receive certain fees from
the Company. For supervision of the Properties and Mortgage Loans, the Advisor
will receive the Asset Management Fee, which, generally, is payable monthly in
an amount equal to one-twelfth of .60% of Real Estate Asset Value and the
outstanding principal amount of the Mortgage Loans, as of the end of the
preceding month. For negotiating Secured Equipment Leases and supervising the
Secured Equipment Lease program, the Advisor will receive, upon entering into
each lease, a Secured Equipment Lease Servicing Fee, payable out of the proceeds
of the borrowings, equal to 2% of the purchase price of the Equipment subject to
each Secured Equipment Lease. See "Management Compensation."
BORROWING
The Company will borrow money to acquire Assets and to pay certain
related fees. The Company intends to encumber Assets in connection with the
borrowing. The Company plans to obtain a revolving Line of Credit initially in
an amount up to $45,000,000, and may, in addition, also obtain Permanent
Financing. The Line of Credit may be increased at the discretion of the Board of
Directors and may be repaid with proceeds of the offering, working capital or
Permanent Financing. The Line of Credit and Permanent Financing are the only
source of funds for making Secured Equipment Leases and for paying the Secured
Equipment Lease Servicing Fee. The Company has engaged in preliminary
discussions with potential lenders but has not yet received a commitment for the
Line of Credit or any Permanent Financing and there is no assurance that the
Company will obtain the Line of Credit or any Permanent Financing on
satisfactory terms.
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Management believes that any financing obtained during the offering
period will allow the Company to make investments in Assets that the Company
otherwise would be forced to delay until it raised a sufficient amount of
proceeds from the sale of Shares. By eliminating this delay the Company will
also eliminate the risk that these investments will no longer be available, or
the terms of the investment will be less favorable, when the Company has raised
sufficient offering proceeds. Alternatively, Affiliates of the Advisor could
make such investments, pending receipt by the Company of sufficient offering
proceeds, in order to preserve the investment opportunities for the Company.
However, Assets acquired by the Company in this manner would be subject to
closing costs both on the original purchase by the Affiliate and on the
subsequent purchase by the Company, which would increase the amount of expenses
associated with the acquisition of Assets and reduce the amount of offering
proceeds available for investment in income-producing assets. Management
believes that the use of borrowings will enable the Company to reduce or
eliminate the instances in which the Company will be required to pay duplicate
closing costs, which may be substantial in certain states.
Similarly, management believes that the borrowings, if obtained, will
benefit the Company by allowing it to take advantage of its ability to borrow at
favorable interest rates. Specifically, the Company intends to structure the
terms of any financing so that the lease rates for Properties acquired and the
interest rates for Mortgage Loans and Secured Equipment Leases made with the
loan proceeds will exceed the interest rate payable on the financing. To the
extent that the Company is able to structure the financing on these terms, the
Company will increase its net revenues. In addition, the use of financing will
increase the diversification of the Company's portfolio by allowing it to
acquire more Assets than would be possible using only the Gross Proceeds from
the offering.
As a result of existing relationships between Affiliates of the Advisor
and certain financing sources, the Company may have the opportunity to obtain
financing at more favorable interest rates than the Company could otherwise
obtain. In connection with any financing obtained by the Company as a result of
any such relationship, the Company will pay a loan origination fee to the
Affiliate. In addition, certain lenders may require, as a condition of providing
financing to the Company, that the Affiliate with which the lender has an
existing relationship act as a loan servicing agent. In connection with any such
arrangement the Company will pay a loan servicing fee to the Affiliate. Any loan
origination fee or loan servicing fee paid to an Affiliate of the Company is
subject to the approval by a majority of the Board of Directors (including a
majority of the Independent Directors) not otherwise interested in the
transaction as fair and reasonable to the Company and on terms not less
favorable to the Company than those available from unaffiliated third parties
and not less favorable than those
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available from the Advisor or its Affiliates in transactions with unaffiliated
third parties. See "Conflicts of Interest - Certain Conflict Resolution
Procedures."
The Company may also borrow funds for the purpose of preserving its
status as a REIT. For example, the Company may borrow to the extent necessary to
permit the Company to make Distributions required in order to enable the Company
to qualify as a REIT for federal income tax purposes; however, the Company will
not borrow for the purpose of returning Invested Capital to the stockholders
unless necessary to eliminate corporate-level tax to the Company. The aggregate
borrowing of the Company, secured and unsecured, shall be reasonable in relation
to Net Assets of the Company and shall be reviewed by the Board of Directors at
least quarterly. The Board of Directors anticipates that the Line of Credit
initially will be in the amount of $45,000,000 and that the aggregate amount of
the Permanent Financing will not exceed 30% of the Company's total assets.
However, in accordance with the Company's Articles of Incorporation, the maximum
amount of borrowing in relation to Net Assets shall not exceed 300% of Net
Assets.
SALE OF PROPERTIES, MORTGAGE LOANS AND SECURED EQUIPMENT LEASES
For the first five to ten years after the commencement of the offering,
the Company intends, to the extent consistent with the Company's objective of
qualifying as a REIT, to reinvest in additional Properties or Mortgage Loans any
proceeds of the Sale of a Property or a Mortgage Loan that are not required to
be distributed to stockholders in order to preserve the Company's REIT status
for federal income tax purposes. The Company may also use such proceeds to
reduce its outstanding indebtedness. Similarly, and to the extent consistent
with REIT qualification, the Company plans to use the proceeds of the Sale of a
Secured Equipment Lease to fund additional Secured Equipment Leases, or to
reduce its outstanding indebtedness on the borrowings. At or prior to the end of
such ten-year period (December 31, 2008), the Company intends to provide
stockholders of the Company with liquidity of their investment, either in whole
or in part, through Listing (although liquidity cannot be assured thereby) or by
commencing the orderly Sale of the Company's assets. If Listing occurs, the
Company intends to use any Net Sales Proceeds not required to be distributed to
stockholders in order to preserve the Company's status as a REIT to reinvest in
additional Properties, Mortgage Loans and Secured Equipment Leases or to repay
outstanding indebtedness. If Listing does not occur within ten years after the
commencement of the offering, the Company
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thereafter will undertake the orderly liquidation of the Company and the Sale of
the Company's assets and will distribute any Net Sales Proceeds to stockholders.
In addition, the Company will not sell any assets if such Sale would not be
consistent with the Company's objective of qualifying as a REIT.
In deciding the precise timing and terms of Property Sales, the Advisor
will consider factors such as national and local market conditions, potential
capital appreciation, cash flows, and federal income tax considerations. The
terms of certain leases, however, may require the Company to sell a Property at
an earlier time if the tenant exercises its option to purchase a Property after
a specified portion of the lease term has elapsed. See "Business - Description
of Leases - Right of Tenant to Purchase." The Company will have no obligation to
sell all or any portion of a Property at any particular time, except as may be
required under property or joint venture purchase options granted to certain
tenants. In connection with Sales of Properties by the Company, purchase money
obligations may be taken by the Company as part payment of the sales price. The
terms of payment will be affected by custom in the area in which the Property is
located and by prevailing economic conditions. When a purchase money obligation
is accepted in lieu of cash upon the Sale of a Property, the Company will
continue to have a mortgage on the Property and the proceeds of the Sale will be
realized over a period of years rather than at closing of the Sale.
The Company does not anticipate selling the Secured Equipment Leases
prior to expiration of the lease term, except in the event that the Company
undertakes orderly liquidation of its assets. In addition, the Company does not
anticipate selling any Mortgage Loans prior to the expiration of the loan term,
except in the event (i) the Company owns the Property (land only) underlying the
building improvements which secure the Mortgage Loan and the Sale of the
Property occurs, or (ii) the Company undertakes an orderly Sale of its assets.
COMPETITION
The Company anticipates that it will compete with other REITs, real
estate partnerships, health care providers and other investors, including, but
not limited to banks and insurance companies, many of which will have greater
financial resources than the Company, in the acquisition, leasing and financing
of Health Care Facilities. Further, non-profit entities are particularly
attracted to investments in senior care facilities because of their ability to
finance acquisitions through the issuance of tax-exempt bonds, providing
non-profit entities with a relatively lower cost of capital as compared to
for-profit purchasers. In addition, in certain states health care facilities
owned by non-profit entities are exempt from taxes on real property. As
profitability increases for investors in health care Properties, competition
among investors likely will become increasingly intense.
REGULATION OF MORTGAGE LOANS AND SECURED EQUIPMENT LEASES
The Mortgage Loan and Secured Equipment Lease programs may be subject
to regulation by federal, state and local authorities and subject to various
laws and judicial and administrative decisions imposing various requirements and
restrictions, including among other things, regulating credit granting
activities, establishing maximum interest rates and finance charges, requiring
disclosures to customers, governing secured transactions, and setting
collection, repossession and claims handling procedures and other trade
practices. In addition, certain states have enacted legislation requiring the
licensing of mortgage bankers or other lenders and these requirements may affect
the Company's ability to effectuate its Mortgage Loan and Secured Equipment
Lease program. Commencement of operations in these or other jurisdictions may be
dependent upon a finding of financial responsibility, character and fitness of
the Company. The Company may determine not to make Mortgage Loans or enter into
Secured Equipment Leases in any jurisdiction in which it believes the Company
has not complied in all material respects with applicable requirements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OF THE COMPANY
The Company has been formed recently and has no operating history.
Since leases generally will be entered into on a "triple-net" basis, the Company
does not expect, although it has the right, to maintain a reserve for operating
expenses. The Company's Properties, Mortgage Loans and Secured Equipment Leases
will not be readily marketable and their values may be affected by general
market conditions. Nevertheless, management believes that capital and revenues
of the Company will be sufficient to fund the Company's anticipated investments,
proposed operations, and cash Distributions to the stockholders.
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Until the Company sells a minimum of 250,000 Shares ($2,500,000), all
proceeds of the offering of its Shares will be held in escrow. After the sale of
the minimum number of Shares of the Company, the proceeds will be deposited in
the Company's general accounts, and, thereafter, the Company intends to commence
its acquisition of suitable Properties and its investment in Mortgage Loans.
Pending investment in suitable Properties and Mortgage Loans, Company
funds will be invested in short-term, highly liquid U.S. Government securities
or in other short-term, highly liquid investments with appropriate safety of
principal. In addition, it is anticipated that the proceeds of the Line of
Credit and Permanent Financing will be obtained from lenders from time to time
as funds are needed to purchase Assets. Management anticipates that after the
Company has invested in Assets, Company revenues sufficient to pay operating
expenses, provide cash Distributions to the stockholders and service debt will
be derived from the lease and mortgage payments paid to the Company by the
tenants and borrowers.
The Company's primary investment objectives are to preserve, protect,
and enhance the Company's assets while (i) making
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distributions commencing in the initial year of Company operations; (ii)
obtaining fixed income through the receipt of base rent, and increasing the
Company's income (and distributions) and providing protection against inflation
through automatic fixed increases in base rent or increases in the base rent
based on increases in consumer price indices, over the term of the lease, and
obtaining fixed income through the receipt of payments from Mortgage Loans and
Secured Equipment Leases; (iii) qualifying and remaining qualified as a REIT for
federal income tax purposes; and (iv) providing stockholders of the Company with
liquidity of their investment within five to ten years after commencement of the
offering, either in whole or in part, through (a) Listing, or (b) the
commencement of the orderly Sale of the Company's assets, and distribution of
the proceeds thereof (outside the ordinary course of business and consistent
with its objective of qualifying as a REIT).
LIQUIDITY AND CAPITAL RESOURCES
The Company will use Net Offering Proceeds (Gross Proceeds less fees
and expenses of the offering) from this offering to purchase Properties and to
invest in Mortgage Loans. See "Investment Objectives and Policies." In addition,
the Company intends to borrow money to acquire Assets and to pay certain related
fees. The Company intends to encumber Assets in connection with such borrowing.
The Company plans to obtain a revolving Line of Credit initially in an amount up
to $45,000,000, and may, in addition, also obtain Permanent Financing. The Line
of Credit may be increased at the discretion of the Board of Directors and may
be repaid with offering proceeds, working capital or Permanent Financing.
Although the Board of Directors anticipates that the Line of Credit initially
will be in the amount of $45,000,000 and the aggregate amount of any Permanent
Financing shall not exceed 30% of the Company's total assets, the maximum amount
the Company may borrow is 300% of the Company's Net Assets. The Company has
engaged in preliminary discussions with potential lenders but has not yet
received a commitment for the Line of Credit or any Permanent Financing and
there is no assurance that the Company will obtain the Line of Credit or any
Permanent Financing on satisfactory terms.
As of the date of this Prospectus, the Company had not entered into any
arrangements creating a reasonable probability that a Property would be acquired
by the Company or that a particular Mortgage Loan or Secured Equipment Lease
would be funded. The number of Properties to be acquired and the number of
Mortgage Loans to be invested in by the Company will depend upon the amount of
Net Offering Proceeds available and the amount of funds borrowed to acquire
Properties and make Mortgage Loans. The number of Secured Equipment Leases to be
offered is currently undetermined, but the Company will fund the Secured
Equipment Leases with the proceeds from the Line of Credit or Permanent
Financing, and the Company has undertaken, consistent with its objective of
qualifying as a REIT for federal income tax purposes, to ensure that the value
of the Secured Equipment Leases, in the aggregate, will not exceed 25% of the
Company's total assets and that the value of the Secured Equipment Leases to a
single lessee, in the aggregate, will not exceed 5% of the Company's total
assets. Management is not aware of any material trends, favorable or
unfavorable, in either capital resources or the outlook for long-term cash
generation, nor does management expect any material changes in the availability
and relative cost of such capital resources, other than as referred to in this
Prospectus.
Management expects that the cash to be generated from operations will
be adequate to pay operating expenses and to make Distributions to stockholders.
RESULTS OF OPERATIONS
As of the initial date of this Prospectus, no significant operations
had commenced because the Company was in its development stage. No operations
will commence until such time as the Company has sold at least 250,000 Shares
($2,500,000). Management is not aware of any known trends or uncertainties,
other than national economic conditions, which may reasonably be expected to
have a material impact, favorable or unfavorable, on revenues or income from the
acquisition and operations of real properties, other than those Properties
referred to in this Prospectus.
The Advisor of the Company is in the process of assessing and
addressing the impact of the year 2000 on its computer package software. The
hardware and built-in software used by the Advisor are believed to be year 2000
compliant. Accordingly, the Company does not expect this matter to materially
impact how it conducts business or its future results of operations or financial
position.
There currently are no material changes being considered in the
objectives and policies of the Company as set forth in this Prospectus.
MANAGEMENT
GENERAL
The Company will operate under the direction of the Board of Directors,
the members of which are accountable to the Company as fiduciaries. As required
by applicable regulations, a majority of the Independent Directors and a
majority of the Directors have reviewed and ratified the Articles of
Incorporation and have adopted the Bylaws.
The Company currently has five Directors; it may have no fewer than
three Directors and no more than 15. Directors will be elected annually, and
each Director will hold office until the next annual meeting of stockholders or
until his successor has been duly elected and qualified. There is no limit on
the number of times that a Director may be elected to office. Although the
number of Directors may be increased or decreased as discussed above, a decrease
shall not have the effect of shortening the term of any incumbent Director.
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Any Director may resign at any time and may be removed with or without
cause by the stockholders upon the affirmative vote of at least a majority of
all the Shares outstanding and entitled to vote at a meeting called for this
purpose. The notice of such meeting shall indicate that the purpose, or one of
the purposes, of such meeting is to determine if a Director shall be removed.
FIDUCIARY RESPONSIBILITY OF THE BOARD OF DIRECTORS
The Board of Directors will be responsible for the management and
control of the affairs of the Company; however, the Board of Directors will
retain the Advisor to manage the Company's day-to-day affairs and the
acquisition and disposition of investments, subject to the supervision of the
Board of Directors.
The Directors are not required to devote all of their time to the
Company and are only required to devote such of their time to the affairs of the
Company as their duties require. The Board of Directors will meet quarterly in
person or by telephone, or more frequently if necessary. It is not expected that
the Directors will be required to devote a substantial portion of their time to
discharge their duties as directors. Consequently, in the exercise of their
fiduciary responsibilities, the Directors will rely heavily on the Advisor. In
this regard, the Advisor, in addition to the Directors, will have a fiduciary
duty to the Company.
The Directors will establish written policies on investments and
borrowings and will monitor the administrative procedures, investment
operations, and performance of the Company and the Advisor to assure that such
policies are in the best interest of the stockholders and are fulfilled. Until
modified by the Directors, the Company will follow the policies on investments
set forth in this Prospectus. See "Investment Objectives and Policies."
The Independent Directors are responsible for reviewing the fees and
expenses of the Company at least annually or with sufficient frequency to
determine that the total fees and expenses of the Company are reasonable in
light of the Company's investment performance, Net Assets, Net Income, and the
fees and expenses of other comparable unaffiliated real estate investment
trusts. For purposes of this determination, Net Assets are the Company's total
assets (other than intangibles), calculated at cost before deducting
depreciation or other non-cash reserves, less total liabilities, and computed at
least quarterly on a basis consistently applied. Such determination will be
reflected in the minutes of the meetings of the Board of Directors. In addition,
a majority of the Independent Directors and a majority of Directors not
otherwise interested in the transaction must approve each transaction with the
Advisor or its Affiliates. The Board of Directors also will be responsible for
reviewing and evaluating the performance of the Advisor before entering into or
renewing an advisory agreement. The Independent Directors shall determine from
time to time and at least annually that compensation to be paid to the Advisor
is reasonable in relation to the nature and quality of services to be performed
and shall supervise the performance of the Advisor and the compensation paid to
it by the Company to determine that the provisions of the Advisory Agreement are
being carried out. Specifically, the Independent Directors will consider factors
such as the amount of the fee paid to the Advisor in relation to the size,
composition and performance of the Company's investments, the success of the
Advisor in generating appropriate investment opportunities, rates charged to
other comparable REITs and other investors by advisors performing similar
services, additional revenues realized by the Advisor and its Affiliates through
their relationship with the Company, whether paid by the Company or by others
with whom the Company does business, the quality and extent of service and
advice furnished by the Advisor, the performance of the investment portfolio of
the Company and the quality of the portfolio of the Company relative to the
investments generated by the Advisor for its own account. Such review and
evaluation will be reflected in the minutes of the meetings of the Board of
Directors. The Board of Directors shall determine that any successor Advisor
possesses sufficient qualifications to (i) perform the advisory function for the
Company and (ii) justify the compensation provided for in its contract with the
Company.
The liability of the officers and Directors while serving in such
capacity is limited in accordance with the Articles of Incorporation and
applicable law. See "Summary of the Articles of Incorporation and Bylaws -
Limitation of Director and Officer Liability."
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and executive officers of the Company are listed below:
Name Age Position with the Company
---- --- -------------------------
James M. Seneff, Jr. 52 Director, Chairman of the Board, and
Chief Executive Officer
Robert A. Bourne 51 Director and President
David W. Dunbar 46 Independent Director
Timothy S. Smick 46 Independent Director
Edward A. Moses 56 Independent Director
Daniel L. Simmons 45 Executive Vice President
Curtis B. McWilliams 43 Executive Vice President
Jeanne A. Wall 40 Executive Vice President
Lynn E. Rose 49 Secretary and Treasurer
James M. Seneff, Jr. Director, Chairman of the Board, and Chief
Executive Officer. Mr. Seneff currently holds the position of Chairman of the
Board, Chief Executive Officer and director of CNL Health Care Advisors, Inc.,
the Advisor to the Company. Mr. Seneff also serves as Chairman of the Board,
Chief Executive Officer and a director of CNL American Properties Fund, Inc.,
CNL Hospitality Properties, Inc. (formerly CNL American Realty Fund, Inc.), CNL
Fund Advisors, Inc. and CNL Real Estate Advisors, Inc. Mr. Seneff is a principal
stockholder of CNL Group, Inc., a diversified real estate company, and has
served as its Chairman of the Board of Directors, director, and Chief Executive
Officer
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since its formation in 1980. CNL Group, Inc. is the parent company of CNL
Securities Corp., which is acting as the Managing Dealer in this offering, CNL
Investment Company, CNL Health Care Advisors, Inc., CNL Fund Advisors, Inc. and
CNL Real Estate Advisors, Inc. Mr. Seneff has been Chairman of the Board, Chief
Executive Officer and a director of CNL Securities Corp. since its formation in
1979. Mr. Seneff also has held the position of Chairman of the Board, Chief
Executive Officer, President and a director of CNL Management Company, a
registered investment advisor, since its formation in 1976, has served as Chief
Executive Officer, Chairman of the Board and a director of CNL Investment
Company, and Chief Executive Officer and Chairman of the Board of Commercial Net
Lease Realty, Inc. since 1992, served as Chief Executive Officer and Chairman of
the Board of CNL Realty Advisors, Inc. from its inception in 1991 through 1997
at which time such company merged with Commercial Net Lease Realty, Inc., and
has held the position of Chief Executive Officer, Chairman of the Board and a
director of CNL Institutional Advisors, Inc., a registered investment advisor,
since its inception in 1990. Mr. Seneff previously served on the Florida State
Commission on Ethics and is a former member and past Chairman of the State of
Florida Investment Advisory Council, which recommends to the Florida Board of
Administration investments for various Florida employee retirement funds. The
Florida Board of Administration, Florida's principal investment advisory and
money management agency, oversees the investment of more than $60 billion of
retirement funds. Since 1971, Mr. Seneff has been active in the acquisition,
development, and management of real estate projects and, directly or through an
affiliated entity, has served as a general partner or joint venturer in over 100
real estate ventures involved in the financing, acquisition, construction, and
rental of restaurants, office buildings, apartment complexes, hotels, and other
real estate. Included in these real estate ventures are approximately 65
privately offered real estate limited partnerships with investment objectives
similar to one or more of the Company's investment objectives, in which Mr.
Seneff, directly or through an affiliated entity, serves or has served as a
general partner. Mr. Seneff received his degree in Business Administration from
Florida State University in 1968.
Robert A. Bourne. Director and President. Mr. Bourne currently holds the
position of President and director of CNL Health Care Advisors, Inc., the
Advisor to the Company. Mr. Bourne also serves as President and a director of
CNL American Properties Fund, Inc., CNL Hospitality Properties, Inc. and CNL
Real Estate Advisors, Inc. Mr. Bourne currently holds the position of Vice
Chairman of the Board of Directors, director and Treasurer of CNL Fund Advisors,
Inc. Mr. Bourne served as President of CNL Fund Advisors, Inc. from the date of
its inception through October 1997. Mr. Bourne is President and Treasurer of CNL
Group, Inc., President, Treasurer, a director, and a registered principal of CNL
Securities Corp. (the Managing Dealer of this offering), President, Treasurer, a
director and a registered principal of CNL Investment Company, and Chief
Investment Officer, a director and Treasurer of CNL Institutional Advisors,
Inc., a registered investment advisor. Mr. Bourne served as President of CNL
Institutional Advisors, Inc. from the date of its inception through June 30,
1997. Mr. Bourne served as President and a director from July 1992 to February
1996, served as Secretary and Treasurer from February 1996 through December
1997, and has served as Vice Chairman of the Board of Directors since February
1996, of Commercial Net Lease Realty, Inc. In addition, Mr. Bourne served as
President of CNL Realty Advisors, Inc. from 1991 to February 1996, and served as
a director of CNL Realty Advisors, Inc. from 1991 through December 1997, and as
Treasurer and Vice Chairman from February 1996 through 1997, at which time such
Company merged with Commercial Net Lease Realty, Inc. Upon graduation from
Florida State University in 1970, where he received a B.A. in Accounting, with
honors, Mr. Bourne worked as a certified public accountant and, from September
1971 through December 1978 was employed by Coopers & Lybrand, Certified Public
Accountants, where he held the position of tax manager beginning in 1975. From
January 1979 until June 1982, Mr. Bourne was a partner in the accounting firm of
Cross & Bourne and from July 1982 through January 1987 he was a partner in the
accounting firm of Bourne & Rose, P.A., Certified Public Accountants. Mr.
Bourne, who joined CNL Securities Corp. in 1979, has participated as a general
partner or joint venturer in over 100 real estate ventures involved in the
financing, acquisition, construction, and rental of restaurants, office
buildings, apartment complexes, hotels, and other real estate. Included in these
real estate ventures are approximately 64 privately offered real estate limited
partnerships with investment objectives similar to one or more of the Company's
investment objectives, in which Mr. Bourne, directly or through an affiliated
entity, serves or has served as a general partner.
Daniel L. Simmons. Executive Vice President. Mr. Simmons serves as
Executive Vice President of CNL Health Care Advisors, Inc., the Advisor to the
Company. Since 1993, Mr. Simmons has served as a consultant to The Celebration
Company, a subsidiary of The Walt Disney Company, regarding seniors' housing
issues. From November 1997 to June 1998, Mr. Simmons served as a consultant to
CNL Group, Inc., providing advice on issues regarding health care property
development and management. From 1984 to 1993, Mr. Simmons was a co-founder and
partner in the Johnson Simmons Company, where he was responsible for site
acquisition, design, development, financing and regulatory matters for three
continuing care communities. Mr. Simmons was also responsible for the
development, financing and operations associated with the restaurant and
commercial properties divisions of the Johnson Simmons Company. During his
tenure, Johnson Simmons Company developed and managed over 1,100 units of
seniors' housing and a 240-bed skilled nursing facility, held in excess of $100
million in assets, and employed more than 1,200 people. From 1983 to 1984, Mr.
Simmons served as director of development for Cadem Corporation, a subsidiary of
National Medical Enterprises. At Cadem, he was responsible for site, design,
development and regulatory issues for proposed seniors' housing projects. From
1982 to 1983, Mr. Simmons served as vice president of Southern Management
Services Corporation, where he was responsible for the development and
operations of seniors' housing, assisted living, and skilled nursing facilities.
He was also responsible for all regulatory issues with the State of
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Florida, Department of Insurance, and the current Agency for Health Care
Administration regarding the licensing and regulation of continuing care
retirement communities, nursing homes and assisted living facilities. Mr.
Simmons attended Florida State University and the University of South Florida
and was a founding member of the National Association of Senior Living
Industries.
Curtis B. McWilliams. Executive Vice President. Mr. McWilliams serves
as Executive Vice President of CNL Health Care Advisors, Inc., the Advisor to
the Company. Mr. McWilliams joined CNL Group, Inc. in April 1997 and currently
serves as an Executive Vice President. In addition, Mr. McWilliams serves as
President of CNL Fund Advisors, Inc., as Executive Vice President of CNL
American Properties Fund, Inc., and as President of CNL Financial Services, Inc.
and certain other subsidiaries of CNL Group, Inc. From September 1983 through
March 1997, Mr. McWilliams was employed by Merrill Lynch. From January 1991 to
August 1996, Mr. McWilliams was a managing director in the corporate banking
group of Merrill Lynch's investment banking division. During this time, he was a
senior relationship manager with Merrill Lynch and as such was responsible for a
number of the firm's larger corporate relationships. From February 1990 to
February 1993, he also served as co-head of one of the Industrial Banking Groups
within Merrill Lynch's investment banking division and had administrative
responsibility for a group of bankers and client relationships, including the
firm's transportation group. From September 1996 to March 1997, Mr. McWilliams
served as Chairman of Merrill Lynch's Private Advisory Services. Mr. McWilliams
received a B.S.E. in Chemical Engineering from Princeton University in 1977 and
a Masters of Business Administration with a concentration in finance from the
University of Chicago in 1983.
Jeanne A. Wall. Executive Vice President. Ms. Wall serves as Executive
Vice President of CNL Health Care Advisors, Inc., the Advisor to the Company.
Ms. Wall is also Executive Vice President of CNL American Properties Fund, Inc.,
CNL Hospitality Properties, Inc., CNL Fund Advisors, Inc. and CNL Real Estate
Advisors, Inc. Ms. Wall has served as Chief Operating Officer of CNL Investment
Company and of CNL Securities Corp. since November 1994 and has served as
Executive Vice President of CNL Investment Company since January 1991. In 1984,
Ms. Wall joined CNL Securities Corp. In 1985, Ms. Wall became Vice President of
CNL Securities Corp., in 1987 she became a Senior Vice President and in July
1997, she became Executive Vice President of CNL Securities Corp. In this
capacity, Ms. Wall serves as national marketing and sales director and oversees
the national marketing plan for the CNL investment programs. In addition, Ms.
Wall oversees product development, partnership administration and investor
services for programs offered through participating brokers, and corporate
communications for CNL Group, Inc. and Affiliates. Ms. Wall also has served as
Senior Vice President of CNL Institutional Advisors, Inc., a registered
investment advisor, from 1990 to 1993, as Vice President of CNL Realty Advisors,
Inc. from its inception in 1991 through 1997, and as Vice President of
Commercial Net Lease Realty, Inc. from 1992 through 1997. Ms. Wall holds a B.A.
in Business Administration from Linfield College and is a registered principal
of CNL Securities Corp. Ms. Wall currently serves as a trustee on the Board of
the Investment Program Association and on the Direct Participation Program
committee for the National Association of Securities Dealers.
Lynn E. Rose. Secretary and Treasurer. Ms. Rose serves as Secretary,
Treasurer and a director of CNL Health Care Advisors, Inc., the Advisor to the
Company. Ms. Rose is also Secretary and Treasurer of CNL American Properties
Fund, Inc. and CNL Hospitality Properties, Inc. and is Secretary, Treasurer and
a director of CNL Real Estate Advisors, Inc. Ms. Rose serves as Secretary and a
director of CNL Fund Advisors, Inc. Ms. Rose served as Treasurer of CNL Fund
Advisors, Inc. from the date of its inception through June 30, 1997. Ms. Rose, a
certified public accountant, has served as Secretary of CNL Group, Inc. since
1987, as Chief Financial Officer of CNL Group, Inc., since December 1993, and
served as Controller of CNL Group, Inc. from 1987 until December 1993. In
addition, Ms. Rose has served as Chief Financial Officer and Secretary of CNL
Securities Corp. since July 1994. She has served as Chief Operating Officer,
Vice President and Secretary of CNL Corporate Services, Inc. since November
1994. Ms. Rose also has served as Chief Financial Officer and Secretary of CNL
Institutional Advisors, Inc. since its inception in 1990, as Secretary and a
director of CNL Realty Advisors, Inc. from its inception in 1991 through 1997,
and as Treasurer of CNL Realty Advisors, Inc. from 1991 to February 1996. In
addition, Ms. Rose served as Secretary and Treasurer of Commercial Net Lease
Realty, Inc. from 1992 to February 1996. Ms. Rose also currently serves as
Secretary for approximately 50 additional corporations. Ms. Rose oversees the
management information services, administration, legal compliance, accounting,
tenant compliance, and reporting for over 250 corporations, partnerships and
joint ventures. Prior to joining CNL, Ms. Rose was a partner with Robert A.
Bourne in the accounting firm of Bourne & Rose, P.A., Certified Public
Accountants. Ms. Rose holds a B.A. in Sociology from the University of Central
Florida and is a registered financial and operations principal of CNL Securities
Corp. She was licensed as a certified public accountant in 1979.
David W. Dunbar. Independent Director. Mr. Dunbar serves as chairman
and chief executive officer of Peoples Bank, which he organized and founded in
1996. Mr. Dunbar is also a member of the boards of directors of Morton Plant
Mease Health Care, Inc., an 841-bed, not-for-profit hospital, Morton Plant Mease
Hospital Foundation and North Bay Hospital, a 122-bed facility. In addition, Mr.
Dunbar serves as a member of the Florida Elections Commission, the body
responsible for investigating and holding hearings regarding alleged violations
of Florida's campaign finance laws. During 1994 and 1995, Mr. Dunbar was a
member of the board of directors and an executive officer of Peoples State Bank.
Mr. Dunbar was the chief executive officer of Republic Bank from 1991 through
1993. From 1988 through 1991, Mr. Dunbar developed commercial and medical office
buildings and, through a financial consulting company he founded, provided
specialized lending services for real estate development clients, specialized
construction litigation support for national insurance companies and strategic
planning services for institutional clients. In
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1990, Mr. Dunbar was the chief executive officer, developer and owner of a
60,000 square foot medical office building located on the campus of Memorial
Hospital in Tampa, Florida. In addition, in 1990, Mr. Dunbar served as the
Governor's appointee to the State of Florida Taxation and Budget Reform
Commission, a 25 member, blue ribbon commission established to review, study and
make appropriate recommendations for changes to state tax laws. Mr. Dunbar
received a degree in finance from Florida State University. He is also a
graduate of the American Bankers Association National Commercial Lending School
at the University of Oklahoma and the School of Banking of the South at
Louisiana State University.
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Timothy S. Smick. Independent Director. From 1996 through February
1998, Mr. Smick served as chief operating officer, executive vice president and
a member of the board of directors of Sunrise Assisted Living, Inc., one of the
nation's leading providers of assisted living care for seniors with 68
communities located in 13 states. In addition, Mr. Smick served as president of
Sunrise Management Inc., a wholly owned subsidiary of Sunrise Assisted Living,
Inc. During 1995, Mr. Smick served as a senior housing consultant to LaSalle
Advisory, Ltd., a pension fund advisory company. From 1985 through 1994, Mr.
Smick was chairman and chief executive officer of PersonaCare, Inc., a company
he co-founded that provided sub-acute, skilled nursing and assisted living care
with 12 facilities in six states. Mr. Smick's health care industry experience
also includes serving as the regional operations director for Manor Healthcare,
Inc., a division of ManorCare, Inc., and as operations director for Allied
Health and Management, Inc. Prior to co-founding PersonaCare, Inc., Mr. Smick
was a partner in Duncan & Smick, a commercial real estate development firm. Mr.
Smick received a B.A. in English from Wheaton College and pursued graduate
studies at Loyola College.
Edward A. Moses. Independent Director. Mr. Moses has served as dean of
the Roy E. Crummer Graduate School of Business at Rollins College since 1994,
and as a professor and NationsBank professor of finance since 1989. As dean, Mr.
Moses is presently establishing a comprehensive program of executive education
for health care management at the Roy E. Crummer Graduate School of Business.
From 1985 to 1989 he served as dean and professor of finance at the University
of North Florida. He has also served in academic and administrative positions at
the University of Tulsa, Georgia State University and the University of Central
Florida. Mr. Moses has written six textbooks in the fields of investments and
corporate finance as well as numerous articles in leading business journals . He
has held offices in a number of professional organizations, including president
of the Southern Finance and Eastern Finance Associations , served on the Board
of the Southern Business Administration Association, and served as a consultant
for major banks as well as a number of Fortune 500 companies. He currently
serves as a faculty member in the Graduate School of Banking at Louisiana State
University. Mr. Moses received a B.S. in Accounting from the Wharton School at
the University of Pennsylvania in 1965 and a Masters of Business Administration
(1967) and Ph.D. in finance from the University of Georgia in 1971.
INDEPENDENT DIRECTORS
Under the Articles of Incorporation, a majority of the Board of
Directors must consist of Independent Directors, except for a period of 90 days
after the death, removal or resignation of an Independent Director. The
Independent Directors shall nominate replacements for vacancies in the
Independent Director positions. An Independent Director may not, directly or
indirectly (including through a member of his immediately family), own any
interest in, be employed by, have any present business or professional
relationship with, serve as an officer or director of the Advisor or its
Affiliates, or serve as a director of more than three REITs organized by the
Advisor or its Affiliates. Except to carry out the responsibilities of a
Director, an Independent Director may not perform material services for the
Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has a standing Audit Committee, the members of which are
selected by the full Board of Directors each year. The Audit Committee makes
recommendations to the Board of Directors in accordance with those of the
independent accountants of the Company. The Board of Directors shall review with
such accounting firm the scope of the audit and the results of the audit upon
its completion.
At such time, if any, as the Shares are listed on a national securities
exchange or over-the-counter market, the Company will form a Compensation
Committee, the members of which will be selected by the full Board of Directors
each year.
At least a majority of the members of each committee of the Company's Board
of Directors must be Independent Directors.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Each Director is entitled to receive $6,000 annually for serving on the
Board of Directors, as well as fees of $750 per meeting attended ($375 for each
telephonic meeting in which the Director participates), including committee
meetings. No executive officer or Director of the Company has received a bonus
from the Company. The Company will not pay any compensation to the officers and
Directors of the Company who also serve as officers and directors of the
Advisor.
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MANAGEMENT COMPENSATION
For a description of the types, recipients, methods of computation, and
estimated amounts of all compensation, fees, and distributions to be paid
directly or indirectly by the Company to the Advisor, Managing Dealer, and their
Affiliates, see "Management Compensation."
THE ADVISOR AND THE ADVISORY AGREEMENT
THE ADVISOR
CNL Health Care Advisors, Inc. is a Florida corporation organized in July
1997 to provide management, advisory and administrative services. The Company
entered into the Advisory Agreement with the Advisor effective September 15,
1998. CNL Health Care Advisors, Inc., as Advisor, has a fiduciary responsibility
to the Company and the stockholders.
The directors and officers of the Advisor are as follows:
James M. Seneff, Jr. Chairman of the Board, Chief Executive
Officer, and Director
Robert A. Bourne President and Director
Daniel L. Simmons Executive Vice President
Curtis B. McWilliams Executive Vice President
Jeanne A. Wall Executive Vice President
Lynn E. Rose Secretary, Treasurer and Director
The backgrounds of these individuals are described above under "Management
- - Directors and Executive Officers."
The Advisor employs personnel, in addition to the directors and executive
officers listed above, who have extensive experience in selecting and managing
properties, although such personnel have limited experience in selecting and
managing Health Care Facilities.
The Advisor currently owns 20,000 shares of Common Stock. The Advisor may
not sell these shares of Common Stock while the Advisory Agreement is in effect,
although the Advisor may transfer such shares to Affiliates. Neither the
Advisor, a Director, or any Affiliate may vote or consent on matters submitted
to the stockholders regarding removal of the Advisor, Directors or any of their
Affiliates, or any transaction between the Company and any of them. In
determining the requisite percentage in interest of shares of Common Stock
necessary to approve a matter on which the Advisor, Directors, and any Affiliate
may not vote or consent, any shares owned by any of them will not be included.
THE ADVISORY AGREEMENT
Under the terms of the Advisory Agreement, the Advisor has responsibility
for the day-to-day operations of the Company, administers the Company's
bookkeeping and accounting functions, serves as the Company's consultant in
connection with policy decisions to be made by the Board of Directors, manages
the Company's Properties and Mortgage Loans, administers the Company's Secured
Equipment Lease program and renders other services as the Board of Directors
deems appropriate. The Advisor is subject to the supervision of the Company's
Board of Directors and has only such functions as are delegated to it.
The Company will reimburse the Advisor for all of the costs it incurs in
connection with the services it provides to the Company, including, but not
limited to: (i) Organizational and Offering Expenses, which are defined to
include expenses attributable to preparing the documents relating to this
offering, the formation and organization of the Company, qualification of the
Shares for sale in the states, escrow arrangements, filing fees and expenses
attributable to selling the Shares, (ii) Selling Commissions, advertising
expenses, expense reimbursements, and legal and accounting fees, (iii) the
actual cost of goods and materials used by the Company and obtained from
entities not affiliated with the Advisor, including brokerage fees paid in
connection with the purchase and sale of securities, (iv) administrative
services (including personnel costs; provided, however, that no reimbursement
shall be made for costs of personnel to the extent that such personnel perform
services in transactions for which the Advisor receives a separate fee, at the
lesser of actual cost or 90% of the competitive rate charged by unaffiliated
persons providing similar goods and services in the same geographic location),
(v) Acquisition Expenses, which are defined to include expenses related to the
selection and acquisition of Properties, for goods and services provided by the
Advisor at the lesser of actual cost or 90% of the competitive rate charged by
unaffiliated persons providing similar goods and services in the same geographic
location), and (vi) expenses related to negotiating and servicing the Mortgage
Loans and Secured Equipment Leases.
The Company shall not reimburse the Advisor at the end of any fiscal
quarter Operating Expenses that, in the four consecutive fiscal quarters then
ended (the "Expense Year") exceed the greater of 2% of Average Invested Assets
or 25% of Net Income (the "2%/25% Guidelines") for such year. Within 60 days
after the end of any fiscal quarter of the Company for which total Operating
Expenses for the Expense Year exceed the 2%/25% Guidelines, the Advisor shall
reimburse the Company the amount by which the total Operating Expenses paid or
incurred by the Company exceed the 2%/25% Guidelines.
The Company will not reimburse the Advisor or its Affiliates for services
for which the Advisor or its Affiliates are entitled to compensation in the form
of a separate fee.
Pursuant to the Advisory Agreement, the Advisor is entitled to receive fees
and reimbursements, as listed in "Management Compensation." The incentive fee
payable to the Advisor if Listing occurs (the "Subordinated Incentive Fee") may
be paid, at the option of the Company, in cash, in Shares, by delivery of a
promissory note payable to the Advisor, or by any combination thereof. The
Subordinated Incentive Fee is an amount equal to 10% of the amount by which (i)
the market value of the Company, measured by taking the average closing price or
average of bid and asked prices, as the case may be, over a period of 30 days
during which the Shares are traded, with such period beginning 180 days after
Listing (the "Market Value"), plus the total Distributions paid to Stockholders
from the Company's inception until the date of Listing, exceeds (ii) the sum of
(A) 100% of Invested Capital and (B) the total Distributions required to be paid
to the Stockholders in order to pay the Stockholders' 8% Return from inception
through the date the Market Value is determined. The Subordinated Incentive Fee
will be reduced by the amount of any prior payment to the Advisor of a deferred
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subordinated share of Net Sales Proceeds from Sales of assets of the Company. In
the event the Subordinated Incentive Fee is paid to the Advisor following
Listing, no Performance Fee (defined as the fee payable under certain
circumstances if certain performance standards are met, such circumstances and
standards being described below) will be paid to the Advisor under the Advisory
Agreement nor will any additional share of Net Sales Proceeds be paid to the
Advisor.
The total of all Acquisition Fees and any Acquisition Expenses payable to
the Advisor and its Affiliates shall be reasonable and shall not exceed an
amount equal to 6% of the Real Estate Asset Value of a Property, or in the case
of a Mortgage Loan, 6% of the funds advanced, unless a majority of the Board of
Directors, including a majority of the Independent Directors not otherwise
interested in the transaction, approves fees in excess of this limit subject to
a determination that the transaction is commercially competitive, fair and
reasonable to the Company. The Acquisition Fees payable in connection with the
selection or acquisition of any Property shall be reduced to the extent that,
and if necessary to limit, the total compensation paid to all persons involved
in the acquisition of such Property to the amount customarily charged in
arm's-length transactions by other persons or entities rendering similar
services as an ongoing public activity in the same geographical location and for
comparable types of Properties, and to the extent that other acquisition fees,
finder's fees, real estate commissions, or other similar fees or commissions are
paid by any person in connection with the transaction.
If the Advisor or a CNL Affiliate performs services that are outside of the
scope of the Advisory Agreement, compensation is at such rates and in such
amounts as are agreed to by the Advisor and the Independent Directors of the
Company.
Further, if Listing occurs, the Company automatically will become a
perpetual life entity. At such time, the Company and the Advisor will negotiate
in good faith a fee structure appropriate for an entity with a perpetual life,
subject to approval by a majority of the Independent Directors. In negotiating a
new fee structure, the Independent Directors shall consider all of the factors
they deem relevant. These are expected to include, but will not necessarily be
limited to: (i) the amount of the advisory fee in relation to the asset value,
composition, and profitability of the Company's portfolio; (ii) the success of
the Advisor in generating opportunities that meet the investment objectives of
the Company; (iii) the rates charged to other REITs and to investors other than
REITs by advisors that perform the same or similar services; (iv) additional
revenues realized by the Advisor and its Affiliates through their relationship
with the Company, including loan administration, underwriting or broker
commissions, servicing, engineering, inspection and other fees, whether paid by
the Company or by others with whom the Company does business; (v) the quality
and extent of service and advice furnished by the Advisor; (vi) the performance
of the investment portfolio of the Company, including income, conservation or
appreciation of capital, and number and frequency of problem investments; and
(vii) the quality of the Property, Mortgage Loan and Secured Equipment Lease
portfolio of the Company in relationship to the investments generated by the
Advisor for its own account. The Board of Directors, including a majority of the
Independent Directors, may not approve a new fee structure that, in its
judgment, is more favorable to the Advisor than the current fee structure.
The Advisory Agreement, which was entered into by the Company with the
unanimous approval of the Board of Directors, including the Independent
Directors, expires one year after the date of execution, on September 15, 1999,
subject to successive one-year renewals upon mutual consent of the parties. In
the event that a new Advisor is retained, the previous Advisor will cooperate
with the Company and the Directors in effecting an orderly transition of the
advisory functions. The Board of Directors (including a majority of the
Independent Directors) shall approve a successor Advisor only upon a
determination that the Advisor possesses sufficient qualifications to perform
the advisory functions for the Company and that the compensation to be received
by the new Advisor pursuant to the new Advisory Agreement is justified.
The Advisory Agreement may be terminated without cause or penalty by either
party, or by the mutual consent of the parties (by a majority of the Independent
Directors of the Company or a majority of the directors of the Advisor, as the
case may be), upon 60 days' prior written notice. At that time, the Advisor
shall be entitled to receive the Performance Fee if performance standards
satisfactory to a majority of the Board of Directors, including a majority of
the Independent Directors, when compared to (a) the performance of the Advisor
in comparison with its performance for other entities, and (b) the performance
of other advisors for similar entities, have been met. If Listing has not
occurred, the Performance Fee, if any, shall equal 10% of the amount, if any, by
which (i) the appraised value of the assets of the Company on the date of
termination of the Advisory Agreement (the "Termination Date"), less the amount
of all indebtedness secured by the assets of the Company, plus the total
Distributions made to stockholders from the Company's inception through the
Termination Date, exceeds (ii) Invested Capital plus an amount equal to the
Stockholders' 8% Return from inception through the Termination Date. The Advisor
shall be entitled to receive all accrued but unpaid compensation and expense
reimbursements in cash within 30 days of the Termination Date. All other amounts
payable to the Advisor in the event of a termination shall be evidenced by a
promissory note and shall be payable from time to time. The Performance Fee
shall be paid in 12 equal quarterly installments without interest on the unpaid
balance, provided, however, that no payment will be made in any quarter in which
such payment would jeopardize the Company's REIT status, in which case any such
payment or payments will be delayed until the next quarter in which payment
would not jeopardize REIT status. Notwithstanding the preceding sentence, any
amounts which may be deemed payable at the date the obligation to pay the
Performance Fee is incurred which relate to the appreciation of the Company's
assets shall be an amount which provides compensation to the terminated Advisor
only for that portion of the holding period for the respective assets during
which such terminated Advisor provided services to the Company.
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If Listing occurs, the Performance Fee, if any, payable thereafter will be as
negotiated between the Company and the Advisor. The Advisor shall not be
entitled to payment of the Performance Fee in the event the Advisory Agreement
is terminated because of failure of the Company and the Advisor to establish a
fee structure appropriate for a perpetual-life entity at such time, if any, as
the Shares become listed on a national securities exchange or over-the-counter
market. The Performance Fee, to the extent payable at the time of Listing, will
not be paid in the event that the Subordinated Incentive Fee is paid.
The Advisor has the right to assign the Advisory Agreement to an Affiliate
subject to approval by the Independent Directors of the Company. The Company has
the right to assign the Advisory Agreement to any successor to all of its
assets, rights, and obligations.
The Advisor will not be liable to the Company or its stockholders or
others, except by reason of acts constituting bad faith, fraud, misconduct, or
negligence, and will not be responsible for any action of the Board of Directors
in following or declining to follow any advice or recommendation given by it.
The Company has agreed to indemnify the Advisor with respect to acts or
omissions of the Advisor undertaken in good faith, in accordance with the
foregoing standards and pursuant to the authority set forth in the Advisory
Agreement. Any indemnification made to the Advisor may be made only out of the
net assets of the Company and not from stockholders.
PRIOR PERFORMANCE INFORMATION
The information presented in this section represents the historical
experience of certain real estate programs organized by certain officers and
directors of the Advisor. PRIOR PUBLIC PROGRAMS HAVE INVESTED ONLY IN RESTAURANT
PROPERTIES AND HAVE NOT INVESTED IN HEALTH CARE FACILITIES. INVESTORS IN THE
COMPANY SHOULD NOT ASSUME THAT THEY WILL EXPERIENCE RETURNS, IF ANY, COMPARABLE
TO THOSE EXPERIENCED BY INVESTORS IN SUCH PRIOR PUBLIC REAL ESTATE PROGRAMS.
INVESTORS WHO PURCHASE SHARES IN THE COMPANY WILL NOT THEREBY ACQUIRE ANY
OWNERSHIP INTEREST IN ANY PARTNERSHIPS OR CORPORATIONS TO WHICH THE FOLLOWING
INFORMATION RELATES.
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Two Directors of the Company, Robert A. Bourne and James M. Seneff, Jr.,
individually or with others have served as general partners of 88 and 89 real
estate limited partnerships, respectively, including the 18 publicly offered CNL
Income Fund partnerships, and as directors and officers of CNL American
Properties Fund, Inc. and CNL Hospitality Properties, Inc. listed in the table
below. None of these limited partnerships or unlisted REITs has been audited by
the IRS. Of course, there is no guarantee that the Company will not be audited.
Based on an analysis of the operating results of the prior programs, Messrs.
Bourne and Seneff believe that each of such programs has met or is meeting its
principal investment objectives in a timely manner.
CNL Realty Corporation, which was organized as a Florida corporation in
November 1985 and whose sole stockholders are Messrs. Bourne and Seneff,
currently serves as the corporate general partner with Messrs. Bourne and Seneff
as individual general partners of 18 CNL Income Fund limited partnerships, all
of which were organized to invest in fast-food, family-style and, in the case of
two of the partnerships, casual dining restaurant properties and have investment
objectives similar to those of the Company. Messrs. Bourne and Seneff also
currently serve as directors and officers of CNL American Properties Fund, Inc.
and CNL Hospitality Properties, Inc., unlisted public REITs, which also were
organized to invest in fast-food, family-style and casual dining restaurant
properties, mortgage loans and secured equipment leases (and also hotel
properties in the case of CNL Hospitality Properties, and have investment
objectives similar to those of the Company. As of June 30, 1998, the 18
partnerships and the two unlisted public REITs had raised a total of
$1,153,278,381 from a total of 73,754 investors, and had invested in 1,033
fast-food, family-style and casual dining restaurant properties. None of the 18
public partnerships or the two unlisted public REITs has invested in Health Care
Facilities. Certain additional information relating to the offerings and
investment history of the 18 public partnerships and the two unlisted public
REITs is set forth below.
<TABLE>
<CAPTION>
Number of Date 90% of Net
Limited Proceeds Fully
Maximum Partnership Invested or
Name of Offering Units or Committed to
Entity Amount (1) Date Closed Shares Sold Investment (2)
- ------ ---------- ----------- ----------- --------------
<S> <C>
CNL Income $15,000,000 December 31, 1986 30,000 December 1986
Fund, Ltd. (30,000 units)
CNL $25,000,000 August 21, 1987 50,000 November 1987
Income (50,000 units)
Fund II, Ltd.
CNL $25,000,000 April 29, 1988 50,000 June 1988
Income (50,000 units)
Fund III, Ltd.
CNL Income $30,000,000 December 6, 1988 60,000 February 1989
Fund IV, Ltd. (60,000 units)
CNL $25,000,000 June 7, 1989 50,000 December 1989
Income (50,000 units)
Fund V, Ltd.
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<PAGE>
CNL Income
Fund VI, Ltd. $35,000,000 January 19, 1990 70,000 May 1990
(70,000 units)
CNL Income $30,000,000 August 1, 1990 30,000,000 January 1991
Fund VII, Ltd. (30,000,000 units)
CNL Income $35,000,000 March 7, 1991 35,000,000 September 1991
Fund VIII, Ltd. (35,000,000 units)
CNL Income $35,000,000 September 6, 1991 3,500,000 November 1991
Fund IX, Ltd. (3,500,000 units)
CNL $40,000,000 April 22, 1992 4,000,000 June 1992
Income (4,000,000 units)
Fund X, Ltd.
CNL Income $40,000,000 October 8, 1992 4,000,000 September 1992
Fund XI, Ltd. (4,000,000 units)
CNL Income $45,000,000 April 15, 1993 4,500,000 July 1993
Fund XII, Ltd. (4,500,000 units)
CNL Income $40,000,000 September 13, 1993 4,000,000 August 1993
Fund XIII, Ltd. (4,000,000 units)
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CNL Income $45,000,000 March 23, 1994 4,500,000 May 1994
Fund XIV, Ltd. (4,500,000 units)
CNL Income $40,000,000 September 22, 1994 4,000,000 December 1994
Fund XV, Ltd. (4,000,000 units)
CNL $45,000,000 July 18, 1995 4,500,000 August 1995
Income (4,500,000 units)
Fund XVI, Ltd.
CNL Income $30,000,000 October 10, 1996 3,000,000 December 1996
Fund XVII, Ltd. (3,000,000 units)
CNL $35,000,000 February 6, 1998 3,500,000 December 1997
Income (3,500,000 units)
Fund XVIII, Ltd
CNL $745,000,000 (3) (3) (3)
American (74,500,000 shares)
Properties Fund, Inc.
CNL Hospitality $165,000,000 (4) (4) (4)
Properties, Inc. (16,500,000 shares)
</TABLE>
- ---------------------
(1) The amount stated includes the exercise by the general partners of each
partnership of their option to increase by $5,000,000 the maximum size
of the offering of CNL Income Fund, Ltd., CNL Income Fund II, Ltd., CNL
Income Fund III, Ltd., CNL Income Fund IV, Ltd., CNL Income Fund VI,
Ltd., CNL Income Fund VIII, Ltd., CNL Income Fund X, Ltd., CNL Income
Fund XII, Ltd., CNL Income Fund XIV, Ltd., CNL Income Fund XVI, Ltd.
and CNL Income Fund XVIII, Ltd.
(2) For a description of the property acquisitions by these programs, see
the table set forth on the following page.
(3) In April 1995, CNL American Properties Fund, Inc., commenced an
offering of a maximum of 15,000,000 shares of common stock
($150,000,000), excluding 1,500,000 shares ($15,000,000) available to
investors participating in the reinvestment plan. On February 6, 1997,
the initial offering closed upon receipt of subscriptions totalling
$150,591,765 (15,059,177 shares), including $591,765 (59,177 shares)
through the reinvestment plan. Following completion of the initial
offering on February 6, 1997, CNL American Properties Fund, Inc.
commenced a subsequent offering (the "1997 Offering ") of up to
27,500,000 shares ($275,000,000) of common stock. On March 2, 1998, the
1997 Offering closed upon receipt of subscriptions totalling
$251,872,648 (25,187,265 shares), including $1,8872,648 (187,265
shares) through the reinvestment plan. Following completion of the 1997
Offering on March 2, 1998, CNL American Properties Fund, Inc. commenced
a subsequent offering (the "1998 Offering ") of up to 34,500,000 shares
($345,000,000) of common stock. As of June 30, 1998, CNL American
Properties Fund, Inc. had received subscriptions totalling $111,880,063
(11,188,006 shares), including $1,828,291 (182,829 shares) through the
reinvestment plan, from the 1998 Offering. As of such date, CNL
American Properties Fund, Inc. had purchased 320 properties.
(4) Effective July 9, 1997, CNL Hospitality Properties, Inc. (formerly CNL
American Realty Fund, Inc.) commenced an offering of up to 16,500,000
shares of ($165,000,000) of common stock. As of June 30, 1998, CNL
Hospitality Properties, Inc. had received subscriptions totalling
$23,578,169 (2,357,817 shares), including $9,704 (970 shares) through
the reinvestment plan. As of such date, CNL Hospitality Properties,
Inc. had not purchased any properties.
As of June 30, 1998, Mr. Seneff and Mr. Bourne, directly or through
affiliated entities, also had served as joint general partners of 69 nonpublic
real estate limited partnerships. The offerings of 68 of these 69 nonpublic
limited partnerships had terminated as of June 30, 1998. These 68 partnerships
raised a total of $170,327,353 from approximately 4,241 investors, and
purchased, directly or through participation in a joint venture or limited
partnership, interests in a total of 206 projects as of June 30, 1998. These 206
projects consist of 19 apartment projects (comprising 10% of the total amount
raised by all 68 partnerships), 13 office buildings (comprising 5% of the total
amount raised by all 68 partnerships), 159 fast-food, family-style, or casual
dining restaurant property and business investments (comprising 68% of the total
amount raised by all 68 partnerships), one condominium development (comprising
.5% of the total amount raised by all 68 partnerships), four hotels/motels
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(comprising 5% of the total amount raised by all 68 partnerships), eight
commercial/retail properties (comprising 11% of the total amount raised by all
68 partnerships), and two tracts of undeveloped land (comprising .5% of the
total amount raised
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by all 68 partnerships). The offering of the one remaining nonpublic limited
partnership (offering totalling $15,000,000) had raised $13,637,500 from 263
investors (approximately 90.91% of the total offering amount) as of June 30,
1998.
Mr. Bourne also has served, without Mr. Seneff, as a general partner of
one additional nonpublic real estate limited partnership program which raised a
total of $600,000 from 13 investors and purchased, through participation in a
limited partnership, one apartment building located in Georgia with a purchase
price of $1,712,000.
Mr. Seneff also has served, without Mr. Bourne, as a general partner of
two additional nonpublic real estate limited partnerships which raised a total
of $240,000 from 12 investors and purchased two office buildings with an
aggregate purchase price of $928,390. Both of the office buildings are located
in Florida.
Of the 89 real estate limited partnerships whose offerings had closed
as of June 30, 1998 (including 18 CNL Income Fund limited partnerships) in which
Mr. Seneff and/or Mr. Bourne serve or have served as general partners in the
past, 38 invested in restaurant properties leased on a "triple-net" basis,
including seven which also invested in franchised restaurant businesses
(accounting for approximately 93% of the total amount raised by all 89 real
estate limited partnerships).
The following table sets forth summary information, as of June 30,
1998, regarding property acquisitions by the 18 limited partnerships and the two
unlisted REITs that, either individually or through a joint venture or
partnership arrangement, have investment objectives similar to those of the
Company.
<TABLE>
<CAPTION>
Name of Type of Method of Type of
Entity Property Location Financing Program
- ------ -------- -------- --------- -------
<S> <C>
CNL Income 22 fast-food or AL, AZ, CA, FL, All cash Public
Fund, Ltd. family-style GA, LA, MD, OK,
restaurants PA, TX, VA, WA
CNL Income 49 fast-food or AL, AZ, CO, FL, All cash Public
Fund II, Ltd. family-style GA, IL, IN, KS, LA,
restaurants MI, MN, MO, NC,
NM, OH, TN, TX,
WA, WY
CNL Income 37 fast-food or AZ, CA, CO, FL, All cash Public
Fund III, Ltd. family-style GA, IA, IL, IN, KS,
restaurants KY, MD, MI, MN,
MO, NC, NE, OK,
TX
CNL Income 45 fast-food or AL, DC, FL, GA, All cash Public
Fund IV, Ltd. family-style IL, IN, KS, MA,
restaurants MD, MI, MS, NC,
OH, PA, TN, TX,
VA
CNL Income 35 fast-food or AZ, FL, GA, IL, IN, All cash Public
Fund V, Ltd. family-style MI, NH, NY, OH,
restaurants SC, TN, TX, UT, WA
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<PAGE>
Name of Type of Method of Type of
Entity Property Location Financing Program
- ------ -------- -------- --------- -------
CNL Income 55 fast-food or AR, AZ, FL, GA, All cash Public
Fund VI, Ltd. family-style IL, IN, KS, MA,
restaurants MI, MN, NC, NE,
NM, NY, OH, OK,
PA, TN, TX, VA,
WA, WY
CNL Income 49 fast-food or AZ, CO, FL, GA, All cash Public
Fund VII, Ltd. family-style IN, LA, MI, MN,
restaurants NC, OH, SC, TN,
TX, UT, WA
CNL Income 42 fast-food or AZ, FL, IN, LA, All cash Public
Fund VIII, Ltd. family-style MI, MN, NC, NY,
restaurants OH, TN, TX, VA
CNL Income 43 fast-food or AL, CO, FL, GA, All cash Public
Fund IX, Ltd. family-style IL, IN, LA, MI,
restaurants MN, MS, NC, NH,
NY, OH, SC, TN,
TX
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<PAGE>
Name of Type of Method of Type of
Entity Property Location Financing Program
- ------ -------- -------- --------- -------
CNL Income 51 fast-food or AL, CA, CO, FL, All cash Public
Fund X, Ltd. family-style ID, IL, LA, MI,
restaurants MO, MT, NC, NH,
NM, NY, OH, PA,
SC, TN, TX
CNL Income 40 fast-food or AL, AZ, CA, CO, All cash Public
Fund XI, Ltd. family-style CT, FL, KS, LA,
restaurants MA, MI, MS, NC,
NH, NM, OH, OK,
PA, SC, TX, VA,
WA
CNL Income 49 fast-food or AL, AZ, CA, FL, All cash Public
Fund XII, Ltd. family-style GA, LA, MO, MS,
restaurants NC, MN, OH, SC,
TN, TX, WA
CNL Income 50 fast-food or AL, AR, AZ, CA, All cash Public
Fund XIII, Ltd. family-style CO, FL, GA, IN,
restaurants KS, LA, MD, NC,
OH, PA, SC, TN,
TX, VA
CNL Income 64 fast-food or AL, AZ, CO, FL, All cash Public
Fund XIV, Ltd. family-style GA, KS, LA, MN,
restaurants MO, MS, NC, NJ,
NV, OH, SC, TN,
TX, VA
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<PAGE>
Name of Type of Method of Type of
Entity Property Location Financing Program
- ------ -------- -------- --------- -------
CNL Income 55 fast-food or AL, CA, FL, GA, All cash Public
Fund XV, Ltd. family-style KS, KY, MN, MO,
restaurants MS, NC, NJ, NM,
OH, OK, PA, SC,
TN, TX, VA
CNL Income 47 fast-food or AZ, CA, CO, DC, All cash Public
Fund XVI, Ltd. family-style FL, GA, ID, IN, KS,
restaurants MN, MO, NC, NM,
NV, OH, TN, TX,
UT, WI
CNL Income 29 fast-food or CA, FL, GA, IL, IN, All cash Public
Fund XVII, Ltd. family-style MI, NC, NV, OH,
restaurants SC, TN, TX
CNL Income 23 fast-food or AZ, CA, FL, GA, All cash Public
Fund XVIII, Ltd. family-style IL, KY, MD, MN,
restaurants NC, NV, NY, OH,
TN, TX
CNL American 320 fast-food, AL, AZ, CA, CO, All cash Public
Properties Fund, family-style, or CT, DE, FL, GA,
Inc. casual dining IA, ID, IL, IN, KS,
restaurants KY, MD, MI, MN,
MO, NC, NE, NJ,
NM, NV, NY, OH,
OK, OR, PA, RI,
SC, TN, TX, UT,
VA, WA, WI, WV
CNL Hospitality (1) (1) (1) Public REIT
Properties, Inc.
</TABLE>
- ------------------
(1) As of June 30, 1998, CNL Hospitality Properties, Inc. had not acquired
any properties.
A more detailed description of the acquisitions by real estate limited
partnerships and the two unlisted REITs sponsored by Messrs. Bourne and Seneff
is set forth in prior performance Table VI, included in Part II of the
registration statement filed with the Securities and Exchange Commission for
this offering. A copy of Table VI is available to stockholders from the Company
upon request, free of charge. In addition, upon request to the Company, the
Company will provide, without charge, a copy of the most recent Annual Report on
Form 10-K filed with the Securities and Exchange Commission for CNL Income Fund,
Ltd., CNL Income Fund II, Ltd., CNL Income Fund III, Ltd., CNL Income Fund IV,
Ltd., CNL Income Fund V, Ltd., CNL Income Fund VI, Ltd., CNL Income Fund VII,
Ltd., CNL Income Fund VIII, Ltd., CNL Income Fund IX, Ltd., CNL Income Fund X,
Ltd., CNL Income Fund XI, Ltd., CNL Income Fund XII, Ltd., CNL Income Fund XIII,
Ltd., CNL Income Fund XIV, Ltd., CNL Income Fund XV, Ltd., CNL Income Fund XVI,
Ltd., CNL Income Fund XVII, Ltd., CNL Income Fund XVIII, Ltd., CNL American
Properties Fund, Inc. and CNL Hospitality Properties, Inc. as well as a copy,
for a reasonable fee, of the exhibits filed with such reports.
In order to provide potential purchasers of Shares in the
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Company with information to enable them to evaluate the prior experience of the
Messrs. Seneff and Bourne as general partners of real estate limited
partnerships and as directors and officers of the two unlisted REITs, including
those set forth in the foregoing table, certain financial and other information
concerning those limited partnerships and the two unlisted REITs with investment
objectives similar to one or more of the Company's investment objectives is
provided in the Prior Performance Tables included as Appendix C. Information
about the previous public partnerships, the offerings of which became fully
subscribed between January 1993 and December 1997, is included therein.
Potential stockholders are encouraged to examine the Prior Performance Tables
attached as Appendix C (in Table III), which include information as to the
operating results of these prior partnerships, for more detailed information
concerning the experience of Messrs. Seneff and Bourne.
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
The Company's primary investment objectives are to preserve, protect,
and enhance the Company's assets while (i) making Distributions commencing in
the initial year of Company operations; (ii) obtaining fixed income through the
receipt of base rent, and increasing the Company's income (and Distributions)
and providing protection against inflation through automatic fixed increases in
base rent or increases in base rent based on increases in consumer price indices
over the terms of the leases, and obtaining fixed income through the receipt of
payments on Mortgage Loans and Secured Equipment Leases; (iii) qualifying and
remaining qualified as a REIT for federal income tax purposes; and (iv)
providing stockholders of the Company with liquidity of their investment, either
in whole or in part, within five to ten years after commencement of the
offering, through (a) Listing, or, (b) if Listing does not occur within ten
years after commencement of the offering (December 31, 2008), the commencement
of orderly Sales of the Company's assets, outside the ordinary course of
business and consistent with its objective of qualifying as a REIT, and
distribution of the proceeds thereof. The sheltering from tax of income from
other sources is not an objective of the Company. If the Company is successful
in achieving its investment and operating objectives, the stockholders (other
than tax-exempt entities) are likely to recognize taxable income in each year.
While there is no order of priority intended in the listing of the Company's
objectives, stockholders should realize that the ability of the Company to meet
these objectives may be severely handicapped by any lack of diversification of
the Company's investments and the terms of the leases.
The Company intends to meet its objectives through its investment
policies of (i) purchasing carefully selected, well-located Properties and
leasing them on a "triple-net" basis (which means that the tenant will be
responsible for paying the cost of all repairs, maintenance, property taxes, and
insurance) to operators of Health Care Facilities under leases generally
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requiring the tenant to pay base annual rental with automatic fixed increases in
base rent or increases in base rent based on increases in consumer price indices
over the term of the lease, and (ii) offering Mortgage Loans and Secured
Equipment Leases to operators of Health Care Facilities.
In accordance with its investment policies, the Company intends to
invest in Properties whose tenants are operators of Health Care Facilities to be
selected by the Company, based upon recommendations by the Advisor. Although
there is no limit on the number of properties of a particular operator of Health
Care Facilities which the Company may acquire, the Company currently does not
expect to acquire a Property if the Board of Directors, including a majority of
the Independent Directors, determines that the acquisition would adversely
affect the Company in terms of geographic, property type or chain
diversification. Potential Mortgage Loan borrowers and Secured Equipment Lease
lessees or borrowers will similarly be operators of Health Care Facilities
selected by the Company, following the Advisor's recommendations. The Company
has undertaken, consistent with its objective of qualifying as a REIT for
federal income tax purposes, to ensure that the value of all Secured Equipment
Leases, in the aggregate, will not exceed 25% of the Company's total assets,
while Secured Equipment Leases to any single lessee or borrower, in the
aggregate, will not exceed 5% of the Company's total assets. It is intended that
investments will be made in Properties, Mortgage Loans and Secured Equipment
Leases in various locations in an attempt to achieve diversification and thereby
minimize the effect of changes in local economic conditions and certain other
risks. The extent of such diversification, however, depends in part upon the
amount raised in the offering and the purchase price of each Property. See
"Estimated Use of Proceeds" and "Risk Factors - Investment Risks - Possible Lack
of Diversification." For a more complete description of the manner in which the
structure of the Company's business, including its investment policies, will
facilitate the Company's ability to meet its investment objectives, See
"Business."
The investment objectives of the Company may not be changed without the
approval of stockholders owning a majority of the shares of outstanding Common
Stock. The Bylaws of the Company require the Independent Directors to review the
Company's investment policies at least annually to determine that the policies
are in the best interests of the stockholders. The determination shall be set
forth in the minutes of the Board of Directors along with the basis for such
determination. The Directors (including a majority of the Independent Directors)
have the right, without a stockholder vote, to alter the Company's investment
policies but only to the extent consistent with the Company's investment
objectives and investment limitations. See "Certain Investment Limitations,"
below.
CERTAIN INVESTMENT LIMITATIONS
In addition to other investment restrictions imposed by the Directors
from time to time, consistent with the Company's objective of qualifying as a
REIT, the Articles of Incorporation or the Bylaws provide for the following
limitations on the
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Company's investments.
1. Not more than 10% of the Company's total assets shall be invested in
unimproved real property or mortgage loans on unimproved real property. For
purposes of this paragraph, "unimproved real property" does not include any
Property under construction, under contract for development or planned for
development within one year.
2. The Company shall not invest in commodities or commodity future
contracts. This limitation is not intended to apply to interest rate futures,
when used solely for hedging purposes.
3. The Company shall not invest in or make Mortgage Loans unless an
appraisal is obtained concerning the underlying property. Mortgage indebtedness
on any property shall not exceed such property's appraised value. In cases in
which a majority of Independent Directors so determine, and in all cases in
which the Mortgage Loan involves the Advisor, Directors, or Affiliates, such
appraisal must be obtained from an independent expert concerning the underlying
property. Such appraisal shall be maintained in the Company's records for at
least five years, and shall be available for inspection and duplication by any
stockholder. In addition to the appraisal, a mortgagee's or owner's title
insurance policy or commitment as to the priority of the mortgage or condition
of the title must be obtained. The Company may not invest in real estate
contracts of sale otherwise known as land sale contracts.
4. The Company may not make or invest in Mortgage Loans, including
construction loans, on any one Property if the aggregate amount of all mortgage
loans outstanding on the Property, including the loans of the Company, would
exceed an amount equal to 85% of the appraised value of the Property as
determined by appraisal unless substantial justification exists because of the
presence of other underwriting criteria. For purposes of this subsection, the
"aggregate amount of all mortgage loans outstanding on the Property, including
the loans of the Company" shall include all interest (excluding contingent
participation in income and/or appreciation in value of the mortgaged property),
the current payment of which may be deferred pursuant to the terms of such
loans, to the extent that deferred interest on each loan exceeds 5% per annum of
the principal balance of the loan.
5. The Company may not invest in indebtedness ("Junior Debt") secured
by a mortgage on real property which is subordinate to the lien or other
indebtedness ("Senior Debt"), except where the amount of such Junior Debt, plus
the outstanding amount of the Senior Debt, does not exceed 90% of the appraised
value of such property, if after giving effect thereto, the value of all such
investments of the Company (as shown on the books of the Company in accordance
with generally accepted accounting principles after all reasonable reserves but
before provision for depreciation) would not then exceed 25% of the Company's
Net Assets. The value of all investments in Junior Debt of the Company which
does not meet the aforementioned requirements is
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limited to 10% of the Company's tangible assets (which is included within the
25% limitation).
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6. The Company may not engage in any short sale, or borrow, on an
unsecured basis, if such borrowing will result in an asset coverage of less than
300%, except that such borrowing limitation shall not apply to a first mortgage
trust. "Asset coverage", for the purpose of this section, means the ratio which
the value of the total assets of an issuer, less all liabilities and
indebtedness except indebtedness for unsecured borrowings, bears to the
aggregate amount of all unsecured borrowings of such issuer.
7. The Company may not incur any indebtedness which would result in an
aggregate amount of Leverage in excess of 300% of Net Assets.
8. The Company may not make or invest in any mortgage loans that are
subordinate to any mortgage, other indebtedness or equity interest of the
Advisor, the Directors, or Affiliates of the Company.
9. The Company will not invest in equity securities unless a majority
of the Directors (including a majority of Independent Directors) not otherwise
interested in such transaction approve the transaction as being fair,
competitive, and commercially reasonable and determine that the transaction will
not jeopardize the Company's ability to qualify and remain qualified as a REIT.
Investments in entities affiliated with the Advisor, a Director, the Company, or
Affiliates thereof are subject to the restrictions on joint venture investments.
In addition, the Company shall not invest in any security of any entity holding
investments or engaging in activities prohibited by the Company's Articles of
Incorporation.
10. The Company will not issue (i) equity securities redeemable solely
at the option of the holder (except that stockholders may offer their Shares to
the Company as described under "Redemption of Shares,"); (ii) debt securities
unless the historical debt service coverage (in the most recently completed
fiscal year), as adjusted for known charges, is sufficient to service that
higher level of debt properly; (iii) Shares on a deferred payment basis or under
similar arrangements; (iv) non-voting or assessable securities; or (v) options,
warrants, or similar evidences of a right to buy its securities (collectively,
"Options") unless (1) issued to all of its stockholders ratably, (2) as part of
a financing arrangement, or (3) as part of a stock option plan available to
Directors, officers, or employees of the Company or the Advisor. Options may not
be issued to the Advisor, Directors or any Affiliate thereof except on the same
terms as such Options are sold to the general public, provided that the Company
may issue Options to persons other than the Advisor, Directors or any Affiliate
thereof at exercise prices not less than the fair market value of the underlying
securities on the date of grant and for consideration that, in the judgment of
the Independent Directors, has a market value not less than the value of such
Option on the date of grant. Options issuable to the Advisor, Directors or any
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Affiliate thereof shall not exceed 10% of the outstanding Shares on the date of
grant.
11. A majority of the Directors shall authorize the consideration to be
paid for each Property, based on the fair market value of the Property. If a
majority of the Independent Directors determine, or if the Property is acquired
from the Advisor, a Director, or Affiliates thereof, such fair market value
shall be determined by an independent expert selected by the Independent
Directors.
12. The Company will not engage in underwriting or the agency
distribution of securities issued by others or in trading, as compared to
investment activities.
13. The Company will not invest in real estate contracts of sale unless
such contracts of sale are in recordable form and appropriately recorded in the
chain of title.
14. The Company will not invest in any foreign currency or bullion or
engage in short sales.
15. The Company will not issue senior securities except notes to banks
and other lenders and preferred shares.
16. The Company will not make loans to the Advisor or its Affiliates.
17. The Company will not operate so as to be classified as an
"investment company" under the Investment Company Act of 1940, as amended.
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18. The Company will not make any investment that the Company believes
will be inconsistent with its objective of qualifying as a REIT.
The foregoing limitations may not be modified or eliminated without the
approval of a majority of the shares of outstanding Common Stock.
Except as set forth above or elsewhere in this Prospectus, the Company
does not intend to issue senior securities; borrow money; make loans to other
persons; invest in the securities of other issuers for the purpose of exercising
control; underwrite securities of other issuers; engage in the purchase and sale
(or turnover) of investments; offer securities in exchange for property,
repurchase or otherwise reacquire its shares or other securities; or make annual
or other reports to security holders. The Company evaluates investments in
Mortgage Loans on an individual basis and does not have a standard turnover
policy with respect to such investments.
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DISTRIBUTION POLICY
GENERAL
In order to qualify as a REIT for federal income tax purposes, among
other things, the Company must make distributions each taxable year (not
including any return of capital for federal income tax purposes) equal to at
least 95% of its real estate investment trust taxable income, although the Board
of Directors, in its discretion, may increase that percentage as it deems
appropriate. See "Federal Income Tax Considerations Taxation of the Company -
Distribution Requirements." The declaration of Distributions is within the
discretion of the Board of Directors and depends upon the Company's
distributable funds, current and projected cash requirements, tax considerations
and other factors.
DISTRIBUTIONS
The Company intends to make regular Distributions to stockholders. To
the extent consistent with the Company's objective of qualifying as a REIT, it
is anticipated that the first Distributions will be paid not later than the
close of the first full calendar quarter after the first release of funds from
escrow to the Company. Distributions will be made to those stockholders who are
stockholders as of the record date selected by the Directors. Distributions will
be declared monthly during the offering period, declared monthly during any
subsequent offering, paid on a quarterly basis during an offering period, and
declared and paid quarterly thereafter. The Company is required to distribute
annually at least 95% of its real estate investment trust taxable income to
maintain its objective of qualifying as a REIT. Generally, income distributed
will not be taxable to the Company under federal income tax laws if the Company
complies with the provisions relating to qualification as a REIT. If the cash
available to the Company is insufficient to pay such Distributions, the Company
may obtain the necessary funds by borrowing, issuing new securities, or selling
Assets. These methods of obtaining funds could affect future Distributions by
increasing operating costs. To the extent that Distributions to stockholders
exceed earnings and profits, such amounts constitute a return capital for
federal income tax purposes, although such Distributions will not reduce
stockholders' aggregate Invested Capital. Distributions in kind shall not be
permitted, except for distributions of readily marketable securities;
distributions of beneficial interests in a liquidating trust established for the
dissolution of the Company and the liquidation of its assets in accordance with
the terms of the Articles of Incorporation; or distributions of in-kind property
as long as the Directors (i) advise each stockholder of the risks associated
with direct ownership of the property; (ii) offer each stockholder the election
of receiving in-kind property distributions; and (iii) distribute in-kind
property only to those stockholders who accept the Directors' offer.
Distributions will be made at the discretion of the Directors,
depending primarily on net cash from operations (which includes cash received
from tenants except to the extent that such cash represents a return of
principal in regard to the lease of a Property consisting of building only,
distributions from joint ventures, and interest income from lessees of Equipment
and borrowers under Mortgage Loans, less expenses paid) and the general
financial condition of the Company, subject to the
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obligation of the Directors to cause the Company to qualify and remain qualified
as a REIT for federal income tax purposes. The Company intends to increase
Distributions in accordance with increases in net cash from operations.
SUMMARY OF THE
ARTICLES OF INCORPORATION AND BYLAWS
GENERAL
The Company is organized as a corporation under the laws of the State
of Maryland. As a Maryland corporation, the Company is governed by the Maryland
General Corporation Law. Maryland corporate law deals with a variety of matters
regarding Maryland corporations, including liabilities of the Company,
stockholders, directors, and officers, the amendment of the Articles of
Incorporation, and mergers of a Maryland corporation with other entities. Since
many matters are not addressed by Maryland corporate law, it is customary for a
Maryland corporation to address these matters through provisions in its Articles
of Incorporation.
The Articles of Incorporation and the Bylaws of the Company contain
certain provisions that could make it more difficult to acquire control of the
Company by means of a tender offer, a proxy contest, or otherwise. These
provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of the Company to negotiate first with its Board of Directors.
The Company believes that these provisions increase the likelihood that
proposals initially will be on more attractive terms than would be the case in
their absence and facilitate negotiations which may result in improvement of the
terms of an initial offer.
The Articles of Incorporation also permit Listing by the Board of
Directors after completion or termination of this offering.
The discussion below sets forth material provisions of governing laws,
instruments and guidelines applicable to the Company. For more complete
provisions, reference is made to the Maryland General Corporation Law, the
guidelines for REITs published by the North American Securities Administrators
Association and the Company's Articles of Incorporation and Bylaws.
DESCRIPTION OF CAPITAL STOCK
General. The Company has authorized a total of 206,000,000 shares of
capital stock, consisting of 100,000,000 shares of Common Stock, $.01 par value
per share, 3,000,000 shares of Preferred Stock ("Preferred Stock"), and
103,000,000 additional shares of excess stock ("Excess Shares"), $.01 par value
per share. Of the 103,000,000 Excess Shares, 100,000,000 are issuable in
exchange for Common Stock and 3,000,000 are issuable in exchange for Preferred
Stock as described below at "Restriction of Ownership." The Company currently
has 20,000 shares of Common Stock outstanding and no Preferred Stock or
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Excess Shares outstanding. The Board of Directors may determine to engage in
future offerings of Common Stock of up to the number of unissued authorized
shares of Common Stock available.
The Company will not issue share certificates except to stockholders
who make a written request to the Company. Each stockholder's investment will be
recorded on the books of the Company, and information concerning the
restrictions and rights attributable to Shares (whether in connection with an
initial issuance or a transfer) will be sent to the stockholder receiving Shares
in connection with an issuance or transfer. A stockholder wishing to transfer
his or her Shares will be required to send only an executed form to the Company,
and the Company will provide the required form upon a stockholder's request. The
executed form and any other required documentation must be received by the
Company at least one calendar month prior to the last day of the current
quarter. Subject to restrictions in the Articles of Incorporation, transfers of
Shares shall be effective, and the transferee of the Shares will be recognized
as the holder of such Shares as of the first day of the following quarter on
which the Company receives properly executed documentation. Stockholders who are
residents of New York may not transfer fewer than 250 shares at any time.
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Stockholders have no preemptive rights to purchase or subscribe for
securities that the Company may issue subsequently. Each Share is entitled to
one vote per Share, and Shares do not have cumulative voting rights. The
Stockholders are entitled to Distributions in such amounts as may be declared by
the Board of Directors from time to time out of funds legally available for such
payments and, in the event of liquidation, to share ratably in any assets of the
Company remaining after payment in full of all creditors.
All of the Shares offered hereby will be fully paid and nonassessable
when issued.
The Articles of Incorporation authorize the Board of Directors to
designate and issue from time to time one or more classes or series of Preferred
Shares without stockholder approval. The Board of Directors may determine the
relative rights, preferences, and privileges of each class or series of
Preferred Stock so issued. The issuance of Preferred Shares shall be approved by
a majority of the Independent Directors who do not have any interest in the
transactions and who have access, at the expense of the Company, to the
Company's or independent legal counsel. Because the Board of Directors has the
power to establish the preferences and rights of each class or series of
Preferred Stock, it may afford the holders of any series or class of Preferred
Stock preferences, powers, and rights senior to the rights of holders of Common
Stock; however, the voting rights for each share of Preferred Stock shall not
exceed voting rights which bear the same relationship to the voting rights of
the Shares as the consideration paid to the Company for each share of Preferred
Stock bears to the book value of the Shares on the date that such Preferred
Stock is issued. The issuance of Preferred Stock could have the effect of
delaying or preventing a change in control of the Company. The Board of
Directors has no present
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plans to issue any Preferred Stock.
Similarly, the voting rights per share of equity securities of the
Company (other than the publicly held equity securities of the Company) sold in
a private offering shall not exceed the voting rights which bear the same
relationship to the voting rights of the publicly held equity securities as the
consideration paid to the Company for each privately offered Company share bears
to the book value of each outstanding publicly held equity security. The Board
of Directors currently has no plans to offer equity securities of the Company in
a private offering.
For a description of the characteristics of the Excess Shares, which
differ from Common Stock and Preferred Stock in a number of respects, including
voting and economic rights, see "Restriction of Ownership," below.
Soliciting Dealer Warrants. The Company has agreed to issue and sell,
as part of an overall compensation package, Soliciting Dealer Warrants to the
Managing Dealer, whereby one warrant to purchase one share of Common Stock will
be issued for every 25 Shares sold by the Managing Dealer. The Managing Dealer
has agreed to pay the Company $0.0008 for each Soliciting Dealer Warrant. These
warrants will be issued on a quarterly basis commencing 60 days after the date
on which the Shares are first sold pursuant to this offering. All or a portion
of the Soliciting Dealer Warrants may be reallowed to Soliciting Dealers with
prior written approval from, and in the sole discretion of, the Managing Dealer,
except where prohibited by either federal or state securities laws. The Company
will not issue Soliciting Dealer Warrants to the Managing Dealer and the
Managing Dealer will not transfer Soliciting Dealer Warrants, in connection with
the sale of Shares to residents of Minnesota or Texas.
The holder of a Soliciting Dealer Warrant will be entitled to purchase
one share of Common Stock from the Company at a price of $12.00 (120% of the
current public offering price per Share) during the Exercise Period; provided
however that Soliciting Dealer Warrants will not be exercisable until one year
from the date of issuance. Holders of Soliciting Dealer Warrants may not
exercise the Soliciting Dealer Warrants to the extent such exercise would
jeopardize the Company's status as a REIT under the Code.
The terms of the Soliciting Dealer Warrants, including the exercise
price and the number and type of securities issuable upon exercise of a
Soliciting Dealer Warrant and the number of such warrants may be adjusted in the
event of stock dividends, certain subdivisions, combinations and
reclassification of shares of Common Stock or the issuance to stockholders of
rights, options or warrants entitling them to purchase shares of Common Stock or
securities convertible into shares of Common Stock. The terms of the Soliciting
Dealer Warrants also may be adjusted if the Company engages in certain merger or
consolidation transactions or if all or substantially all of the Company's
assets are sold. Soliciting Dealer Warrants are not transferable or assignable
except by the Managing
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Dealer, the Soliciting Dealers, their successors in interest, or to individuals
who are both officers and directors of such a person. Exercise of these
Soliciting Dealer Warrants will be under the terms and conditions detailed this
Prospectus and in the Warrant Purchase Agreement, which is an exhibit to the
Registration Statement.
As holders of Soliciting Dealer Warrants, persons do not have the
rights of stockholders, may not vote on Company matters and are not entitled to
receive Distributions until such time as such warrants are exercised.
The Company anticipates that it will value the Soliciting Dealer
Warrants using an option pricing model in accordance with the guidance provided
in Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." The option pricing model that the Company will use
will take into consideration the following factors: (i) the exercise price of
the Soliciting Dealer Warrants; (ii) the expected life of the Soliciting Dealer
Warrants; (iii) the price of the Shares; (iv) expected Distributions with
respect to the Shares; (v) the risk-free interest rate for the expected term of
the Soliciting Dealer Warrants and, to the extent applicable, (vi) the expected
volatility of the Shares. Any difference between the fair value of a Soliciting
Dealer Warrant and the purchase price of the Soliciting Dealer Warrants would be
reflected in the financial statements of the Company as a charge to capital in
excess of par value related to stock issuance costs, with a corresponding credit
to equity relating to the issuance of the Soliciting Dealer Warrants.
BOARD OF DIRECTORS
The Articles of Incorporation provide that the number of Directors of
the Company cannot be less than three nor more than 15. A majority of the Board
of Directors will be Independent Directors. See "Management - Independent
Directors." Each Director, other than a Director elected to fill the unexpired
term of another Director, will be elected at each annual meeting or at any
special meeting of the stockholders called for that purpose, by a majority of
the shares of Common Stock present in person or by proxy and entitled to vote.
Independent Directors will nominate replacements for vacancies among the
Independent Directors. Under the Articles of Incorporation, the term of office
for each Director will be one year, expiring each annual meeting of
stockholders; however, nothing in the Articles of Incorporation prohibits a
director from being reelected by the stockholders. The Directors may not (a)
amend the Articles of Incorporation, except for amendments which do not
adversely affect the rights, preferences and privileges of stockholders; (b)
sell all or substantially all of the Company's assets other than in the ordinary
course of business or in connection with liquidation and dissolution; (c) cause
the merger or other reorganization of the Company; or (d) dissolve or liquidate
the Company, other than before the initial investment in property. The Directors
may establish such committees as they deem appropriate (provided that the
majority of the members of each committee are Independent Directors).
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STOCKHOLDER MEETINGS
An annual meeting will be held for the purpose of electing Directors
and for the transaction of such other business as may come before the meeting,
and will be held not less than 30 days after delivery of the annual report.
Under the Company's Bylaws, a special meeting of stockholders may be called by
the chief executive officer, a majority of the Directors, or a majority of the
Independent Directors. Special meetings of the stockholders also shall be called
by an officer of the Company upon the written request of stockholders holding in
the aggregate not less than 10% of the outstanding Common Stock entitled to vote
at such meeting. Upon receipt of such a written request, either in person or by
mail, stating the purpose or purposes of the meeting, the Company shall provide
all stockholders, within ten days of receipt of the written request, written
notice, either in person or by mail, of a meeting and its purpose. Such meeting
will be held not less than fifteen nor more than sixty days after distribution
of the notice, at a time and place specified in the request, or if none is
specified, at a time and place convenient to stockholders.
At any meeting of stockholders, each stockholder is entitled to one
vote per share of Common Stock owned of record on the applicable record date. In
general, the presence in person or by proxy of 50% of the shares of Common Stock
then outstanding shall constitute a quorum, and the majority vote of the shares
of Common Stock present in person or by proxy will be binding on all the
stockholders of the Company.
ADVANCE NOTICE FOR STOCKHOLDER NOMINATIONS FOR
DIRECTORS AND PROPOSALS OF NEW BUSINESS
The Bylaws of the Company require notice at least 60 days and not more
than 90 days before the anniversary of the prior annual meeting of stockholders
in order for a stockholder to (a) nominate a Director, or (b) propose new
business other than pursuant to the notice of the meeting or by or on behalf of
the Directors. The Bylaws contain a similar notice requirement in connection
with nominations for Directors at a special meeting of stockholders called for
the purpose of electing one or more Directors. Accordingly, failure to comply
with the notice provisions will make stockholders unable to nominate Directors
or propose new business.
AMENDMENTS TO THE ARTICLES OF INCORPORATION
Pursuant to the Company's Articles of Incorporation, the Directors can
amend the Articles of Incorporation by a two-thirds majority from time to time
if necessary in order to qualify initially or in order to continue to qualify as
a REIT. Except as set forth above, the Articles of Incorporation may be amended
only by the affirmative vote of a majority, and, in some cases a two-thirds
majority, of the shares of Common Stock outstanding and entitled to vote. The
stockholders may vote to amend the Articles of Incorporation, terminate or
dissolve the Company or remove one or more Directors without necessity for
concurrence by the Board of Directors.
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MERGERS, COMBINATIONS, AND SALE OF ASSETS
A merger, combination, sale, or other disposition of all or
substantially all of the Company's assets other than in the ordinary course of
business must be approved by the Directors and a majority of the shares of
Common Stock outstanding and entitled to vote. In addition, any such transaction
involving an Affiliate of the Company or the Advisor also must be approved by a
majority of the Directors (including a majority of the Independent Directors)
not otherwise interested in such transaction as fair and reasonable to the
Company and on terms and conditions not less favorable to the Company than those
available from unaffiliated third parties.
The Maryland Business Combinations Statute provides that certain
business combinations (including mergers, consolidations, share exchanges or, in
certain circumstances, asset transfers or issuances or reclassifications of
equity securities) between a Maryland corporation and any person who
beneficially owns 10% or more of the voting power of such corporation's shares
or an affiliate of such corporation who, at any time within the two-year period
prior to the date in question, was the beneficial owner of 10% or more of the
voting power of the then-outstanding voting shares of such corporation (an
"Interested Stockholder") or an affiliate thereof, are prohibited for five years
after the most recent date on which the Interested Stockholder became an
Interested Stockholder. Thereafter, any such business combination must be
recommended by the board of directors of such corporation and approved by the
affirmative vote of at least (i) 80% of the votes entitled to be cast by holders
of outstanding shares of voting stock of the corporation and (ii) two-thirds of
the votes entitled to be cast by holders of voting shares of such corporation
other than shares held by the Interested Stockholder with whom (or with whose
affiliate) the business combination is to be effected, unless, among other
conditions, the corporation's common stockholders receive a minimum price (as
determined by statute) for their shares and the consideration is received in
cash or in the same form as previously paid by the Interested Stockholder for
its shares.
Section 2.8 of the Articles of Incorporation provides that the
prohibitions and restrictions set forth in the Maryland Business Combinations
Statute are inapplicable to any business combination between the Company and any
person. Consequently, business combinations between the Company and Interested
Stockholders can be effected upon the affirmative vote of a majority of the
outstanding Shares entitled to vote thereon and do not require the approval of a
supermajority of the outstanding Shares held by disinterested stockholders.
CONTROL SHARE ACQUISITIONS
The Maryland Control Share Acquisition Statute provides that control
shares of a Maryland corporation acquired in a control share acquisition have no
voting rights except to the extent approved by a vote of two thirds of the votes
entitled to be cast
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on the matter, excluding shares owned by the acquiror, officers or directors who
are employees of the corporation. Control Shares are shares which, if aggregated
with all other shares of the corporation previously acquired by the acquiror, or
in respect of which the acquiror is able to exercise or direct the exercise of
voting power (except solely by virtue of a revocable proxy), would entitle the
acquiror to exercise voting power in electing directors of such corporation
within one of the following ranges of voting power: (i) one-fifth or more but
less than one-third, (ii) one-third or more but less than a majority, or (iii) a
majority or more of all voting power. Control Shares do not include shares the
acquiring person is entitled to vote as a result of having previously obtained
stockholder approval. A control share acquisition means the acquisition of
control shares, subject to certain exceptions.
Section 2.9 of the Articles of Incorporation provides that the Maryland
Control Share Acquisition Statute is inapplicable to any acquisition of
securities of the Company by any person. Consequently, in instances where the
Board of Directors otherwise waives or modifies restrictions relating to the
ownership and transfer of securities of the Company or such restrictions are
otherwise removed, control shares of the Company will have voting rights,
without having to obtain the approval of a supermajority of the outstanding
Shares eligible to vote thereon.
TERMINATION OF THE COMPANY AND REIT STATUS
The Articles of Incorporation provide for the voluntary termination and
dissolution of the Company by the affirmative vote of a majority of the shares
of Common Stock outstanding and entitled to vote at a meeting called for that
purpose. In addition, the Articles of Incorporation permit the stockholders to
terminate the status of the Company as a REIT under the Code only by the
affirmative vote of the holders of a majority of the shares of Common Stock
outstanding and entitled to vote.
Under the Articles of Incorporation, the Company automatically will
terminate and dissolve on December 31, 2008, unless Listing occurs, in which
event the Company automatically will become a perpetual life entity.
RESTRICTION OF OWNERSHIP
To qualify as a REIT under the Code (i) not more than 50% of the value
of the REIT's outstanding stock may be owned, directly or indirectly (applying
certain attribution rules), by five or fewer individuals (as defined in the Code
to include certain entities) during the last half of a taxable year, (ii) the
REIT's stock must be beneficially owned (without reference to any attribution
rules) 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; and (iii)
certain other requirements must be satisfied. See "Federal Income Tax
Considerations - Taxation of the Company."
To ensure that the Company satisfies these requirements, the Articles
of Incorporation restrict the direct or indirect
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ownership (applying certain attribution rules) of shares of Common Stock and
Preferred Stock by any Person (as defined in the Articles of Incorporation) to
no more than 9.8% of the outstanding shares of such Common Stock or 9.8% of any
series of Preferred Shares (the "Ownership Limit"). However, the Articles of
Incorporation provide that this Ownership Limit may be modified, either entirely
or with respect to one or more Persons, by a vote of a majority of the
Directors, if such modification does not jeopardize the Company's status as a
REIT. As a condition of such modification, the Board of Directors may require
opinions of counsel satisfactory to it and/or an undertaking from the applicant
with respect to preserving the status of the Company as a REIT.
It is the responsibility of each Person (as defined in the Articles of
Incorporation) owning (or deemed to own) more than 5% of the outstanding shares
of Common Stock or any series of outstanding Preferred Stock to give the Company
written notice of such ownership. In addition, to the extent deemed necessary by
the Directors, the Company can demand that each stockholder disclose to the
Company in writing all information regarding the Beneficial and Constructive
Ownership (as such terms are defined in the Articles of Incorporation) of the
Common Stock and Preferred Stock.
If the ownership, transfer or acquisition of shares of Common or
Preferred Stock, or change in capital structure of the Company or other event or
transaction would result in (i) any Person owning (applying certain attribution
rules) Common Stock or Preferred Stock in excess of the Ownership Limit, (ii)
fewer than 100 Persons owning the Common Stock and Preferred Stock, (iii) the
Company being "closely held" within the meaning of section 856(h) of the Code,
or (iv) the Company failing any of the gross income requirements of section
856(c) of the Code or otherwise failing to qualify as a REIT, then the
ownership, transfer, or acquisition, or change in capital structure or other
event or transaction that would have such effect will be void as to the
purported transferee or owner, and the purported transferee or owner will not
have or acquire any rights to the Common Stock and/or Preferred Stock, as the
case may be, to the extent required to avoid such a result. Common Stock or
Preferred Stock owned, transferred or proposed to be transferred in excess of
the Ownership Limit or which would otherwise jeopardize the Company's status as
a REIT will automatically be converted to Excess Shares. A holder of Excess
Shares is not entitled to Distributions, voting rights, and other benefits with
respect to such shares except for the right to payment of the purchase price for
the shares (or, in the case of a devise or gift or similar event which results
in the issuance of Excess Shares, the fair market value at the time of such
devise or gift or event) and the right to certain distributions upon
liquidation. Any Distribution paid to a proposed transferee or holder of Excess
Shares shall be repaid to the Company upon demand. Excess Shares shall be
subject to repurchase by the Company at its election. The purchase price of any
Excess Shares shall be equal to the lesser of (a) the price paid in such
purported transaction (or, in the case of a devise or gift or similar event
resulting in the issuance of Excess Shares, the
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fair market value at the time of such devise or gift or event), or (b) the fair
market value of such Shares on the date on which the Company or its designee
determines to exercise its repurchase right. If the foregoing transfer
restrictions are determined to be void or invalid by virtue of any legal
decision, statute, rule or regulation, then the purported transferee of any
Excess Shares may be deemed, at the option of the Company, to have acted as an
agent on behalf of the Company in acquiring such Excess Shares and to hold such
Excess Shares on behalf of the Company.
For purposes of the Articles of Incorporation, the term "Person" shall
mean an individual, corporation, partnership, estate, trust (including a trust
qualified under Section 401(a) or 501(c)(17) of the Code), a portion of a trust
permanently set aside 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, or a group
as that term is used for purposes of Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended; but does not include (i) CNL Health Care Advisors,
Inc., during the period ending on December 31, 1998, or (ii) an underwriter
which participated in a public offering of Shares for a period of sixty (60)
days following the purchase by such underwriter of Shares therein, provided that
the foregoing exclusions shall apply only if the ownership of such Shares by CNL
Health Care Advisors, Inc. or an underwriter would not cause the Company to fail
to qualify as a REIT by reason of being "closely held" within the meaning of
Section 856(a) of the code or otherwise cause the Company to fail to qualify as
a REIT.
RESPONSIBILITY OF DIRECTORS
Directors serve in a fiduciary capacity and shall have a fiduciary duty
to the stockholders of the Company, which duty shall include a duty to supervise
the relationship of the Company with the Advisor. See "Management -- Fiduciary
Responsibilities of the Board of Directors."
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to Maryland corporate law and the Company's Articles of
Incorporation, the Company is required to indemnify and hold harmless a present
or former Director, officer, Advisor, or Affiliate and may indemnify and hold
harmless a present or former employee or agent of the Company (the "Indemnitee")
against any or all losses or liabilities reasonably incurred by the Indemnitee
in connection with or by reason of any act or omission performed or omitted to
be performed on behalf of the Company while a Director, officer, Advisor,
Affiliate, employee, or agent and in such capacity, provided, that the
Indemnitee has determined, in good faith, that the act or omission which caused
the loss or liability was in the best interests of the Company. The Company will
not indemnify or hold harmless the Indemnitee if: (i) the loss or liability was
the result of negligence or misconduct, or if the Indemnitee is an Independent
Director, the loss or liability was the result of gross negligence or willful
misconduct, (ii) the act or omission was material to the loss or liability and
was committed in bad faith or was the result of
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active or deliberate dishonesty, (iii) the Indemnitee actually received an
improper personal benefit in money, property, or services, (iv) in the case of
any criminal proceeding, the Indemnitee had reasonable cause to believe that the
act or omission was unlawful, or (v) in a proceeding by or in the right of the
Company, the Indemnitee shall have been adjudged to be liable to the Company. In
addition, the Company will not provide indemnification for any loss or liability
arising from an alleged violation of federal or state securities laws unless one
or more of the following conditions are met: (i) there has been a successful
adjudication on the merits of each count involving alleged securities law
violations as to the particular Indemnitee; (ii) such claims have been dismissed
with prejudice on the merits by a court of competent jurisdiction as to the
particular Indemnitee; or (iii) a court of competent jurisdiction approves a
settlement of the claims against a particular Indemnitee and finds that
indemnification of the settlement and the related costs should be made, and the
court considering the request for indemnification has been advised of the
position of the Securities and Exchange Commission and of the published position
of any state securities regulatory authority in which securities of the Company
were offered or sold as to indemnification for violations of securities laws.
Pursuant to its Articles of Incorporation, the Company is required to pay or
reimburse reasonable expenses incurred by a present or former Director, officer,
Advisor or Affiliate and may pay or reimburse reasonable expenses incurred by
any other Indemnitee in advance of final disposition of a proceeding if the
following are satisfied: (i) the Indemnitee was made a party to the proceeding
by reasons of his or her service as a Director, officer, Advisor, Affiliate,
employee or agent of the Company, (ii) the Indemnitee provides the Company with
written affirmation of his or her good faith belief that he or she has met the
standard of conduct necessary for indemnification by the Company as authorized
by the Articles of Incorporation, (iii) the Indemnitee provides the Company with
a written agreement to repay the amount paid or reimbursed by the Company,
together with the applicable legal rate of interest thereon, if it is ultimately
determined that the Indemnitee did not comply with the requisite standard of
conduct, and (iv) the legal proceeding was initiated by a third party who is not
a stockholder or, if by a stockholder of the Company acting in his or her
capacity as such, a court of competent jurisdiction approves such advancement.
The Company's Articles of Incorporation further provide that any
indemnification, payment, or reimbursement of the expenses permitted by the
Articles of Incorporation will be furnished in accordance with the procedures in
Section 2-418 of the Maryland General Corporation Law.
Any indemnification may be paid only out of Net Assets of the Company,
and no portion may be recoverable from the stockholders.
There are certain defenses under Maryland law available to the
Directors, officers and the Advisor in the event of a stockholder action against
them. One such defense is the "business judgment rule." A Director, officer or
the Advisor can argue that he or she performed the action giving rise to the
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stockholder's action in good faith and in a manner he or she reasonably believed
to be in the best interests of the Company, and with such care as an ordinarily
prudent person in a like position would have used under similar circumstances.
The Directors, officers and the Advisor are also entitled to rely on
information, opinions, reports or records prepared by experts (including
accountants, consultants, counsel, etc.) who were selected with reasonable care.
However, the Directors, officers and the Advisor may not invoke the business
judgment rule to further limit the rights of the stockholders to access records
as provided in the Articles of Incorporation.
The Company will enter into indemnification agreements with each of the
Company's officers and Directors. The indemnification agreements will require,
among other things, that the Company indemnify its officers and Directors to the
fullest extent permitted by law, and advance to the officers and Directors all
related expenses, subject to reimbursement if it is subsequently determined that
indemnification is not permitted. In accordance with these agreements, the
Company must indemnify and advance all expenses reasonably incurred by officers
and Directors seeking to enforce their rights under the indemnification
agreements. The Company also must cover officers and Directors under the
Company's directors' and officers' liability insurance. Although these
indemnification agreements offer substantially the same scope of coverage
afforded by the indemnification provisions in the Articles of Incorporation and
the Bylaws, it provides greater assurance to Directors and officers that
indemnification will be available because these contracts cannot be modified
unilaterally by the Board of Directors or by the stockholders.
REMOVAL OF DIRECTORS
Under the Articles of Incorporation, a Director may resign or be
removed with or without cause by the affirmative vote of a majority of the
capital stock of the Company outstanding and entitled to vote.
INSPECTION OF BOOKS AND RECORDS
The Advisor will keep, or cause to be kept, on behalf of the Company,
full and true books of account on an accrual basis of accounting, in accordance
with generally accepted accounting principles. All of such books of account,
together with all other records of the Company, including a copy of the Articles
of Incorporation and any amendments thereto, will at all times be maintained at
the principal office of the Company, and will be open to inspection,
examination, and, for a reasonable charge, duplication upon reasonable notice
and during normal business hours by a stockholder or his agent.
As a part of its books and records, the Company will maintain at its
principal office an alphabetical list of names of stockholders, along with their
addresses and telephone numbers and the number of Shares held by each
stockholder. Such list shall be updated at least quarterly and shall be
available for inspection at the Company's home office by a stockholder or his
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or her designated agent upon such stockholder's request. Such list also shall be
mailed to any stockholder requesting the list within 10 days of a request. The
copy of the stockholder list shall be printed in alphabetical order, on white
paper, and in readily readable type size that is not smaller than 10-point type.
The Company may impose a reasonable charge for expenses incurred in reproducing
such list. The list may not be sold or used for commercial purposes.
If the Advisor or Directors neglect or refuse to exhibit, produce or
mail a copy of the stockholder list as requested, the Advisor and the Directors
shall be liable to any stockholder requesting the list for the costs, including
attorneys' fees, incurred by that stockholder for compelling the production of
the stockholder list. It shall be a defense that the actual purpose and reason
for the requests for inspection or for a copy of the stockholder list is to
secure such list of stockholders or other information for the purpose of selling
such list or copies thereof, or of using the same for a commercial purpose other
than in the interest of the applicant as a stockholder relative to the affairs
of the Company. The Company may require the stockholder requesting the
stockholder list to represent that the list is not requested for a commercial
purpose unrelated to the stockholder's interest in the Company. The remedies
provided by the Articles of Incorporation to stockholders requesting copies of
the stockholder list are in addition to, and do not in any way limit, other
remedies available to stockholders under federal law, or the law of any state.
RESTRICTIONS ON "ROLL-UP" TRANSACTIONS
In connection with a proposed Roll-Up Transaction, which, in general
terms, is any transaction involving the acquisition, merger, conversion, or
consolidation, directly or indirectly, of the Company and the issuance of
securities of a Roll-Up Entity that would be created or would survive after the
successful completion of the Roll-Up Transaction, an appraisal of all Properties
shall be obtained from an Independent Expert. In order to qualify as an
Independent Expert for this purpose(s), the person or entity shall have no
material current or prior business or personal relationship with the Advisor or
Directors and shall be engaged to a substantial extent in the business of
rendering opinions regarding the value of assets of the type held by the
Company. The Properties shall be appraised on a consistent basis, and the
appraisal shall be based on the evaluation of all relevant information and shall
indicate the value of the Properties as of a date immediately prior to the
announcement of the proposed Roll-Up Transaction. The appraisal shall assume an
orderly liquidation of Properties over a 12-month period. The terms of the
engagement of such Independent Expert shall clearly state that the engagement is
for the benefit of the Company and the stockholders. A summary of the
independent appraisal, indicating all material assumptions underlying the
appraisal, shall be included in a report to stockholders in connection with a
proposed Roll-Up Transaction. In connection with a proposed Roll-Up Transaction,
the person sponsoring the Roll-Up Transaction shall offer to stockholders who
vote against the proposal the choice of:
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(i) accepting the securities of the Roll-Up Entity offered
in the proposed Roll-Up Transaction; or
(ii) one of the following:
(A) remaining stockholders of the Company and preserving their
interests therein on the same terms and conditions as existed
previously; or
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(B) receiving cash in an amount equal to the stockholder's pro
rata share of the appraised value of the net assets of the Company.
The Company is prohibited from participating in any proposed Roll-Up
Transaction:
(i) which would result in the stockholders having democracy rights in
the Roll-Up Entity that are less than those provided in the Company's Articles
of Incorporation, Sections 8.1, 8.2, 8.4, 8.5, 8.6 and 9.1 and described
elsewhere in this Prospectus, including rights with respect to the election and
removal of Directors, annual reports, annual and special meetings, amendment of
the Articles of Incorporation, and dissolution of the Company.
(See "Description of Capital Stock" and "Stockholder Meetings,"
above);
(ii) which includes provisions that would operate as a material
impediment to, or frustration of, the accumulation of shares by any purchaser of
the securities of the Roll-Up Entity (except to the minimum extent necessary to
preserve the tax status of the Roll-Up Entity), or which would limit the ability
of an investor to exercise the voting rights of its securities of the Roll-Up
Entity on the basis of the number of shares held by that investor;
(iii) in which investor's rights to access of records of the Roll-Up
Entity will be less than those provided in Sections 8.5 and 8.6 of the Company's
Articles of Incorporation and described in "Inspection of Books and Records,"
above; or
(iv) in which any of the costs of the Roll-Up Transaction would be
borne by the Company if the Roll-Up Transaction is not approved by the
stockholders.
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following is a summary of the material federal income tax
consequences of the ownership of Shares of the Company, prepared by Shaw Pittman
Potts & Trowbridge, as Counsel. This discussion is based upon the laws,
regulations, and reported judicial and administrative rulings and decisions in
effect as of the date of this Prospectus, all of which are subject to change,
retroactively or prospectively, and to possibly differing interpretations. This
discussion does not purport to deal with
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the federal income or other tax consequences applicable to all investors in
light of their particular investment or other circumstances, or to all
categories of investors, some of whom may be subject to special rules
(including, for example, insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, foreign corporations and persons who are
not citizens or residents of the United States). No ruling on the federal, state
or local tax considerations relevant to the operation of the Company, or to the
purchase, ownership or disposition of the Shares, has been requested from the
Internal Revenue Service (the "IRS" or the "Service") or other tax authority.
Counsel has rendered certain opinions discussed herein and believes that if the
Service were to challenge the conclusions of Counsel, such conclusions should
prevail in court. However, opinions of counsel are not binding on the Service or
on the courts, and no assurance can be given that the conclusions reached by
Counsel would be sustained in court. Prospective investors should consult their
own tax advisors in determining the federal, state, local, foreign and other tax
consequences to them of the purchase, ownership and disposition of the Shares of
the Company, the tax treatment of a REIT and the effect of potential changes in
applicable tax laws.
TAXATION OF THE COMPANY
General. The Company expects to elect to be taxed as a REIT for federal
income tax purposes, as defined in Sections 856 through 860 of the Code,
commencing with its taxable year ending December 31, 1998. The Company believes
that it will be organized and will operate in such a manner as to qualify as a
REIT, and the Company intends to continue to operate in such a manner, but no
assurance can be given that it will operate in a manner so as to qualify or
remain qualified as a REIT. The provisions of the Code pertaining to REITs are
highly technical and complex. Accordingly, this summary is qualified in its
entirety by the applicable Code sections, rules and regulations issued
thereunder, and administrative and judicial interpretations thereof.
If the Company qualifies for taxation as a REIT, it generally will not
be subject to federal corporate income tax on its net income that is currently
distributed to holders of Shares. This treatment substantially eliminates the
"double taxation" (at the corporate and stockholder levels) that generally
results from an investment in a corporation. However, the Company will be
subject to federal income tax in the following circumstances. First, the Company
will be taxed at regular corporate rates on any undistributed real estate
investment trust taxable income, including undistributed net capital gains.
Second, under certain circumstances, the Company may be subject to the
alternative minimum tax on its items of tax preference. Third, if the Company
has net income from foreclosure property, it will be subject to tax on such
income at the highest corporate rate. Foreclosure property generally means real
property (and any personal property incident to such real property) which is
acquired as a result of a default either on a lease of such property or on
indebtedness which such property secured and with respect to which an
appropriate election is made. Fourth, if the Company has net income derived from
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prohibited transactions, such income will be subject to a 100% tax. A prohibited
transaction generally includes a sale or other disposition of property (other
than foreclosure property) that is held primarily for sale to customers in the
ordinary course of business. Fifth, if the Company should fail to satisfy the
75% gross income test or the 95% gross income test (as discussed below), but has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the 75% or
95% test. Sixth, if, during each calendar year, the Company fails to distribute
at least the sum of (i) 85% of its real estate investment trust ordinary income
for such year; (ii) 95% of its real estate investment trust capital gain net
income for such year; and (iii) any undistributed taxable income from prior
periods, the Company will be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed.
If the Company fails to qualify as a REIT for any taxable year and
certain relief provisions do not apply, the Company will be subject to federal
income tax (including alternative minimum tax) as an ordinary corporation on its
taxable income at regular corporate rates without any deduction or adjustment
for distributions to holders of Shares. To the extent that the Company would, as
a consequence, be subject to tax liability for any such taxable year, the amount
of cash available for satisfaction of its liabilities and for distribution to
holders of Shares would be reduced. Distributions made to holders of Shares
generally would be taxable as ordinary income to the extent of current and
accumulated earnings and profits and, subject to certain limitations, would be
eligible for the corporate dividends received deduction, but there can be no
assurance that any such Distributions would be made. The Company would not be
eligible to elect REIT status for the four taxable years after the taxable year
it failed to qualify as a REIT, unless its failure to qualify was due to
reasonable cause and not willful neglect and certain other requirements were
satisfied.
Opinion of Counsel. Based upon representations made by officers of the
Company with respect to relevant factual matters, upon the existing Code
provisions, rules and regulations promulgated thereunder (including proposed
regulations) and reported administrative and judicial interpretations thereof,
upon Counsel's independent review of such documents as Counsel deemed relevant
in the circumstances and upon the assumption that the Company will operate in
the manner described in this Prospectus, Counsel has advised the Company that,
in its opinion, commencing with the Company's taxable year ending December 31,
1998, the Company will be organized in conformity with the requirements for
qualification as a REIT, and the Company's proposed method of operation will
enable it to meet the requirements for qualification as a REIT. It must be
emphasized, however, that the Company's ability to qualify and remain qualified
as a REIT is dependent upon actual operating results and future actions by and
events involving the Company and others, and no assurance can be given that the
actual results of the Company's operations and future actions and events will
enable the Company to satisfy in any given year the requirements for
qualification and taxation as a REIT.
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Requirements for Qualification as a REIT. As discussed more fully
below, the Code defines a REIT as 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, but for Sections 856 through
860 of the Code, as a domestic corporation; (iv) which is neither a financial
institution nor an insurance company; (v) the beneficial ownership of which is
held (without reference to any rules of attribution) by 100 or more persons;
(vi) which is not closely held as defined in section 856(h) of the Code; and
(vii) which meets certain other tests regarding the nature of its assets and
income and the amount of its distributions.
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the assets and gross
income (as defined in the Code) of the partnership attributed to the REIT shall
retain the same character as in the hands of the partnership for purposes of
Section 856 of the Code, including satisfying the gross income tests and the
asset tests described below. Thus, the Company's proportionate share of the
assets, liabilities and items of income of any Joint Venture, as described in
"Business -- Joint Venture Arrangements," will be treated as assets, liabilities
and items of income of the Company for purposes of applying the asset and gross
income tests described herein.
Ownership Tests. The ownership requirements for qualification as a REIT
are that (i) during the last half of each taxable year not more than 50% in
value of the REIT's outstanding shares may be owned, directly or indirectly
(applying certain attribution rules), by five or fewer individuals (or certain
entities as defined in the Code) and (ii) there must be at least 100
stockholders (without reference to any attribution rules) on at least 335 days
of such 12-month taxable year (or a proportionate number of days of a short
taxable year). These two requirements do not apply to the first taxable year for
which an election is made to be treated as a REIT. In order to meet these
requirements for subsequent taxable years, or to otherwise obtain, maintain, or
reestablish REIT status, the Articles of Incorporation generally prohibit any
person or entity from actually, constructively or beneficially acquiring or
owning (applying certain attribution rules) more than 9.8% of the outstanding
Common Stock or 9.8% of any series of outstanding Preferred Stock. Among other
provisions, the Articles of Incorporation empower the Board of Directors to
redeem, at its option, a sufficient number of Shares to bring the ownership of
Shares of the Company in conformity with these requirements or to assure
continued conformity with such requirements.
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Under the Articles of Incorporation, each holder of Shares is required,
upon demand, to disclose to the Board of Directors in writing such information
with respect to actual, constructive or beneficial ownership of Shares of the
Company as the Board of Directors deems necessary to comply with provisions of
the Code applicable to the Company or the provisions of the Articles of
Incorporation, or the requirements of any other appropriate taxing authority.
Certain Treasury regulations govern the method by which the Company is required
to demonstrate compliance with these stock ownership requirements and the
failure to satisfy such regulations could cause the Company to fail to qualify
as a REIT. The Company has represented that it expects to meet these stock
ownership requirements for each taxable year and it will be able to demonstrate
its compliance with these requirements.
Asset Tests. At the end of each quarter of a REIT's taxable year, at
least 75% of the value of its total assets must consist of "real estate assets,"
cash and cash items (including receivables) and certain government securities.
The balance of a REIT's assets generally may be invested without restriction,
except that holdings of securities not within the 75% class of assets generally
must not, with respect to any issuer, exceed 5% of the value of the REIT's
assets or 10% of the issuer's outstanding voting securities. The term "real
estate assets" includes real property, interests in real property, leaseholds of
land or improvements thereon, and mortgages on the foregoing and any property
attributable to the temporary investment of new capital (but only if such
property is stock or a debt instrument and only for the one-year period
beginning on the date the REIT receives such capital). When a mortgage is
secured by both real property and other property, it is considered to constitute
a mortgage on real property to the extent of the fair market value of the real
property when the REIT is committed to make the loan (or, in the case of a
construction loan, the reasonably estimated cost of construction). Initially,
the bulk of the Company's assets will be real property. However, the Company
will also hold the Secured Equipment Leases. Counsel is of the opinion, based on
certain assumptions, that the Secured Equipment Leases will be treated as loans
secured by personal property for federal income tax purposes. See "Federal
Income Tax Considerations Characterization of the Secured Equipment Leases."
Therefore, the Secured Equipment Leases will not qualify as "real estate
assets." However, the Company has represented that at the end of each quarter
the value of the Secured Equipment Leases, together with any personal property
owned by the Company, will in the aggregate represent less than 25% of the
Company's total assets and that the value of the Secured Equipment Leases
entered into with any particular tenant will represent less than 5% of the
Company's total assets. No independent appraisals will be acquired to support
this representation, and Counsel, in rendering its opinion as to the
qualification of the Company as a REIT, is relying on the conclusions of the
Company and its senior management as to the relative values of its assets. There
can be no assurance however, that the IRS may not contend that either (i) the
value of the Secured Equipment Leases
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entered into with any particular tenant represents more than 5% of the Company's
total assets, or (ii) the value of the Secured Equipment Leases, together with
any personal property owned by the Company, exceeds 25% of the Company's total
assets.
As indicated in "Business - Joint Venture Arrangements," the Company
may participate in Joint Ventures. If a Joint Venture were classified, for
federal income tax purposes, as an association taxable as a corporation rather
than as a partnership, the Company's ownership of a 10% or greater interest in
the Joint Venture would cause the Company to fail to meet the requirement that
it not own 10% or more of an issuer's voting securities. However, Counsel is of
the opinion, based on certain assumptions, that any Joint Ventures will
constitute partnerships for federal income tax purposes. See "Federal Income Tax
Considerations - Investment in Joint Ventures."
Income Tests. A REIT also must meet two separate tests with respect to
its sources of gross income for each taxable year.
(a) The 75 Percent and 95 Percent Tests. In general, at least 75% of a
REIT's gross income for each taxable year must be from "rents from real
property," interest on obligations secured by mortgages on real property, gains
from the sale or other disposition of real property and certain other sources,
including "qualified temporary investment income." For these purposes,
"qualified temporary investment income" means any income (i) attributable to a
stock or debt instrument purchased with the proceeds received by the REIT in
exchange for stock (or certificates of beneficial interest) in such REIT (other
than amounts received pursuant to a distribution reinvestment plan) or in a
public offering of debt obligations with a maturity of at least five years and
(ii) received or accrued during the one-year period beginning on the date the
REIT receives such capital. In addition, a REIT must derive at least 95% of its
gross income for each taxable year from any combination of the items of income
which qualify under the 75% test, from dividends and interest, and from gains
from the sale, exchange or other disposition of certain stock and securities.
Initially, the bulk of the Company's income will be derived from rents
with respect to the Properties. Rents from Properties received by the Company
qualify as "rents from real property" in satisfying these two tests only if
several conditions are met. First, the rent must not be based in whole or in
part, directly or indirectly, on the income or profits of any person. An amount
received or accrued generally will not be excluded from the term "rents from
real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Second, the Code provides that rents received
from a tenant will not qualify as "rents from real property" if the REIT, or a
direct or indirect owner of 10% or more of the REIT owns, directly or
constructively, 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, for rents to
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qualify as "rents from real property," 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 revenue, except that a REIT may directly perform services which are
"usually or customarily rendered" in connection with the rental of space for
occupancy, other than services which are considered to be rendered to the
occupant of the property. However, a REIT is currently permitted to earn up to
one percent of its gross income from tenants, determined on a
property-by-property basis, by furnishing services that are noncustomary or
provided directly to the tenants, without causing the rental income to fail to
qualify as rents from real property.
The Company has represented with respect to its leasing of the
Properties that it will not (i) charge rent for any Property that is based in
whole or in part on the income or profits of any person (except by reason of
being based on a percentage or percentages of receipts or sales, as described
above); (ii) charge rent that will be attributable to personal property in an
amount greater than 15% of the total rent received under the applicable lease;
(iii) directly perform services considered to be rendered to the occupant of a
Property or which are not usually or customarily furnished or rendered in
connection with the rental of real property; or (iv) enter into any lease with a
Related Party Tenant. Specifically, the Company expects that virtually all of
its income will be derived from leases of the type described in "Business -
Description of Leases," and it does not expect such leases to generate income
that would not qualify as rents from real property for purposes of the 75% and
95% income tests.
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In addition, the Company will be paid interest on the Mortgage Loans.
All interest income qualifies under the 95% gross income test. If a Mortgage
Loan is secured by both real property and other property, all the interest on it
will nevertheless qualify under the 75% gross income test if the amount of the
loan did not exceed the fair market value of the real property at the time of
the loan commitment. The Company has represented that this will always be the
case. Therefore, in the opinion of Counsel, income generated through the
Company's investments in Mortgage Loans will be treated as qualifying income
under the 75% gross income test.
The Company will also receive payments under the terms of the Secured
Equipment Leases. Although the Secured Equipment Leases will be structured as
leases or loans, Counsel is of the opinion that, subject to certain assumptions,
they will be treated as loans secured by personal property for federal income
tax purposes. See "Federal Income Tax Considerations Characterization of the
Secured Equipment Leases." If the Secured Equipment Leases are treated as loans
secured by personal property for federal income tax purposes then, the portion
of the payments under the terms of the Secured Equipment Leases that represent
interest, rather than a return of capital for federal income tax purposes, will
not satisfy the 75% gross income test (although it will satisfy the 95% gross
income test). The Company believes, however, that the aggregate amount of such
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non-qualifying income will not cause the Company to exceed the limits on
non-qualifying income under the 75% gross income test.
If, contrary to the opinion of Counsel, the Secured Equipment Leases
are treated as true leases, rather than as loans secured by personal property
for federal income tax purposes, the payments under the terms of the Secured
Equipment Leases would be treated as rents from personal property. Rents from
personal property will satisfy either the 75% or 95% gross income tests if they
are received in connection with a lease of real property and the rent
attributable to the personal property does not exceed 15% of the total rent
received from the tenant in connection with the lease. However, if rents
attributable to personal property exceed 15% of the total rent received from a
particular tenant, then the portion of the total rent attributable to personal
property will not satisfy either the 75% or 95% gross income tests.
If, notwithstanding the above, the Company fails to satisfy one or both
of the 75% or 95% tests for any taxable year, it may still qualify as a REIT if
(i) such failure is due to reasonable cause and not willful neglect; (ii) it
reports the nature and amount of each item of its income on a schedule attached
to its tax return for such year; and (iii) the reporting of any incorrect
information is not due to fraud with intent to evade tax. However, even if these
three requirements are met and the Company is not disqualified as a REIT, a
penalty tax would be imposed by reference to the amount by which the Company
failed the 75% or 95% test (whichever amount is greater).
(b) The Impact of Default Under the Secured Equipment Leases. In
applying the gross income tests to the Company, it is necessary to consider the
impact that a default under one or more of the Secured Equipment Leases would
have on the Company's ability to satisfy such tests. A default under one or more
of the Secured Equipment Leases would result in the Company directly holding the
Equipment securing such leases for federal income tax purposes. In the event of
a default, the Company may choose to either lease or sell such Equipment.
However, any income resulting from a rental or sale of Equipment not
incidental to the rental or sale of real property would not qualify under the
75% and 95% gross income tests. In addition, in certain circumstances, income
derived from a sale or other disposition of Equipment could be considered "net
income from prohibited transactions," subject to a 100% tax. The Company does
not, however, anticipate that its income from the rental or sale of Equipment
would be material in any taxable year.
Distribution Requirements. A REIT must distribute to its stockholders
for each taxable year ordinary income dividends in an amount equal to at least
(a) 95% of the sum of (i) its "real estate investment trust taxable income"
(before deduction of dividends paid and excluding any net capital gains) and
(ii) the excess of net income from foreclosure property over the tax on such
income, minus (b) certain excess non-cash income. Real estate investment trust
taxable income generally is the taxable
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income of a REIT computed as if it were an ordinary corporation, with certain
adjustments. Distributions must be made in the taxable year to which they relate
or, if declared before the timely filing of the REIT's tax return for such year
and paid not later than the first regular dividend payment after such
declaration, in the following taxable year.
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The Company has represented that it intends to make Distributions to
stockholders that will be sufficient to meet the 95% distribution requirement.
Under some circumstances, however, it is possible that the Company may not have
sufficient funds from its operations to make cash Distributions to satisfy the
95% distribution requirement. For example, in the event of the default or
financial failure of one or more tenants or lessees, the Company might be
required to continue to accrue rent for some period of time under federal income
tax principles even though the Company would not currently be receiving the
corresponding amounts of cash. Similarly, under federal income tax principles,
the Company might not be entitled to deduct certain expenses at the time those
expenses are incurred. In either case, the Company's cash available for making
Distributions might not be sufficient to satisfy the 95% distribution
requirement. If the cash available to the Company is insufficient, the Company
might raise cash in order to make the Distributions by borrowing funds, issuing
new securities or selling assets. If the Company ultimately were unable to
satisfy the 95% distribution requirement, it would fail to qualify as a REIT
and, as a result, would be subject to federal income tax as an ordinary
corporation without any deduction or adjustment for dividends paid to holders of
the Shares. If the Company fails to satisfy the 95% distribution requirement, as
a result of an adjustment to its tax returns by the Service, under certain
circumstances, it may be able to rectify its failure by paying a "deficiency
dividend" (plus a penalty and interest) within 90 days after such adjustment.
This deficiency dividend will be included in the Company's deductions for
dividends paid for the taxable year affected by such adjustment. However, the
deduction for a deficiency dividend will be denied, if any part of the
adjustment resulting in the deficiency is attributable to fraud with intent to
evade tax or to willful failure to timely file an income tax return.
TAXATION OF STOCKHOLDERS
Taxable Domestic Stockholders. For any taxable year in which the
Company qualifies as a REIT for federal income tax purposes, Distributions made
by the Company to its stockholders that are United States persons (generally,
any person other than a nonresident alien individual, a foreign trust or estate
or a foreign partnership or corporation) generally will be taxed as ordinary
income. Amounts received by such United States persons that are properly
designated as capital gain dividends by the Company generally will be taxed as
long-term capital gain, without regard to the period for which such person has
held its Shares, to the extent that they do not exceed the Company's actual net
capital gain for the taxable year. Corporate stockholders may be required to
treat up to 20% of certain capital gains dividends as ordinary income. Such
ordinary income
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and capital gain are not eligible for the dividends received deduction allowed
to corporations. In addition, the Company may elect to retain and pay income tax
on its long-term capital gains. If the Company so elects, each stockholder will
take into income the stockholder's share of the retained capital gain as
long-term capital gain and will receive a credit or refund for that
stockholder's share of the tax paid by the Company. The stockholder will
increase the basis of such stockholder's share by an amount equal to the excess
of the retained capital gain included in the stockholder's income over the tax
deemed paid by such stockholder. Distributions to such United States persons in
excess of the Company's current or accumulated earnings and profits will be
considered first a tax-free return of capital for federal income tax purposes,
reducing the tax basis of each stockholder's Shares, and then, to the extent the
Distribution exceeds each stockholder's basis, a gain realized from the sale of
Shares. The Company will notify each stockholder as to the portions of each
Distribution which, in its judgment, constitute ordinary income, capital gain or
return of capital for federal income tax purposes. Any Distribution that is (i)
declared by the Company in October, November or December of any calendar year
and payable to stockholders of record on a specified date in such months and
(ii) actually paid by the Company in January of the following year, shall be
deemed to have been received by each stockholder on December 31 of such calendar
year and, as a result, will be includable in gross income of the stockholder for
the taxable year which includes such December 31. Stockholders who elect to
participate in the Reinvestment Plan will be treated as if they received a cash
Distribution from the Company and then applied such Distribution to purchase
Shares in the Reinvestment Plan. Stockholders may not deduct on their income tax
returns any net operating or net capital losses of the Company.
Upon the sale or other disposition of the Company's Shares, a
stockholder generally will recognize capital gain or loss equal to the
difference between the amount realized on the sale or other disposition and the
adjusted basis of the Shares involved in the transaction. Such gain or loss will
be long-term capital gain or loss if, at the time of sale or other disposition,
the Shares involved have been held for more than one year. In addition, if a
stockholder
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receives a capital gain dividend with respect to Shares which he has held for
six months or less at the time of sale or other disposition, any loss recognized
by the stockholder will be treated as long-term capital loss to the extent of
the amount of the capital gain dividend that was treated as long-term capital
gain.
Generally, the redemption of Shares by the Company will result in
recognition of ordinary income by the stockholder unless the stockholder
completely terminates or substantially reduces his or her interest in the
Company. A redemption of Shares for cash will be treated as a distribution that
is taxable as a dividend to the extent of the Company's current or accumulated
earnings and profits at the time of the redemption under Section 302 of the Code
unless the redemption (a) results in a "complete termination" of the
stockholder's interest in the Company under Section 302(b)(3) of the Code, (b)
is "substantially disproportionate" with respect to the stockholder under
Section 302(b)(2) of the Code, or (c) is "not essentially equivalent to a
dividend" with respect to the stockholder under Section 302(b)(1) of the Code.
Under Code Section 302(b)(2) a redemption is considered "substantially
disproportionate" if the percentage of the voting stock of the corporation owned
by a stockholder immediately after the redemption is less than eighty percent of
the percentage of the voting stock of the corporation owned by such stockholder
immediately before the redemption. In determining whether the redemption is not
treated as a dividend, Shares considered to be owned by a stockholder by reason
of certain constructive ownership rules set forth in Section 318 of the Code, as
well as Shares actually owned, must generally be taken into account. A
distribution to a stockholder will be "not essentially equivalent to a dividend"
if its results in a "meaningful reduction" in the stockholder's interest in the
Company. The Service has published a ruling indicating that a redemption which
results in a reduction in the proportionate interest in a corporation (taking
into account the Section 318 constructive ownership rules) of a stockholder
whose relative stock interest is minimal (an interest of less than 1% should
satisfy this requirement) and who exercises no control over the corporation's
affairs should be treated as being "not essentially equivalent to a dividend."
If the redemption is not treated as a dividend, the redemption of the
Shares for cash will result in taxable gain or loss equal to the difference
between the amount of cash received and the stockholder's tax basis in the
Shares redeemed. Such gain or loss would be capital gain or loss if the Shares
were held as a capital asset and would be long-term capital gain or loss if the
holding period for the Shares exceeds one year.
The Company will report to its U.S. stockholders and the Service the
amount of dividends paid or treated as paid during each calendar year, and the
amount of tax withheld, if any. Under the backup withholding rules, a
stockholder may be subject to backup withholding at the rate of 31% with respect
to dividends paid unless such holder (a) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact or
(b) provides a taxpayer identification
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number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with applicable requirements of the backup withholding rules.
A stockholder that does not provide the Company with a correct taxpayer
identification number may also be subject to penalties imposed by the Service.
Any amount paid to the Service as backup withholding will be creditable against
the stockholder's income tax liability. In addition, the Company may be required
to withhold a portion of capital gain dividends to any stockholders who fail to
certify their non-foreign status to the Company. See "Foreign Stockholders"
below.
The state and local income tax treatment of the Company and its
stockholders may not conform to the federal income tax treatment described
above. As a result, stockholders should consult their own tax advisors for an
explanation of how other state and local tax laws would affect their investment
in Shares.
Tax-Exempt Stockholders. Dividends paid by the Company to a stockholder
that is a tax-exempt entity generally will not constitute "unrelated business
taxable income" ("UBTI") as defined in Section 512(a) of the Code, provided that
the tax-exempt entity has not financed the acquisition of its Shares with
"acquisition indebtedness" within the meaning of Section 514(c) of the Code and
the Shares are not otherwise used in an unrelated trade or business of the
tax-exempt entity.
Notwithstanding the foregoing, qualified trusts that hold more than 10%
(by value) of the shares of certain REITs may be required to treat a certain
percentage of such REIT's distributions as UBTI. This requirement will apply
only if (i) treating qualified trusts holding REIT shares as individuals would
result in a determination that the REIT is "closely held" within the meaning of
Section 856(h)(1) of the Code and (ii) the REIT is "predominantly held" by
qualified trusts. A REIT is predominantly held if either (i) a single qualified
trust holds more than 25% by value of the REIT interests or (ii) one or more
qualified trusts, each owning more than 10% by value of the REIT interests, hold
in the aggregate more than 50% of the REIT interests. The percentage of any REIT
dividend treated as UBTI is equal to the ratio of (a) the UBTI earned by the
REIT (treating the REIT as if it were a qualified trust and therefore subject to
tax on UBTI) to (b) the total gross income (less certain associated expenses) of
the REIT. A de minimis exception applies where the ratio set forth in the
preceding sentence is less than 5% for any year. For these purposes, a qualified
trust is any trust described in Section 401(a) of the Code and exempt from tax
under Section 501(a) of the Code. The restrictions on ownership of Shares in the
Articles of Incorporation will prevent application of the provisions treating a
portion of REIT distributions as UBTI to tax-exempt entities purchasing Shares
in the Company, absent a waiver of the restrictions by the Board of Directors.
See "Summary of the Articles of Incorporation and Bylaws - Restriction of
Ownership."
Assuming that there is no waiver of the restrictions on ownership of
Shares in the Articles of Incorporation and that a tax-exempt stockholder does
not finance the acquisition of its
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Shares with "acquisition indebtedness" within the meaning of Section 514(c) of
the Code or otherwise use its Shares in an unrelated trade or business, in the
opinion of Counsel the distributions of the Company with respect to such
tax-exempt stockholder will not constitute UBTI.
The tax discussion of distributions by qualified retirement plans,
IRAs, Keogh plans and other tax-exempt entities is beyond the scope of this
discussion, and such entities should consult their tax adviser regarding such
questions.
Foreign Stockholders. The rules governing United States federal income
taxation of nonresident alien individuals, foreign corporations, foreign
participants and other foreign stockholders (collectively, "Non-U.S.
Stockholders") are complex, and no attempt will be made herein to provide more
than a summary of such rules. The following discussion assumes that the income
from investment in the Shares will not be effectively connected with the
Non-U.S. Stockholders' conduct of a United States trade or business. Prospective
Non-U.S. Stockholders should consult with their own tax advisors to determine
the impact of federal, state and local laws with regard to an investment in
Shares, including any reporting requirements. Non-U.S. Stockholders will be
admitted as stockholders with the approval of the Advisor.
Distributions that are not attributable to gain from sales or exchanges
by the Company of United States real property interests and not designated by
the Company as capital gain dividends will be treated as dividends of ordinary
income to the extent that they are made out of current and accumulated earnings
and profits of the Company. Such dividends ordinarily will be subject to a
withholding tax equal to 30% of the gross amount of the dividend, unless an
applicable tax treaty reduces or eliminates that tax. A number of U.S. tax
treaties that reduce the rate of withholding tax on corporate dividends do not
reduce, or reduce to a lesser extent, the rate of withholding applied to
dividends from a REIT. The Company expects to withhold U.S. income tax at the
rate of 30% on the gross amount of any such distributions paid to a Non-U.S.
Stockholder unless (i) a lower treaty rate applies (and, with regard to payments
on or after January 1, 1999, the Non-U.S. Stockholder files IRS Form W-8 with
the Company and, if the Shares are not traded on an established securities
market, acquires a taxpayer identification number from the IRS) or (ii) the
Non-U.S. Stockholder files an IRS Form 4224 (or, with respect to payments on or
after January 1, 1999, files IRS Form W-8 with the Company) with the Company
claiming that the distribution is effectively connected income. Distributions in
excess of the Company's current and accumulated earnings and profits will not be
taxable to a stockholder to the extent that such distributions paid do not
exceed the adjusted basis of the stockholder's Shares, but rather will reduce
the adjusted basis of such Shares. To the extent that distributions in excess of
current and accumulated earnings and profits exceed the adjusted basis of a
Non-U.S. Stockholders' Shares, such distributions will give rise to tax
liability if the Non-U.S. Stockholder would otherwise be subject to tax on any
gain from the sale or disposition of the Shares, as described below. If it
cannot be determined at the time a distribution is paid whether or not such
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distribution will be in excess of current and accumulated earnings and profits,
the distributions will be subject to withholding at the rate of 30%. However, a
Non-U.S. Stockholder may seek a refund of such amounts from the IRS if it is
subsequently determined that such distribution was, in fact, in excess of the
Company's current and accumulated earnings and profits. Beginning with payments
made on or after
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January 1, 1999, the Company will be permitted, but not required, to make
reasonable estimates of the extent to which distributions exceed current or
accumulated earnings and profits. Such distributions will generally be subject
to a 10% withholding tax, which may be refunded to the extent they exceed the
stockholder's actual U.S. tax liability, provided the required information is
furnished to the IRS.
For any year in which the Company qualifies as a REIT, distributions
that are attributable to gain from sales or exchanges by the Company of United
States real property interests will be taxed to a Non-U.S. Stockholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980, as
amended ("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales
of United States real property interests are taxed to a Non-U.S. Stockholder as
if such gain were effectively connected with a United States business. Non-U.S.
Stockholders would thus be taxed at the normal capital gain rates applicable to
U.S. Stockholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals). Also,
distributions subject to FIRPTA may be subject to a 30% branch profits tax in
the hands of a foreign corporate stockholder not entitled to treaty exemption or
rate reduction. The Company is required by applicable Treasury Regulations to
withhold 35% of any distribution that could be designated by the Company as a
capital gain dividend. This amount is creditable against the Non-U.S.
Stockholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of Shares
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by foreign persons. It is currently anticipated that the Company
will be a "domestically controlled REIT," and in such case the sale of Shares
would not be subject to taxation under FIRPTA. However, gain not subject to
FIRPTA nonetheless will be taxable to a Non-U.S. Stockholder if (i) investment
in the Shares is treated as "effectively connected" with the Non-U.S.
Stockholders' U.S. trade or business, or (ii) the Non-U.S. Stockholder is a
nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and certain other conditions are met.
Effectively connected gain realized by a foreign corporate shareholder may be
subject to an additional 30% branch profits tax, subject to possible exemption
or rate reduction under an applicable tax treaty. If the gain on the sale of
Shares were to be subject to taxation under FIRPTA, the Non-U.S. Stockholder
would be subject to the same treatment as U.S. Stockholders with respect to such
gain (subject to applicable alternative minimum tax and a special alternative
minimum tax in the case of nonresident alien individuals), and the purchaser of
the Shares would be required to withhold and remit to the Service 10% of the
purchase price.
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STATE AND LOCAL TAXES
The Company and its shareholders may be subject to state and local
taxes in various states and localities in which it or they transact business,
own property, or reside. The tax treatment of the Company and the stockholders
in such jurisdictions may differ from the federal income tax treatment described
above. Consequently, prospective stockholders should consult their own tax
advisors regarding the effect of state and local tax laws upon an investment in
the Common Stock of the Company.
CHARACTERIZATION OF PROPERTY LEASES
The Company will purchase both new and existing Properties and lease
them to operators of Health Care Facilities pursuant to leases of the type
described in "Business - Description of Property Leases." The ability of the
Company to claim certain tax benefits associated with ownership of the
Properties, such as depreciation, depends on a determination that the lease
transactions engaged in by the Company are true leases, under which the Company
is the owner of the leased Property for federal income tax purposes, rather than
a conditional sale of the Property or a financing transaction. A determination
by the Service that the Company is not the owner of the Properties for federal
income tax purposes may have adverse consequences to the Company, such as the
denying of the Company's depreciation deductions. Moreover, a denial of the
Company's depreciation deductions could result in a determination that the
Company's Distributions to stockholders were insufficient to satisfy the 95%
distribution requirement for qualification as a REIT. However, as discussed
above, if the Company has sufficient cash, it may be able to remedy any past
failure to satisfy the distribution requirements by paying a "deficiency
dividend" (plus a penalty and interest). See "Distribution Requirements," above.
Furthermore, in the event that the Company were determined not to be the owner
of a particular Property, in the opinion of Counsel the income that the Company
would receive pursuant to the recharacterized lease would constitute interest
qualifying under the 95% and 75% gross income tests by reason of being interest
on an obligation secured by a mortgage on an interest in real property, because
the legal ownership structure of such Property will have the effect of making
the building serve as collateral for the debt obligation.
The characterization of transactions as leases, conditional sales, or
financings has been addressed in numerous cases. The courts have not identified
any one factor as being determinative of whether the lessor or the lessee of
property is to be treated as the owner. Judicial decisions and pronouncements of
the Service with respect to the characterization of transactions as either
leases, conditional sales, or financing transactions have made it clear that the
characterization of leases for tax purposes is a question which must be decided
on the basis of a weighing of many factors, and courts have reached different
conclusions even where characteristics of two lease transactions were
substantially similar.
While certain characteristics of the leases anticipated to be entered
into by the Company suggest the Company might not be the owner of the
Properties, such as the fact that such leases are "triple-net" leases, a
substantial number of other
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characteristics indicate the bona fide nature of such leases and that the
Company will be the owner of the Properties. For example, under the types of
leases described in "Business Description of Property Leases," the Company will
bear the risk of substantial loss in the value of the Properties, since the
Company will acquire its interests in the Properties with an equity investment,
rather than with nonrecourse indebtedness. Further, the Company, rather than the
tenant, will benefit from any appreciation in the Properties, since the Company
will have the right at any time to sell or transfer its Properties, subject to
the tenant's right to purchase the property at a price not less than the
Property's fair market value (determined by appraisal or otherwise).
Other factors that are consistent with the ownership of the Properties
by the Company are (i) the tenants are liable for repairs and to return the
Properties in reasonably good condition; (ii) insurance proceeds generally are
to be used to restore the Properties and, to the extent not so used, belong to
the Company; (iii) the tenants agree to subordinate their interests in the
Properties to the lien of any first mortgage upon delivery of a nondisturbance
agreement and agree to attorn to the purchaser upon any foreclosure sale; and
(iv) based on the Company's representation that the Properties can reasonably be
expected to have at the end of their lease terms (generally a maximum of 30 to
40 years) a fair market value of at least 20% of the Company's cost and a
remaining useful life of at least 20% of their useful lives at the beginning of
the leases, the Company has not relinquished the Properties to the tenants for
their entire useful lives, but has retained a significant residual interest in
them. Moreover, the Company will not be primarily dependent upon tax benefits in
order to realize a reasonable return on its investments.
Concerning the Properties for which the Company owns the buildings and
the underlying land, on the basis of the foregoing, assuming (i) the Company
leases the Properties on substantially the same terms and conditions described
in "Business -- Description of Leases," and (ii) as is represented by the
Company, the residual value of the Properties remaining after the end of their
lease terms (including all renewal periods) may reasonably be expected to be at
least 20% of the Company's cost of such Properties, and the remaining useful
lives of the Properties after the end of their lease terms (including all
renewal periods) may reasonably be expected to be at least 20% of the
Properties' useful lives at the beginning of their lease terms, it is the
opinion of Counsel that the Company will be treated as the owner of the
Properties for federal income tax purposes and will be entitled to claim
depreciation and other tax benefits associated with such ownership. In the case
of Properties for which the Company does not own the underlying land, Counsel
cannot opine that such transactions will be characterized as leases.
CHARACTERIZATION OF SECURED EQUIPMENT LEASES
The Company will purchase Equipment and lease it to operators of Health
Care Facilities pursuant to leases of the
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type described in "Business - General." The ability of the Company to qualify as
a REIT depends on a determination that the Secured Equipment Leases are
financing arrangements, under which the lessees acquire ownership of the
Equipment for federal income tax purposes. If the Secured Equipment Leases are
instead treated as true leases, the Company may be unable to satisfy the income
tests for REIT qualification. See "Federal Income Tax Considerations - Taxation
of the Company - Income Tests."
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While certain characteristics of the Secured Equipment Leases to be
entered into by the Company suggest that the Company retains ownership of the
Equipment, such as the fact that certain of the Secured Equipment Leases are
structured as leases, with the Company retaining title to the Equipment, a
substantial number of other characteristics indicate that the Secured Equipment
Leases are financing arrangements and that the lessees are the owners of the
Equipment for federal income tax purposes. For example, under the types of
Secured Equipment Leases described in "Business - General," the lease term will
equal or exceed the useful life of the Equipment, and the lessee will have the
option to purchase the Equipment at the end of the lease term for a nominal sum.
Moreover, under the terms of the Secured Equipment Leases, the Company and the
lessees will each agree to treat the Secured Equipment Leases as loans secured
by personal property, rather than leases, for tax purposes.
On the basis of the foregoing, assuming (i) the Secured Equipment
Leases are made on substantially the same terms and conditions described in
"Business - General," and (ii) as represented by the Company, each of the
Secured Equipment Leases will have a term that equals or exceeds the useful life
of the Equipment subject to the lease, it is the opinion of Counsel that the
Company will not be treated as the owner of the Equipment that is subject to the
Secured Equipment Leases for federal income tax purposes and that the Company
will be able to treat the Secured Equipment Leases as loans secured by personal
property. Counsel's opinion that the Company will be organized in conformity
with the requirements for qualification as a REIT is based, in part, on the
assumption that each of the Secured Equipment Leases will conform to the
conditions outlined in clauses (i) and (ii) of the preceding sentence.
INVESTMENT IN JOINT VENTURES
As indicated in "Business -- Joint Venture Arrangements," the Company
may participate in Joint Ventures which own and lease Properties. Assuming that
the Joint Ventures have the characteristics described in "Business - Joint
Venture Arrangements," and are operated in the same manner that the Company
operates with respect to Properties that it owns directly, it is the opinion of
Counsel that (i) the Joint Ventures will be treated as partnerships, as defined
in Sections 7701(a)(2) and 761(a) of the Code and not as associations taxable as
corporations, and that the Company will be subject to tax as a partner pursuant
to Sections 701-761 of the Code and (ii) all material allocations to the Company
of income, gain, loss and deduction as provided in the Joint Venture agreements
and as discussed in the Prospectus will be respected under Section
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704(b) of the Code. The Company has represented that it will not become a
participant in any Joint Venture unless the Company has first obtained advice of
Counsel that the Joint Venture will constitute a partnership for federal income
tax purposes and that the allocations to the Company contained in the Joint
Venture agreement will be respected.
If, contrary to the opinion of Counsel, a Joint Venture were to be
treated as an association taxable as a corporation, the Company would be treated
as a stockholder for tax purposes and would not be treated as owning a pro rata
share of the Joint Venture's assets. In addition, the items of income and
deduction of the Joint Venture would not pass through to the Company. Instead,
the Joint Venture would be required to pay income tax at regular corporate tax
rates on its net income, and distributions to partners would constitute
dividends that would not be deductible in computing the Joint Venture's taxable
income. Moreover, a determination that a Joint Venture is taxable as a
corporation could cause the Company to fail to satisfy the asset tests for
qualification as a REIT. See "Asset Tests" and "Income Tests," above.
REPORTS TO STOCKHOLDERS
The Company will furnish each stockholder with its audited annual
report within 120 days following the close of each fiscal year. These annual
reports will contain the following: (i) financial statements, including a
balance sheet, statement of operations, statement of stockholders' equity, and
statement of cash flows, prepared in accordance with generally accepted
accounting principles which are audited and reported on by independent certified
public accountants; (ii) the ratio of the costs of raising capital during the
period to the capital raised; (iii) the aggregate amount of advisory fees and
the aggregate amount of other fees paid to the Advisor and any Affiliate of the
Advisor by the Company and including fees or charges paid to the Advisor and any
Affiliate of the Advisor by third parties doing business with the Company; (iv)
the Operating Expenses of the Company, stated as a percentage of the Average
Invested Assets (the average of the aggregate book value of the assets of the
Company, for a specified period, invested, directly or indirectly, in equity
interests in and loans secured by real estate, before reserves for depreciation
or bad debts or other similar non-cash reserves, computed by taking the average
of such values at the end of each month during such period) and as a percentage
of its Net Income; (v) a report from the Independent Directors that the policies
being followed by the Company are in the best interest of its stockholders and
the basis for such determination; (vi) separately stated, full disclosure of all
material terms, factors and circumstances surrounding any and all transactions
involving the Company, Directors, Advisor and any Affiliate thereof occurring in
the year for which the annual report is made, and the Independent Directors
shall be specifically charged with a duty to examine and comment in the report
on the fairness of such transactions; and (vii) Distributions to the
stockholders for the period, identifying the source of such Distributions and if
such information is not
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available at the time of the distribution, a written explanation of the relevant
circumstances will accompany the Distributions (with the statement as to the
source of Distributions to be sent to stockholders not later than 60 days after
the end of the fiscal year in which the distribution was made).
Within 75 days following the close of each Company fiscal year, each
stockholder that is a Qualified Plan will be furnished with an annual statement
of Share valuation to enable it to file annual reports required by ERISA as they
relate to its investment in the Company. The statement will report an estimated
value of each Share, prior to the termination of the offering, of $10 per Share
and, after the termination of the offering, based on (i) appraisal updates
performed by the Company based on a review of the existing appraisal and lease
of each Property, focusing on a re-examination of the capitalization rate
applied to the rental stream to be derived from that Property; and (ii) a review
of the outstanding Mortgage Loans and Secured Equipment Leases focusing on a
determination of present value by a re-examination of the capitalization rate
applied to the stream of payments due under the terms of each Mortgage Loan and
Secured Equipment Leases. The Company may elect to deliver such reports to all
stockholders. Stockholders will not be forwarded copies of appraisals or
updates. In providing such reports to stockholders, neither the Company nor its
Affiliates thereby make any warranty, guarantee, or representation that (i) the
stockholders or the Company, upon liquidation, will actually realize the
estimated value per Share, or (ii) the stockholders will realize the estimated
net asset value if they attempt to sell their Shares.
If the Company is required by the Securities Exchange Act of 1934, as
amended, to file quarterly reports with the Securities and Exchange Commission
on Form 10-Q, stockholders will be furnished with a summary of the information
contained in each such report within 60 days after the end of each fiscal
quarter. Such summary information generally will include a balance sheet, a
quarterly statement of income, and a statement of cash flows, and any other
pertinent information regarding the Company and its activities during the
quarter. Stockholders also may receive a copy of any Form 10-Q upon request to
the Company. If the Company is not subject to this filing requirement,
stockholders will be furnished with a semi-annual report within 60 days after
each six-month period containing information similar to that contained in the
quarterly report but applicable to such six-month period.
Stockholders and their duly authorized representatives are entitled to
inspect and copy, at their expense, the books and records of the Company at all
times during regular business hours, upon reasonable prior notice to the
Company, at the location where such reports are kept by the Company.
Stockholders, upon request and at their expense, may obtain full information
regarding the financial condition of the Company, a copy of the Company's
federal, state, and local income tax returns for each fiscal year of the
Company, and, subject to certain confidentiality requirements, a list containing
the name, address, and Shares held by each stockholder.
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The fiscal year of the Company will be the calendar year.
The Company's federal tax return (and any applicable state income tax
returns) will be prepared by the accountants regularly retained by the Company.
Appropriate tax information will be submitted to the stockholders within 30 days
following the end of each fiscal year of the Company. A specific reconciliation
between GAAP and income tax information will not be provided to the
stockholders; however, such reconciling information will be available in the
office of the Company for inspection and review by any interested stockholder.
THE OFFERING
GENERAL
A minimum of 250,000 Shares ($2,500,000) and a maximum of 15,000,000
Shares ($150,000,000) are being offered at a purchase price of $10.00 per share.
In addition, the Company has registered an additional 500,000 Shares
($5,000,000) available only to stockholders who receive a copy of this
Prospectus and who elect to participate in the Reinvestment Plan. Any
participation in such plan by a person who becomes a stockholder otherwise than
by participating in this offering will require solicitation under a separate
prospectus. See "Summary of Reinvestment Plan." The Board of Directors may
determine to engage in future offerings of Common Stock of up to the number of
unissued authorized shares of Common Stock available following termination of
this offering.
A minimum investment of 250 Shares ($2,500) is required. IRAs, Keogh
plans, and pension plans must make a minimum investment of at least 100 Shares
($1,000). For Minnesota investors, IRAs and qualified plans must make a minimum
investment of 200 Shares ($2,000) and, for Iowa investors, IRAs and qualified
plans must make a minimum investment of 250 Shares ($2,500). Any investor who
makes the required minimum investment may purchase additional Shares in
increments of one Share. See "The Offering - General," "The Offering -
Subscription Procedures," and "Summary of Reinvestment Plan."
No Shares will be sold and the offering will terminate unless
subscriptions for at least 250,000 Shares ($2,500,000) have been obtained within
one year after the date of this Prospectus. If such minimum amount is sold, the
Company may, in its sole discretion, and without prior notice to the
subscribers, elect to extend the offering for up to one additional year
thereafter (in states that permit such an extension). Until subscription funds
for the Company total $2,500,000, the funds will be held in escrow by SouthTrust
Asset Management Company of Florida, N.A., and interest earned on such funds
will accrue to the benefit of subscribers. Pursuant to the requirements of the
Commissioner of Securities of the State of Pennsylvania, subscriptions from
Pennsylvania residents may not be released from escrow, or included in
determining whether the $2,500,000 minimum for the Company has been reached,
until subscriptions for
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Shares totalling at least $7,775,000 have been received from all sources.
Subscription amounts with all interest due will be returned in the event that
subscriptions aggregating $2,500,000 are not received within one year after the
commencement of the offering.
PLAN OF DISTRIBUTION
The Shares will be offered to the public on a "best efforts" basis
(which means that no one is guaranteeing that any minimum amount will be sold)
through the Soliciting Dealers, who will be members of the National Association
of Securities Dealers, Inc. (the "NASD") or other persons or entities exempt
from broker-dealer registration, and the Managing Dealer. The Soliciting Dealers
will use their best efforts during the offering period to find eligible persons
who desire to subscribe for the purchase of Shares from the Company. Both James
M. Seneff, Jr. and Robert A. Bourne are Affiliates and licensed principals of
the Managing Dealer, and the Advisor is an Affiliate of the Managing Dealer.
Prior to a subscriber's admission to the Company as a stockholder,
funds paid by such subscriber will be deposited in an interest-bearing escrow
account with SouthTrust Asset Management Company of Florida, N.A. The Company,
within 30 days after the date a subscriber is admitted to the Company, will pay
to such subscriber the interest (generally calculated on a daily basis) actually
earned on such subscriber's funds. After the initial admission of stockholders
to the Company in connection with the sale of at least 250,000 Shares, interest
will be payable only to those subscribers whose funds have been held in escrow
by such bank for at least 20 days. Stockholders otherwise are not entitled to
interest earned on Company funds or to receive interest on their Invested
Capital. See "Escrow Arrangements" below.
Subject to the provisions for reduced Selling Commissions described
below, the Company will pay the Managing Dealer an aggregate of 7.5% of the
Gross Proceeds as Selling Commissions. The Managing Dealer shall reallow fees of
up to 7% to the Soliciting Dealers with respect to Shares sold by them. In
addition, the Company will pay the Managing Dealer, as an expense allowance, a
marketing support and due diligence expense reimbursement fee equal to 0.5% of
Gross Proceeds. All or any portion of this fee may be reallowed to any
Soliciting Dealer with the prior written approval from, and in the sole
discretion of, the Managing Dealer, based on such factors as the number of
Shares sold by such Soliciting Dealer, the assistance, if any, of such
Soliciting Dealer in marketing the offering, and bona fide due diligence
expenses incurred. The Company also will issue to the Managing Dealer, a
Soliciting Dealer Warrant to purchase one share of Common Stock for every 25
Shares sold, to be exercised, if at all, during the Exercise Period, at a price
of $12.00 per share. The Managing Dealer may, in its sole discretion, reallow
all or any part of such Soliciting Dealer Warrant to certain Soliciting Dealers,
unless prohibited by federal or state securities laws. Soliciting Dealer
Warrants will not be exercisable until one year from date of issuance.
Soliciting
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Dealer Warrants are not transferable or assignable except by the Managing
Dealer, the Soliciting Dealers, their successors in interest, or individuals who
are both officers and directors of such a person. See "Summary of Articles of
Incorporation and Bylaws -- Description of Capital Stock -- Soliciting Dealer
Warrants." Stockholders who elect to participate in the Reinvestment Plan will
be charged Selling Commissions and the marketing support and due diligence fee
on Shares purchased for their accounts on the same basis as investors who
purchase Shares in the offering. See "Summary of Reinvestment Plan."
A registered principal or representative of the Managing Dealer or a
Soliciting Dealer, employees, officers, and Directors of the Company, or
employees, officers and directors of the Advisor, any of their Affiliates and
any Plan established exclusively for the benefit of such persons or entities may
purchase Shares net of 7% commissions, at a per Share purchase price of $9.30.
Clients of an investment adviser registered under the Investment Advisers Act of
1940, as amended, who have been advised by such adviser on an ongoing basis
regarding investments other than in the Company, and who are not being charged
by such adviser or its Affiliates, through the payment of commissions or
otherwise, for the advice rendered by such adviser in connection with the
purchase of the Shares, may purchase the Shares net of 7% commissions. In
addition, Soliciting Dealers that have a contractual arrangement with their
clients for the payment of fees which is consistent with accepting Selling
Commissions, in their sole discretion, may elect not to accept any Selling
Commissions offered by the Company for Shares that they sell. In that event,
such Shares shall be sold to the investor net of all Selling Commissions, at a
per Share purchase price of $9.30. In connection with the purchases of certain
minimum numbers of Shares, the amount of Selling Commissions otherwise payable
to the Managing Dealer or a Soliciting Dealer shall be reduced in accordance
with the following schedule:
<TABLE>
<CAPTION>
Purchase Price for Reallowed Commissions on Sales
Incremental Share in per Share on Total Sale for Increment
Dollar Amount Volume Discount Share in Volume Discount Range
of Shares Purchased Range Per Share Percent Dollar Amount
------------------- -------------------- ------- -------------
<S> <C>
$10 -- $250,000 $10.00 7.0% $0.70
250,010 -- 500,000 9.85 5.5% 0.55
500,010 -- 750,000 9.70 4.0% 0.40
750,010 -- 1,000,000 9.60 3.0% 0.30
1,000,010 -- 5,000,000 9.50 2.0% 0.20
</TABLE>
Selling Commissions for purchases of $5,000,000 or more will, in the
sole discretion of the Managing Dealer, be reduced to $0.15 per Share or less
but in no event will the proceeds to the Company be less than $9.25 per Share.
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For example, if an investor purchases 100,000 Shares, the investor
could pay as little as $978,750 rather than $1,000,000 for the Shares, in which
event the Selling Commissions on the sale of such Shares would be $53,750 ($0.54
per Share). The net proceeds to the Company will not be affected by such
discounts.
Subscriptions may be combined for the purpose of determining the volume
discounts in the case of subscriptions made by any "purchaser," provided all
such Shares are purchased through the same Soliciting Dealer or through the
Managing Dealer. The volume discount will be prorated among the separate
subscribers considered to be a single "purchaser." Shares purchased pursuant to
the Reinvestment Plan on behalf of a Participant in the Reinvestment Plan will
not be combined with other subscriptions for Shares by the investor in
determining the
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volume discount to which such investor may be entitled. See "Summary of
Reinvestment Plan." Further subscriptions for Shares will not be combined for
purposes of the volume discount in the case of subscriptions by any "purchaser"
who subscribes for additional Shares subsequent to the purchaser's initial
purchase
of Shares.
Any request to combine more than one subscription must be made in
writing in a form satisfactory to the Company and must set forth the basis for
such request. Any such request will be subject to verification by the Managing
Dealer that all of such subscriptions were made by a single "purchaser." If a
"purchaser" does not reduce the per Share purchase price, the excess purchase
price over the discounted purchase price will be returned to the actual separate
subscribers for Shares.
For purposes of such volume discounts, "purchaser" includes (i) an
individual, his or her spouse, and their children under the age of 21, who
purchase the Shares for his or her or their own accounts, and all pension or
trust funds established by each such individual; (ii) a corporation,
partnership, association, joint-stock company, trust fund, or any organized
group of persons, whether incorporated or not (provided that the entities
described in this clause (ii) must have been in existence for at least six
months before purchasing the Shares and must have formed such group for a
purpose other than to purchase the Shares at a discount); (iii) an employee's
trust, pension, profit-sharing, or other employee benefit plan qualified under
Section 401 of the Code; and (iv) all pension, trust, or other funds maintained
by a given bank. In addition, the Company, in its sole discretion, may aggregate
and combine separate subscriptions for Shares received during the offering
period from (i) the Managing Dealer or the same Soliciting Dealer, (ii)
investors whose accounts are managed by a single investment adviser registered
under the Investment Advisers Act of 1940, (iii) investors over whose accounts a
designated bank, insurance company, trust company, or other entity exercises
discretionary investment responsibility, or (iv) a single corporation,
partnership, trust association, or other organized group of persons, whether
incorporated or not, and whether such subscriptions are by or for the benefit of
such corporation, partnership, trust association, or group. Except as provided
in this paragraph, subscriptions will not be cumulated, combined, or aggregated.
Any reduction in commissions will reduce the effective purchase price
per Share to the investor involved but will not alter the net proceeds payable
to the Company as a result of such sale. All investors will be deemed to have
contributed the same amount per Share to the Company whether or not the investor
receives a discount. Accordingly, for purposes of Distributions, investors who
pay reduced commissions will receive higher returns on their investments in the
Company as compared to investors who do not pay reduced commissions.
In connection with the sale of Shares, certain registered principals or
representatives of the Managing Dealer may perform wholesaling functions for
which they will receive compensation
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payable by the Managing Dealer in an aggregate amount not in excess of one
percent of Gross Proceeds. The first 0.5% of Gross Proceeds of any such fee will
be paid from the 7.5% of Gross Proceeds payable to the Managing Dealer as
Selling Commissions. In addition, the Advisor and its Affiliates, including the
Managing Dealer and its registered principals or representatives, may incur due
diligence fees and other expenses, including expenses related to sales seminars
and wholesaling activities, a portion of which may be paid by the Company.
In addition, stockholders may agree with their participating Soliciting
Dealer and the Managing Dealer to have Selling Commissions relating to their
Shares paid over a seven-year period pursuant to a deferred commission
arrangement (the "Deferred Commission Option"). Stockholders electing the
Deferred Commission Option will be required to pay a total of $9.40 per Share
purchased upon subscription, rather than $10.00 per Share, with respect to which
$0.15 per Share will be payable as Selling Commissions due upon subscription,
$0.10 of which may be reallowed to the Soliciting Dealer by the Managing Dealer.
For each of the six years following such subscription on a date to be determined
by the Managing Dealer, $0.10 per Share will be paid by the Company as deferred
Selling Commissions with respect to Shares sold pursuant to the Deferred
Commission Option, which amounts will be deducted from and paid out of
distributions otherwise payable to such stockholders holding such Shares and may
be reallowed to the Soliciting Dealer by the Managing Dealer. The net proceeds
to the Company will not be affected by the election of the Deferred Commission
Option. Under this arrangement, a stockholder electing the Deferred Commission
Option will pay a 1% Selling Commission per year thereafter for the next six
years which will be deducted from and paid by the Company out of distributions
otherwise payable to such stockholder. At such time, if any, as Listing occurs,
the Company shall have the right to require the acceleration of all outstanding
payment obligations under the Deferred Commission Option. All such Selling
Commissions will be paid to the Managing Dealer, whereby a total of up to 7% of
such Selling Commissions may be reallowed to the Soliciting Dealer.
The Company or its Affiliates also may provide incentive items for
registered representatives of the Managing Dealer and the Soliciting Dealers,
which in no event shall exceed an aggregate of $100 per annum per participating
salesperson. In the event other incentives are provided to registered
representatives of the Managing Dealer or the Soliciting Dealers, they will be
paid only in cash, and such payments will be made only to the Managing Dealer or
the Soliciting Dealers rather than to their registered representatives. Any such
sales incentive program must first have been submitted for review by the NASD,
and must comply with Rule 2710(c)(6)(B)(xii). Costs incurred in connection with
such sales incentive programs, if any, will be considered underwriting
compensation. See "Estimated Use of Proceeds."
The Company will also reimburse the Managing Dealer and the Soliciting
Dealers for bona fide due diligence expenses and certain expenses as incurred in
connection with the offering.
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The total amount of underwriting compensation, including commissions
and reimbursement of expenses, paid in connection with the offering will not
exceed 10.5% of Gross Proceeds.
The Managing Dealer and the Soliciting Dealers severally will indemnify
the Company and its officers and Directors, the Advisor and its officers and
directors and their Affiliates, against certain liabilities, including
liabilities under the Securities Act of 1933.
SUBSCRIPTION PROCEDURES
Procedures Applicable to All Subscriptions. In order to purchase
Shares, the subscriber must complete and execute the Subscription Agreement. Any
subscription for Shares must be accompanied by cash or check payable to
"SouthTrust Asset Management Company of Florida, N.A., Escrow Agent" (or to the
Company after subscription funds are released from escrow), in the amount of
$10.00 per Share. See "Escrow Arrangements" below.
Certain Soliciting Dealers who have "net capital," as defined in the applicable
federal securities regulations, of $250,000 or more may instruct their customers
to make their checks for Shares for which they have subscribed payable directly
to the Soliciting Dealer. In such case, the Soliciting Dealer will issue a check
made payable to the order of the Escrow Agent for the aggregate amount of the
subscription proceeds.
Each subscription will be accepted or rejected by the Company within 30
days after its receipt, and no sale of Shares shall be completed until at least
five business days after the date on which the subscriber receives a copy of
this Prospectus. If a subscription is rejected, the funds will be returned to
the subscriber within ten business days after the date of such rejection,
without interest and without deduction. A form of the Subscription Agreement is
set forth as Appendix D to this Prospectus. The subscription price of each Share
is payable in full upon execution of the Subscription Agreement. A subscriber
whose subscription is accepted shall be sent a confirmation of his or her
purchase.
The Advisor and each Soliciting Dealer who sells Shares on behalf of
the Company have the responsibility to make every reasonable effort to determine
that the purchase of Shares is appropriate for an investor and that the
requisite suitability standards are met. See "Suitability Standards and How to
Subscribe -- Suitability Standards." In making this determination, the
Soliciting Dealers will rely on relevant information provided by the investor,
including information as to the investor's age, investment objectives,
investment experience, income, net worth, financial situation, other
investments, and any other pertinent information. Each investor should be aware
that determining suitability is the responsibility of the Soliciting Dealer.
The Advisor and each Soliciting Dealer shall maintain records of the
information used to determine that an investment in the Shares is suitable and
appropriate for an investor. The Advisor and each Soliciting Dealer shall
maintain these records for at least six years.
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Subscription payments will be released from escrow promptly after the
receipt by the Company of subscriptions for a minimum of 250,000 Shares
(excluding subscriptions of Pennsylvania investors). Persons whose subscriptions
are accepted prior to the release of such payments from escrow will be admitted
as stockholders within 15 days after such release of payments. Thereafter,
subscribers will be admitted as stockholders not later than the last day of the
calendar month following acceptance of their subscriptions.
Procedures Applicable to Non-Telephonic Orders. Each Soliciting Dealer
receiving a subscriber's check made payable solely to the bank escrow agent
(where, pursuant to such Soliciting Dealer's internal supervisory procedures,
internal supervisory review must be conducted at the same location at which
subscription documents and checks are received from subscribers), will deliver
such checks to the Managing Dealer no later than the close of business of the
first business day after receipt of the subscription documents by the Soliciting
Dealer except that, in any case in which the Soliciting Dealer maintains a
branch office, and, pursuant to a Soliciting Dealer's internal supervisory
procedures, final internal supervisory review is conducted at a different
location, the branch office shall transmit the subscription documents and check
to the Soliciting Dealer conducting such internal supervisory review by the
close of business on the first business day following their receipt by the
branch office and the Soliciting Dealer shall review the subscription documents
and subscriber's check to ensure their proper execution and form and, if they
are acceptable, transmit the check to the Managing Dealer by the close of
business on the first business day after the check is received by the Soliciting
Dealer. The Managing Dealer will transmit the check to the Escrow Agent by no
later than the close of business on the first business day after the check is
received from the Soliciting Dealer.
Procedures Applicable to Telephonic Orders. Certain Soliciting Dealers
may permit investors to subscribe for Shares by telephonic order to the
Soliciting Dealer. There are no additional fees associated with telephonic
orders. Subscribers who wish to subscribe for Shares by telephonic order to the
Soliciting Dealer may complete the telephonic order either by delivering a check
in the amount necessary to purchase the Shares to be covered by the subscription
agreement to the Soliciting Dealer or by authorizing the Soliciting Dealer to
pay the purchase price for the Shares to be covered by the subscription
agreement from funds available in an account maintained by the Soliciting Dealer
on behalf of the subscriber. A subscriber must specifically authorize the
registered representative and branch manager to execute the subscription
agreement on behalf of the subscriber and must already have made or agreed to
make payment for the Shares covered by the subscription agreement.
To the extent that customers of any Soliciting Dealer wish to subscribe
and pay for Shares with funds held by or to be deposited with those firms, then
such firms shall, subject to Rule 15c2-4 promulgated under the Securities
Exchange Act of
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1934, either (i) upon receipt of an executed subscription agreement or direction
to execute a subscription agreement on behalf of a customer, to forward the
offering price for the Shares covered by the subscription agreement on or before
the close of business of the first business day following receipt or execution
of a subscription agreement by such firms to the Managing Dealer (except that,
in any case in which the Soliciting Dealer maintains a branch office, and,
pursuant to a Soliciting Dealer's internal supervisory procedures, final
internal supervisory review is conducted at a different location, the branch
office shall transmit the subscription documents and subscriber's check to the
Soliciting Dealer conducting such internal supervisory review by the close of
business on the first business day following their receipt by the branch office
and the Soliciting Dealer shall review the subscription documents and
subscriber's check to ensure their proper execution and form and, if they are
acceptable, transmit the check to the Managing Dealer by the close of business
on the first business day after the check is received by the Soliciting Dealer),
or (ii) to solicit indications of interest in which event (a) such Soliciting
Dealers must subsequently contact the customer indicating interest to confirm
the interest and give instructions to execute and return a subscription
agreement or to receive authorization to execute the subscription agreement on
the customer's behalf, (b) such Soliciting Dealers must mail acknowledgments of
receipt of orders to each customer confirming interest on the business day
following such confirmation, (c) such Soliciting Dealers must debit accounts of
such customers on the fifth business day (the "debit date") following receipt of
the confirmation referred to in (a), and (d) such Soliciting Dealers must
forward funds to the Managing Dealer in accordance with the procedures and on
the schedule set forth in clause (i) of this sentence. If the procedure in (ii)
is adopted, subscribers' funds are not required to be in their accounts until
the debit date. The Managing Dealer will transmit the check to the Escrow Agent
by no later than the close of business on the first business day after the check
is received from the Soliciting Dealer.
Investors, however, who are residents of Florida, Iowa, Maine,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Mexico,
North Carolina, Ohio, Oregon, South Dakota, Tennessee, or Washington must
complete and sign the Subscription Agreement in order to subscribe for Shares
and, therefore, may not subscribe for Shares by telephone. Representatives of
Soliciting Dealers who accept telephonic orders will execute the Subscription
Agreement on behalf of investors who place such orders. All investors who
telephonically subscribe for Shares will receive, with confirmation of their
subscription, a second copy of the Prospectus.
Residents of California, Oklahoma, and Texas who telephonically
subscribe for Shares will have the right to rescind such subscriptions within
ten days from receipt of the confirmation. Such investors who do not rescind
their subscriptions within such ten-day period shall be deemed to have assented
to all of the terms and conditions of the Subscription Agreement.
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Additional Subscription Procedures. Investors who have questions or who
wish to place orders for Shares by telephone or to participate in the
Reinvestment Plan should contact their Soliciting Dealer. Certain Soliciting
Dealers do not permit telephonic subscriptions or participation in the
Reinvestment Plan. See "Summary of Reinvestment Plan." The form of Subscription
Agreement for certain Soliciting Dealers who do not permit telephonic
subscriptions or participation in the Reinvestment Plan differs slightly from
the form attached hereto as Appendix D, primarily in that it will eliminate one
or both of these options.
Investors who wish to establish an IRA for the purpose of investing
solely in Shares may do so by completing, in addition to the Subscription
Agreement, the special IRA account form attached hereto as a part of Appendix D
appointing Franklin Bank, N.A., an unaffiliated bank, to act as their IRA
custodian. The custodian will not have the authority to vote any of the Shares
held in an IRA except in accordance with written instructions from the
beneficiary of the IRA, although it will hold the Shares on behalf of the
beneficiary and make distributions and, at the direction and in the discretion
of the beneficiary, investments in Shares or in other securities issued by
Affiliates of the Advisor. The custodian will not have authority at any time to
make investments through any such IRA on behalf of the beneficiary if the
investments do not constitute Shares or other securities issued by Affiliates of
the Advisor. The investors will not be required to pay any initial or annual
fees in connection with any such IRA. The fees for establishing and maintaining
all such IRAs will be paid by the Advisor initially and annually up to an
aggregate amount of $5,000, and by the Company above such amount.
ESCROW ARRANGEMENTS
Subscription proceeds will be received in trust and deposited in a
separate account with SouthTrust Asset Management Company of Florida, N.A. (the
"Bank"). No Shares will be sold by the Company, no commissions or fees will be
paid by it, and the initial admission of investors of the Company will not take
place unless subscriptions have been accepted for at least 250,000 Shares
($2,500,000) and subscription funds from investors who place telephonic orders
have been on deposit with the Bank for at least 15 days from the date written
confirmation is mailed to the investor by the Managing Dealer. If subscriptions
for at least $2,500,000 have not been received, accepted, and paid for within
one year from the initial date of this Prospectus, all funds received will be
promptly repaid in full, with any interest earned thereon. In addition,
California , Florida and Iowa investors only will have the right, as provided in
the attached form of Subscription Agreement, to withdraw their subscription
funds if subscribers for at least $2,500,000 have not been accepted by the
Company within six months after the initial date of this Prospectus and the
Company elects at that time not to terminate the offering.
The Escrow Agreement between the Company and the Bank provides that
escrowed funds will be invested by the Bank in an interest-bearing account with
the power of investment in
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short-term, highly liquid securities issued or guaranteed by the U.S.
Government, other investments permitted under Rule 15c2-4 of the Securities
Exchange Act of 1934, as amended, or, upon receipt of subscription proceeds for
at least 250,000 Shares (provided that subscription funds from investors who
place telephonic orders have been on deposit with the Bank for at least 15
days), in other short-term, highly liquid investments with appropriate safety of
principal. Such subscription funds will be released periodically (at least once
per month) upon admission of stockholders to the Company.
The interest, if any, earned on subscription proceeds prior to their
release from escrow, within 30 days after the date a subscriber is admitted to
the Company as a stockholder, will be distributed to each subscriber. After the
initial admission of stockholders to the Company in connection with the sale of
at least 250,000 Shares, interest will be payable only to those subscribers
whose funds have been held in escrow by the Bank for at least 20 days.
Stockholders will not otherwise be entitled to interest earned on Company funds
or to receive interest on their Invested Capital.
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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 prospective investors. This discussion does not purport to deal with
all aspects of ERISA or the Code that may be relevant to particular investors in
light of their particular circumstances.
A PROSPECTIVE INVESTOR THAT IS AN EMPLOYEE BENEFIT PLAN SUBJECT TO
ERISA, A TAX-QUALIFIED RETIREMENT PLAN, AN IRA, OR A GOVERNMENTAL, CHURCH, OR
OTHER PLAN THAT IS EXEMPT FROM ERISA IS ADVISED TO CONSULT ITS OWN LEGAL ADVISOR
REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER APPLICABLE PROVISIONS OF
ERISA, THE CODE, AND STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, OR SALE
OF THE SHARES BY SUCH PLAN OR IRA.
Fiduciary Duties and Prohibited Transactions. A fiduciary of a pension,
profit-sharing, retirement or other employee benefit plan subject to ERISA (an
"ERISA Plan") should consider the fiduciary standards under ERISA in the context
of the ERISA Plan's particular circumstances before authorizing an investment of
any portion of the ERISA Plan's assets in the Common Stock. Accordingly, such
fiduciary should consider (i) whether the investment satisfies the
diversification requirements of Section 404(a)(1)(C) of ERISA; (ii) whether the
investment is in accordance with the documents and instruments governing the
ERISA Plan as required by Section 404(a)(1)(D) of ERISA; (iii) whether the
investment is prudent under Section 404(a)(1)(B) of ERISA; and (iv) whether the
investment is solely in the interests of the ERISA Plan participants and
beneficiaries and for the exclusive purpose of providing benefits to the ERISA
Plan participants and beneficiaries and defraying reasonable administrative
expenses of the ERISA Plan as required by Section 404(a)(1)(A) of ERISA.
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In addition to the imposition of fiduciary standards, ERISA and Section
4975 of the Code prohibit a wide range of transactions between an ERISA Plan, an
IRA, or certain other plans (collectively, a "Plan") and persons who have
certain specified relationships to the Plan ("parties in interest" within the
meaning of ERISA and "disqualified persons" within the meaning of the Code).
Thus, a Plan fiduciary or person making an investment decision for a Plan also
should consider whether the acquisition or the continued holding of the Shares
might constitute or give rise to a direct or indirect prohibited transaction.
Plan Assets. The prohibited transaction rules of ERISA and the Code
apply to transactions with a Plan and also to transactions with the "plan
assets" of the Plan. The "plan assets" of a Plan include the Plan's interest in
an entity in which the Plan invests and, in certain circumstances, the assets of
the entity in which the Plan holds such interest. The term "plan assets" is not
specifically defined in ERISA or the Code, nor, as of the date hereof, has it
been interpreted definitively by the courts in litigation. On November 13, 1986,
the United States Department of Labor, the governmental agency primarily
responsible for administering ERISA, adopted a final regulation (the "DOL
Regulation") setting out the standards it will apply in determining whether an
equity investment in an entity will cause the assets of such entity to
constitute "plan assets." The DOL Regulation applies for purposes of both ERISA
and Section 4975 of the Code.
Under the DOL Regulation, if a Plan acquires an equity interest in an
entity, which equity interest is not a "publicly-offered security," the Plan's
assets generally would include both the equity interest and an undivided
interest in each of the entity's underlying assets unless certain specified
exceptions apply. The DOL Regulation defines a publicly-offered security as a
security that is "widely held," "freely transferable," and either part of a
class of securities registered under Section 12(b) or 12(g) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or sold pursuant to an
effective registration statement under the Securities Act (provided the
securities are registered under the Exchange Act within 120 days after the end
of the fiscal year of the issuer during which the offering occurred). The Shares
are being sold in an offering registered under the Securities Act of 1933, as
amended, and will be registered within the relevant time period under Section
12(b) of the Exchange Act.
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The DOL Regulation provides 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. However, a class of securities
will not fail to be "widely held" solely 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 expects the Shares to be
"widely held" upon completion of the offering.
The DOL Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on
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the basis of all the relevant facts and circumstances. The DOL Regulation
further provides that when 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 affect, alone or in combination, the
finding that such securities are freely transferable. The Company believes that
the restrictions imposed under the Articles of Incorporation on the transfer of
the Common Stock are limited to restrictions on transfer generally permitted
under the DOL Regulation and are not likely to result in the failure of the
Common Stock to be "freely transferable." See "Summary of the Articles of
Incorporation and Bylaws -- Restriction on Ownership." The DOL Regulation only
establishes a presumption in favor of a finding of free transferability and,
therefore, no assurance can be given that the Department of Labor and the U.S.
Treasury Department would not reach a contrary conclusion with respect to the
Common Stock.
Assuming that the Shares will be "widely held" and "freely
transferable," the Company believes that the Shares will be publicly-offered
securities for purposes of the DOL Regulation and that the assets of the Company
will not be deemed to be "plan assets" of any Plan that invests in the Shares.
DETERMINATION OF OFFERING PRICE
The offering price per Share was determined by the Company based upon
the estimated costs of investing in the Properties and the Mortgage Loans, the
fees to be paid to the Advisor and its Affiliates, as well as fees to third
parties, and the expenses of this offering.
SUPPLEMENTAL SALES MATERIAL
Shares are being offered only through this Prospectus. In addition to
this Prospectus, the Company may use certain sales materials in connection with
this offering, although only when accompanied or preceded by the delivery of
this Prospectus. No sales material may be used unless it has first been approved
in writing by the Company. As of the date of this Prospectus, it is anticipated
that the following sales material will be authorized for use by the Company in
connection with this offering: (i) a brochure entitled CNL Health Care
Properties, Inc.; (ii) a fact sheet describing the general features of the
Company; (iii) a cover letter transmitting the Prospectus; (iv) a summary
description of the offering; (v) a slide presentation; (vi) broker updates;
(vii) an audio cassette presentation; (viii) a video presentation; (ix) an
electronic media presentation; (x) a cd-rom presentation; (xi) a script for
telephonic marketing; (xii) seminar advertisements and invitations; and (xiii)
certain third-party articles. All such materials will be used only by registered
broker-dealers that are members of the NASD. The Company also may respond to
specific questions from Soliciting Dealers and prospective investors. Additional
materials relating to the offering may be made available to Soliciting Dealers
for their internal use.
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LEGAL OPINIONS
The legality of the shares being offered hereby has been passed upon
for the Company by Shaw Pittman Potts & Trowbridge. Statements made under "Risk
Factors -- Tax Risks" and "Federal Income Tax Considerations" have been reviewed
by Shaw Pittman Potts & Trowbridge, who have given their opinion that such
statements as to matters of law are correct in all material respects. Shaw
Pittman Potts & Trowbridge serves as securities and tax counsel to the Company
and to the Advisor and certain of their Affiliates. Certain members of the firm
have invested in prior programs sponsored by the Affiliates of the Company in
aggregate amounts which do not exceed one percent of the amounts sold by any
such program, and members of the firm also may invest in the Company.
EXPERTS
The audited balance sheet and statement of stockholder's equity of the
Company as of December 31, 1997, and for the period December 22, 1997 (date of
inception) through December 31, 1997, included in this Prospectus, have been
included herein in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
A Registration Statement has been filed with the Securities and
Exchange Commission with respect to the securities offered hereby. This
Prospectus does not contain all information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. Statements contained in this Prospectus as to the
contents of any document are necessarily summaries of such documents, and in
each instance reference is made to the copy of such documents filed with the
Commission, each such statement being qualified in all respects by such
reference. For further information regarding the Company and the Shares,
reference is hereby made to the Registration Statement and to the exhibits and
schedules filed or incorporated as a part thereof which may be obtained from the
principal office of the Commission in Washington, D.C., upon payment of the fee
prescribed by the Commission, or examined at the principal office of the
Commission without charge. The Commission maintains a Web site located at
http://www.sec.gov. that contains information regarding registrants that file
electronically with the Commission.
DEFINITIONS
"Acquisition Expenses" means any and all expenses incurred by the
Company, the Advisor, or any Affiliate of either in connection with the
selection or acquisition of any Property or the making of any Mortgage Loan,
whether or not acquired, including, without limitation, legal fees and expenses,
travel
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and communication expenses, costs of appraisals, nonrefundable option payments
on property not acquired, accounting fees and expenses, and title insurance.
"Acquisition Fees" means any and all fees and commissions, exclusive of
Acquisition Expenses, paid by any person or entity to any other person or entity
(including any fees or commissions paid by or to any Affiliate of the Company or
the Advisor) in connection with making or investing in Mortgage Loans or the
purchase, development or construction of a Property, including, without
limitation, real estate commissions, acquisition fees, finder's fees, selection
fees, Development Fees, Construction Fees, nonrecurring management fees,
consulting fees, loan fees, points, or any other fees or commissions of a
similar nature. Excluded shall be development fees and construction fees paid to
any person or entity not affiliated with the Advisor in connection with the
actual development and construction of any Property.
"ADLs" means activities of daily living, such as eating, dressing,
walking, bathing and bathroom use.
"Advisor" means CNL Health Care Advisors, Inc., a Florida corporation,
any successor advisor to the Company, or any person or entity to which CNL
Health Care Advisors, Inc. or any successor advisors subcontracts substantially
all of its functions.
"Advisory Agreement" means the Advisory Agreement between the Company
and the Advisor, pursuant to which the Advisor will act as the advisor to the
Company and provide specified services to the Company.
"Affiliate" means (i) any person or entity directly or indirectly
through one or more intermediaries controlling, controlled by, or under common
control with another person or entity; (ii) any person or entity directly or
indirectly owning, controlling, or holding with power to vote ten percent (10%)
or more of the outstanding voting securities of another person or entity; (iii)
any officer, director, partner, or trustee of such person or entity; (iv) any
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person ten percent (10%) or more of whose outstanding voting securities are
directly or indirectly owned, controlled or held, with power to vote, by such
other person; and (v) if such other person or entity is an officer, director,
partner, or trustee of a person or entity, the person or entity for which such
person or entity acts in any such capacity.
"Articles of Incorporation" means the Articles of Incorporation, as the
same may be amended from time to time, of the Company.
"Asset Management Fee" means the fee payable to the Advisor for
day-to-day professional management services in connection with the Company and
its investments in Properties and Mortgage Loans pursuant to the Advisory
Agreement.
"Assets" means Properties, Mortgage Loans and Secured
Equipment Leases, collectively.
"Average Invested Assets" means, for a specified period, the average of
the aggregate book value of the assets of the Company invested, directly or
indirectly, in equity interests in and loans secured by real estate before
reserves for depreciation or bad debts or other similar non-cash reserves,
computed by taking the average of such values at the end of each month during
such period.
"Bank" means SouthTrust Asset Management Company of Florida, N.A.,
escrow agent for the offering.
"Board of Directors" means the Directors of the Company.
"Bylaws" means the bylaws of the Company.
"Certificate of Need Laws" means laws enacted by certain states
requiring a health care corporation to apply and to be approved prior to
establishing or modifying a health care facility.
"CNL" means CNL Group, Inc., the parent company of the Advisor and the
Managing Dealer.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" means the common stock, par value $.01 per
share, of the Company.
"Competitive Real Estate Commission" means a real estate or brokerage
commission for the purchase or sale of property which is reasonable, customary,
and competitive in light of the size, type, and location of the property. The
total of all real estate commissions paid by the Company to all persons and
entities (including the subordinated real estate disposition fee payable to the
Advisor) in connection with any Sale of one or more of the Company's Properties
shall not exceed the lesser of (i) a Competitive Real Estate Commission or (ii)
six percent of the gross sales price of the Property or Properties.
"Construction Fee" means a fee or other renumeration for
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acting as a general contractor and/or construction manager to construct
improvements, supervise and coordinate projects or provide major repairs or
rehabilitation on a Property.
"Counsel" means tax counsel to the Company.
"Deferred Commission Option" means an agreement between a stockholder,
the participating Soliciting Dealer and the Managing Dealer to have Selling
Commissions paid over a seven year period as described in "The Offering - Plan
of Distribution."
"Development Fee" means a fee for such activities as negotiating and
approving plans and undertaking to assist in obtaining zoning and necessary
variances and necessary financing for a specific Property, either initially or
at a later date.
"Director" means a member of the Board of Directors of the
Company.
"Distributions" means any distributions of money or other property by
the Company to owners of shares of Common Stock, including distributions that
may constitute a return of capital for federal income tax purposes.
"Equipment" means the furniture, fixtures and equipment used at Health
Care Facilities by operators of Health Care Facilities.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"ERISA Plan" means a pension, profit-sharing, retirement, or other
employee benefit plan subject to ERISA.
"Excess Shares" means the excess shares exchanged for shares of Common
Stock or Preferred Stock, as the case may be, transferred or proposed to be
transferred in excess of the Ownership Limit or which would otherwise jeopardize
the Company's status as a REIT under the Code.
"Front-End Fees" means fees and expenses paid by any person or entity
to any person or entity for any services rendered in connection with the
organization of the Company and investing in Properties and Mortgage Loans,
including Selling Commissions, marketing support and due diligence expense
reimbursement fees, Organizational and Offering Expenses, Acquisition Expenses
and Acquisition Fees paid out of Gross Proceeds, and any other similar fees,
however designated. During the term of the Company, Front-End Fees shall not
exceed 20% of Gross Proceeds.
"Gross Proceeds" means the aggregate purchase price of all Shares sold
for the account of the Company through the offering, without deduction for
Selling Commissions, volume discounts, the marketing support and due diligence
expense reimbursement fee or Organization and Offering Expenses. For the purpose
of computing Gross Proceeds, the purchase price of any Share for which reduced
Selling Commissions are paid to the Managing Dealer or a Soliciting Dealer
(where net proceeds to the Company are not reduced) shall be deemed to be the
full offering price, currently $10.00.
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"Health Care Facilities" means facilities at which health care services
are provided, including, but not limited to, congregate living, assisted living,
and skilled nursing facilities, continuing care retirement communities and life
care communities, and medical office buildings and walk-in clinics.
"IADLs" means instrumental activities of daily living, such as
shopping, telephone use and money management.
"Independent Director" means a Director who is not and within the last
two years has not been directly or indirectly associated with the Advisor by
virtue of (i) ownership of an interest in the Advisor or its Affiliates, (ii)
employment by the Advisor or its Affiliates, (iii) service as an officer or
director of the Advisor or its Affiliates, (iv) the performance of services,
other than as a Director, for the Company, (v) service as a director or trustee
of more than three real estate investment trusts advised by the Advisor, or (vi)
maintenance of a material business or professional relationship with the Advisor
or any of its Affiliates. An indirect relationship shall include circumstances
in which a Director's spouse, parents, children, siblings, mothers- or
fathers-in-law or sons- or daughters-in-law, or brothers- or sisters-in-law is
or has been associated with the Advisor, any of its affiliates, or the Company.
A business or professional relationship is considered material if the gross
revenue derived by the Director from the Advisor and Affiliates exceeds 5% of
either the Director's annual gross revenue during either of the last two years
or the Director's net worth on a fair market value basis.
"Independent Expert" means a person or entity with no material current
or prior business or personal relationship with the Advisor or the Directors and
who is engaged to a substantial extent in the business of rendering opinions
regarding the value of assets of the type held by the Company.
"Invested Capital" means the amount calculated by multiplying the total
number of shares of Common Stock purchased by stockholders by the issue price,
reduced by the portion of any Distribution that is attributable to Net Sales
Proceeds and by any amounts paid by the Company to repurchase shares pursuant to
the plan for redemption of shares.
"IRA" means an Individual Retirement Account.
"IRS" means the Internal Revenue Service.
"Joint Ventures" means the joint venture or general partnership
arrangements in which the Company is a co-venturer or general partner which are
established to acquire Properties.
"Leverage" means the aggregate amount of indebtedness of the Company
for money borrowed (including purchase money mortgage loans) outstanding at any
time, both secured and unsecured.
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"Line of Credit" means a line of credit initially in an amount up to
$45,000,000, the proceeds of which will be used to acquire Properties and make
Mortgage Loans and Secured Equipment Leases and to pay the Secured Equipment
Lease Servicing Fee. The Line of Credit may be in addition to any Permanent
Financing.
"Listing" means the listing of the shares of Common Stock of the
Company on a national securities exchange or over-the-counter market.
"Managing Dealer" means CNL Securities Corp., an Affiliate of the
Advisor, or such other person or entity selected by the Board of Directors to
act as the managing dealer for the offering. CNL Securities Corp. is a member of
the National Association of Securities Dealers, Inc.
"Mortgage Loans" means, in connection with mortgage financing provided
by the Company, notes or other evidences of indebtedness or obligations which
are secured or collateralized by real estate owned by the borrower.
"Net Assets" means the total assets of the Company (other than
intangibles) at cost before deducting depreciation or other non-cash reserves
less total liabilities, calculated quarterly by the Company, on a basis
consistently applied.
"Net Income" means for any period, the total revenues applicable to
such period, less the total expenses applicable to such period excluding
additions to reserves for depreciation, bad debts, or other similar non-cash
reserves; provided, however, Net Income for purposes of calculating total
allowable Operating Expenses (as defined herein) shall exclude the gain from the
sale of the Company's Assets.
"Net Offering Proceeds" means Gross Proceeds less (i) Selling
Commissions, (ii) Organizational and Offering Expenses, and (iii) the marketing
support and due diligence expense reimbursement fee.
"Net Sales Proceeds" means, in the case of a transaction described in
clause (i)(A) of the definition of Sale, the proceeds of any such transaction
less the amount of all real estate commissions and closing costs paid by the
Company. In the case of a transaction described in clause (i)(B) of such
definition, Net Sales Proceeds means the proceeds of any such transaction less
the amount of any legal and other selling expenses incurred in connection with
such transaction. In the case of a transaction described in clause (i)(C) of
such definition, Net Sales Proceeds means the proceeds of any such transaction
actually distributed to the Company from the Joint Venture. In the case of a
transaction or series of transactions described in clause (i)(D) of the
definition of Sale, Net Sales Proceeds means the proceeds of any such
transaction less the amount of all commissions and closing costs paid by the
Company. In the case of a transaction described in clause (ii) of the definition
of Sale, Net Sales Proceeds means the proceeds of such transaction or series of
transactions less all amounts generated thereby and reinvested in one or more
Properties within 180 days thereafter and less the amount of any real estate
commissions, closing costs, and legal and other selling expenses incurred by
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or allocated to the Company in connection with such transaction or series of
transactions. Net Sales Proceeds shall also include, in the case of any lease of
a Property consisting of a building only, any Mortgage Loan or any Secured
Equipment Lease, any amounts from tenants, borrowers or lessees that the Company
determines, in its discretion, to be economically equivalent to proceeds of a
Sale. Net Sales Proceeds shall not include, as determined by the Company in its
sole discretion, any amounts reinvested in one or more Properties, Mortgage
Loans or Secured Equipment Leases, to repay outstanding indebtedness, or to
establish reserves.
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"Operating Expenses" includes all costs and expenses incurred by the
Company, as determined under generally accepted accounting principles, which in
any way are related to the operation of the Company or to Company business,
including (a) advisory fees, (b) the Asset Management Fee, (c) the Performance
Fee, and (d) the Subordinated Incentive Fee, but excluding (i) the expenses of
raising capital such as Organizational and Offering Expenses, legal, audit,
accounting, underwriting, brokerage, listing, registration, and other fees,
printing and other such expenses, and tax incurred in connection with the
issuance, distribution, transfer, registration, and Listing of the Shares, (ii)
interest payments, (iii) taxes, (iv) non-cash expenditures such as depreciation,
amortization, and bad debt reserves, (v) the Advisor's subordinated 10% share of
Net Sales Proceeds, (vi) the Secured Equipment Lease Servicing Fee, and (vii)
Acquisition Fees and Acquisition Expenses, real estate commissions on the sale
of property and other expenses connected with the acquisition and ownership of
real estate interests, mortgage loans, or other property (such as the costs of
foreclosure, insurance premiums, legal services, maintenance, repair, and
improvement of property).
"Organizational and Offering Expenses" means any and all costs and
expenses, other than Selling Commissions, the Soliciting Dealer Warrants and the
0.5% marketing support and due diligence expense reimbursement fee incurred by
the Company, the Advisor or any Affiliate of either in connection with the
formation, qualification, and registration of the Company and the marketing and
distribution of Shares, including, without limitation, the following: legal,
accounting, and escrow fees; printing, amending, supplementing, mailing, and
distributing costs; filing, registration, and qualification fees and taxes;
telegraph and telephone costs; and all advertising and marketing expenses,
including the costs related to investor and broker-dealer sales meetings. The
Organizational and Offering Expenses paid by the Company in connection with the
formation of the Company, together with the 7.5% Selling Commissions, the
Soliciting Dealer Warrants and the 0.5% marketing support and due diligence
expense reimbursement fee incurred by the Company will not exceed thirteen
percent (13%) of the proceeds raised in connection with this offering.
"Ownership Limit" means, with respect to shares of Common Stock and
Preferred Stock, the percent limitation placed on the ownership of Common Stock
and Preferred Stock by any one Person (as defined in the Articles of
Incorporation). As of the initial
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date of this Prospectus, the Ownership Limit is 9.8% of the outstanding Common
Stock and 9.8% of the outstanding Preferred Stock.
"Participants" means those stockholders who elect to participate in the
Reinvestment Plan.
"Performance Fee" means the fee payable to the Advisor under certain
circumstances if certain performance standards have been met and the
Subordinated Incentive Fee has not been paid.
"Permanent Financing" means financing (i) to acquire Assets, (ii) to
pay the Secured Equipment Lease Servicing Fee, (iii) to pay a fee of 4.5% of any
Permanent Financing, excluding amounts to fund Secured Equipment Leases, as
Acquisition Fees, and (iv) to refinance outstanding amounts on the Line of
Credit. Permanent Financing may be in addition to any borrowing under the Line
of Credit.
"Plan" means ERISA Plans, IRAs, Keogh plans, stock bonus plans, and
certain other plans.
"Preferred Stock" means any class or series of preferred stock of the
Company that may be issued in accordance with the terms of the Articles of
Incorporation and applicable law.
"Properties" means (i) the real properties, including the buildings
located thereon (ii) the real properties only, or (iii) the buildings only,
which are acquired by the Company, either directly or through joint venture
arrangements or other partnerships.
"Prospectus" means the final prospectus included in the Company's
Registration Statement filed with the Securities and Exchange Commission,
pursuant to which the Company will offer Shares to the public, as the same may
be amended or supplemented from time to time after the effective date of such
Registration Statement.
"Qualified Plans" means qualified pension, profit-sharing, and stock
bonus plans, including Keogh plans and IRAs.
"Real Estate Asset Value" means the amount actually paid or allocated
to the purchase, development, construction or improvement of a Property,
exclusive of Acquisition Fees and Acquisition Expenses.
"Reinvestment Agent" or "Agent" means the independent agent, which
currently is MMS Escrow and Transfer Agency, Inc., for Participants in the
Reinvestment Plan.
"Reinvestment Plan" means the Reinvestment Plan, in the form attached
hereto as Appendix A.
"Reinvestment Proceeds" means net proceeds available from the sale of
Shares under the Reinvestment Plan to redeem Shares or, under certain
circumstances, to invest in additional Properties or Mortgage Loans.
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"REIT" means real estate investment trust, as defined pursuant to
Sections 856 through 860 of the Code.
"Related Party Tenant" means a related party tenant, as defined
pursuant to Section 856(d)(2)(B) of the Code.
"Roll-Up Entity" means a partnership, real estate investment trust,
corporation, trust, or similar entity that would be created or would survive
after the successful completion of a proposed Roll-Up Transaction.
"Roll-Up Transaction" means a transaction involving the acquisition,
merger, conversion, or consolidation, directly or indirectly, of the Company and
the issuance of securities of a Roll-Up Entity. Such term does not include: (i)
a transaction involving securities of the Company that have been listed on a
national securities exchange or the National Association of Securities Dealers
Automated Quotation National Market System for at least 12 months; or (ii) a
transaction involving the conversion to corporate, trust, or association form of
only the Company if, as a consequence of the transaction, there will be no
significant adverse change in stockholder voting rights, the term of existence
of the Company, compensation to the Advisor, or the investment objectives of the
Company.
"Sale" (i) means any transaction or series of transactions whereby: (A)
the Company sells, grants, transfers, conveys, or relinquishes its ownership of
any Property or portion thereof, including the lease of any Property consisting
of the building only, and including any event with respect to any Property which
gives rise to a significant amount of insurance proceeds or condemnation awards;
(B) the Company sells, grants, transfers, conveys, or relinquishes its ownership
of all or substantially all of the interest of the Company in any Joint Venture
in which it is a co-venturer or partner; (C) any Joint Venture in which the
Company as a co-venturer or partner sells, grants, transfers, conveys, or
relinquishes its ownership of any Property or portion thereof, including any
event with respect to any Property which gives rise to insurance claims or
condemnation awards or, (D) the Company sells, grants, conveys or relinquishes
its interest in any Mortgage Loan or Secured Equipment Lease or portion thereof,
including any event with respect to any Mortgage Loan or Secured Equipment Lease
which gives rise to a significant amount of insurance proceeds or similar
awards, but (ii) shall not include any transaction or series of transactions
specified in clause (i)(A), (i)(B) or (i)(C) above in which the proceeds of such
transaction or series of transactions are reinvested in one or more Properties
within 180 days thereafter.
"Secured Equipment Leases" means the Equipment financing made available
by the Company to operators of Health Care Facilities pursuant to which the
Company will finance, through loans or direct financing leases, the Equipment.
"Secured Equipment Lease Servicing Fee" means the fee payable to the
Advisor by the Company out of the proceeds of the Line of Credit or Permanent
Financing for negotiating Secured Equipment Leases and supervising the Secured
Equipment Lease
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program equal to 2% of the purchase price of the Equipment subject to each
Secured Equipment Lease and paid upon entering into such lease or loan.
"Selling Commissions" means any and all commissions payable to
underwriters, managing dealers, or other broker-dealers in connection with the
sale of Shares as described in the Prospectus, including, without limitation,
commissions payable to CNL Securities Corp.
"Shares" means the up to 15,500,000 shares of Common Stock
of the Company to be sold in the offering.
"Soliciting Dealers" means those broker-dealers that are members of the
National Association of Securities Dealers, Inc., or that are exempt from
broker-dealer registration, and that, in either case, enter into participating
broker or other agreements with the Managing Dealer to sell Shares.
"Soliciting Dealer Warrants" means warrants to purchase one share of
Common Stock of the Company for every 25 Shares sold through the offering, which
are issuable to the Managing Dealer (all or a portion of which may be reallowed
to Soliciting Dealers, with prior written approval from, and in the sole
discretion of, at the Managing Dealer) and are to be exercised during the
Exercise Period, at a price of $12.00 per share.
"Sponsor" means any Person directly or indirectly instrumental in
organizing, wholly or in part, the Company or any person who will control,
manage or participate in the management of the Company, and any Affiliate of
such Person. Not included is any Person whose only relationship with the Company
is that of an independent property manager of Company assets, and whose only
compensation is as such. Sponsor does not include independent third parties such
as attorneys, accountants, and underwriters whose only compensation is for
professional services. A Person may also be deemed a Sponsor of the Company by:
a. taking the initiative, directly or indirectly, in
founding or organizing the business or enterprise of
the Company, either alone or in conjunction with one or
more other Persons;
b. receiving a material participation in the Company in
connection with the founding or organizing of the
business of the Company, in consideration of services
or property, or both services and property;
c. having a substantial number of relationships and
contacts with the Company;
d. possessing significant rights to control Company
Properties;
e. receiving fees for providing services to the Company
which are paid on a basis that is not customary in the
industry;
f. or providing goods or services to the Company on a basis which
was not negotiated at arms length with the Company.
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"Stockholder" shall mean a registered holder of the Company's Shares.
"Stockholders' 8% Return," as of each date, shall mean an aggregate
amount equal to an 8% cumulative, noncompounded, annual return on Invested
Capital.
"Subscription Agreement" means the Subscription Agreement, in one of
the forms attached hereto as Appendix D.
"Subordinated Incentive Fee" means the fee payable to the Advisor under
certain circumstances if the Shares are listed on a national securities exchange
or over-the-counter market.
"Termination Date" means the date of termination of the Advisory
Agreement.
"Total Proceeds" means Gross Proceeds, loan proceeds from Permanent
Financing and amounts outstanding on the Line of Credit, if any, at the time of
Listing, but excluding loan proceeds used to finance Secured Equipment Leases.
"Triple-Net Lease" means a Property lease pursuant to which the tenant
is responsible for property costs associated with ongoing operations, including
repairs, maintenance, property taxes, utilities and insurance.
"Unimproved Real Property" means Property in which the Company has an
equity interest that is not acquired for the purpose of producing rental or
other operating income, that has no development or construction in process and
for which no development or construction is planned, in good faith, to commence
within one year.
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APPENDIX A
FORM OF
REINVESTMENT PLAN
<PAGE>
FORM OF
REINVESTMENT PLAN
CNL HEALTH CARE PROPERTIES, INC., a Maryland corporation (the
"Company"), pursuant to its Articles of Incorporation, adopted a Reinvestment
Plan (the "Reinvestment Plan") on the terms and conditions set forth below.
1. Reinvestment of Distributions. MMS Securities, Inc., the agent (the
"Reinvestment Agent") for participants (the "Participants") in the Reinvestment
Plan, will receive all cash distributions made by the Company with respect to
shares of common stock of the Company (the "Shares") owned by each Participant
(collectively, the "Distributions"). The Reinvestment Agent will apply such
Distributions as follows:
(a) At any period during which the Company is making a public
offering of Shares, the Reinvestment Agent will invest Distributions in
Shares acquired from the managing dealer or participating brokers for
the offering at the public offering price per Share. During such
period, commissions and the marketing support and due diligence fee
equal to 0.5% of the total amount raised from sale of the Shares may be
reallowed to the broker who made the initial sale of Shares to the
Participant at the same rate as for initial purchases.
(b) If no public offering of Shares is ongoing, the Reinvestment
Agent will purchase Shares from any additional shares which the Company
elects to register with the Securities and Exchange Commission (the
"SEC") for the Reinvestment Plan, at a per Share price equal to the
fair market value of the Shares determined by (i) quarterly appraisal
updates performed by the Company based on a review of the existing
appraisal and lease of each Property, focusing on a re-examination of
the capitalization rate applied to the rental stream to be derived from
that Property; and (ii) a review of the outstanding Mortgage Loans and
Secured Equipment Leases focusing on a determination of present value
by a re-examination of the capitalization rate applied to the stream of
payments due under the terms of each Mortgage Loan and Secured
Equipment Lease. The capitalization rate used by the Company and, as a
result, the price per Share paid by Participants in the Reinvestment
Plan prior to Listing will be determined by the Advisor in its sole
discretion. The factors that the Advisor will use to determine the
capitalization rate include (i) its experience in selecting, acquiring
and managing properties similar to the Properties; (ii) an examination
of the conditions in the market; and (iii) capitalization rates in use
by private appraisers, to the extent that the Advisor deems such
factors appropriate, as well as any other factors that the Advisor
deems relevant or appropriate in making its determination. The
Company's internal accountants will then convert the most recent
quarterly balance sheet of the Company from a "GAAP" balance sheet to a
"fair market value" balance sheet. Based on the "fair market value"
balance sheet, the internal accountants will then assume a sale of the
Company's assets and the liquidation of the Company in accordance with
its constitutive documents and applicable law and compute the
appropriate method of distributing the cash available after payment of
reasonable liquidation expenses, including closing costs typically
associated with the sale of assets and shared by the buyer and seller,
and the creation of reasonable reserves to provide for the payment of
any contingent liabilities. Upon listing of the Shares on a national
securities exchange or over-the-counter market, the Reinvestment Agent
may purchase Shares either through such market or directly from the
Company pursuant to a registration statement relating to the
Reinvestment Plan, in either case at a per Share price equal to the
then-prevailing market price on the national securities exchange or
over-the-counter market on which the Shares are listed at the date of
purchase by the Reinvestment Agent. In the event that, after Listing
occurs, the Reinvestment Agent purchases Shares on a national
securities exchange or over-the-counter market through a registered
broker-dealer, the amount to be reinvested shall be reduced by any
brokerage commissions charged by such registered broker-dealer. In the
event that such registered broker-dealer charges reduced brokerage
commissions, additional funds in the amount of any such reduction shall
be left available for the purchase of Shares.
(c) For each Participant, the Reinvestment Agent will maintain a
record which shall reflect for each fiscal quarter the Distributions
received by the Reinvestment Agent on behalf of such Participant. The
Reinvestment Agent will use the aggregate amount of Distributions to
all Participants for each fiscal quarter
A-1
<PAGE>
to purchase Shares for the Participants. If the aggregate amount of
Distributions to Participants exceeds the amount required to purchase
all Shares then available for purchase, the Reinvestment Agent will
purchase all available Shares and will return all remaining
Distributions to the Participants within 30 days after the date such
Distributions are made. The purchased Shares will be allocated among
the Participants based on the portion of the aggregate Distributions
received by the Reinvestment Agent on behalf of each Participant, as
reflected in the records maintained by the Reinvestment Agent. The
ownership of the Shares purchased pursuant to the Reinvestment Plan
shall be reflected on the books of the Company.
(d) Distributions shall be invested by the Reinvestment Agent in
Shares promptly following the payment date with respect to such
Distributions to the extent Shares are available. If sufficient Shares
are not available, Distributions shall be invested on behalf of the
Participants in one or more interest-bearing accounts in Franklin Bank,
N.A., Southfield, Michigan, or in another commercial bank approved by
the Company which is located in the continental United States and has
assets of at least $100,000,000, until Shares are available for
purchase, provided that any Distributions that have not been invested
in Shares within 30 days after such Distributions are made by the
Company shall be returned to Participants.
(e) The allocation of Shares among Participants may result in the
ownership of fractional Shares, computed to four decimal places.
(f) Distributions attributable to Shares purchased on behalf of
the Participants pursuant to the Reinvestment Plan will be reinvested
in additional Shares in accordance with the terms hereof.
(g) No certificates will be issued to a Participant for Shares
purchased on behalf of the Participant pursuant to the Reinvestment
Plan except to Participants who make a written request to the
Reinvestment Agent. Participants in the Reinvestment Plan will receive
statements of account in accordance with Paragraph 7 below.
2. Election to Participate. Any stockholder who participates in a
public offering of Shares and who has received a copy of the related final
prospectus included in the Company's registration statement filed with the SEC
may elect to participate in and purchase Shares through the Reinvestment Plan at
any time by written notice to the Company and would not need to receive a
separate prospectus relating solely to the Reinvestment Plan. A person who
becomes a stockholder otherwise than by participating in a public offering of
Shares may purchase Shares through the Reinvestment Plan only after receipt of a
separate prospectus relating solely to the Reinvestment Plan. Participation in
the Reinvestment Plan will commence with the next Distribution made after
receipt of the Participant's notice, provided it is received more than ten days
prior to the last day of the fiscal month or quarter, as the case may be, to
which such Distribution relates. Subject to the preceding sentence, regardless
of the date of such election, a shareholder will become a Participant in the
Reinvestment Plan effective on the first day of the fiscal month (prior to
termination of the offering of Shares) or fiscal quarter (after termination of
the offering of Shares) following such election, and the election will apply to
all Distributions attributable to the fiscal quarter or month (as the case may
be) in which the shareholder makes such written election to participate in the
Reinvestment Plan and to all fiscal quarters or months thereafter. A Participant
who has terminated his participation in the Reinvestment Plan pursuant to
Paragraph 11 will be allowed to participate in the Reinvestment Plan again upon
receipt of a current version of a final prospectus relating to participation in
the Reinvestment Plan which contains, at a minimum, the following: (i) the
minimum investment amount; (ii) the type or source of proceeds which may be
invested; and (iii) the tax consequences of the reinvestment to the Participant,
by notifying the Reinvestment Agent and completing any required forms.
3. Distribution of Funds. In making purchases for Participants'
accounts, the Reinvestment Agent may commingle Distributions attributable to
Shares owned by Participants in the Reinvestment Plan.
4. Proxy Solicitation. The Reinvestment Agent will distribute to
Participants proxy solicitation material received by it from the Company which
is attributable to Shares held in the Reinvestment Plan. The Reinvestment Agent
will vote any Shares that it holds for the account of a Participant in
accordance with the Participant's written instructions. If a Participant gives a
proxy to person(s) representing the Company covering Shares registered in the
Participant's name, such proxy will be deemed to be an instruction to the
Reinvestment Agent to vote the full Shares
A-2
<PAGE>
in the Participant's account in like manner. If a Participant does not direct
the Reinvestment Agent as to how the Shares should be voted and does not give a
proxy to person(s) representing the Company covering these Shares, the
Reinvestment Agent will not vote said Shares.
5. Absence of Liability. Neither the Company nor the Reinvestment Agent
shall have any responsibility or liability as to the value of the Company's
Shares, any change in the value of the Shares acquired for the Participant's
account, or the rate of return earned on, or the value of, the interest-bearing
accounts, in which Distributions are invested. Neither the Company nor the
Reinvestment Agent shall be liable for any act done in good faith, or for any
good faith omission to act, including, without limitation, any claims of
liability (a) arising out of the failure to terminate a Participant's
participation in the Reinvestment Plan upon such Participant's death prior to
receipt of notice in writing of such death and the expiration of 15 days from
the date of receipt of such notice and (b) with respect to the time and the
prices at which Shares are purchased for a Participant. Notwithstanding the
foregoing, liability under the federal securities laws cannot be waived.
Similarly, the Company and the Reinvestment Agent have been advised that in the
opinion of certain state securities commissioners, indemnification is also
considered contrary to public policy and therefore unenforceable.
6. Suitability.
(a) Within 60 days prior to the end of each fiscal year, CNL
Securities Corp. ("CSC"), will mail to each Participant a participation
agreement (the "Participation Agreement"), in which the Participant
will be required to represent that there has been no material change in
the Participant's financial condition and confirm that the
representations made by the Participant in the Subscription Agreement
(a form of which shall be attached to the Participation Agreement) are
true and correct as of the date of the Participation Agreement, except
as noted in the Participation Agreement or the attached form of
Subscription Agreement.
(b) Each Participant will be required to return the executed
Participation Agreement to CSC within 30 days after receipt. In the
event that a Participant fails to respond to CSC or return the
completed Participation Agreement on or before the fifteenth (15th) day
after the beginning of the fiscal year following receipt of the
Participation Agreement, the Participant's Distribution for the first
fiscal quarter of that year will be sent directly to the Participant
and no Shares will be purchased on behalf of the Participant for that
fiscal quarter and, subject to (c) below, any fiscal quarters
thereafter, until CSC receives an executed Participation Agreement from
the Participant.
(c) If a Participant fails to return the executed Participation
Agreement to CSC prior to the end of the second fiscal quarter for any
year of the Participant's participation in the Reinvestment Plan, the
Participant's participation in the Reinvestment Plan shall be
terminated in accordance with Paragraph 11 below.
(d) Each Participant shall notify CSC in the event that, at any
time during his participation in the Reinvestment Plan, there is any
material change in the Participant's financial condition or inaccuracy
of any representation under the Subscription Agreement.
(e) For purposes of this Paragraph 6, a material change shall
include any anticipated or actual decrease in net worth or annual gross
income or any other change in circumstances that would cause the
Participant to fail to meet the suitability standards set forth in the
Company's Prospectus.
7. Reports to Participants. Within 60 days after the end of each fiscal
quarter, the Reinvestment Agent will mail to each Participant a statement of
account describing, as to such Participant, the Distributions received during
the quarter, the number of Shares purchased during the quarter, the per Share
purchase price for such Shares, the total administrative charge to such
Participant, and the total Shares purchased on behalf of the Participant
pursuant to the Reinvestment Plan. Each statement shall also advise the
Participant that, in accordance with Paragraph 6(d) hereof, he is required to
notify CSC in the event that there is any material change in his financial
condition or if any representation under the Subscription Agreement becomes
inaccurate. Tax information for income earned on Shares under the Reinvestment
Plan will be sent to each participant by the Company or the Reinvestment Agent
at least annually.
A-3
<PAGE>
8. Administrative Charges, Commissions, and Plan Expenses. The Company
shall be responsible for all administrative charges and expenses charged by the
Reinvestment Agent. The administrative charge for each Participant for each
fiscal quarter shall be the lesser of 5% of the amount reinvested for the
Participant or $2.50, with a minimum charge of $.50. Any interest earned on
Distributions will be paid to the Company to defray costs relating to the
Reinvestment Plan. Additionally, in connection with any Shares purchased from
the Company both prior to and after the termination of a public offering of the
Shares, the Company will pay to CSC selling commissions of 7.5%, a marketing
support and due diligence expense reimbursement fee of .5%, and, in the event
that proceeds of the sale of Shares pursuant to the Reinvestment Plan are used
to acquire Properties or to invest in Mortgage Loans, will pay to CNL Health
Care Advisors, Inc. acquisition fees of 4.5% of the purchase price of the Shares
sold pursuant to the Reinvestment Plan.
9. No Drawing. No Participant shall have any right to draw checks or
drafts against his account or give instructions to the Company or the
Reinvestment Agent except as expressly provided herein.
10. Taxes. Taxable Participants may incur a tax liability for
Distributions made with respect to such Participant's Shares, even though they
have elected not to receive their Distributions in cash but rather to have their
Distributions held in their account under the Reinvestment Plan.
11. Termination.
(a) A Participant may terminate his participation in the
Reinvestment Plan at any time by written notice to the Company. To be
effective for any Distribution, such notice must be received by the
Company at least ten business days prior to the last day of the fiscal
month or quarter to which such Distribution relates.
(b) The Company or the Reinvestment Agent may terminate a
Participant's individual participation in the Reinvestment Plan, and
the Company may terminate the Reinvestment Plan itself at any time by
ten days' prior written notice mailed to a Participant, or to all
Participants, as the case may be, at the address or addresses shown on
their account or such more recent address as a Participant may furnish
to the Company in writing.
(c) After termination of the Reinvestment Plan or termination of a
Participant's participation in the Reinvestment Plan, the Reinvestment
Agent will send to each Participant (i) a statement of account in
accordance with Paragraph 7 hereof, and (ii) a check for (a) the amount
of any Distributions in the Participant's account that have not been
reinvested in Shares, and (b) the value of any fractional Shares
standing to the credit of a Participant's account based on the market
price of the Shares. The record books of the Company will be revised to
reflect the ownership of record of the Participant's full Shares and
any future Distributions made after the effective date of the
termination will be sent directly to the former Participant.
12. Notice. Any notice or other communication required or permitted to
be given by any provision of this Reinvestment Plan shall be in writing and
addressed to Investor Services Department, CNL Securities Corp., 400 East South
Street, Orlando, Florida 32801, if to the Company, or to MMS Securities, Inc.,
1845 Maxwell, Suite 101, Troy, Michigan 48084-4510, if to the Reinvestment
Agent, or such other addresses as may be specified by written notice to all
Participants. Notices to a Participant may be given by letter addressed to the
Participant at the Participant's last address of record with the Company. Each
Participant shall notify the Company promptly in writing of any change of
address.
13. Amendment. The terms and conditions of this Reinvestment Plan may
be amended or supplemented by an agreement between the Reinvestment Agent and
the Company at any time, including but not limited to an amendment to the
Reinvestment Plan to add a voluntary cash contribution feature or to substitute
a new Reinvestment Agent to act as agent for the Participants or to increase the
administrative charge payable to the Reinvestment Agent, by mailing an
appropriate notice at least 30 days prior to the effective date thereof to each
Participant at his last address of record; provided, that any such amendment
must be approved by a majority of the Independent Directors of the Company. Such
amendment or supplement shall be deemed conclusively accepted by each
Participant except those Participants from whom the Company receives written
notice of termination prior to the effective date thereof.
A-4
<PAGE>
14. Governing Law. THIS REINVESTMENT PLAN AND A PARTICIPANT'S ELECTION
TO PARTICIPATE IN THE REINVESTMENT PLAN SHALL BE GOVERNED BY THE LAWS OF THE
STATE OF FLORIDA; PROVIDED, HOWEVER, THAT CAUSES OF ACTION FOR VIOLATIONS OF
FEDERAL OR STATE SECURITIES LAWS SHALL NOT BE GOVERNED BY THIS SECTION 14.
A-5
<PAGE>
APPENDIX B
FINANCIAL INFORMATION
<PAGE>
INDEX TO FINANCIAL STATEMENTS
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
Page
----
Report of Independent Accountants B-2
Financial Statements:
Balance Sheets at June 30, 1998 (unaudited)
and December 31, 1997 B-3
Statements of Stockholder's Equity for the
six months ended June 30, 1998 (unaudited)
and the period December 22, 1997 (date of
inception) through December 31, 1997 B-4
Notes to Financial Statements B-5
B-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
CNL Health Care Properties, Inc.
We have audited the accompanying balance sheet of CNL Health Care
Properties, Inc. (a development stage company) as of December 31, 1997, and the
related statement of stockholder's equity for the period December 22, 1997 (date
of inception) through December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of CNL Health Care
Properties, Inc. as of December 31, 1997, and the changes in stockholder's
equity for the period December 22, 1997 (date of inception) through December 31,
1997 in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 20, 1998
B-2
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
BALANCE SHEETS
ASSETS
June 30,
1998 December 31,
(Unaudited) 1997
----------- ------------
Cash $ 77 $200,000
Deferred offering costs 468,739 80,330
---------- --------
$468,816 $280,330
========== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accrued offering costs:
Due to CNL Health Care Advisors, Inc. $250,566 $ 58,600
Due to others 18,250 21,730
---------- --------
268,816 80,330
---------- --------
Stockholder's equity:
Common stock, $.01 par value; 100,000
shares authorized, 20,000 shares
issued and outstanding 200 200
Capital in excess of par value 199,800 199,800
-------- --------
200,000 200,000
-------- --------
$468,816 $280,330
========== ========
See accompanying notes to financial statements.
B-3
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
STATEMENTS OF STOCKHOLDER'S EQUITY
Six Months Ended June 30, 1998 and
December 22, 1997 (Date of Inception)
through December 31, 1997
<TABLE>
<CAPTION>
Common stock Capital in
Number Par excess of
of shares value par value Total
--------- ----- ---------- -----
<S> <C>
Balance, December 22, 1997
(Date of Inception) - $ - $ - $ -
Cash received from sale
of common stock to
CNL Health Care Advisors, Inc. 20,000 200 199,800 200,000
-------- -------- -------- --------
Balance at December 31, 1997 20,000 200 199,800 200,000
Cash received from sale
of common stock - - - -
-------- -------- -------- -------
Balance at June 30, 1998 20,000 $ 200 $199,800 $200,000
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
B-4
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
NOTES TO FINANCIAL STATEMENTS
Six Months Ended June 30, 1998 and
December 22, 1997 (Date of Inception)
through December 31, 1997
1. Organization:
CNL Health Care Properties, Inc. (the "Company") was organized in
Maryland on December 22, 1997. The Company intends to file a
registration statement on Form S-11 with the Securities and Exchange
Commission with respect to a public offering (the "Offering") of
15,500,000 shares of common stock. A maximum of 15,000,000 shares may
be sold. In addition, the Company plans to register an additional
500,000 shares which will be available only to stockholders who elect
to participate in the Company's reinvestment plan (the "Reinvestment
Plan") (Note 3). In addition, the Company plans to register 600,000
shares issuable upon the exercise of warrants granted to the managing
dealer of the offering.
The Company intends to use the proceeds from its public offering, after
deducting offering expenses, primarily to acquire real estate
properties (the "Properties") related to health care and seniors'
housing facilities (the "Health Care Facilities") located across the
United States. The Health Care Facilities may include congregate
living, assisted living and skilled nursing facilities, continuing care
retirement communities and life care communities, and medical office
buildings and walk-in clinics. The Company may provide mortgage
financing (the "Mortgage Loans") to operators of Health Care Facilities
in the aggregate principal amount of approximately 5% to 10% of the
Company's total assets. The Company also may offer furniture, fixture
and equipment financing ("Secured Equipment Leases") to operators of
Health Care Facilities. Secured Equipment Leases will be funded from
the proceeds of a loan in an amount up to ten percent of the Company's
total assets which the Company intends to obtain.
The Company is in the development stage and has not begun operations.
2. Income Taxes:
The Company intends to make an election to be taxed as a real estate
investment trust ("REIT") under Sections 856 through 860 of the
Internal Revenue Code commencing with its taxable year ending December
31, 1998. If the Company qualifies for taxation as a REIT, the Company
generally will not be subject to federal corporate income tax to the
extent it distributes its REIT taxable income to its stockholders, so
long as it distributes at least 95 percent of its REIT taxable income.
B-5
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Six Months Ended June 30, 1998 and
December 22, 1997 (Date of Inception)
through December 31, 1997
2. Income Taxes - Continued:
REITs are subject to a number of other organizational and operational
requirements. Even if the Company qualifies for taxation as a REIT, it
may be subject to certain state and local taxes on its income and
property, and federal income and excise taxes on its undistributed
income.
3. Reinvestment Plan:
The Company has established a Reinvestment Plan pursuant to which
stockholders may elect to have the full amount of their cash
distributions from the Company reinvested in additional shares of
common stock of the Company.
The Offering includes 500,000 shares of common stock for purchase
through the Reinvestment Plan.
4. Deferred Offering Costs:
The Company has and will continue to incur certain costs in connection
with the Offering, including filing fees, legal, accounting, marketing
and printing costs and escrow fees, which will be deducted from the
gross proceeds of the Offering. Certain preliminary costs incurred
prior to raising capital have been and will be advanced by an affiliate
of the Company.
5. Capitalization:
At June 30, 1998 and December 31, 1997, the Company was authorized to
issue 100,000 shares of common stock, all of one class, with a par
value of $.01 per share. The Company plans to amend the Articles of
Incorporation to increase the authorized number of shares of common
stock and to authorize the issuance of two additional classes of stock,
preferred stock and excess stock, to accomplish the Offering.
6. Concentration of Credit Risk:
At December 31, 1997, the Company had cash on deposit in one financial
institution in excess of federally insured levels; however, the Company
has not experienced any losses in such account. The Company limits
investments of cash investments to financial institutions with high
credit standing; therefore, the Company believes it is not exposed to
any significant credit risk on cash.
B-6
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Six Months Ended June 30, 1998 and
December 22, 1997 (Date of Inception)
through December 31, 1997
7. Related Party Arrangements:
Certain affiliates of the Company, including those described below,
will receive fees and compensation in connection with the Offering, and
the acquisition, management, and sale of the assets of the Company.
In connection with the formation of the Company and the offering of the
shares, the managing dealer of the Offering, an affiliate of the
Company, will receive selling commissions of 7.5% and a marketing
support and due diligence expense reimbursement of 0.5% of the total
amount raised from the sale of shares, computed at $10.00 per share
sold. Up to 7% of the commissions on shares sold and all or a portion
of the 0.5% marketing support and due diligence expense reimbursement
fee may be reallowed to certain soliciting dealers who are not
affiliates of the Company, with prior written approval from, and in the
sole discretion of, the managing dealer.
In addition, the Company has agreed to issue and sell soliciting dealer
warrants ("Soliciting Dealer Warrants") to the managing dealer. The
price for each warrant will be $0.0008 and one warrant will be issued
for every 25 shares sold by the managing dealer. All or a portion of
the Soliciting Dealer Warrants may be reallowed to soliciting dealers
with prior written approval from, and in the sole discretion of the
managing dealer, except where prohibited by either federal or state
securities laws. The holder of a Soliciting Dealer Warrant will be
entitled to purchase one share of common stock from the Company at a
price of $12.00 during the five year period commencing with the date
the offering begins. No Soliciting Dealer Warrant, however, will be
exercisable until one year from the date of issuance.
Amounts due to CNL Health Care Advisors, Inc., the sole stockholder of
the Company, totalling $250,566 at June 30, 1998, consisted of
expenditures incurred on behalf of the Company of $193,750 and
administrative services in connection with the offering of $66,816.
B-7
<PAGE>
APPENDIX C
PRIOR PERFORMANCE TABLES
<PAGE>
APPENDIX C
PRIOR PERFORMANCE TABLES
The information in this Appendix C contains certain relevant summary
information concerning certain prior public programs sponsored by two of the
Company's principals (who also serve as the Chairman of the Board and President
of the Company) and their Affiliates (the "Prior Public Programs") which were
formed to invest in restaurant properties leased on a triple-net basis to
operators of national and regional fast-food and family-style restaurant chains,
or in the case of CNL Hospitality Properties, Inc. (formerly CNL American Realty
Fund, Inc.), to invest in restaurant properties and hotel properties. No Prior
Public Programs sponsored by the Company's Affiliates have invested in health
care facilities leased on a triple-net basis to operators of the health care
facilities.
A more detailed description of the acquisitions by the Prior Public
Programs is set forth in Part II of the registration statement filed with the
Securities and Exchange Commission for this Offering and is available from the
Company upon request, without charge. In addition, upon request to the Company,
the Company will provide, without charge, a copy of the most recent Annual
Report on Form 10-K filed with the Securities and Exchange Commission for CNL
Income Fund, Ltd., CNL Income Fund II, Ltd., CNL Income Fund III, Ltd., CNL
Income Fund IV, Ltd., CNL Income Fund V, Ltd., CNL Income Fund VI, Ltd., CNL
Income Fund VII, Ltd., CNL Income Fund VIII, Ltd., CNL Income Fund IX, Ltd., CNL
Income Fund X, Ltd., CNL Income Fund XI, Ltd., CNL Income Fund XII, Ltd., CNL
Income Fund XIII, Ltd., CNL Income Fund XIV, Ltd., CNL Income Fund XV, Ltd., CNL
Income Fund XVI, Ltd., CNL Income Fund XVII, Ltd., CNL Income Fund XVIII, Ltd.,
CNL American Properties Fund, Inc., and CNL Hospitality Properties, Inc. as well
as a copy, for a reasonable fee, of the exhibits filed with such reports.
The investment objectives of the Prior Public Programs generally include
preservation and protection of capital, the potential for increased income and
protection against inflation, and potential for capital appreciation, all
through investment in restaurant properties, or in the case of CNL Hospitality
Properties, Inc., through investment in restaurant properties and hotel
properties. In addition, the investment objectives of the Prior Public Programs
included making partially tax-sheltered distributions.
STOCKHOLDERS SHOULD NOT CONSTRUE INCLUSION OF THE FOLLOWING TABLES AS
IMPLYING THAT THE COMPANY WILL HAVE RESULTS COMPARABLE TO THOSE REFLECTED IN
SUCH TABLES. DISTRIBUTABLE CASH FLOW, FEDERAL INCOME TAX DEDUCTIONS, OR OTHER
FACTORS COULD BE SUBSTANTIALLY DIFFERENT. STOCKHOLDERS SHOULD NOTE THAT, BY
ACQUIRING SHARES IN THE COMPANY, THEY WILL NOT BE ACQUIRING ANY INTEREST IN ANY
PRIOR PUBLIC PROGRAMS.
Description of Tables
The following Tables are included herein:
Table I - Experience in Raising and Investing Funds
Table II - Compensation to Sponsor
Table III - Operating Results of Prior Programs
Table V - Sales or Disposal of Properties
Unless otherwise indicated in the Tables, all information contained in the
Tables is as of June 30, 1998. The following is a brief description of the
Tables:
C-1
<PAGE>
Table I - Experience in Raising and Investing Funds
Table I presents information on a percentage basis showing the experience
of two of the principals of the Company and their Affiliates in raising and
investing funds for the Prior Public Programs, the offerings of which became
fully subscribed between July 1993 and June 1998.
The Table sets forth information on the offering expenses incurred and
amounts available for investment expressed as a percentage of total dollars
raised. The Table also shows the percentage of property acquisition cost
leveraged, the date the offering commenced, and the time required to raise funds
for investment.
Table II - Compensation to Sponsor
Table II provides information, on a total dollar basis, regarding amounts
and types of compensation paid to the general partners of the Prior Public
Programs.
The Table indicates the total offering proceeds and the portion of such
offering proceeds paid or to be paid to two of the principals of the Company and
their Affiliates in connection with the Prior Public Programs, the offerings of
which became fully subscribed between July 1993 and June 1998. The Table also
shows the amounts paid to two of the principals of the Company and their
Affiliates from cash generated from operations and from cash generated from
sales or refinancing by each of the Prior Public Programs on a cumulative basis
commencing with inception and ending June 30, 1998.
Table III - Operating Results of Prior Programs
Table III presents a summary of operating results for the period from
inception through June 30, 1998, of the Prior Public Programs, the offerings of
which became fully subscribed between July 1993 and June 1998.
The Table includes a summary of income or loss of the Prior Public
Programs, which are presented on the basis of generally accepted accounting
principles ("GAAP"). The Table also shows cash generated from operations, which
represents the cash generated from operations of the properties of the Prior
Public Programs, as distinguished from cash generated from other sources
(special items). The section of the Table entitled "Special Items" provides
information relating to cash generated from or used by items which are not
directly related to the operations of the properties of the Prior Public
Programs, but rather are related to items of a partnership nature. These items
include proceeds from capital contributions of limited partners and
disbursements made from these sources of funds, such as syndication and
organizational costs, acquisition of the properties and other costs which are
related more to the organization of the partnership and the acquisition of
properties than to the actual operations of the partnerships.
The Table also presents information pertaining to investment income,
returns of capital on a GAAP basis, cash distributions from operations, sales
and refinancing proceeds expressed in total dollar amounts as well as
distributions and tax results on a per $1,000 investment basis.
Table IV - Results of Completed Programs
Table IV is omitted from this Appendix C because none of the directors of
the Company or their Affiliates has been involved in completed public programs
which made investments similar to those of the Company.
Table V - Sales or Disposal of Properties
Table V provides information regarding the sale or disposal of properties
owned by the Prior Public Programs between July 1993 and June 1998.
This Table includes the selling price of the property, the cost of the
property, the date acquired and the date of sale.
C-2
<PAGE>
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund XIII, Fund XIV, Fund XV, Fund XVI,
Ltd. Ltd. Ltd. Ltd.
---- ---- ---- ----
<S> <C>
Dollar amount offered $40,000,000 $45,000,000 $40,000,000 $45,000,000
=========== =========== =========== ===========
Dollar amount raised 100.0% 100.0% 100.0% 100.0%
----------- ----------- ----------- -----------
Less offering expenses:
Selling commissions
and discounts (8.5) (8.5) (8.5) (8.5)
Organizational expenses (3.0) (3.0) (3.0) (3.0)
Marketing support and
due diligence expense
reimbursement fees
(includes amounts
reallowed to
unaffiliated
entities) (0.5) (0.5) (0.5) (0.5)
----------- ----------- ----------- -----------
(12.0) (12.0) (12.0) (12.0)
----------- ----------- ----------- -----------
Reserve for operations -- -- -- --
----------- ----------- ----------- -----------
Percent available for
investment 88.0% 88.0% 88.0% 88.0%
=========== =========== =========== ===========
Acquisition costs:
Cash down payment 82.5% 82.5% 82.5% 82.5%
Acquisition fees paid
to affiliates 5.5 5.5 5.5 5.5
Loan costs -- -- -- --
----------- ----------- ----------- -----------
Total acquisition costs 88.0% 88.0% 88.0% 88.0%
=========== =========== =========== ===========
Percent leveraged
(mortgage financing
divided by total
acquisition costs) -- -- -- --
Date offering began 3/31/93 8/27/93 2/23/94 9/02/94
Length of offering
(in months) 5 6 6 9
Months to invest 90% of
amount available for
investment measured
from date of offering 10 11 10 11
</TABLE>
Note 1 Pursuant to a Registration Statement on Form S-11 under the Securities
Act of 1933, as amended, effective March 29, 1995, CNL American
Properties Fund, Inc. ("APF") registered for sale $165,000,000 of shares
of common stock (the "Initial Offering"), including $15,000,000 available
only to stockholders participating in the company's reinvestment plan.
The Initial Offering of APF commenced April 19, 1995, and upon completion
of the Initial Offering on February 6, 1997, had received subscription
proceeds of $150,591,765 (15,059,177 shares), including $591,765 (59,177
shares) issued pursuant to the reinvestment plan. Pursuant to a
Registration Statement on Form S-11 under the Securities Act of 1933, as
amended, effective January 31, 1997, APF registered for sale $275,000,000
of shares of common stock (the "1997 Offering"), including $25,000,000
available only to stockholders participating in the company's
reinvestment plan. The 1997 Offering of APF commenced following the
completion of the Initial Offering on February 6, 1997, and upon
completion of the 1997 Offering on March 2, 1998, had received
subscription proceeds of $251,872,648 (25,187,265 shares), including
$1,872,648 (187,265 shares) issued pursuant to the reinvestment plan.
Pursuant to a Registration Statement on Form S-11 under the Securities
Act of 1933, as amended, effective May 12, 1998, APF registered for sale
$345,000,000 of shares of common stock (the "1998 Offering"), including
$20,000,000 available only to stockholders participating in the company's
reinvestment plan. The 1998 Offering of APF commenced following the
completion of the 1997 Offering on March 2, 1998. As of June 30, 1998,
APF had received subscriptions totalling $111,835,687 from the 1998
Offering, including $1,823,518 issued pursuant to the company's
reinvestment plan.
C-3
<PAGE>
<TABLE>
<CAPTION>
CNL American CNL Income CNL Income CNL Hospitality
Properties Fund, Fund XVII, Fund XVIII, Properties,
Inc. Ltd. Ltd. Inc.
---- ---- ---- ----
(Note 1) (Note 2)
<S> <C>
Dollar amount offered $400,000,000 $30,000,000 $35,000,000
============ =========== ===========
Dollar amount raised 100.0% 100.0% 100.0%
----------- ----------- -----------
Less offering expenses:
Selling commissions
and discounts (7.5) (8.5) (8.5)
Organizational expenses (3.0) (3.0) (3.0)
Marketing support and
due diligence expense
reimbursement fees
(includes amounts
reallowed to
unaffiliated
entities) (0.5) (0.5) (0.5)
----------- ----------- -----------
(11.0) (12.0) (12.0)
----------- ----------- -----------
Reserve for operations -- -- --
----------- ----------- -----------
Percent available for
investment 89.0% 88.0% 88.0%
========== =========== ==========
Acquisition costs:
Cash down payment 84.5% 83.5% 83.5%
Acquisition fees paid
to affiliates 4.5 4.5 4.5
Loan costs -- -- --
----------- ----------- -----------
Total acquisition costs 89.0% 88.0% 88.0%
============ =========== ===========
Percent leveraged
(mortgage financing
divided by total
acquisition costs) -- -- --
Date offering began 4/19/95 and 9/02/95 9/20/96
2/06/97
Length of offering
(in months) 22 and 13 12 17
Months to invest 90% of
amount available for
investment measured
from date of offering 23 and 16 15 17
</TABLE>
Note 2 Pursuant to a Registration Statement on Form S-11 under the Securities
Act of 1933, as amended, effective July 9, 1997, CNL Hospitality
Properties, Inc. registered for sale $165,000,000 of shares of common
stock, including $15,000,000 available only to stockholders participating
in the company's reinvestment plan. The offering of shares of CNL
Hospitality Properties, Inc. commenced July 9, 1997.
C-4
<PAGE>
TABLE II
COMPENSATION TO SPONSOR
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund XIII, Fund XIV, Fund XV, Fund XVI,
Ltd. Ltd. Ltd. Ltd.
---- ---- ---- ----
<S> <C>
Date offering commenced 3/31/93 8/27/93 2/23/94 9/02/94
Dollar amount raised $40,000,000 $45,000,000 $40,000,000 $45,000,000
============ =========== =========== ===========
Amount paid to sponsor from
proceeds of offering:
Selling commissions and
discounts 3,400,000 3,825,000 3,400,000 3,825,000
Real estate commissions - - - -
Acquisition fees 2,200,000 2,475,000 2,200,000 2,475,000
Marketing support and
due diligence expense
reimbursement fees
(includes amounts
reallowed to
unaffiliated entities) 200,000 225,000 200,000 225,000
------------- ----------- ----------- -----------
Total amount paid to sponsor 5,800,000 6,525,000 5,800,000 6,525,000
============ =========== =========== ===========
Dollar amount of cash generated
from operations before
deducting payments to
sponsor:
1998 (6 months) 1,782,788 1,898,767 1,755,734 1,969,826
1997 3,395,200 3,734,726 3,419,967 3,909,781
1996 3,494,528 3,841,163 3,557,073 3,911,609
1995 3,482,461 3,823,939 3,361,477 2,619,840
1994 3,232,046 2,897,432 1,154,454 212,171
1993 1,148,550 329,957 - -
Amount paid to sponsor from
operations (administrative,
accounting and
management fees):
1998 (6 months) 48,887 53,039 44,829 47,605
1997 121,643 128,536 113,372 129,357
1996 126,947 134,867 122,391 157,883
1995 103,083 114,095 122,107 138,445
1994 83,046 84,801 37,620 7,023
1993 27,003 8,220 - -
Dollar amount of property
sales and refinancing before
deducting payments to sponsor:
Cash (Note 3) 1,769,260 4,770,015 3,312,297 1,385,384
Notes - - - -
Amount paid to sponsors
from property sales and
refinancing:
Real estate commissions - - - -
Incentive fees - - - -
Other (Note 2) - - - -
</TABLE>
Note 1 Pursuant to a Registration Statement on Form S-11 under the Securities
Act of 1933, as amended, effective March 29, 1995, CNL American
Properties Fund, Inc. ("APF") registered for sale $165,000,000 of shares
of common stock (the "Initial Offering"), including $15,000,000 available
only to stockholders participating in the company's reinvestment plan.
The Initial Offering of APF commenced April 19, 1995, and upon completion
of the Initial Offering on February 6, 1997, had received subscription
proceeds of $150,591,765 (15,059,177 shares), including $591,765 (59,177
shares) issued pursuant to the reinvestment plan. Pursuant to a
Registration Statement on Form S-11 under the Securities Act of 1933, as
amended, effective January 31, 1997, APF registered for sale $275,000,000
of shares of common stock (the "1997 Offering"), including $25,000,000
available only to stockholders participating in the company's
reinvestment plan. The 1997 Offering of APF commenced following the
completion of the Initial Offering on February 6, 1997, and upon
completion of the 1997 Offering on March 2, 1998, had received
subscription proceeds of $251,872,648 (25,187,265 shares), including
$1,872,648 (187,265 shares) issued pursuant to the reinvestment plan.
Pursuant to a Registration Statement on Form S-11 under the Securities
Act of 1933, as amended, effective May 12, 1998, APF registered for sale
$345,000,000 of shares of common stock (the "1998 Offering"), including
$20,000,000 available only to stockholders participating in the company's
reinvestment plan. The 1998 Offering of APF commenced following the
completion of the 1997 Offering on March 2, 1998. As of June 30, 1998,
APF had received subscriptions totalling $111,835,687 from the 1998
Offering, including $1,823,518 issued pursuant to the company's
reinvestment plan. The amounts shown represent the combined results of
the Initial Offering, the 1997 Offering and the 1998 Offering as of June
30, 1998, including shares issued pursuant to the company's reinvestment
plans.
Note 2 For negotiating secured equipment leases and supervising the secured
equipment lease program, APF is entitled to receive a one-time secured
equipment lease servicing fee of two percent of the purchase price of the
equipment that is the subject of a secured equipment lease. During the
six months ended June 30, 1998 and the years ended December 31, 1997 and
1996, APF incurred $36,899, $366,865 and $70,070, respectively, in
secured equipment lease servicing fees.
C-5
<PAGE>
<TABLE>
<CAPTION>
CNL American CNL Income CNL Income CNL Hospitality
Properties Fund, Fund XVII, Fund XVIII, Properties,
Inc. Ltd. Ltd. Inc.
---- ---- ---- ----
(Note 1) (Note 4)
<S> <C>
Date offering commenced 4/19/95 and 2/06/97 9/02/95 9/20/96
Dollar amount raised $514,300,100 $30,000,000 $35,000,000
============ =========== ===========
Amount paid to sponsor from
proceeds of offering:
Selling commissions and
discounts 38,572,508 2,550,000 2,975,000
Real estate commissions - - -
Acquisition fees 23,143,505 1,350,000 1,575,000
Marketing support and
due diligence expense
reimbursement fees
(includes amounts
reallowed to
unaffiliated entities) 2,571,501 150,000 175,000
---------- --------- ---------
Total amount paid to sponsor 64,287,514 4,050,000 4,725,000
========== ========= =========
Dollar amount of cash generated
from operations before
deducting payments to
sponsor:
1998 (6 months) 17,846,454 1,315,440 1,517,300
1997 18,514,122 2,611,191 1,459,963
1996 6,096,045 1,340,159 30,126
1995 594,425 11,671 -
1994 - - -
1993 - - -
Amount paid to sponsor from
operations (administrative,
accounting and
management fees):
1998 (6 months) 1,245,501 41,356 58,088
1997 1,437,908 116,077 98,207
1996 613,505 107,211 2,980
1995 95,966 2,659 -
1994 - - -
1993 - - -
Dollar amount of property
sales and refinancing before
deducting payments to sponsor:
Cash (Note 3) 7,894,390 - -
Notes - - -
Amount paid to sponsors
from property sales and
refinancing:
Real estate commissions - - -
Incentive fees - - -
Other (Note 2) - - -
</TABLE>
Note 3 Excludes properties sold and substituted with replacement properties, as
permitted under the terms of the lease agreements.
Note 4 Pursuant to a Registration Statement on Form S-11 under the Securities
Act of 1933, as amended, effective July 9, 1997, CNL Hospitality
Properties, Inc. registered for sale $165,000,000 of shares of common
stock, including $15,000,000 available only to stockholders participating
in the company's reinvestment plan. The offering of shares of CNL
Hospitality Properties, Inc. commenced September 11, 1997. As of June 30,
1998, CNL Hospitality Properties, Inc. had sold 2,357,817 shares,
representing subscription proceeds of $23,578,169 from the offering,
including 970 shares ($9,704) through the reinvestment plan. From the
commencement of the offering through June 30, 1998, total selling
commissions and discounts were $1,768,371, marketing support and due
diligence expense reimbursement fees were $117,891, and acquisition fees
were $1,061,023, for a total amount paid to sponsor of $2,947,285. CNL
Hospitality Properties, Inc. had cash generated from operations for the
period October 15, 1997 (the date funds were originally released from
escrow) through June 30, 1998, of $232,921. CNL Hospitality Properties,
Inc. made payments of $82,971 to the sponsor from operations for this
period.
C-6
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XIII, LTD.
<TABLE>
<CAPTION>
1992
(Note 1) 1993 1994 1995
------------ ------------ ------------ -------------
<S> <C>
Gross revenue $ 0 $ 966,564 $ 3,558,447 $ 3,806,944
Equity in earnings of joint ventures 0 1,305 43,386 98,520
Profit (loss) from sale of properties
(Notes 4, 5 and 6) 0 0 0 (29,560)
Interest income 0 181,568 77,379 51,410
Less: Operating expenses 0 (59,390) (183,311) (214,705)
Interest expense 0 0 0 0
Depreciation and amortization 0 (148,170) (378,269) (393,435)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 941,877 3,117,632 3,319,174
============ ============ ============ ============
Taxable income
- from operations 0 978,535 2,703,252 2,920,859
============ ============ ============ ============
- from gain (loss) on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 1,121,547 3,149,000 3,379,378
Cash generated from sales (Notes 4, 5 and 6) 0 0 0 286,411
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 1,121,547 3,149,000 3,665,789
Less: Cash distributions to investors
(Note 7)
- from operating cash flow 0 (528,364) (2,800,004) (3,350,014)
- from sale of properties 0 0 0 0
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after
cash distributions 0 593,183 348,996 315,775
Special items (not including sales
and refinancing):
Limited partners' capital
contributions 0 40,000,000 0 0
General partners' capital
contributions 1,000 0 0 0
Syndication costs 0 (3,932,017) (181) 0
Acquisition of land and buildings 0 (19,691,630) (5,764,308) (336,116)
Investment in direct financing leases 0 (6,760,624) (1,365,075) 0
Investment in joint ventures 0 (314,998) (545,139) (140,052)
Increase (decrease) in restricted cash 0 0 0 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XIII, Ltd. by related parties 0 (799,980) (25,036) (3,074)
Increase in other assets 0 (454,909) 9,226 0
Loan to tenant 0 0 0 0
Collections on loan to tenant 0 0 0 0
Other 0 0 0 954
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 1,000 8,639,025 (7,341,517) (162,513)
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 33 67 72
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) (Notes 4, 5 and 6) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
6 months
1996 1997 1998
------------ ------------ --------------
<S> <C>
Gross revenue $ 3,685,280 $ 3,654,128 $ 1,488,274
Equity in earnings of joint ventures 60,654 150,417 121,482
Profit (loss) from sale of properties
(Notes 4, 5 and 6) 82,855 (48,538) 0
Interest income 49,820 27,925 22,448
Less: Operating expenses (253,360) (354,206) (122,065)
Interest expense 0 0 0
Depreciation and amortization (393,434) (394,099) (196,413)
------------ ------------ ------------
Net income - GAAP basis 3,231,815 3,035,627 1,313,726
============ ============ ============
Taxable income 2,972,159 2,470,268 1,512,381
============ ============ ============
- from operations 0 (9,715) 0
============ ============ ============
- from gain (loss) on sale
3,367,581 3,273,557 1,733,901
Cash generated from operations 550,000 932,849 0
(Notes 2 and 3) 0 0 0
Cash generated from sales (Notes 4, 5 and 6) ------------ ------------ ------------
Cash generated from refinancing
3,917,581 4,206,406 1,733,901
Cash generated from operations, sales
and refinancing
Less: Cash distributions to investors (3,367,581) (3,273,557) (1,700,004)
(Note 7) 0 0 0
- from operating cash flow (32,427) (126,451) 0
- from sale of properties ------------ ------------ ------------
- from cash flow from prior period
517,573 806,398 33,897
Cash generated (deficiency) after
cash distributions
Special items (not including sales
and refinancing): 0 0 0
Limited partners' capital
contributions 0 0 0
General partners' capital 0 0 0
contributions 0 0 0
Syndication costs 0 0 0
Acquisition of land and buildings 0 (1,482,849) 0
Investment in direct financing leases (550,000) 550,000 0
Investment in joint ventures
Increase (decrease) in restricted cash
Reimbursement of organization,
syndication and acquisition costs 0 0 0
paid on behalf of CNL Income Fund 0 0 0
XIII, Ltd. by related parties 0 (196,980) 0
Increase in other assets 0 127,843 0
Loan to tenant 0 0 0
Collections on loan to tenant ------------ ------------ ------------
Other
Cash generated (deficiency) after cash
distributions and special items (32,427) (195,588) 33,897
============ ============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 74 61 37
============ ============ ============
- from recapture 0 0 0
============ ============ ============
Capital gain (loss) (Notes 4, 5 and 6) 0 0 0
============ ============ ============
</TABLE>
C-8
<PAGE>
TABLE III - CNL INCOME FUND XIII, LTD. (continued)
<TABLE>
<CAPTION>
1992
(Note 1) 1993 1994 1995
------------ ------------ ------------ -------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 18 70 82
- from capital gain 0 0 0 0
- from investment income from prior
period 0 0 0 2
- from return of capital 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on GAAP basis (Note 7) 0 18 70 84
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 18 70 84
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on cash basis (Note 7) 0 18 70 84
============ ============ ============ ============
Total cash distributions as a percentage
of original $1,000 investment (Note 8) 0.00% 5.33% 7.56% 8.44%
Total cumulative cash distributions per
$1,000 investment from inception 0 18 88 172
Amount (in percentage terms) remaining
invested in program properties at the end
of each year (period) presented (original
total acquisition cost of properties
retained, divided by original total
acquisition cost of all properties
in program) (Notes 4, 5 and 6) N/A 100% 100% 100%
</TABLE>
Note 1: The registration statement relating to the offering of Units by
CNL Income Fund XIII, Ltd. became effective on March 17, 1993.
Activities through April 15, 1993, were devoted to organization of
the partnership and operations had not begun.
Note 2: Cash generated from operations includes cash received from
tenants, plus distributions from joint ventures, less cash paid
for expenses, plus interest received.
Note 3: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included
in the financial statements of CNL Income Fund XIII, Ltd.
Note 4: During 1995, the partnership sold one of its properties to a
tenant for its original purchase price, excluding acquisition fees
and miscellaneous acquisition expenses. The net sales proceeds
were used to acquire an additional property. As a result of this
transaction, the partnership recognized a loss for financial
reporting purposes of $29,560 primarily due to acquisition fees
and miscellaneous acquisition expenses the partnership had
allocated to the property and due to the accrued rental income
relating to future scheduled rent increases that the partnership
had recorded and reversed at the time of sale.
Note 5: In November 1996, CNL Income Fund XIII, Ltd. sold one of its
properties and received net sales proceeds of $550,000, resulting
in a gain of $82,855 for financial reporting purposes. In January
1997, the partnership reinvested the net sales proceeds in an
additional property as tenants-in-common with an affiliate of the
general partners.
Note 6: In October 1997, the partnership sold one of its properties and
received net sales proceeds of $932,849, resulting in a loss of
$48,538 for financial reporting purposes. In December 1997, the
partnership reinvested the net sales proceeds in an additional
property as tenants-in-common with affiliates of the general
partners.
Note 7: As a result of the partnership's change in investor services
agents in 1993, distributions are now declared at the end of each
quarter and paid in the following quarter. Since this table
generally presents distributions on a cash basis (rather than
amounts declared), distributions on a cash basis for 1993 only
reflect payments for three quarters. Distributions declared for
the quarters ended December 31, 1993, 1994, 1995, 1996 and 1997,
are reflected in the 1994, 1995, 1996, 1997 and 1998 columns,
respectively, for distributions on a cash basis due to the
payment of such distributions in January 1994, 1995, 1996, 1997
and 1998, respectively. As a result of 1994, 1995, 1996, 1997 and
1998 distributions being presented on a cash basis, distributions
declared and unpaid as of December 31, 1994, 1995, 1996, 1997 and
June 30, 1998, are not included in the 1994, 1995, 1996, 1997 and
1998 totals, respectively.
Note 8: Total cash distributions as a percentage of original $1,000
investment are calculated based on actual distributions declared
for the period. (See Note 7 above)
Note 9: Certain data for columns representing less than 12 months have
been annualized.
C-9
<PAGE>
<TABLE>
<CAPTION>
6 months
1996 1997 1998
------------ ------------ -------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis) 78 75 33
- from investment income 2 0 0
- from capital gain
- from investment income from prior 5 10 4
period 0 0 6
- from return of capital ------------ ------------ ------------
85 85 43
Total distributions on GAAP basis (Note 7) ============ ============ ============
Source (on cash basis)
- from sales 0 0 0
- from refinancing 0 0 0
- from operations 84 82 43
- from cash flow from prior period 1 3 0
------------ ------------ ------------
Total distributions on cash basis (Note 7) 85 85 43
============ ============ ============
Total cash distributions as a percentage
of original $1,000 investment (Note 8)
Total cumulative cash distributions per 8.50% 8.50% 8.50%
$1,000 investment from inception
Amount (in percentage terms) remaining 257 342 385
invested in program properties at the end
of each year (period) presented (original
total acquisition cost of properties
retained, divided by original total
acquisition cost of all properties
in program) (Notes 4, 5 and 6)
100% 99% 100%
</TABLE>
C-10
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XIV, LTD.
<TABLE>
<CAPTION>
1992
(Note 1) 1993 1994 1995
------------ ------------ ------------ ------------
<S> <C>
Gross revenue $ 0 $ 256,234 $ 3,135,716 $ 4,017,266
Equity in earnings of joint ventures 0 1,305 35,480 338,717
Profit (Loss) from sale of properties
(Notes 4, 5, 6 and 7) 0 0 0 (66,518)
Interest income 0 27,874 200,499 50,724
Less: Operating expenses 0 (14,049) (181,980) (248,840)
Interest expense 0 0 0 0
Depreciation and amortization 0 (28,918) (257,640) (340,112)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 242,446 2,932,075 3,751,237
============ ============ ============ ============
Taxable income
- from operations 0 278,845 2,482,240 3,162,165
============ ============ ============ ============
- from gain (loss) on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 321,737 2,812,631 3,709,844
Cash generated from sales (Notes 4, 6,
7 and 8) 0 0 0 696,012
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 321,737 2,812,631 4,405,856
Less: Cash distributions to investors
(Note 5)
- from operating cash flow 0 (9,050) (2,229,952) (3,543,751)
- from sale of properties 0 0 0 0
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 312,687 582,679 862,105
Special items (not including sales and
refinancing):
Limited partners' capital
contributions 0 28,785,100 16,214,900 0
General partners' capital
contributions 1,000 0 0 0
Syndication costs 0 (2,771,892) (1,618,477) 0
Acquisition of land and buildings 0 (13,758,004) (11,859,237) (964,073)
Investment in direct financing leases 0 (4,187,268) (5,561,748) (75,352)
Investment in joint ventures 0 (315,209) (1,561,988) (1,087,218)
Return of capital from joint venture 0 0 0 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XIV, Ltd. by related parties 0 (706,215) (376,738) (577)
Increase in other assets 0 (444,267) 0 0
Increase in restricted cash 0 0 0 0
Other 0 0 0 5,530
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 1,000 6,914,932 (4,180,609) (1,259,585)
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 16 56 70
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) (Notes 4, 6, 7 and 8) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-11
<PAGE>
<TABLE>
<CAPTION>
6 months
1996 1997 1998
------------ ------------ -------------
<S> <C>
Gross revenue $ 3,999,813 $ 3,918,582 $ 1,626,212
Equity in earnings of joint ventures 459,137 309,879 164,631
Profit (Loss) from sale of properties
(Notes 4, 5, 6 and 7) 0 0 112,206
Interest income 44,089 40,232 42,434
Less: Operating expenses (246,621) (262,592) (140,356)
Interest expense 0 0 0
Depreciation and amortization (340,089) (340,161) (170,106)
------------ ------------ ------------
Net income - GAAP basis 3,916,329 3,665,940 1,635,021
============ ============ ============
Taxable income
- from operations 3,236,329 3,048,675 1,742,143
============ ============ ============
- from gain (loss) on sale 0 47,256 33,783
============ ============ ============
Cash generated from operations
(Notes 2 and 3) 3,706,296 3,606,190 1,845,728
Cash generated from sales (Notes 4, 6,
7 and 8) 0 0 1,250,140
Cash generated from refinancing 0 0 0
------------ ------------ ------------
Cash generated from operations, sales
and refinancing 3,706,296 3,606,190 3,095,868
Less: Cash distributions to investors
(Note 5)
- from operating cash flow (3,706,296) (3,606,190) (1,845,728)
- from sale of properties 0 0 0
- from cash flow from prior period (6,226) (106,330) (10,532)
------------ ------------ ------------
Cash generated (deficiency) after cash
distributions (6,226) (106,330) 1,239,608
Special items (not including sales and
refinancing):
Limited partners' capital
contributions 0 0 0
General partners' capital
contributions 0 0 0
Syndication costs 0 0 0
Acquisition of land and buildings 0 0 0
Investment in direct financing leases 0 0 0
Investment in joint ventures (7,500) (121,855) (310,097)
Return of capital from joint venture 0 51,950 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XIV, Ltd. by related parties 0 0 0
Increase in other assets 0 0 0
Increase in restricted cash 0 0 (193,654)
Other 0 0 0
------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items (13,726) (176,235) 735,857
============ ============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 71 67 38
============ ============ ============
- from recapture 0 0 0
============ ============ ============
Capital gain (loss) (Notes 4, 6, 7 and 8) 0 1 1
============ ============ ============
</TABLE>
C-12
<PAGE>
TABLE III - CNL INCOME FUND XIV, LTD. (continued)
<TABLE>
<CAPTION>
1992
(Note 1) 1993 1994 1995
------------ ------------ ------------ -------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 1 51 79
- from capital gain 0 0 0 0
- from return of capital 0 0 0 0
- from investment income from prior
period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on GAAP basis (Note 5) 0 1 51 79
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from operations 0 1 51 79
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on cash basis (Note 5) 0 1 51 79
============ ============ ============ ============
Total cash distributions as a percentage of
original $1,000 investment (Note 9) 0.00% 4.50% 6.50% 8.06%
Total cumulative cash distributions
per $1,000 investment from inception 0 1 52 131
Amount (in percentage terms) remaining invest-
ed in program properties at the end of each
year (period) presented (original total
acquisition cost of properties retained,
divided by original total acquisition
cost of all properties in program)
(Notes 4, 6, 7 and 8) N/A 100% 100% 100%
</TABLE>
Note 1: Pursuant to a registration statement on Form S-11 under the
Securities Act of 1933, as amended, CNL Income Fund XIV, Ltd.
("CNL XIV") and CNL Income Fund XIII, Ltd. each registered for
sale $40,000,000 units of limited partnership interests ("Units").
The offering of Units of CNL Income Fund XIII, Ltd. commenced
March 17, 1993. Pursuant to the registration statement, CNL XIV
could not commence until the offering of Units of CNL Income Fund
XIII, Ltd. was terminated. CNL Income Fund XIII, Ltd. terminated
its offering of Units on August 26, 1993, at which time the
maximum offering proceeds of $40,000,000 had been received. Upon
the termination of the offering of Units of CNL Income Fund XIII,
Ltd., CNL XIV commenced its offering of Units. Activities through
September 13, 1993, were devoted to organization of the
partnership and operations had not begun.
Note 2: Cash generated from operations includes cash received from
tenants, plus distributions from joint ventures, less cash paid
for expenses, plus interest received.
Note 3: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included
in the financial statements of CNL Income Fund XIV, Ltd.
Note 4: During 1995, the partnership sold two of its properties to a
tenant for its original purchase price, excluding acquisition fees
and miscellaneous acquisition expenses. The net sales proceeds
were used to acquire two additional properties. As a result of
these transactions, the partnership recognized a loss for
financial reporting purposes of $66,518 primarily due to
acquisition fees and miscellaneous acquisition expenses the
partnership had allocated to the property and due to the accrued
rental income relating to future scheduled rent increases that the
partnership had recorded and reversed at the time of sale. In
addition, during 1996, Wood-Ridge Real Estate Joint Venture, in
which the partnership owns a 50% interest, sold its two properties
to the tenant and recognized a gain of approximately $261,100 for
financial reporting purposes. As a result, the partnership's pro
rata share of such gain of approximately $130,550 is included in
equity in earnings of unconsolidated joint ventures for 1996.
Note 5: As a result of the partnership's change in investor services
agents in 1993, distributions are now declared at the end of each
quarter and paid in the following quarter. Since this table
generally presents distributions on a cash basis (rather than
amounts declared), distributions on a cash basis for 1993 only
reflect payments for three quarters. Distributions declared for
the quarters ended December 31, 1993, 1994, 1995, 1996 and 1997,
are reflected in the 1994, 1995, 1996, 1997 and 1998 columns,
respectively, for distributions on a cash basis due to the payment
of such distributions in January 1994, 1995, 1996, 1997 and 1998,
respectively. As a result of 1994, 1995, 1996, 1997 and 1998
distributions being presented on a cash basis, distributions
declared and unpaid as of December 31, 1994, 1995, 1996, 1997 and
June 30, 1998 are not included in the 1994, 1995, 1996, 1997 and
1998 totals, respectively.
Note 6: In January 1998, the partnership sold its property in Madison,
Alabama, to a third party for $740,000 and received net sales
proceeds of $696,486. Due to the fact that during 1997 the
partnership wrote off $13,314 in accrued rental income (non-cash
accounting adjustments relating to the straight-lining of future
scheduled rent increases over the lease term in accordance with
generally accepted accounting principles), no gain or loss was
incurred for financial reporting purposes in January 1998 relating
to this sale. In April 1998, the partnership reinvested a portion
of the net sales proceeds from the sale of the property in
Madison, Alabama in Melbourne Joint Venture, with an affiliate of
the partnership which has the same general partners. The
partnership intends to use the remaining proceeds to invest in an
additional property or for other partnership purposes.
Note 7: In January 1998, the partnership sold one of its properties in
Richmond, Virginia for $512,462 and received net sales proceeds of
$512,246, resulting in a gain of $70,798 for financial reporting
purposes. The partnership intends to reinvest the net sales
proceeds from the sale of the property in Richmond, Virginia in an
additional property.
Note 8: In April 1998, the partnership reached an agreement to accept
$360,000 for the property in Riviera Beach, Florida, which was
taken through a right of way taking in December 1997. The
partnership had received preliminary sales proceeds of $318,592 as
of December 31, 1997. Upon agreement and receipt of the final
sales price of $360,000, the partnership recognized a gain of
$41,408 for financial reporting purposes. The partnership intends
to reinvest the net sales proceeds from the sale of this property
in an additional property.
Note 9: Total cash distributions as a percentage of original $1,000
investment are calculated based on actual distributions declared
for the period. (See Note 5 above)
Note 10: Certain data for columns representing less than 12 months have
been annualized.
C-13
<PAGE>
<TABLE>
<CAPTION>
6 months
1996 1997 1998
------------ ------------ ------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 83 81 36
- from capital gain 0 0 0
- from return of capital 0 0 0
- from investment income from prior
period 0 2 5
------------ ------------ ------------
Total distributions on GAAP basis (Note 5) 83 83 41
============ ============ ============
Source (on cash basis)
- from sales 0 0 0
- from operations 83 81 41
- from cash flow from prior period 0 2 0
------------ ------------ ------------
Total distributions on cash basis (Note 5) 83 83 41
============ ============ ============
Total cash distributions as a percentage of
original $1,000 investment (Note 9) 8.25% 8.25% 8.25%
Total cumulative cash distributions
per $1,000 investment from inception 214 297 338
Amount (in percentage terms) remaining invest-
ed in program properties at the end of each
year (period) presented (original total
acquisition cost of properties retained,
divided by original total acquisition
cost of all properties in program)
(Notes 4, 6, 7 and 8) 100% 100% 100%
</TABLE>
C-14
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XV, LTD.
<TABLE>
<CAPTION>
1993
(Note 1) 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C>
Gross revenue $ 0 $ 1,143,586 $ 3,546,320 $ 3,632,699
Equity in earnings of joint ventures 0 8,372 280,606 392,862
Profit (Loss) from sale of properties
(Note 4) 0 0 (71,023) 0
Interest income 0 167,734 88,059 43,049
Less: Operating expenses 0 (62,926) (228,319) (235,319)
Interest expense 0 0 0 0
Depreciation and amortization 0 (70,848) (243,175) (248,232)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 1,185,918 3,372,468 3,585,059
============ ============ ============ ============
Taxable income
- from operations 0 1,026,715 2,861,912 2,954,318
============ ============ ============ ============
- from gain on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 1,116,834 3,239,370 3,434,682
Cash generated from sales (Note 4) 0 0 811,706 0
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 1,116,834 4,051,076 3,434,682
Less: Cash distributions to investors
(Notes 5, 6 and 8)
- from operating cash flow 0 (635,944) (2,650,003) (3,200,000)
- from sale of properties 0 0 0 0
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 480,890 1,401,073 234,682
Special items (not including sales and
refinancing):
Limited partners' capital contri-
butions 0 40,000,000 0 0
General partners' capital contri-
butions 1,000 0 0 0
Syndication costs 0 (3,892,003) 0 0
Acquisition of land and buildings 0 (22,152,379) (1,625,601) 0
Investment in direct financing
leases 0 (6,792,806) (2,412,973) 0
Investment in joint ventures 0 (1,564,762) (720,552) (129,939)
Return of capital from joint venture 0 0 0 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XV, Ltd. by related parties 0 (1,098,197) (23,507) 0
Increase in other assets 0 (187,757) 0 0
Other (38) (6,118) 25,150 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 962 4,786,868 (3,356,410) 104,743
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 33 71 73
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) (Note 4) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-15
<PAGE>
<TABLE>
<CAPTION>
6 months
1997 1998
------------ -----------
<S> <C>
Gross revenue $ 3,622,123 $ 1,498,779
Equity in earnings of joint ventures 239,249 120,294
Profit (Loss) from sale of properties
(Note 4) 0 0
Interest income 46,642 33,275
Less: Operating expenses (224,761) (128,176)
Interest expense 0 0
Depreciation and amortization (248,348) (124,200)
------------ -----------
Net income - GAAP basis 3,434,905 1,399,972
============ ===========
Taxable income
- from operations 2,856,893 1,492,168
============ ===========
- from gain on sale 47,256 0
============ ===========
Cash generated from operations
(Notes 2 and 3) 3,306,595 1,710,905
Cash generated from sales (Note 4) 0 0
Cash generated from refinancing 0 0
------------ -----------
Cash generated from operations, sales
and refinancing 3,306,595 1,710,905
Less: Cash distributions to investors
(Notes 5, 6 and 8)
- from operating cash flow (3,280,000) (1,710,905)
- from sale of properties 0 0
- from cash flow from prior period 0 (89,095)
------------ -------------
Cash generated (deficiency) after cash
distributions 26,595 (89,095)
Special items (not including sales and
refinancing):
Limited partners' capital contri-
butions 0 0
General partners' capital contri-
butions 0 0
Syndication costs 0 0
Acquisition of land and buildings 0 0
Investment in direct financing
leases 0 0
Investment in joint ventures 0 (207,986)
Return of capital from joint venture 51,950 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XV, Ltd. by related parties 0 0
Increase in other assets 0 0
Other 0 0
------------ ------------
Cash generated (deficiency) after cash
distributions and special items 78,545 (297,081)
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 71 37
============ ============
- from recapture 0 0
============ ============
Capital gain (loss) (Note 4) 1 0
============ ============
</TABLE>
C-16
<PAGE>
TABLE III - CNL INCOME FUND XV, LTD. (continued)
<TABLE>
<CAPTION>
1993
(Note 1) 1994 1995 1996
------------ ------------ ------------ -----------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 21 66 80
- from capital gain 0 0 0 0
- from investment income from prior
period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on GAAP basis (Note 5) 0 21 66 80
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 21 66 80
- from investment income from prior period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on cash basis (Note 5) 0 21 66 80
============ ============ ============ ============
Total cash distributions as a percentage
of original $1,000 investment (Notes 6,
7 and 8). 0.00% 5.00% 7.25% 8.20%
Total cumulative cash distributions per
$1,000 investment from inception 0 21 87 167
Amount (in percentage terms) remaining
invested in program properties at the end
of each year (period) presented (original
total acquisition cost of properties
retained, divided by original total
acquisition cost of all properties
in program) (Note 4) N/A 100% 100% 100%
</TABLE>
Note 1 The registration statement relating to this offering of Units of
CNL Income Fund XV, Ltd. became effective February 23, 1994.
Activities through March 23, 1994, were devoted to organization of
the partnership and operations had not begun.
Note 2: Cash generated from operations includes cash received from
tenants, plus distributions from joint venture, less cash paid for
expenses, plus interest received.
Note 3: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included
in the financial statements of CNL Income Fund XV, Ltd.
Note 4: During 1995, the partnership sold three of its properties to a
tenant for its original purchase price, excluding acquisition fees
and miscellaneous acquisition expenses. The majority of the net
sales proceeds were used to acquire additional properties. As a
result of these transactions, the partnership recognized a loss
for financial reporting purposes of $71,023 primarily due to
acquisition fees and miscellaneous acquisition expenses the
partnership had allocated to the three properties and due to the
accrued rental income relating to future scheduled rent increases
that the partnership had recorded and reversed at the time of
sale. In addition, during 1996, Wood-Ridge Real Estate Joint
Venture, in which the partnership owns a 50% interest, sold its
two properties to the tenant and recognized a gain of
approximately $261,100 for financial reporting purposes. As a
result, the partnership's pro rata share of such gain of
approximately $130,550 is included in equity in earnings of
unconsolidated joint ventures for 1996.
Note 5: Distributions declared for the quarters ended December 31, 1994,
1995, 1996 and 1997 are reflected in the 1995, 1996, 1997 and 1998
columns, respectively, due to the payment of such distributions in
January 1995, 1996, 1997 and 1998, respectively. As a result of
distributions being presented on a cash basis, distributions
declared and unpaid as of December 31, 1994, 1995, 1996, 1997 and
June 30, 1998 are not included in the 1994, 1995, 1996, 1997 and
1998 totals, respectively.
Note 6: On December 31, 1996, CNL Income Fund XV, Ltd. declared a special
distribution of cumulative excess operating reserves equal to .20%
of the total invested capital. Accordingly, the total yield for
1996 was 8.20%
Note 7: Total cash distributions as a percentage of original $1,000
investment are calculated based on actual distributions declared
for the period. (See Note 5 above)
Note 8: Cash distributions for 1998 include an additional amount equal to
0.50% of invested capital which was earned in 1997 or prior years,
but declared payable in the first quarter of 1998
Note 9: Certain data for columns representing less than 12 months have
been annualized.
C-17
<PAGE>
<TABLE>
<CAPTION>
6 months
1997 1998
------------ ------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 82 35
- from capital gain 0 0
- from investment income from prior
period 0 10
------------ ------------
Total distributions on GAAP basis (Note 5) 82 45
============ ============
Source (on cash basis)
- from sales 0 0
- from refinancing 0 0
- from operations 82 43
- from investment income from prior period 0 2
------------ ------------
Total distributions on cash basis (Note 5)
82 45
Total cash distributions as a percentage ============ ============
of original $1,000 investment (Notes 6,
7 and 8). 8.00% 8.50%
Total cumulative cash distributions per
$1,000 investment from inception 249 294
Amount (in percentage terms) remaining
invested in program properties at the end
of each year (period) presented (original
total acquisition cost of properties
retained, divided by original total
acquisition cost of all properties
in program) (Note 4) 100% 100%
</TABLE>
C-18
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XVI, LTD.
<TABLE>
<CAPTION>
1993
(Note 1) 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C>
Gross revenue $ 0 $ 186,257 $ 2,702,504 $ 4,343,390
Equity in earnings from joint venture 0 0 0 19,668
Profit from sale of properties (Notes 4
and 5) 0 0 0 124,305
Interest income 0 21,478 321,137 75,160
Less: Operating expenses 0 (10,700) (274,595) (261,878)
Interest expense 0 0 0 0
Depreciation and amortization 0 (9,458) (318,205) (552,447)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 187,577 2,430,841 3,748,198
============ ============ ============ ============
Taxable income
- from operations 0 189,864 2,139,382 3,239,830
============ ============ ============ ============
- from gain on sale (Notes 4 and 5) 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 205,148 2,481,395 3,753,726
Cash generated from sales (Notes 4 and 5) 0 0 0 775,000
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 205,148 2,481,395 4,528,726
Less: Cash distributions to investors
(Note 6)
- from operating cash flow 0 (2,845) (1,798,921) (3,431,251)
- from sale of properties 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 202,303 682,474 1,097,475
Special items (not including sales and
refinancing):
Limited partners' capital contri-
butions 0 20,174,172 24,825,828 0
General partners' capital contri-
butions 1,000 0 0 0
Syndication costs 0 (1,929,465) (2,452,743) 0
Acquisition of land and buildings 0 (13,170,132) (16,012,458) (2,355,627)
Investment in direct financing
leases 0 (975,853) (5,595,236) (405,937)
Investment in joint ventures 0 0 0 (775,000)
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XVI, Ltd. by related parties 0 (854,154) (405,569) (2,494)
Increase in other assets 0 (443,625) (58,720) 0
Increase (decrease) in restricted cash 0 0 0 0
Reimbursement from developer of
construction costs 0 0 0 0
Other (36) (20,714) 20,714 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 964 2,982,532 1,004,290 (2,441,583)
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 17 53 71
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) (Notes 4 and 5) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-19
<PAGE>
<TABLE>
<CAPTION>
6 months
1997 1998
------------ -------------
<S> <C>
Gross revenue $ 4,308,853 $ 1,987,937
Equity in earnings from joint venture 73,507 64,956
Profit from sale of properties (Notes 4
and 5) 41,148 0
Interest income 73,634 34,195
Less: Operating expenses (272,932) (132,020)
Interest expense 0 0
Depreciation and amortization (563,883) (268,997)
------------ ------------
Net income - GAAP basis 3,660,327 1,686,071
============ ============
Taxable income
- from operations 3,178,911 1,629,897
============ ============
- from gain on sale (Notes 4 and 5) 64,912 0
============ ============
Cash generated from operations
(Notes 2 and 3) 3,780,424 1,922,221
Cash generated from sales (Notes 4 and 5) 610,384 0
Cash generated from refinancing 0 0
------------ ------------
Cash generated from operations, sales
and refinancing 4,390,808 1,922,221
Less: Cash distributions to investors
(Note 6)
- from operating cash flow (3,600,000) (1,890,000)
- from sale of properties 0 0
-------------- -------------
Cash generated (deficiency) after cash
distributions 790,808 32,221
Special items (not including sales and
refinancing):
Limited partners' capital contri-
butions 0 0
General partners' capital contri-
butions 0 0
Syndication costs 0 0
Acquisition of land and buildings (23,501) 0
Investment in direct financing
leases (29,257) (31,504)
Investment in joint ventures 0 (607,896)
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XVI, Ltd. by related parties 0 0
Increase in other assets 0 0
Increase (decrease) in restricted cash (610,384) 610,384
Reimbursement from developer of
construction costs 0 161,204
Other 0 0
-------------- -------------
Cash generated (deficiency) after cash
distributions and special items 127,666 164,409
============== =============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 70 36
============== ==============
- from recapture 0 0
============= ==============
Capital gain (loss) (Notes 4 and 5) 1 0
============= ==============
</TABLE>
C-20
<PAGE>
TABLE III - CNL INCOME FUND XVI, LTD. (continued)
<TABLE>
<CAPTION>
1993
(Note 1) 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 1 45 76
- from capital gain 0 0 0 0
- from investment income from
prior period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on GAAP basis (Note 6) 0 1 45 76
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 1 45 76
------------ ------------ ------------ ------------
Total distributions on cash basis (Note 6) 0 1 45 76
============ ============ ============ ============
Total cash distributions as a percentage
of original $1,000 investment (Notes 7
and 8) 0.00% 4.50% 6.00% 7.88%
Total cumulative cash distributions per
$1,000 investment from inception 0 1 46 122
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) (Notes 4 and 5) N/A 100% 100% 100%
</TABLE>
Note 1: Pursuant to a registration statement on Form S-11 under the
Securities Act of 1933, as amended, CNL Income Fund XVI, Ltd.
("CNL XVI") and CNL Income Fund XV, Ltd. each registered for sale
$40,000,000 units of limited partnership interests ("Units"). The
offering of Units of CNL Income Fund XV, Ltd. commenced February
23, 1994. Pursuant to the registration statement, CNL XVI could
not commence until the offering of Units of CNL Income Fund XV,
Ltd. was terminated. CNL Income Fund XV, Ltd. terminated its
offering of Units on September 1, 1994, at which time the maximum
offering proceeds of $40,000,000 had been received. Upon the
termination of the offering of Units of CNL Income Fund XV, Ltd.,
CNL XVI commenced its offering of Units. Activities through
September 22, 1994, were devoted to organization of the
partnership and operations had not begun.
Note 2: Cash generated from operations includes cash received from
tenants, less cash paid for expenses, plus interest received.
Note 3: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included
in the financial statements of CNL Income Fund XVI, Ltd.
Note 4: In April 1996, CNL Income Fund XVI, Ltd. sold one of its
properties and received net sales proceeds of $775,000, resulting
in a gain of $124,305 for financial reporting purposes. In October
1996, the partnership reinvested the net sales proceeds in an
additional property as tenants-in-common with an affiliate of the
general partners.
Note 5: In March 1997, CNL Income Fund XVI, Ltd. sold one of its
properties and received net sales proceeds of $610,384, resulting
in a gain of $41,148 for financial reporting purposes. In January
1998, the partnership reinvested the net sales proceeds in an
additional property as tenants-in-common with affiliates of the
general partners.
Note 6: Distributions declared for the quarters ended December 31, 1994,
1995, 1996 and 1997 are reflected in the 1995, 1996, 1997 and 1998
columns, respectively, due to the payment of such distributions in
January 1995, 1996, 1997 and 1998, respectively. As a result of
distributions being presented on a cash basis, distributions
declared and unpaid as of December 31, 1994, 1995, 1996, 1997 and
June 30, 1998 are not included in the 1994, 1995, 1996, 1997 and
1998 totals, respectively.
Note 7: Cash distributions for 1998 include an additional amount equal to
0.20% of invested capital which was earned in 1997 but declared
payable in the first quarter of 1998.
Note 8: Total cash distributions as a percentage of original $1,000
investment are calculated based on actual distributions declared
for the period. (See Note 6 above)
Note 9: Certain data for columns representing less than 12 months have
been annualized.
C-21
<PAGE>
<TABLE>
<CAPTION>
6 months
1997 1998
------------ ------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income
- from capital gain 80 37
- from investment income from 0 0
prior period 0 5
------------ ------------
80 42
Total distributions on GAAP basis (Note 6) ============ ============
Source (on cash basis)
- from sales 0 0
- from refinancing 0 0
- from operations 80 42
------------ ------------
Total distributions on cash basis (Note 6) 80 42
============ ============
Total cash distributions as a percentage
of original $1,000 investment (Notes 7
and 8) 8.00% 8.20%
Total cumulative cash distributions per
$1,000 investment from inception 202 244
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) (Notes 4 and 5) 100% 100%
</TABLE>
C-22
<PAGE>
TABLE III Operating Results
of Prior Programs CNL AMERICAN
PROPERTIES FUND, INC.
<TABLE>
<CAPTION>
1994 1997
(Note 1) 1995 1996 (Note 2)
------------ ------------ ------------ ----------
<S> <C>
Gross revenue $ 0 $ 539,776 $ 4,363,456 $ 15,516,102
Interest income 0 119,355 1,843,228 3,941,831
Less: Operating expenses 0 (186,145) (908,924) (2,066,962)
Interest expense 0 0 0 0
Depreciation and amortization 0 (104,131) (521,871) (1,795,062)
Minority interest in income of
consolidated joint venture 0 (76) (29,927) (31,453)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 368,779 4,745,962 15,564,456
============ ============ ============ ============
Taxable income
- from operations (Note 8) 0 379,935 4,894,262 15,727,311
============ ============ ============ ============
- from gain (loss) on sale 0 0 0 (41,115)
============ ============ ============ ============
Cash generated from operations
(Notes 4 and 5) 0 498,459 5,482,540 17,076,214
Cash generated from sales (Note 7) 0 0 0 6,289,236
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 498,459 5,482,540 23,365,450
Less: Cash distributions to investors (Note 9)
- from operating cash flow 0 (498,459) (5,439,404) (16,854,297)
- from sale of properties 0 0 0 0
- from return of capital (Note 10) 0 (136,827) 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 (136,827) 43,136 6,511,153
Special items (not including sales of
real estate and refinancing):
Subscriptions received from
stockholders 0 38,454,158 100,792,991 222,482,560
Sale of common stock to CNL Fund
Advisors, Inc. 200,000 0 0 0
Contributions from minority interest 0 200,000 97,419 0
Distributions to holder of minority
interest 0 0 (39,121) (34,020)
Stock issuance costs (19) (3,680,704) (8,486,188) (19,542,862)
Acquisition of land and buildings 0 (18,835,969) (36,104,148) (143,542,667)
Investment in direct financing
leases 0 (1,364,960) (13,372,621) (39,155,974)
Proceeds from sale of equipment direct
financing leases 0 0 0 962,274
Investment in joint venture 0 0 0 0
Investment in mortgage notes
receivable 0 0 (13,547,264) (4,401,982)
Collections on mortgage notes
receivable 0 0 133,850 250,732
Investment in notes receivable 0 0 0 (12,521,401)
Collections on notes receivable 0 0 0 0
Investment in certificate of deposit 0 0 0 (2,000,000)
Proceeds of borrowing on line of
credit 0 0 3,666,896 19,721,804
Payment on line of credit 0 0 (145,080) (20,784,577)
Reimbursement of organization, acquisition,
and deferred offering and stock issuance
costs paid on behalf of CNL American
Properties Fund, Inc. by related parties (199,036) (2,500,056) (939,798) (2,857,352)
Increase in other assets 0 (628,142) (1,103,896) 0
Other 0 0 (54,333) 49,001
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 945 11,507,500 30,941,643 5,136,689
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED (Note 6)
Federal income tax results:
Ordinary income (loss) (Note 11)
- from operations (Note 8) 0 20 61 67
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-23
<PAGE>
<TABLE>
<CAPTION>
6 months
1998
(Note 3)
--------------
<S> <C>
Gross revenue $ 13,829,348
Interest income 3,799,730
Less: Operating expenses (1,949,398)
Interest expense 0
Depreciation and amortization (1,648,827)
Minority interest in income of
consolidated joint venture (15,380)
--------------
Net income - GAAP basis 14,015,473
==============
Taxable income
- from operations (Note 8) 13,876,482
==============
- from gain (loss) on sale (108,690)
==============
Cash generated from operations
(Notes 4 and 5) 16,600,953
Cash generated from sales (Note 7) 1,233,679
Cash generated from refinancing 0
---------------
Cash generated from operations, sales
and refinancing 17,834,632
Less: Cash distributions to investors (Note 9)
- from operating cash flow (15,992,806)
- from sale of properties 0
- from return of capital (Note 10) 0
---------------
Cash generated (deficiency) after cash
distributions 1,841,826
Special items (not including sales of
real estate and refinancing):
Subscriptions received from
stockholders 152,570,391
Sale of common stock to CNL Fund
Advisors, Inc. 0
Contributions from minority interest 0
Distributions to holder of minority
interest (16,956)
Stock issuance costs (13,840,339)
Acquisition of land and buildings (36,742,586)
Investment in direct financing
leases (71,360,700)
Proceeds from sale of equipment direct
financing leases 0
Investment in joint venture (112,847)
Investment in mortgage notes
receivable 0
Collections on mortgage notes
receivable 147,051
Investment in notes receivable (2,903,600)
Collections on notes receivable 666,633
Investment in certificate of deposit 0
Proceeds of borrowing on line of
credit 2,979,403
Payment on line of credit 0
Reimbursement of organization, acquisition,
and deferred offering and stock issuance
costs paid on behalf of CNL American
Properties Fund, Inc. by related parties (2,570,126)
Increase in other assets (1,845,005)
Other (30,842)
--------------
Cash generated (deficiency) after cash
distributions and special items 28,782,303
==============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED (Note 6)
Federal income tax results:
Ordinary income (loss) (Note 11)
- from operations (Note 8) 32
==============
- from recapture 0
==============
Capital gain (loss) 0
==============
</TABLE>
C-24
<PAGE>
TABLE III - CNL AMERICAN PROPERTIES FUND, INC. (continued)
<TABLE>
<CAPTION>
1994 1997
(Note 1) 1995 1996 (Note 2)
------------ ------------ ------------ ----------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 19 59 66
- from capital gain 0 0 0 0
- from investment income from
prior period 0 0 0 0
- from return of capital (Note 10) 0 14 8 6
------------ ------------ ------------ ------------
Total distributions on GAAP basis (Note 11) 0 33 67 72
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 26 67 72
- from return of capital (Note 10) 0 7 0 0
------------ ------------ ------------ ------------
Total distributions on cash basis (Note 11) 0 33 67 72
============ ============ ============ ============
Total cash distributions as a percentage
of original $1,000 investment (Note 6 and 9) 0.00% 5.34% 7.06% 7.45%
Total cumulative cash distributions per
$1,000 investment from inception 0 33 100 172
Amount (in percentage terms) remaining
invested in program properties at the end of
each year (period) presented (original total
acquisition cost of properties retained,
divided by original total acquisition cost
of all properties in program) (Note 7) N/A 100% 100% 100%
</TABLE>
Note 1: Pursuant to a Registration Statement on Form S-11 under the
Securities Act of 1933, as amended, effective March 29, 1995, CNL
American Properties Fund, Inc. ("APF") registered for sale
$165,000,000 of shares of common stock (the "Initial Offering"),
including $15,000,000 available only to stockholders participating
in the company's reinvestment plan. The Initial Offering of APF
commenced April 19, 1995, and upon completion of the Initial
Offering on February 6, 1997, had received subscription proceeds
of $150,591,765 (15,059,177 shares), including $591,765 (59,177
shares) issued pursuant to the reinvestment plan. Pursuant to a
Registration Statement on Form S-11 under the Securities Act of
1933, as amended, effective January 31, 1997, APF registered for
sale $275,000,000 of shares of common stock (the "1997 Offering"),
including $25,000,000 available only to stockholders participating
in the company's reinvestment plan. The 1997 Offering of APF
commenced following the completion of the Initial Offering on
February 6, 1997, and upon completion of the 1997 Offering on
March 2, 1998, had received subscription proceeds of $251,872,648
(25,187,265 shares), including $1,872,648 (187,265 shares) issued
pursuant to the reinvestment plan. Pursuant to a Registration
Statement on Form S-11 under the Securities Act of 1933, as
amended, effective May 12, 1998, APF registered for sale
$345,000,000 of shares of common stock (the "1998 Offering"),
including $20,000,000 available only to stockholders participating
in the company's reinvestment plan. The 1998 Offering of APF
commenced following the completion of the 1997 Offering on March
2, 1998. As of June 30, 1998, APF had received subscriptions
totalling $111,835,687 from the 1998 Offering, including
$1,823,518 issued pursuant to the company's reinvestment plan.
Activities through June 1, 1995, were devoted to organization of
APF and operations had not begun.
Note 2: The amounts shown represent the combined results of the Initial
Offering and the 1997 Offering. Note 3: The amounts shown
represent the combined results of the Initial Offering, 1997
Offering and 1998 Offering.
Note 4: Cash generated from operations includes cash received from
tenants, less cash paid for expenses, plus interest received.
Note 5: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included
in the financial statements of APF.
Note 6: Total cash distributions as a percentage of original $1,000
investment are calculated based on actual distributions declared
for the period.
Note 7: In May 1997 and July 1997, APF sold four properties and one
property, respectively, to a tenant for $5,254,083 and $1,035,153,
respectively, which was equal to the carrying value of the
properties at the time of sale. In May 1998, APF sold two
properties to third parties for $1,605,154 (and received net sales
proceeds of approximately $1,233,700 after deduction of
construction costs incurred but not paid by APF as of the date of
the sale) which approximated the carrying value of the properties
at the time of sale. As a result, no gain or loss was recognized
for financial reporting purposes. The company reinvested the
proceeds from the sale of properties in additional properties.
Note 8: Taxable income presented is before the dividends paid deduction.
Note 9: For the six months ended June 30, 1998 and the years ended
December 31, 1997, 1996 and 1995, 86.37%, 93.33%, 90.25% and
59.82%, respectively, of the distributions received by
stockholders were considered to be ordinary income and 13.63%,
6.67%, 9.75% and 40.18%, respectively, were considered a return of
capital for federal income tax purposes. No amounts distributed to
stockholders for the six months ended June 30, 1998 and the years
ended December 31, 1997, 1996 and 1995 are required to be or have
been treated by the company as a return of capital for purposes of
calculating the stockholders' return on their invested capital.
C-25
<PAGE>
<TABLE>
<CAPTION>
6 months
1998
(Note 3)
-------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 32
- from capital gain 0
- from investment income from
prior period 0
- from return of capital (Note 10) 5
------------
37
============
Total distributions on GAAP basis (Note 11)
Source (on cash basis)
- from sales 0
- from refinancing 0
- from operations 37
- from return of capital (Note 10) 0
------------
Total distributions on cash basis (Note 11) 37
============
Total cash distributions as a percentage
of original $1,000 investment (Note 6 and 9) 7.62%
Total cumulative cash distributions per
$1,000 investment from inception 209
Amount (in percentage terms) remaining
invested in program properties at the end of
each year (period) presented (original total
acquisition cost of properties retained,
divided by original total acquisition cost
of all properties in program) (Note 7) 100%
</TABLE>
Note 10: Cash distributions presented above as a return of capital on a
GAAP basis represent the amount of cash distributions in excess of
accumulated net income on a GAAP basis. Accumulated net income
includes deductions for depreciation and amortization expense and
income from certain non-cash items. This amount is not required to
be presented as a return of capital except for purposes of this
table, and APF has not treated this amount as a return of capital
for any other purpose.
Note 11: Tax and distribution data and total distributions on GAAP basis
were computed based on the weighted average shares outstanding
during each period presented.
C-26
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XVII, LTD.
<TABLE>
<CAPTION>
1995 6 months
(Note 1) 1996 1997 1998
------------ ------------ ------------ -------------
<S> <C>
Gross revenue $ 0 $ 1,195,263 $ 2,643,871 $ 1,417,608
Equity in earnings of unconsolidated
joint ventures 0 4,834 100,918 69,785
Interest income 12,153 244,406 69,779 24,834
Less: Operating expenses (3,493) (169,536) (181,865) (93,411)
Interest expense 0 0 0 0
Depreciation and amortization (309) (179,208) (387,292) (176,959)
Minority interest in income of
consolidated joint venture 0 (41,854) (31,219)
------------ ------------ ------------ ------------
Net income - GAAP basis 8,351 1,095,759 2,203,557 1,210,638
============ ============ ============ ============
Taxable income
- from operations 12,153 1,114,964 2,058,601 1,062,296
============ ============ ============ ============
- from gain on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 9,012 1,232,948 2,495,114 1,274,084
Cash generated from sales 0 0 0 0
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 9,012 1,232,948 2,495,114 1,274,084
Less: Cash distributions to investors
(Note 4)
- from operating cash flow (1,199) (703,681) (2,177,584) (1,200,000)
- from sale of properties 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 7,813 529,267 317,530 74,084
Special items (not including sales and
refinancing):
Limited partners' capital contri-
butions 5,696,921 24,303,079 0 0
General partners' capital contri-
butions 1,000 0 0 0
Contributions from minority interest 0 140,676 278,170 0
Distribution to holder of minority
interest 0 0 (41,507) (24,426)
Syndication costs (604,348) (2,407,317) 0 0
Acquisition of land and buildings (332,928) (19,735,346) (1,740,491) 0
Investment in direct financing
leases 0 (1,784,925) (1,130,497) 0
Investment in joint ventures 0 (201,501) (1,135,681) (127,807)
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XVII, Ltd. by related parties (347,907) (326,483) (25,444) 0
Increase in other assets (221,282) 0 0 0
Reimbursement from developer of
construction costs 0 0 0 322,897
Other (410) 410 0 (16,797)
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 4,198,859 517,860 (3,477,920) 227,951
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 36 37 69 35
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-27
<PAGE>
TABLE III - CNL INCOME FUND XVII, LTD. (continued)
<TABLE>
<CAPTION>
1995 6 months
(Note 1) 1996 1997 1998
------------ ------------ ------------ --------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 4 23 73 40
- from capital gain 0 0 0 0
- from investment income from
prior period 0 0 0 0
----------- ------------ ------------ ------------
Total distributions on GAAP basis (Note 4) 0 23 73 40
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 4 23 73 40
------------ ------------ ------------ -------------
Total distributions on cash basis (Note 4) 4 23 73 40
============ ============ ============ =============
Total cash distributions as a percentage
of original $1,000 investment (Note 5) 5.00% 5.50% 7.625% 8.00
Total cumulative cash distributions per
$1,000 investment from inception 4 27 100 140
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) (Note 6) N/A 98% 100% 99%
</TABLE>
Note 1: Pursuant to a registration statement on Form S-11 under the
Securities Act of 1933, as amended, effective August 11, 1995, CNL
Income Fund XVII, Ltd. ("CNL XVII") and CNL Income Fund XVIII,
Ltd. each registered for sale $30,000,000 units of limited
partnership interests ("Units"). The offering of Units of CNL
Income Fund XVII, Ltd. commenced September 2, 1995. Pursuant to
the registration statement, CNL XVIII could not commence until the
offering of Units of CNL Income Fund XVII, Ltd. was terminated.
CNL Income Fund XVII, Ltd. terminated its offering of Units on
September 19, 1996, at which time subscriptions for the maximum
offering proceeds of $30,000,000 had been received. Upon the
termination of the offering of Units of CNL Income Fund XVII,
Ltd., CNL XVIII commenced its offering of Units. Activities
through November 3, 1995, were devoted to organization of the
partnership and operations had not begun.
Note 2: Cash generated from operations includes cash received from
tenants, plus distributions from joint ventures, less cash paid
for expenses, plus interest received.
Note 3: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included
in the financial statements of CNL XVII.
Note 4: Distributions declared for the quarters ended December 31, 1995,
1996 and 1997 are reflected in the 1996, 1997 and 1998
columns, respectively, due to the payment of such distributions in
January 1996, 1997 and 1998, respectively. As a result of
distributions being presented on a cash basis, distributions
declared and unpaid as of December 31, 1996, 1997 and June 30,
1998 are not included in the 1996, 1997 and 1998 totals,
respectively.
Note 5: Total cash distributions as a percentage of original $1,000
investment are calculated based on actual distributions declared
for the period. (See Note 4 above)
Note 6: During 1998, CNL Income Fund XVII, Ltd. received approximately
$322,900 from the developer of the properties in Aiken, South
Carolina and Weatherford, Texas. This represents a reimbursement
from the developer upon final reconciliation of total construction
costs, to the total construction costs funded by the partnership
in accordance with the development agreement. The partnership
intends to reinvest the funds in additional properties.
Note 7: Certain data for columns representing less than 12 months have
been annualized.
C-28
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XVIII, LTD.
<TABLE>
<CAPTION>
1995 6 months
(Note 1) 1996 1997 1998
------------ ------------ ------------ --------
<S> <C>
Gross revenue $ 0 $ 1,373 $ 1,291,416 $ 1,447,579
Equity in earnings of joint venture 0 0 0 0
Interest income 0 30,241 161,826 99,885
Less: Operating expenses 0 (3,992) (156,403) (103,375)
Interest expense 0 0 0 0
Depreciation and amortization 0 (712) (142,079) (178,935)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 26,910 1,154,760 1,265,154
============ ============ ============ ============
Taxable income
- from operations 0 30,223 1,318,750 1,206,888
============ ============ ============ ============
- from gain on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 27,146 1,361,756 1,459,212
Cash generated from sales 0 0 0 0
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 27,146 1,361,756 1,459,212
Less: Cash distributions to investors
(Note 4)
- from operating cash flow 0 (2,138) (855,957) (1,112,150)
- from sale of properties 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 25,008 505,799 347,062
Special items (not including sales and
refinancing):
Limited partners' capital contri-
butions 0 8,498,815 25,723,944 854,241
General partners' capital contri-
butions 1,000 0 0 0
Contributions from minority interest 0 0 0 0
Syndication costs 0 (845,657) (2,450,214) (161,141)
Acquisition of land and buildings 0 (1,533,446) (18,581,999) (2,219,267)
Investment in direct financing leases 0 0 (5,962,087) (877,348)
Investment in joint venture 0 0 0 0
Increase in restricted cash 0 0 0 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XVIII, Ltd. by related parties 0 (497,420) (396,548) (35,055)
Increase in other assets 0 (276,848) 0 (48,378)
Other (20) (107) (66,893) (10,000)
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 980 5,370,345 (1,227,998) (2,149,886)
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 6 57 34
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) 0 0 0 0
============ ============ ============ ============
C-29
</TABLE>
<PAGE>
TABLE III - CNL INCOME FUND XVIII, LTD. (continued)
<TABLE>
<CAPTION>
1995 6 months
(Note 1) 1996 1997 1998
------------ ------------ ------------ ---------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 0 38 32
- from capital gain 0 0 0 0
- from investment income from prior
period 0 0 0 0
------------ ------------ ------------ -----------
Total distributions on GAAP basis (Note 4) 0 0 38 32
============ ============ ============ ===========
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 0 38 32
------------ ------------ ------------ -----------
Total distributions on cash basis (Note 4) 0 0 38 32
============ ============ ============ ===========
Total cash distributions as a percentage
of original $1,000 investment from
inception 0.00 % 5.00 % 5.75 % 7.25 %
Total cumulative cash distributions per
$1,000 investment (Note 5) 0 0 38 70
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) N/A 83 % 95 % 99 %
</TABLE>
Note 1: Pursuant to a registration statement on Form S-11 under the
Securities Act of 1933, as amended, effective August 11, 1995, CNL
Income Fund XVIII, Ltd ("CNL XVIII") and CNL Income Fund XVII,
Ltd. each registered for sale $30,000,000 units of limited
partnership interest ("Units"). The offering of Units of CNL
Income Fund XVII, Ltd. commenced September 2, 1995. Pursuant to
the registration statement, CNL XVIII could not commence until the
offering of Units of CNL Income Fund XVII, Ltd. was terminated.
CNL Income Fund XVII, Ltd. terminated its offering of Units on
September 19, 1996, at which time the maximum offering proceeds of
$30,000,000 had been received. Upon the termination of the
offering of Units of CNL Income Fund XVII, Ltd., CNL XVIII
commenced its offering of Units. Activities through October 11,
1996, were devoted to organization of the partnership and
operations had not begun.
Note 2: Cash generated from operations includes cash received from
tenants, less cash paid for expenses, plus interest received.
Note 3: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included
in the financial statements of CNL XVIII.
Note 4: Distributions declared for the quarters ended December 1996 and
1997 are reflected in the 1997 and 1998 columns, respectively, due
to the payment of such distributions in January 1997 and 1998,
respectively. As a result of distributions being presented on a
cash basis, distributions declared and unpaid as of December 31,
1997 and June 30, 1998 are not included in the 1997 and 1998
totals, respectively.
Note 5: Total cash distributions as a percentage of original $1,000
investment are calculated based on actual distributions declared
for the period. (See Note 4 above)
Note 6: Certain data for columns representing less than 12 months have
been annualized.
C-30
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
==========================================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
----------------------------------------------------
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP Total
==========================================================================================================================
<S> <C>
CNL Income Fund, Ltd.:
Burger King -
San Dimas, CA (14) 02/05/87 06/12/92 $1,169,021 0 0 0 $1,169,021
Wendy's -
Fairfield, CA (14) 07/01/87 10/03/94 1,018,490 0 0 0 1,018,490
Wendy's -
Casa Grande, AZ 12/10/86 08/19/97 795,700 0 0 0 795,700
Wendy's -
North Miami, FL (9) 02/18/86 08/21/97 473,713 0 0 0 473,713
Popeye's -
Kissimmee, FL (14) 12/31/86 04/30/98 661,300 0 0 0 661,300
CNL Income Fund II, Ltd.:
Golden Corral -
Salisbury, NC 05/29/87 07/21/93 746,800 0 0 0 746,800
Pizza Hut -
Graham, TX 08/24/87 07/28/94 261,628 0 0 0 261,628
Golden Corral -
Medina, OH (11) 11/18/87 11/30/94 825,000 0 0 0 825,000
Denny's -
Show Low, AZ (8) 05/22/87 01/31/97 620,800 0 0 0 620,800
KFC -
Eagan, MN 06/01/87 06/02/97 623,882 0 42,000 0 665,882
KFC -
Jacksonville, FL 09/01/87 09/09/97 639,363 0 0 0 639,363
Wendy's -
Farmington Hills, MI (12) 05/18/87 10/09/97 833,031 0 0 0 833,031
Wendy's -
Farmington Hills, MI (13) 05/18/87 10/09/97 1,085,259 0 0 0 1,085,259
Denny's -
Plant City, FL 11/23/87 10/24/97 910,061 0 0 0 910,061
Pizza Hut -
Mathis, TX 12/17/87 12/04/97 297,938 0 0 0 297,938
KFC -
Avon Park, FL 09/02/87 12/10/97 501,975 0 0 0 501,975
CNL Income Fund III, Ltd.:
Wendy's -
Chicago, IL (14) 06/02/88 01/10/97 496,418 0 0 0 496,418
Perkins -
Bradenton, FL 06/30/88 03/14/97 1,310,001 0 0 0 1,310,001
Pizza Hut -
Kissimmee, FL 02/23/88 04/08/97 673,159 0 0 0 673,159
</TABLE>
<TABLE>
<CAPTION>
=============================================================================================
Cost of Properties
Including Closing and
Soft Costs
------------------------------------
Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property financing soft costs (1) Total expenditures
==============================================================================================
<S> <C>
CNL Income Fund, Ltd.:
Burger King -
San Dimas, CA (14) 0 $955,000 $ 955,000 $214,021
Wendy's -
Fairfield, CA (14) 0 861,500 861,500 156,990
Wendy's -
Casa Grande, AZ 0 667,255 667,255 128,445
Wendy's -
North Miami, FL (9) 0 385,000 385,000 88,713
Popeye's -
Kissimmee, FL (14) 0 475,360 475,360 185,940
CNL Income Fund II, Ltd.:
Golden Corral -
Salisbury, NC 0 642,800 642,800 104,000
Pizza Hut -
Graham, TX 0 205,500 205,500 56,128
Golden Corral -
Medina, OH (11) 0 743,000 743,000 82,000
Denny's -
Show Low, AZ (8) 0 484,185 484,185 136,615
KFC -
Eagan, MN 0 601,100 601,100 64,782
KFC -
Jacksonville, FL 0 405,000 405,000 234,363
Wendy's -
Farmington Hills, MI (12) 0 679,000 679,000 154,031
Wendy's -
Farmington Hills, MI (13) 0 887,000 887,000 198,259
Denny's -
Plant City, FL 0 820,717 820,717 89,344
Pizza Hut -
Mathis, TX 0 202,100 202,100 95,838
KFC -
Avon Park, FL 0 345,000 345,000 156,975
CNL Income Fund III, Ltd.:
Wendy's -
Chicago, IL (14) 0 591,362 591,362 (94,944)
Perkins -
Bradenton, FL 0 1,080,500 1,080,500 229,501
Pizza Hut -
Kissimmee, FL 0 474,755 474,755 198,404
</TABLE>
C-31
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
==========================================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
----------------------------------------------------
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP Total
==========================================================================================================================
<S> <C>
Burger King -
Roswell, GA 06/08/88 06/20/97 257,981 0 685,000 0 942,981
Wendy's -
Mason City, IA 02/29/88 10/24/97 217,040 0 0 0 217,040
Taco Bell -
Fernandina Beach, FL (14) 04/09/88 01/15/98 721,655 0 0 0 721,655
Denny's -
Daytona Beach, FL (14) 07/12/88 01/23/98 1,008,976 0 0 0 1,008,976
Wendy's -
Punta Gorda, FL 02/03/88 02/20/98 665,973 0 0 0 665,973
Po' Folks -
Hagerstown, MD 06/21/88 06/10/98 788,884 0 0 0 788,884
CNL Income Fund IV, Ltd.:
Taco Bell -
York, PA 03/22/89 04/27/94 712,000 0 0 0 712,000
Burger King -
Hastings, MI 08/12/88 12/15/95 518,650 0 0 0 518,650
Wendy's -
Tampa, FL 12/30/88 09/20/96 1,049,550 0 0 0 1,049,550
Checkers -
Douglasville, GA 12/08/94 11/07/97 380,695 0 0 0 380,695
Taco Bell -
Fort Myers, FL (14) 12/22/88 03/02/98 794,690 0 0 0 794,690
Denny's -
Union Township, OH (14) 11/01/88 03/31/98 674,135 0 0 0 674,135
CNL Income Fund V, Ltd.:
Perkins -
Myrtle Beach, SC (2) 02/28/90 08/25/95 0 0 1,040,000 0 1,040,000
Ponderosa -
St. Cloud, FL (6) (14) 06/01/89 10/24/96 73,713 0 1,057,299 0 1,131,012
Franklin National Bank -
Franklin, TN 06/26/89 01/07/97 960,741 0 0 0 960,741
Shoney's -
Smyrna, TN 03/22/89 05/13/97 636,788 0 0 0 636,788
KFC -
Salem, NH 05/31/89 09/22/97 1,272,137 0 0 0 1,272,137
Perkins -
Port St. Lucie, FL 11/14/89 09/23/97 1,216,750 0 0 0 1,216,750
Hardee's -
Richmond, VA 02/17/89 11/07/97 397,785 0 0 0 397,785
Wendy's -
Tampa, FL 02/16/89 12/29/97 805,175 0 0 0 805,175
</TABLE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
=============================================================================================
Cost of Properties
Including Closing and
Soft Costs
-----------------------------------
Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property financing soft costs (1) Total expenditures
==============================================================================================
<S> <C>
Burger King -
Roswell, GA 0 775,226 775,226 167,755
Wendy's -
Mason City, IA 0 190,252 190,252 26,788
Taco Bell -
Fernandina Beach, FL (14) 0 559,570 559,570 162,085
Denny's -
Daytona Beach, FL (14) 0 918,777 918,777 90,799
Wendy's -
Punta Gorda, FL 0 684,342 684,342 (18,369)
Po' Folks -
Hagerstown, MD 0 1,188,315 1,188,315 (399,431)
CNL Income Fund IV, Ltd.:
Taco Bell -
York, PA 0 616,501 616,501 95,499
Burger King -
Hastings, MI 0 419,936 419,936 98,714
Wendy's -
Tampa, FL 0 828,350 828,350 221,200
Checkers -
Douglasville, GA 0 363,768 363,768 16,927
Taco Bell -
Fort Myers, FL (14) 0 597,998 597,998 196,692
Denny's -
Union Township, OH (14) 0 872,850 872,850 (198,715)
CNL Income Fund V, Ltd.:
Perkins -
Myrtle Beach, SC (2) 0 986,418 986,418 53,582
Ponderosa -
St. Cloud, FL (6) (14) 0 996,769 996,769 134,243
Franklin National Bank -
Franklin, TN 0 1,138,164 1,138,164 (177,423)
Shoney's -
Smyrna, TN 0 554,200 554,200 82,588
KFC -
Salem, NH 0 1,079,310 1,079,310 192,827
Perkins -
Port St. Lucie, FL 0 1,203,207 1,203,207 13,543
Hardee's -
Richmond, VA 0 695,464 695,464 (297,679)
Wendy's -
Tampa, FL 0 657,800 657,800 147,375
</TABLE>
C-32
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
==========================================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
----------------------------------------------------
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP Total
===========================================================================================================================
<S> <C>
Denny's -
Port Orange, FL (14) 07/10/89 01/23/98 1,283,096 0 0 0 1,283,096
Shoney's -
Tyler, TX 03/20/89 02/17/98 844,229 0 0 0 894,229
CNL Income Fund VI, Ltd.:
Hardee's -
Batesville, AR 11/02/89 05/24/94 791,211 0 0 0 791,211
Hardee's -
Heber Springs, AR 02/13/90 05/24/94 638,270 0 0 0 638,270
Hardee's -
Little Canada, MN 11/28/89 06/29/95 899,503 0 0 0 899,503
Jack in the Box -
Dallas, TX 06/28/94 12/09/96 982,980 0 0 0 982,980
Denny's -
Show Low, AZ (8) 05/22/87 01/31/97 349,200 0 0 0 349,200
KFC -
Whitehall Township, MI 02/26/90 07/09/97 629,888 0 0 0 629,888
Perkins -
Naples, FL 12/26/89 07/09/97 1,487,725 0 0 0 1,487,725
Burger King -
Plattsmouth, NE 01/19/90 07/18/97 699,400 0 0 0 699,400
Shoney's -
Venice, FL 08/03/89 09/17/97 1,206,696 0 0 0 1,206,696
Jack in the Box -
Yuma, AZ (10) 07/14/94 10/31/97 510,653 0 0 0 510,653
Denny's -
Deland, FL 03/22/90 01/23/98 1,236,97 0 0 0 1,236,97
Wendy's -
Liverpool, NY 12/08/89 02/09/98 145,221 0 0 0 145,221
Perkin's -
Melbourne, FL 02/03/90 02/12/98 552,910 0 0 0 552,910
Hardee's
Bellevue, NE 05/03/90 06/05/98 900,000 0 0 0 900,000
CNL Income Fund VII, Ltd.:
Taco Bell -
Kearns, UT 06/14/90 05/19/92 700,000 0 0 0 700,000
Hardee's -
St. Paul, MN 08/09/90 05/24/94 869,036 0 0 0 869,036
Perkins -
Florence, SC (3) 08/28/90 08/25/95 0 0 1,160,000 0 1,160,000
</TABLE>
<TABLE>
<CAPTION>
===========================================================================================
Cost of Properties
Including Closing and
Soft Costs
-----------------------------------
Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property financing soft costs (1) Total expenditures
============================================================================================
<S> <C>
Denny's -
Port Orange, FL (14) 0 1,021,000 1,021,000 262,096
Shoney's -
Tyler, TX 0 770,300 770,300 73,929
CNL Income Fund VI, Ltd.:
Hardee's -
Batesville, AR 0 605,500 605,500 185,711
Hardee's -
Heber Springs, AR 0 532,893 532,893 105,377
Hardee's -
Little Canada, MN 0 821,692 821,692 77,811
Jack in the Box -
Dallas, TX 0 964,437 964,437 18,543
Denny's -
Show Low, AZ (8) 0 272,354 272,354 76,846
KFC -
Whitehall Township, MI 0 725,604 725,604 (95,716)
Perkins -
Naples, FL 0 1,083,869 1,083,869 403,856
Burger King -
Plattsmouth, NE 0 561,000 561,000 138,400
Shoney's -
Venice, FL 0 1,032,435 1,032,435 174,261
Jack in the Box -
Yuma, AZ (10) 0 448,082 448,082 62,571
Denny's -
Deland, FL 0 1,000,000 1,000,000 236,971
Wendy's -
Liverpool, NY 0 341,440 341,440 (196,219)
Perkin's -
Melbourne, FL 0 692,850 692,850 (139,940)
Hardee's
Bellevue, NE 0 899,512 899,512 488
CNL Income Fund VII, Ltd.:
Taco Bell -
Kearns, UT 0 560,202 560,202 139,798
Hardee's -
St. Paul, MN 0 742,333 742,333 126,703
Perkins -
Florence, SC (3) 0 1,084,905 1,084,905 75,095
</TABLE>
C-33
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
=========================================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
----------------------------------------------------
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP Total
=========================================================================================================================
<S> <C>
Church's Fried Chicken -
Jacksonville, FL (4) (14) 04/30/90 12/01/95 0 0 240,000 0 240,000
Shoney's -
Colorado Springs, CO 07/03/90 07/24/96 1,044,909 0 0 0 1,044,909
Hardee's -
Hartland, MI 07/10/90 10/23/96 617,035 0 0 0 617,035
Hardee's -
Columbus, IN 09/04/90 05/30/97 223,590 0 0 0 223,590
KFC -
Dunnellon, FL 08/02/90 10/07/97 757,800 0 0 0 757,800
Jack in the Box -
Yuma, AZ (10) 07/14/94 10/31/97 471,372 0 0 0 471,372
CNL Income Fund VIII, Ltd.:
Denny's -
Ocoee, FL 03/16/91 07/31/95 1,184,865 0 0 0 1,184,865
Church's Fried Chicken -
Jacksonville, FL (4) (14) 09/28/90 12/01/95 0 0 240,000 0 240,000
Church's Fried Chicken -
Jacksonville, FL (5) (14) 09/28/90 12/01/95 0 0 220,000 0 220,000
Ponderosa -
Orlando, FL (6) (14) 12/17/90 10/24/96 0 0 1,353,775 0 1,353,775
CNL Income Fund IX, Ltd.:
Burger King -
Woodmere, OH (15) 05/31/91 12/12/96 918,445 0 0 0 918,445
Burger King -
Alpharetta, GA 09/20/91 06/30/97 1,053,571 0 0 0 1,053,571
CNL Income Fund X, Ltd.:
Shoney's -
Denver, CO 03/04/92 08/11/95 1,050,186 0 0 0 1,050,186
Jack in the Box -
Freemont, CA 03/26/92 09/23/97 1,366,550 0 0 0 1,366,550
Jack in the Box -
Sacramento, CA 12/19/91 01/20/98 1,234,175 0 0 0 1,234,175
CNL Income Fund XI, Ltd.:
Burger King -
Philadelphia, PA 09/29/92 11/07/96 1,044,750 0 0 0 1,044,750
CNL Income Fund XII, Ltd.:
Golden Corral -
Houston, TX 12/28/92 04/10/96 1,640,000 0 0 0 1,640,000
</TABLE>
<TABLE>
<CAPTION>
===============================================================================================
Cost of Properties
Including Closing and
Soft Costs
-----------------------------------
Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property financing soft costs (1) Total expenditures
================================================================================================
<S> <C>
Church's Fried Chicken -
Jacksonville, FL (4) (14) 0 233,728 233,720 6,272
Shoney's -
Colorado Springs, CO 0 893,739 893,739 151,170
Hardee's -
Hartland, MI 0 841,642 841,642 (224,607)
Hardee's -
Columbus, IN 0 219,676 219,676 3,914
KFC -
Dunnellon, FL 0 546,333 546,333 211,467
Jack in the Box -
Yuma, AZ (10) 0 413,614 413,614 57,758
CNL Income Fund VIII, Ltd.:
Denny's -
Ocoee, FL 0 949,199 949,199 235,666
Church's Fried Chicken -
Jacksonville, FL (4) (14) 0 238,153 238,153 1,847
Church's Fried Chicken -
Jacksonville, FL (5) (14) 0 215,845 215,845 4,155
Ponderosa -
Orlando, FL (6) (14) 0 1,179,210 1,179,210 174,565
CNL Income Fund IX, Ltd.:
Burger King -
Woodmere, OH (15) 0 918,445 918,445 0
Burger King -
Alpharetta, GA 0 713,866 713,866 339,705
CNL Income Fund X, Ltd.:
Shoney's -
Denver, CO 0 987,679 987,679 62,507
Jack in the Box -
Freemont, CA 0 1,102,766 1,102,766 263,784
Jack in the Box -
Sacramento, CA 0 969,423 969,423 264,752
CNL Income Fund XI, Ltd.:
Burger King -
Philadelphia, PA 0 818,850 818,850 225,900
CNL Income Fund XII, Ltd.:
Golden Corral -
Houston, TX 0 1,636,643 1,636,643 3,357
</TABLE>
C-34
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
========================================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
----------------------------------------------------
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP Total
========================================================================================================================
<S> <C>
CNL Income Fund XIII, Ltd.:
Checkers -
Houston, TX 03/31/94 04/24/95 286,411 0 0 0 286,411
Checkers -
Richmond, VA 03/31/94 11/21/96 550,000 0 0 0 550,000
Denny's -
Orlando, FL 09/01/93 10/24/97 932,849 0 0 0 932,849
CNL Income Fund XIV, Ltd.:
Checkers -
Knoxville, TN 03/31/94 03/01/95 339,031 0 0 0 339,031
Checkers -
Dallas, TX 03/31/94 03/01/95 356,981 0 0 0 356,981
TGI Friday's -
Woodridge, NJ (7) 01/01/95 09/27/96 1,753,533 0 0 0 1,753,533
Wendy's -
Woodridge, NJ (7) 11/28/94 09/27/96 747,058 0 0 0 747,058
Hardee's -
Madison, AL 12/14/93 01/08/98 700,950 0 0 0 700,950
Checkers -
Richmond, VA (#548) 03/31/94 01/29/98 512,462 0 0 0 512,462
Checkers -
Riviera Beach, FL 03/31/94 04/14/98 360,000 0 0 0 360,000
CNL Income Fund XV, Ltd.:
Checkers -
Knoxville, TN 05/27/94 03/01/95 263,221 0 0 0 263,221
Checkers -
Leavenworth, KS 06/22/94 03/01/95 259,600 0 0 0 259,600
Checkers -
Knoxville, TN 07/08/94 03/01/95 288,885 0 0 0 288,885
TGI Friday's -
Woodridge, NJ (7) 01/01/95 09/27/96 1,753,533 0 0 0 1,753,533
Wendy's -
Woodridge, NJ (7) 11/28/94 09/27/96 747,058 0 0 0 747,058
CNL Income Fund XVI, Ltd.:
Long John Silver's -
Appleton, WI 06/24/95 04/24/96 775,000 0 0 0 775,000
Checker's -
Oviedo, FL 11/14/94 02/28/97 610,384 0 0 0 610,384
Boston Market -
Madison, TN (16) 05/05/95 05/08/98 774,851 0 0 0 774,851
</TABLE>
<TABLE>
<CAPTION>
===============================================================================================
Cost of Properties
Including Closing and
Soft Costs
-----------------------------------
Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property financing soft costs (1) Total expenditures
================================================================================================
<S> <C>
CNL Income Fund XIII, Ltd.:
Checkers -
Houston, TX 0 286,411 286,411 0
Checkers -
Richmond, VA 0 413,288 413,288 136,712
Denny's -
Orlando, FL 0 934,120 934,120 (1,271)
CNL Income Fund XIV, Ltd.:
Checkers -
Knoxville, TN 0 339,031 339,031 0
Checkers -
Dallas, TX 0 356,981 356,981 0
TGI Friday's -
Woodridge, NJ (7) 0 1,510,245 1,510,245 243,288
Wendy's -
Woodridge, NJ (7) 0 672,746 672,746 74,312
Hardee's -
Madison, AL 0 658,977 658,977 41,973
Checkers -
Richmond, VA (#548) 0 382,435 382,435 130,027
Checkers -
Riviera Beach, FL 0 276,409 276,409 83,591
CNL Income Fund XV, Ltd.:
Checkers -
Knoxville, TN 0 263,221 263,221 0
Checkers -
Leavenworth, KS 0 259,600 259,600 0
Checkers -
Knoxville, TN 0 288,885 288,885 0
TGI Friday's -
Woodridge, NJ (7) 0 1,510,245 1,510,245 243,288
Wendy's -
Woodridge, NJ (7) 0 672,746 672,746 74,312
CNL Income Fund XVI, Ltd.:
Long John Silver's -
Appleton, WI 0 613,838 613,838 161,162
Checker's -
Oviedo, FL 0 506,311 506,311 104,073
Boston Market -
Madison, TN (16) 0 774,851 774,851 0
</TABLE>
C-35
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
======================================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
----------------------------------------------------
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP Total
======================================================================================================================
<S> <C>
Boston Market -
Chattanooga, TN (17) 05/05/95 06/16/98 713,386 0 0 0 713,386
CNL Income Fund XVII, Ltd.:
Boston Market -
Troy, OH (18) 07/24/96 06/16/98 857,487 0 0 0 857,487
CNL American Properties Fund, Inc.:
TGI Friday's -
Orange, CT 10/30/95 05/08/97 1,312,799 0 0 0 1,312,799
TGI Friday's -
Hazlet, NJ 07/15/96 05/08/97 1,324,109 0 0 0 1,324,109
TGI Friday's -
Marlboro, NJ 08/01/96 05/08/97 1,372,075 0 0 0 1,372,075
TGI Friday's -
Hamden, CT 08/26/96 05/08/97 1,245,100 0 0 0 1,245,100
Boston Market -
Southlake, TX 07/02/97 07/21/97 1,035,153 0 0 0 1,035,135
Boston Market -
Franklin, TN (19) 08/18/95 04/14/98 950,361 0 0 0 950,361
Boston Market -
Grand Island, NE (20) 09/19/95 04/14/98 837,656 0 0 0 837,656
Burger King -
Indian Head Park, IL 04/03/96 05/05/98 674,320 0 0 0 674,320
Boston Market -
Dubuque, IA (21) 10/04/95 05/08/98 969,159 0 0 0 969,159
Boston Market -
Merced, CA (22) 10/06/96 05/08/98 930,834 0 0 0 930,834
</TABLE>
<TABLE>
<CAPTION>
=============================================================================================
Cost of Properties
Including Closing and
Soft Costs
-----------------------------------
Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property financing soft costs (1) Total expenditures
==============================================================================================
<S> <C>
Boston Market -
Chattanooga, TN (17) 0 713,386 713,386 0
CNL Income Fund XVII, Ltd.:
Boston Market -
Troy, OH (18) 0 857,487 857,487 0
CNL American Properties Fund, Inc.:
TGI Friday's -
Orange, CT 0 1,310,980 1,310,980 1,819
TGI Friday's -
Hazlet, NJ 0 1,294,237 1,294,237 29,872
TGI Friday's -
Marlboro, NJ 0 1,324,288 1,324,288 47,787
TGI Friday's -
Hamden, CT 0 1,203,136 1,203,136 41,964
Boston Market -
Southlake, TX 0 1,035,135 1,035,135 0
Boston Market -
Franklin, TN (19) 0 950,361 950,361 0
Boston Market -
Grand Island, NE (20) 0 837,656 837,656 0
Burger King -
Indian Head Park, IL 0 670,867 670,867 3,453
Boston Market -
Dubuque, IA (21) 0 969,159 969,159 0
Boston Market -
Merced, CA (22) 0 930,834 930,834 0
</TABLE>
(1) Amounts shown do not include pro rata share of original offering costs or
acquisition fees.
(2) Amount shown is face value and does not represent discounted current value.
The mortgage note bears interest at a rate of 10.25% per annum and provides
for a balloon payment of $1,006,004 in July 2000.
(3) Amount shown is face value and does not represent discounted current value
The mortgage note bears interest at a rate of 10.25% per annum and provides
for a balloon payment of $1,106,657 in July 2000.
(4) Amounts shown are face value and do not represent discounted current value.
Each mortgage note bears interest at a rate of 10.00% per annum and
provides for a balloon payment of $218,252 in December 2005.
(5) Amount shown is face value and does not represent discounted current value.
The mortgage note bears interest at a rate of 10.00% per annum and provides
for a balloon payment of $200,324 in December 2005.
(6) Amounts shown are face value and do not represent discounted current value.
Each mortgage note bears interest at a rate of 10.75% per annum and
provides for 12 monthly payments of interest only and thereafter, 168 equal
monthly payments of principal and interest.
(7) CNL Income Fund XIV, Ltd. and CNL Income Fund XV, Ltd. each owned a 50
percent interest in Wood-Ridge Real Estate Joint Venture, which owned two
properties. The amounts presented for CNL Income Fund XIV, Ltd. and CNL
Income Fund XV, Ltd. represent each partnership's 50 percent interest in
the properties owned by Wood-Ridge Real Estate Joint Venture.
C-36
<PAGE>
(8) CNL Income Fund II, Ltd. owns a 64 percent interest and CNL Income Fund VI,
Ltd. owns a 36 percent interest in this joint venture. The amounts
presented for CNL Income Fund II, Ltd. and CNL Income Fund VI, Ltd.
represent each partnership's percent interest in the property owned by Show
Low Joint Venture.
(9) CNL Income Fund, Ltd. owns a 50 percent interest in this joint venture. The
amounts presented represent the partnerships percent interest in the
property owned by Seventh Avenue Joint Venture. A third party owns the
remaining 50 percent interest in this joint venture.
(10) CNL Income Fund VI, Ltd. and CNL Income Fund VII, Ltd. own a 52 percent and
48 percent interest, respectively, in the property in Yuma, Arizona. The
amounts presented for CNL Income Fund VI, Ltd. and CNL Income Fund VII,
Ltd. represent each partnership's respective interest in the property.
(11) Cash received net of closing costs includes $198,000 received as a lease
termination fee.
(12) Cash received net of closing costs includes $93,885 received as a lease
termination fee.
(13) Cash received net of closing costs includes $120,115 received as a lease
termination fee.
(14) Closing costs deducted from net sales proceeds do not include deferred,
subordinated real estate disposition fees payable to CNL Fund Advisors or
its affiliates.
(15) The Burger King property in Woodmere, Ohio was exchanged on December 12,
1996 for a Burger King property in Carrboro, NC at the option of the tenant
as permitted under the terms of the lease agreement. Due to the exchange,
the Burger King property in Carrboro, NC is being leased under the same
lease as the Burger King property in Woodmere, OH.
(16) The Boston Market property in Madison, TN was exchanged on May 8, 1998 for
a Boston Market property in Lawrence, KS at the option of the tenant as
permitted under the terms of the lease agreement. Due to the exchange, the
Boston Market property in Lawrence, KS is being leased under the same lease
as the Boston Market property in Madison, TN.
(17) The Boston Market property in Chattanooga, TN was exchanged on June 16,
1998 for a Boston Market property in Indianapolis, IN at the option of the
tenant as permitted under the terms of the lease agreement. Due to the
exchange, the Boston Market property in Indianapolis, IN is being leased
under the same lease as the Boston Market property in Chattanooga, TN.
(18) The Boston Market property in Troy, OH was exchanged on June 16, 1998 for a
Boston Market property in Inglewood, CA at the option of the tenant as
permitted under the terms of the lease agreement. Due to the exchange, the
Boston Market property in Inglewood, CA is being leased under the same
lease as the Boston Market property in Troy, OH.
(19) The Boston Market property in Franklin, TN was exchanged on April 14, 1998
for a Boston Market property in Glendale, AZ at the option of the tenant as
permitted under the terms of the lease agreement. Due to the exchange, the
Boston Market property in Glendale, AZ is being leased under the same terms
as the Boston Market property in Franklin, TN.
(20) The Boston Market property in Grand Island, NE was exchanged on April 14,
1998 for a Boston Market property in Warwick, RI at the option of the
tenant as permitted under the terms of the lease agreement. Due to the
exchange, the Boston Market property in Warwick, RI is being leased under
the same terms as the Boston Market property in Grand Island, NE.
(21) The Boston Market property in Dubuque, IA was exchanged on May 8, 1998 for
a Boston Market property in Columbus, OH at the option of the tenant as
permitted under the terms of the lease agreement. Due to the exchange, the
Boston Market property in Columbus, OH is being leased under the same terms
as the Boston Market property in Dubuque, IA.
(22) Cash received net of closing costs includes $362,949 in construction costs
incurred but not paid by CNL American Properties Fund, Inc. as of the
closing date, which were deducted from the actual net sales proceeds
received by CNL American Properties Fund, Inc.
C-37
APPENDIX D
SUBSCRIPTION AGREEMENT
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
- --------------------------------------------------------------------------------
Up to 15,500,000 Shares -- $10.00 per Share
Minimum Purchase -- 250 Shares ($2,500)
100 Shares ($1,000) for IRAs, Keogh, and Qualified Plans
(Minimum purchase may be higher in certain states)
================================================================================
PLEASE READ CAREFULLY this Subscription Agreement and the Notices (on the back
of the Agreement) before completing this document. TO SUBSCRIBE FOR SHARES,
complete and sign, where appropriate, and deliver the Subscription Agreement,
along with your check, to your Registered Representative. YOUR CHECK SHOULD BE
MADE PAYABLE TO:
SOUTHTRUST ASSET MANAGEMENT COMPANY OF FLORIDA, N.A.
ALL ITEMS ON THE SUBSCRIPTION AGREEMENT MUST BE COMPLETED IN ORDER FOR YOUR
SUBSCRIPTION TO BE PROCESSED.
================================================================================
Overnight Packages: Regular Mail Packages:
Attn: Investor Services Attn: Investor Services
400 E. South Street Post Office Box 1033
Orlando, Florida 32801 Orlando, Florida 32802-1033
For Telephone Inquiries:
CNL SECURITIES CORP.
(407) 650-1000 OR (800) 522-3863
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
- --------------------------------------------------------------------------------
1.--------------- INVESTMENT ---------------------------------------------------
This subscription is in the amount of $ _____________ for the purchase of ______
Shares ($10.00 per Share). The minimum initial subscription is 250 Shares
($2,500); 100 Shares ($1,000) for IRA, Keogh and qualified plan accounts (except
in states with higher minimum purchase requirements). |_| ADDITIONAL PURCHASE
|_| REINVESTMENT PLAN - Investor elects to participate in Plan (See prospectus
for details.)
2.--------------- SUBSCRIBER INFORMATION ---------------------------------------
Name (1st) |_| M |_| F Date of Birth (MM/DD/YY)
----------------- -------------
Name (2nd) |_| M |_| F Date of Birth (MM/DD/YY)
----------------- -------------
Address
-------------------------------------------------------------------------
City State Zip Code
------------------------- -------------- ---------------------
Custodian Account No. Daytime Phone # ( )
------------------- ---- ----------------
|_| U.S. Citizen |_| Resident Alien |_| Foreign Resident Country
-------
|_| Check if Subscriber is a U.S. citizen residing outside the U.S.
Income Tax Filing State
--------------------------------------------------------
ALL SUBSCRIBERS: State of Residence of Subscriber/Plan Beneficiary
(required)
----------------------------------------------------
Taxpayer Identification Number: For most individual taxpayers, it is their
Social Security number. Note: If the purchase is in more than one name, the
number should be that of the first person listed. For IRAs, Keoghs and qualified
plans, enter both the Social Security number and the custodian taxpayer
identification number.
Taxpayer ID# - Social Security # - -
------------------ ------ -------- ---------
3. --------------- INVESTOR MAILING ADDRESS ------------------------------------
For the Subscriber of an IRA, Keogh, or qualified plan to receive informational
mailings, please complete if different from address in Section 2.
Name
----------------------------------------------------------------------------
Address
-------------------------------------------------------------------------
City State Zip Code
----------------------------- --------------- --------------
Daytime Phone #( )
------- ---------------------------
4. --------------- DIRECT DEPOSIT ADDRESS --------------------------------------
Investors requesting direct deposit of distribution checks to another financial
institution or mutual fund, please complete below. In no event will the Company
or Affiliates be responsible for any adverse consequences of direct deposit.
Company
-------------------------------------------------------------------------
Address
-------------------------------------------------------------------------
City State Zip Code
----------------------------- ------------ ---------------
Account No. Phone #( )
-------------------------------- ------ ------------------
5. --------------- FORM OF OWNERSHIP -------------------------------------------
(Select only one)
|_|INDIVIDUAL-one signature required (1)
|_|HUSBAND AND WIFE, AS COMMUNITY PROPERTY- two
signatures required (15)
|_|TENANTS IN COMMON-two signatures required (9)
|_|TENANTS BY THE ENTIRETY-two signatures required (31)
|_|S-CORPORATION (22)
|_|C-CORPORATION (5)
|_|IRA-custodian signature required (23)
|_|SEP-custodian signature required (38)
|_|TAXABLE TRUST (7)
|_|TAX-EXEMPT TRUST (20)
|_|JOINT TENANTS WITH RIGHT OF SURVIVORSHIP - all parties must sign (8)
|_|A MARRIED PERSON/SEPARATE PROPERTY - one signature required (34)
|_|KEOGH (H.R.10) - trustee signature required (24)
|_|CUSTODIAN - custodian signature required (33)
|_|PARTNERSHIP (3)
|_|NON-PROFIT ORGANIZATION (12)
|_|PENSION PLAN - trustee signature(s) required (19)
|_|PROFIT SHARING PLAN - trustee signature(s) required (27)
|_|CUSTODIAN UGMA-STATE of - custodian signature required (16)
|_|CUSTODIAN UTMA-STATE of - custodian signature required (42)
|_|ESTATE - Personal Representative signature required (13)
|_|REVOCABLE GRANTOR TRUST - grantor signature required (25)
|_|IRREVOCABLE TRUST - trustee signature required (21)
|_|SUBSCRIBER elects to have the Shares covered by this subscription placed in a
new sponsored IRA account offered by Franklin Bank as custodian. IRA
documents will be sent to subscriber upon receipt of subscription documents.
There is no annual fee involved for CNL Health Care Properties, Inc.
investments.
<PAGE>
6. -------------- SUBSCRIBER SIGNATURES ----------------------------------------
If the Subscriber is executing the Subscriber Signature Page, the Subscriber
understands that, BY EXECUTING THIS AGREEMENT A SUBSCRIBER DOES NOT WAIVE ANY
RIGHTS HE MAY HAVE UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE
ACT OF 1934 OR UNDER ANY STATE SECURITIES LAW:
X
--------------------------------------------- --------------------------
Signature of 1st Subscriber Date
X
--------------------------------------------- --------------------------
Signature of 2nd Subscriber Date
7. -------------- BROKER/DEALER INFORMATION ------------------------------------
Broker/Dealer NASD Firm Name
----------------------------------------------------
Registered Representative
-------------------------------------------------------
Branch Mail Address
-------------------------------------------------------------
City State Zip Code
---------------------------------- ---------- ---------------
|_| Please check if new address
Phone #( ) Fax #( ) |_| Sold CNL before
------ ------------- ------ -------------
Shipping Address
----------------------------------------------------------------
City State Zip Code
---------------------------------- ----------- ---------------
|_| Telephonic Subscriptions (check here): If the Registered Representative
and Branch Manager are executing the signature page on behalf of the
Subscriber, both must sign below. Registered Representatives and Branch
Managers may not sign on behalf of residents of Florida, Iowa, Maine,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New
Mexico, North Carolina, Ohio, Oregon, South Dakota, Tennessee or
Washington. [NOTE: Not to be executed until Subscriber(s) has (have)
acknowledged receipt of final prospectus.] Telephonic subscriptions may
not be completed for IRA accounts.
|_| Deferred Commission Option (check here): The Deferred Commission Option
means an agreement between a stockholder, the participating
Broker/Dealer and the Managing Dealer to have Selling Commissions paid
over a seven year period as described in "The Offering -- Plan of
Distribution." This option will only be available with prior
authorization by the Broker/Dealer.
|_| Registered Investment Advisor (RIA) (check here): This investment is
made through the RIA in its capacity as an RIA and not in its capacity
as a Registered Representative, if applicable. If an owner or principal
or any member of the RIA firm is an NASD licensed Registered
Representative affiliated with a Broker/Dealer, the transaction should
be conducted through that Broker/Dealer, not through the RIA.
PLEASE READ CAREFULLY THE REVERSE SIDE OF THIS SIGNATURE PAGE AND
SUBSCRIPTION AGREEMENT BEFORE COMPLETING
X
-------------------------------- -------------- ---------------------------
Principal, Branch Manager or Date Print or Type Name of
Other Authorized Signature Person Signing
X
-------------------------------- -------------- ---------------------------
Registered Representative/ Date Print or Type Name of
Investment Advisor Signature Person Signing
- --------------------------------------------------------------------------------
Make check payable to : SOUTHTRUST ASSET MANAGEMENT COMPANY OF FLORIDA, N.A.,
ESCROW AGENT
<TABLE>
<CAPTION>
<S> <C>
Please remit check and For overnight delivery, please send to: For Office Use Only
subscription document to:
CNL SECURITIES CORP.
CNL SECURITIES CORP. Attn: Investor Services Sub. #
Attn: Investor Services 400 E. South Street -------------
P. O. Box 1033 Orlando, FL 32801 Admit Date
Orlando, FL 32802-1033 (407) 650- 1000 ---------
(800) 522-3863 (800) 522-3863 Amount
-------------
Region
-------------
RSVP#
--------------
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
NOTICE TO ALL INVESTORS:
(a) The purchase of Shares by an IRA, Keogh, or other tax-qualified plan does
not, by itself, create the plan.
(b) The Company, in its sole and absolute discretion, may accept or reject the
Subscriber's subscription which if rejected will be promptly returned to the
Subscriber, without interest. Non-U.S. stockholders (as defined in the
Prospectus) will be admitted as stockholders with the approval of the Advisor.
(c) THE SALE OF SHARES SUBSCRIBED FOR HEREUNDER MAY NOT BE COMPLETED UNTIL AT
LEAST FIVE BUSINESS DAYS AFTER THE DATE THE SUBSCRIBER RECEIVES A FINAL
PROSPECTUS. EXCEPT AS PROVIDED IN THIS NOTICE, THE NOTICE BELOW, AND IN THE
PROSPECTUS, THE SUBSCRIBER WILL NOT BE ENTITLED TO REVOKE OR WITHDRAW HIS
SUBSCRIPTION.
The subscriber is asked to refer to the prospectus concerning the Deferred
Commission Option outlined in "The Offering -- Plan of Distribution." This
option will only be available with prior authorization by the Broker/Dealer .
NOTICE TO CALIFORNIA, FLORIDA AND IOWA RESIDENTS: California, Florida and Iowa
investors will have the right to withdraw their subscription funds if
subscriptions for at least $2,500,000 have not been accepted by the Company
within six months after the initial offer of Shares of the Company pursuant to
the Prospectus and the Company elects at that time to extend the offering beyond
such date. The Company will promptly notify California, Florida and Iowa
investors if the Company so elects to extend the offering, and such investors
must exercise their right to withdraw within ten (10) days of such notice by
delivering written notice to the Company of their intention to exercise such
right. The subscription funds of withdrawing California, Florida and Iowa
investors will be promptly returned along with such investors' pro rata share of
interest earned thereon net of any escrow fees calculated as set forth in the
Prospectus and the Escrow Agreement.
NOTICE TO NORTH CAROLINA RESIDENTS: By signing this Subscription Agreement,
North Carolina investors acknowledge receipt of the Prospectus and represent
that they meet the suitability standards for North Carolina investors listed in
the Prospectus.
BROKER/DEALER AND FINANCIAL ADVISOR:
By signing this subscription agreement, the signers certify that they recognize
and have complied with their obligations under the NASD's Conduct Rules, and
hereby further certify as follows: (i) a copy of the Prospectus, including the
Subscription Agreement attached thereto as Appendix D, as amended and/or
supplemented to date, has been delivered to the Subscriber; (ii) they have
discussed such investor's prospective purchase of Shares with such investor and
have advised such investor of all pertinent facts with regard to the liquidity,
valuation, and marketability of the Shares; and (iii) they have reasonable
grounds to believe that the purchase of Shares is a suitable investment for such
investor, that such investor meets the suitability standards applicable to such
investor set forth in the Prospectus and related supplements, if any, that such
investor is legally capable of purchasing such Shares and will not be in
violation of any laws for having engaged in such purchase, and that such
investor is in a financial position to enable such investor to realize the
benefits of such an investment and to suffer any loss that may occur with
respect thereto and will maintain documentation on which the determination was
based for a period of not less than six years; (iv) under penalties of perjury,
(a) the information provided in this Subscription Agreement to the best of our
knowledge and belief is true, correct, and complete, including, but not limited
to, the number shown above as the Subscriber's taxpayer identification number;
(b) to the best of our knowledge and belief, the Subscriber is not subject to
backup withholding either because the Subscriber has not been notified that the
Subscriber is subject to backup withholding as result of failure to report all
interest or dividends or the Internal Revenue Service has notified the
subscriber that the Subscriber is no longer subject to backup withholding under
Section 3406(a)(1)(C) of the Internal Revenue Code of 1986, as amended; and (c)
to the best of our knowledge and belief, the Subscriber is not a nonresident
alien, foreign corporation, foreign trust, or foreign estate for U.S. tax
purposes, and we hereby agree to notify the Company if it comes to the attention
of either of us that the Subscriber becomes such a person within sixty (60) days
of any event giving rise to the Subscriber becoming such a person.
<PAGE>
Franklin Bank, N.A.
- --------------------------------------------------------------------------------
FRANKLIN BANK, N.A., INDIVIDUAL RETIREMENT ACCOUNT APPLICATION
ACCOUNTHOLDER INFORMATION: NAME ______________________________________________
DISCLAIMER:
Franklin Bank, N.A. is a national bank, not associated with CNL Group,
Inc. or any CNL entity. Franklin Bank, N.A. is a custodian for IRAs and will act
in a custodial capacity for all beneficial owners of IRAs. CNL has no
affiliation with Franklin Bank, N.A.
It is not reasonable to project the growth of your IRA investments
include assets other than bank time deposits or savings accounts. Therefore,
your final account balance will depend upon many factors - the amount of your
contributions, the amount of time the funds are invested, the earnings and/or
losses from the investments, expenses incurred such as brokerage commissions and
trustee's fees and the overall performance of your investments. We expressly
state that the growth in the value of your IRA cannot be guaranteed or
projected.
SIGNATURES IMPORTANT: Please read before signing.
I understand the eligibility requirements for the type of
IRA deposit I am making and I state that I do qualify to
make the deposit. I understand that the terms and conditions
which apply to the Individual Retirement Account are
contained in this Application and Form 5305A (which will be
provided within 10 days of our receipt of this application).
I agree to be bound by those terms and conditions. I
understand that I will not be required to pay an annual fee
as long as all investments in this IRA are sponsored by a
CNL entity. Within seven (7) days from the date I establish
the Individual Retirement Account I may revoke it without
penalty by mailing or delivering a written notice to the
Custodian.
I assume complete responsibility for:
1. Determining that I am eligible for an IRA each year I
make a contribution.
2. Insuring that all contributions I make are within the
limits set forth by the tax laws.
3. The tax consequences of any contribution (including
rollover contributions) and distributions.
Signature _______________________________________________
Accountholder
<TABLE>
<CAPTION>
<S> <C>
----------------------------------------------- ------------------------------------
Authorized Signature Trustee Date
DESIGNATION OF
BENEFICIARY(IES): I designate the individual(s) named below as my
primary and contingent Beneficiary(ies) of the IRA.
I revoke all prior IRA Beneficiary designations, if
any, made by me. I understand that I may change or
add Beneficiaries at any time by completing and
delivering the proper form to the Custodian. (If
you wish to name more than one Beneficiary, attach
a list of each Beneficiary's name, social security
number, relationship to you and percentage share in
this IRA.) If any primary or contingent Beneficiary
dies before me, his or her interest and the
interest of his or her heirs shall terminate
completely, and the percentage share of any
remaining Beneficiary(ies) shall be increased on a
pro rata basis.
Primary The following individual(s) shall be my Primary Beneficiary(ies):
Beneficiary(ies)
Name_____________________________________________________________ Social Security #___________________
Address__________________________________________________________ Date of Birth__________ Share______
_________________________________________________________________ Relationship________________________
Contingent If none of the Primary Beneficiaries survive me, the
Beneficiary (ies) following individual(s) shall be my Beneficiary(ies):
Name_____________________________________________________________ Social Security #___________________
Address__________________________________________________________ Date of Birth__________ Share______
_________________________________________________________________ Relationship________________________
Spousal Consent
I am the spouse of IRA accountholder named above. I agree to
my spouse's naming of a primary Beneficiary other than
myself. I acknowledge that I have received a fair and
reasonable disclosure of my spouse's property and financial
obligation. I also acknowledge that I shall have no claim
whatsoever against the Custodian for any payments to my
spouse's Beneficiary(ies).
_________________________________________________________________ _________________________
Spouse's Signature Date
</TABLE>
- --------------------------------------------------------------------------------
Custodial Services P.O. Box 7090 Troy, MI 48007-7090
1-800-344-0667
<PAGE>
INVESTMENT OPTIONS:
|_| I would like to receive information regarding mutual fund investments.
|_| I would like to receive information regarding money market accounts.
Note: Franklin Bank, N.A. may consider other investment options for your IRA.
Please provide the following information on your options.
Fund Name
-----------------------------------------------------------------------
Sponsor Name
--------------------------------------------------------------------
Address
-------------------------------------------------------------------------
Account No. Telephone #
----------------------------------- ----------------------
Registered Representative information:
Registered Representative's Name
------------------------------------------------
Company
-------------------------------------------------------------------------
Address
-------------------------------------------------------------------------
Telephone #
---------------------------------------------------------------------
<PAGE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 31. Other Expenses of Issuance and Distribution.
Amount
------
SEC registration fee............................. $ 47,849
NASD filing fee.................................. 16,720
Accounting fees and expenses..................... 100,000*
Escrow Agent's Fees.............................. 5,000*
Sales and advertising expenses................... 3,000,000*
Legal fees and expenses.......................... 250,000*
Blue Sky fees and expenses....................... 300,000*
Printing expenses................................ 200,000*
Miscellaneous.................................... 580,431*
Total.................................... $ 4,500,000*
- ---------------------
* Estimated through completion of the offering, assuming sale of 15,000,000
shares.
Item 32. Sales to Special Parties.
The registrant was capitalized through the purchase by the Advisor
of 20,000 shares of Common Stock for aggregate consideration of $200,000.
Item 33. Recent Sales of Unregistered Securities.
See response to Item 32. The offer and sale of the shares is
claimed to be exempt from the registration provisions of the Securities Act of
1933, as amended, by virtue of Section 4(2) thereunder.
Item 34. Indemnification of Directors and Officers.
Pursuant to Maryland corporate law and the Company's Articles of
Incorporation, the Company is required to indemnify and hold harmless a present
or former Director, officer, Advisor, or Affiliate and may indemnify and hold
harmless a present or former employee or agent of the Company (the "Indemnitee")
against any or all losses or liabilities reasonably incurred by the Indemnitee
in connection with or by reason of any act or omission performed or omitted to
be performed on behalf of the Company while a Director, officer, Advisor,
Affiliate, employee, or agent and in such capacity, provided, that the
Indemnitee has determined, in good faith, that the act or omission which caused
the loss or liability was in the best interests of the Company. The Company will
not indemnify or hold harmless the Indemnitee if: (i) the loss or liability was
the result of
II-2
<PAGE>
negligence or misconduct, or if the Indemnitee is an Independent Director, the
loss or liability was the result of gross negligence or willful misconduct, (ii)
the act or omission was material to the loss or liability and was committed in
bad faith or was the result of active or deliberate dishonesty, (iii) the
Indemnitee actually received an improper personal benefit in money, property, or
services, (iv) in the case of any criminal proceeding, the Indemnitee had
reasonable cause to believe that the act or omission was unlawful, or (v) in a
proceeding by or in the right of the Company, the Indemnitee shall have been
adjudged to be liable to the Company. In addition, the Company will not provide
indemnification for any loss or liability arising from an alleged violation of
federal or state securities laws unless one or more of the following conditions
are met: (i) there has been a successful adjudication on the merits of each
count involving alleged securities law violations as to the particular
Indemnitee; (ii) such claims have been dismissed with prejudice on the merits by
a court of competent jurisdiction as to the particular Indemnitee; or (iii) a
court of competent jurisdiction approves a settlement of the claims against a
particular Indemnitee and finds that indemnification of the settlement and the
related costs should be made, and the court considering the request for
indemnification has been advised of the position of the Securities and Exchange
Commission and of the published position of any state securities regulatory
authority in which securities of the Company were offered or sold as to
indemnification for violations of securities laws. Pursuant to its Articles of
Incorporation, the Company is required to pay or reimburse reasonable expenses
incurred by a present or former Director, officer, Advisor or Affiliate and may
pay or reimburse reasonable expenses incurred by any other Indemnitee in advance
of final disposition of a proceeding if the following are satisfied: (i) the
Indemnitee was made a party to the proceeding by reasons of his or her service
as a Director, officer, Advisor, Affiliate, employee or agent of the Company,
(ii) the Indemnitee provides the Company with written affirmation of his or her
good faith belief that he or she has met the standard of conduct necessary for
indemnification by the Company as authorized by the Articles of Incorporation,
(iii) the Indemnitee provides the Company with a written agreement to repay the
amount paid or reimbursed by the Company, together with the applicable legal
rate of interest thereon, if it is ultimately determined that the Indemnitee did
not comply with the requisite standard of conduct, and (iv) the legal proceeding
was initiated by a third party who is not a stockholder or, if by a stockholder
of the Company acting in his or her capacity as such, a court of competent
jurisdiction approves such advancement. The Company's Articles of Incorporation
further provide that any indemnification, payment, or reimbursement of the
expenses permitted by the Articles of Incorporation will be furnished in
accordance with the procedures in Section 2-418 of the Maryland General
Corporation Law.
Any indemnification may be paid only out of Net Assets of the
Company, and no portion may be recoverable from the stockholders.
The Company will enter into indemnification agreements with each
of the Company's officers and Directors. The indemnification agreements will
require, among other things, that the Company
II-3
<PAGE>
indemnify its officers and Directors to the fullest extent permitted by law, and
advance to the officers and Directors all related expenses, subject to
reimbursement if it is subsequently determined that indemnification is not
permitted. In accordance with this agreement, the Company must indemnify and
advance all expenses incurred by officers and Directors seeking to enforce their
rights under the indemnification agreements. The Company must also cover
officers and Directors under the Company's directors' and officers' liability
insurance.
Item 35. Treatment of Proceeds from Securities Being Registered.
Not applicable.
Item 36. Financial Statements and Exhibits.
Financial Statements:
The following financial statements are included in the Prospectus.
(1) Report of Independent Accountants for CNL Health Care
Properties, Inc.
(2) Balance Sheets of CNL Health Care Properties, Inc. at
June 30, 1998 (unaudited) and December 31, 1997
(3) Statement of Stockholder's Equity of CNL Health Care
Properties, Inc. for the six months ended June 30, 1998
(unaudited) and the period December 22, 1997 (date of
inception) through December 31, 1997
(4) Notes to Financial Statements of CNL Health Care
Properties, Inc.
All Schedules have been omitted as the required information is
inapplicable or is presented in the financial statements or related notes.
(b) Exhibits:
1.1 Form of Managing Dealer Agreement (Previously filed.)
1.2 Form of Participating Broker Agreement (Filed herewith.)
1.3 Form of Warrant Purchase Agreement (Previously filed.)
3.1 CNL Health Care Properties, Inc. Articles of Incorporation
(Previously filed.)
3.2 Form of CNL Health Care Properties, Inc. Amended and
Restated Articles of Incorporation (Filed herewith.)
3.3 Form of CNL Health Care Properties, Inc. Bylaws
(Previously filed.)
II-4
<PAGE>
4.1 CNL Health Care Properties, Inc. Articles of Incorporation
(Filed as Exhibit 3.1 and incorporated herein by
reference.)
4.2 Form of CNL Health Care Properties, Inc. Amended and
Restated Articles of Incorporation (Filed as Exhibit 3.2
and incorporated herein by reference.)
4.3 Form of CNL Health Care Properties, Inc. Bylaws (Filed as
Exhibit 3.3 and incorporated herein by reference.)
4.4 Form of Reinvestment Plan (Included in the Prospectus as
Appendix A and incorporated herein by reference.)
5 Opinion of Shaw Pittman Potts & Trowbridge as to the
legality of the securities being registered by CNL Health
Care Properties, Inc. (Filed herewith.)
8 Opinion of Shaw Pittman Potts & Trowbridge regarding
certain material tax issues relating to CNL Health Care
Properties, Inc. (Filed herewith.)
10.1 Form of Escrow Agreement between CNL Health Care
Properties, Inc. and SouthTrust Asset Management Company
of Florida, N.A. (Filed herewith.)
10.2 Form of Advisory Agreement (Previously filed.)
10.3 Form of Joint Venture Agreement (Previously filed.)
10.4 Form of Indemnification and Put Agreement (Previously
filed.)
10.5 Form of Unconditional Guaranty of Payment and Performance
(Previously filed.)
10.6 Form of Purchase Agreement (Previously filed.)
10.7 Form of Lease Agreement including Rent Addendum,
Construction Addendum and Memorandum of Lease (Previously
filed.)
10.8 Form of Reinvestment Plan (Included in the Prospectus as
Appendix A and incorporated herein by reference.)
10.9 Form of Indemnification Agreement (Filed herewith.)
23.1 Consent of PricewaterhouseCoopers, LLP, Certified Public
Accountants, dated September 9, 1998 (Filed herewith.)
23.2 Consent of Shaw Pittman Potts & Trowbridge (Contained in
its opinions filed herewith as Exhibits 5 and 8 and
incorporated herein by reference.)
II-5
<PAGE>
24 Power of Attorney (See "Signatures.")
27.1 Financial Data Schedule as of December 31, 1997
(Previously filed.)
27.2 Financial Data Schedule as of April 30, 1998 (Previously
filed.)
27.3 Financial Data Schedule as of June 30, 1998 (Filed
herewith.)
Item 37. Undertakings.
The registrant undertakes (a) to file any prospectuses required by
Section 10(a)(3) as post-effective amendments to this registration statement,
(b) that, for the purpose of determining any liability under the Securities Act
of 1933, as amended, each such post-effective amendment may 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, (c) that all post-effective amendments will comply with
the applicable forms, rules and regulations of the Commission in effect at the
time such post-effective amendments are filed, and (d) to remove from
registration by means of a post-effective amendment any of the securities being
registered which remain unsold at the termination of the offering.
The registrant undertakes to send to each stockholder, at least on
an annual basis, a detailed statement of any transactions with the Advisor or
its Affiliates, and of fees, commissions, compensation, and other benefits paid
or accrued to the Advisor or its Affiliates, for the fiscal year completed,
showing the amount paid or accrued to each recipient and the services performed.
The registrant undertakes to provide to the stockholders the
financial statements required by Form 10-K for the first full fiscal year of
operations of the Registrant.
The registrant undertakes to file a sticker supplement pursuant to
Rule 424(c) under the Act during the distribution period describing each
property not identified in the Prospectus at such time as there arises a
reasonable probability that such property will be acquired and to consolidate
all such stickers into a post-effective amendment filed at least once every
three months, with the information contained in such amendment provided
simultaneously to the existing stockholders. Each sticker supplement will
disclose all compensation and fees received by the Advisor and its Affiliates in
connection with any such acquisition. Post-effective amendments will include
audited financial statements meeting the requirements of Rule 3-14 or Rule 3-05
of Regulation S-X, as appropriate based upon the type of property acquired and
the type of lease to which such property will be subject, only for properties
acquired during the distribution period.
II-6
<PAGE>
The registrant also undertakes to file, after the end of the
distribution period, a current report on Form 8-K containing the financial
statements and any additional information required by Rule 3-14 or Rule 3-05 of
Regulation S-X, as appropriate based on the type of property acquired and the
type of lease to which such property will be subject, to reflect each commitment
(i.e., the signing of a binding purchase agreement) made after the end of the
distribution period involving the use of 10% or more (on a cumulative basis) of
the net proceeds of the offering and to provide the information contained in
such report to the stockholders at least once each quarter after the
distribution period of the offering has ended. The registrant undertakes to
include, in filings containing financial statements of the Company, separate
audited financial statements for all lessees leasing one or more properties
whose cost represents 20% or more of the gross proceeds of the offering.
II-7
<PAGE>
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the
II-8
<PAGE>
Securities Act of 1933, as amended, may be permitted to directors, officers, and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any such action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-9
<PAGE>
TABLE VI
ACQUISITION OF PROPERTIES BY PROGRAMS
Table VI presents information concerning the acquisition of real
properties by the public real estate limited partnerships and the unlisted
public REITs sponsored by Affiliates of the Company through June 30, 1998. The
information includes the gross leasable space or number of units and total
square feet of units, dates of purchase, locations, cash down payment and
contract purchase price plus acquisition fee. This information is intended to
assist the prospective investor in evaluating the terms involved in acquisitions
by such prior programs.
<PAGE>
TABLE VI
ACQUISITIONS OF PROPERTIES BY PROGRAMS
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund, Fund II, Fund III, Fund IV,
Ltd. Ltd. Ltd. Ltd.
---------- ---------- ---------- ----------
(Note 2) (Note 3) (Note 4) (Note 5)
<S> <C>
AL,AZ,CO,FL, AZ,CA,CO,FL, AL,DC,FL,GA,
GA,IL,IN,KS, GA,IA,IL,IN, IL,IN,KS,MA,
AL,AZ,CA,FL, LA,MI,MN,MO, KS,KY,MD,MI, MD,MI,MS,NC,
GA,LA,MD,OK, NC,NM,OH,TN, MN,MO,NC,NE, OH,PA,TN,TX,
Locations PA,TX,VA,WA TX,WA,WY OK,TX VA
Type of property Restaurants Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 22 units 49 units 37 units 45 units
total square feet
of units 80,314 s/f 185,717 s/f 158,819 s/f 159,196 s/f
Dates of purchase 6/17/86 - 2/11/87- 10/04/87- 6/24/88-
12/31/97 1/13/98 5/1/98 12/31/96
Cash down payment (Note 1) $13,435,137 $26,654,961 $22,413,070 $27,611,441
Contract purchase price
plus acquisition fee $13,361,435 $26,501,721 $22,296,185 $27,506,106
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 73,702 153,240 116,885 105,335
----------- ----------- ----------- -----------
Total acquisition cost
(Note 1) $13,435,137 $26,654,961 $22,413,070 $27,611,441
=========== =========== =========== ===========
</TABLE>
Note 1: This amount was derived from capital contributions or proceeds from
partners or stockholders, respectively, and net sales proceeds
reinvested in other properties.
Note 2: The partnership owns a 50% interest in three separate joint ventures
which each own a restaurant property. In addition, the partnership owns
a 12.17% interest in one restaurant property held as tenants-in-common
with affiliates.
Note 3: The partnership owns a 49%, 50% and 64% interest in three separate
joint ventures. Each joint venture owns one restaurant property. In
addition, the partnership owns a 33.87%, a 57.77%, a 47%, a 37.01%, a
39.42% and a 13.38% interest in six restaurant properties held
separately as tenants-in-common with affiliates.
Note 4: The partnership owns a 73.4%, 69.07% and 46.89% interest in three
separate joint ventures. Each joint venture owns one restaurant
property. In addition, the partnership owns a 32.77%, a 9.84% and a
25.84% interest in three restaurant properties held separately as
tenants-in-common with affiliates.
Note 5: The partnership owns a 51%, 26.6%, 57%, 96.1% and 68.87% interest in
five separate joint ventures. Each joint venture owns one restaurant
property. In addition, the partnership owns a 53.68% interest in one
restaurant property held as tenants-in-common with affiliates.
<PAGE>
TABLE VI - ACQUISITIONS OF PROPERTIES BY PROGRAMS (continued)
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund V, Fund VI, Fund VII, Fund VIII,
Ltd. Ltd. Ltd. Ltd.
---------- ---------- ---------- ----------
(Note 6) (Note 7) (Note 8) (Note 9)
<S> <C>
AR,AZ,FL,GA,
IL,IN,KS,MA,
AZ,FL,GA,IL, MI,MN,NC,NE, AZ,CO,FL,GA,
IN,MI,NH,NY, NM,NY,OH,OK, IN,LA,MI,MN, AZ,FL,IN,LA,
OH,SC,TN,TX, PA,TN,TX,VA, NC,OH,SC,TN, MI,MN,NC,NY,
Locations UT,WA WA,WY TX,UT,WA OH,TN,TX,VA
Type of property Restaurants Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 35 units 55 units 49 units 42 units
total square feet
of units 143,344 s/f 222,003 s/f 184,412 s/f 179,885 s/f
Dates of purchase 2/06/89- 7/13/89- 3/30/90- 9/13/90-
5/1/98 6/16/98 12/31/97 5/31/96
Cash down payment (Note 1) $26,329,791 $39,944,526 $30,416,598 $31,985,071
Contract purchase price
plus acquisition fee $25,946,991 $39,413,526 $29,745,103 $31,450,507
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 382,800 531,000 671,495 534,564
----------- ----------- ----------- -----------
Total acquisition cost
(Note 1) $26,329,791 $39,944,526 $30,416,598 $31,985,071
=========== =========== =========== ===========
</TABLE>
Note 6: The partnership owns a 43%, 49%, 66.5% and 53.11% interest in four
separate joint ventures. Each joint venture owns one restaurant
property. In addition, the partnership owns a 42.23% and a 27.78%
interest in two restaurant properties held separately as
tenants-in-common with affiliates.
Note 7: The partnership owns a 3.9%, 14.5%, 36%, 66.14%, and a 50% interest
in five separate joint ventures. Each joint venture owns one restaurant
property. In addition, the partnership owns a 51.67%, a 17.93%, a
23.04%, a 34.74%, a 46.2% and a 85.07% interest in six restaurant
properties held separately as tenants-in-common with affiliates.
Note 8: The partnership owns a 51%, 83.3%, 4.79%, 18%, and 79% interest in
five separate joint ventures. Four of the joint ventures each own one
restaurant property and the other joint venture owns six restaurant
properties. In addition, the partnership owns a 48.33%, a 53% and a
35.64% interest in three restaurant properties held separately as
tenants-in-common with affiliates.
Note 9: The partnership owns a 85.5%, 87.68%, 36.8% and a 12% interest in
four separate joint ventures. Three of the joint ventures each own one
restaurant property and the other joint venture owns six restaurant
properties.
<PAGE>
TABLE VI - ACQUISITIONS OF PROPERTIES BY PROGRAMS (continued)
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund IX, Fund X, Fund XI, Fund XII,
Ltd. Ltd. Ltd. Ltd.
---------- ---------- ----------- ----------
(Note 10) (Note 11) (Note 12) (Note 13)
<S> <C>
AL,AZ,CA,CO,
AL,CO,FL,GA, AL,CA,CO,FL, CT,FL,KS,LA,
IL,IN,LA,MI, ID,IL,LA,MI, MA,MI,MS,NC, AL,AZ,CA,FL,
MN,MS,NC,NH, MO,MT,NC,NH, NH,NM,OH,OK, GA,LA,MO,MS,
NY,OH,SC,TN, NM,NY,OH,PA, PA,SC,TX,VA, NC,NM,OH,SC,
Locations TX SC,TN,TX WA TN,TX,WA
Type of property Restaurants Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 43 units 51 units 40 units 49 units
total square feet
of units 185,636 s/f 214,433 s/f 176,062 s/f 206,865 s/f
Dates of purchase 5/31/91- 10/01/91- 5/18/92- 11/20/92-
7/16/97 12/31/97 1/28/97 5/31/96
Cash down payment (Note 1) $32,812,908 $37,444,525 $36,245,591 $40,840,795
Contract purchase price
plus acquisition fee $32,068,289 $36,735,362 $35,644,633 $40,339,796
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 744,619 709,163 600,958 500,999
----------- ----------- ----------- -----------
Total acquisition cost
(Note 1) $32,812,908 $37,444,525 $36,245,591 $40,840,795
=========== =========== =========== ===========
</TABLE>
Note 10: The partnership owns a 50%, 45.2% and 27.3% interest in three
separate joint ventures. One of the joint ventures owns one
restaurant property and the other two joint ventures own six
restaurant properties each. In addition, the partnership owns a
67.23% interest in one restaurant property held as
tenants-in-common with an affiliate.
Note 11: The partnership owns a 50%, 88.3%, 40.95% and 10.5% interest
in four separate joint ventures. Three of the joint ventures own
one restaurant property each and the other joint venture owns six
restaurant properties. In addition, the partnership owns a 13.37%
and a 6.69% interest in two restaurant properties held separately
as tenants-in-common with affiliates.
Note 12: The partnership owns a 62.2%, 77.33%, 85% and 76.6% interest
in four separate joint ventures. Each joint venture owns one
restaurant property. In addition, the partnership owns a 72.5%
interest in one restaurant property held as tenants-in-common with
an affiliate.
Note 13: The partnership owns a 31.13%, 59.05%, 18.61% and 88% interest
in four separate joint ventures. Each joint venture owns one
restaurant property.
<PAGE>
TABLE VI - ACQUISITIONS OF PROPERTIES BY PROGRAMS (continued)
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund XIII, Fund XIV, Fund XV, Fund XVI,
Ltd. Ltd. Ltd. Ltd.
---------- ---------- ---------- ----------
(Note 14) (Note 15) (Note 16) (Note 17)
<S> <C>
AL,AR,AZ,CA, AL,AZ,CO,FL, AL,CA,FL,GA, AZ,CA,CO,DC,
CO,FL,GA,IN, GA,KS,LA,MN, KS,KY,MN,MO, FL,GA,ID,IN,
KS,LA,MD,NC, MO,MS,NC,NJ, MS,NC,NJ,NM, KS,MN,MO,NC,
OH,PA,SC,TN, NV,OH,SC,TN, OH,OK,PA,SC, NM,NV,OH,TN,
Locations TX,VA TX,VA TN,TX,VA TX,UT,WI
Type of property Restaurants Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 50 units 64 units 55 units 47 units
total square feet
of units 167,286 s/f 190,448 s/f 172,379 s/f 180,110 s/f
Dates of purchase 5/18/93- 9/27/93- 4/28/94- 10/21/94-
12/31/97 4/30/98 6/16/98 6/16/98
Cash down payment (Note 1) $36,388,084 $42,748,602 $38,446,910 $42,394,592
Contract purchase price
plus acquisition fee $36,019,958 $42,321,171 $38,054,069 $42,004,434
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 368,126 427,431 392,841 390,158
----------- ----------- ----------- -----------
Total acquisition cost
(Note 1) $36,388,084 $42,748,602 $38,446,910 $42,394,592
=========== =========== =========== ===========
</TABLE>
Note 14: The partnership owns a 50% and a 28% interest in two separate
joint ventures. Each joint venture owns one restaurant property.
In addition, the Partnership owns a 66.13%, a 63.03% and a 47.83%
interest in three restaurant properties held separately as
tenants-in-common with affiliates.
Note 15: The partnership owns a 50% interest in three separate joint
ventures and a 72% and a 39.94% interest in two additional joint
ventures. Three of the joint ventures each own one restaurant
property and the other joint venture owns six restaurant
properties.
Note 16: The partnership owns a 50% interest in a joint venture which
owns six restaurant properties. In addition, the partnership owns
a 15.02% and a 14.93% interest in two restaurant properties held
as tenants-in-common with affiliates.
Note 17: The partnership owns a 80.27% and a 40.42% interest in two
restaurant properties held as tenants-in-common with affiliates.
<PAGE>
TABLE VI - ACQUISITIONS OF PROPERTIES BY PROGRAMS (continued)
<TABLE>
<CAPTION>
CNL American CNL Income CNL Income
Properties Fund, Fund XVII, Fund XVIII,
Inc. Ltd. Ltd.
---------------- ---------- -----------
(Note 18) (Note 19)
<S> <C>
AL,AZ,CA,CO,
CT,DE,FL,GA,
IA,ID,IL,IN,
KS,KY,MD,MI,
MN,MO,NC,NE,
NJ,NM,NV,NY,
OH,OK,OR,PA, AZ,CA,FL,GA,
RI,SC,TN,TX, CA,FL,GA,IL, IL,KY,MD,MN,
UT,VA,WA,WI, IN,MI,NC,NV, NC,NV,NY,OH,
Locations WV OH,SC,TN,TX TN,TX
Type of property Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 320 units 29 units 23 units
total square feet
of units 1,622,754 s/f 119,664 s/f 123,355 s/f
Dates of purchase 6/30/95 - 12/20/95 - 12/27/96 -
6/17/98 6/16/98 06/16/98
Cash down payment (Note 1) $357,943,014 $25,525,954 $29,477,274
Contract purchase price
plus acquisition fee $356,906,132 $25,490,918 $29,369,572
Other cash expenditures
expensed - - -
Other cash expenditures
capitalized 1,036,882 35,036 107,702
------------ ----------- -----------
Total acquisition cost
(Note 1) $357,943,014 $25,525,954 $29,477,274
============ =========== ===========
</TABLE>
Note 18: CNL American Properties Fund, Inc. owns an 85.47% and a 13.11%
interest in two separate joint ventures. Each joint venture owns
one restaurant property.
Note 19: The partnership owns an 80%, a 21% and a 60.06% interest in three
separate joint ventures. Each joint venture owns one restaurant
property. In addition, the partnership owns a 19.73%, 27.5% and
36.97% interest in three restaurant properties held separately as
tenants-in-common with affiliates.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-11 and has duly caused this Amendment
No. 3 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Orlando, State of
Florida, on September 15, 1998.
CNL HEALTH CARE PROPERTIES, INC.
(Registrant)
By: /s/ James M. Seneff, Jr.
James M. Seneff, Jr.
Chairman of the Board and
Chief Executive Officer
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned hereby
constitutes and appoints Robert A. Bourne and James M. Seneff, Jr. and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, with full power to act alone, to sign any and all
documents (including both pre- and post-effective amendments in connection with
the registration statement), and to file the same, with all exhibits thereto,
and all documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agent, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them or
their or his substitutes or substitute, may lawfully do or cause to be done by
virtue thereof.
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 3 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C>
/s/ James M. Seneff, Jr. Chairman of the Board and September 15, 1998
James M. Seneff, Jr. Chief Executive Officer
(Principal Executive Officer)
/s/ Robert A. Bourne Director and President September 15, 1998
Robert A. Bourne (Principal Financial and
Accounting Officer)
/s/ David W. Dunbar Director September 15, 1998
David W. Dunbar
/s/ Timothy S. Smick Director September 15, 1998
Timothy S. Smick
/s/ Edward A. Moses Director September 15, 1998
Edward A. Moses
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibits
1.1 Form of Managing Dealer Agreement (Previously filed.)
1.2 Form of Participating Broker Agreement (Filed herewith.)
1.3 Form of Warrant Purchase Agreement (Previously filed.)
3.1 CNL Health Care Properties, Inc. Articles of Incorporation
(Previously filed.)
3.2 Form of CNL Health Care Properties, Inc. Amended and Restated
Articles of Incorporation (Filed herewith.)
3.3 Form of CNL Health Care Properties, Inc. Bylaws (Previously
filed.)
4.1 CNL Health Care Properties, Inc. Articles of Incorporation (Filed
as Exhibit 3.1 and incorporated herein by reference.)
4.2 Form of CNL Health Care Properties, Inc. Amended and Restated
Articles of Incorporation (Filed as Exhibit 3.2 and incorporated
herein by reference.)
4.3 Form of CNL Health Care Properties, Inc. Bylaws (Filed as Exhibit
3.3 and incorporated herein by reference.)
4.4 Form of Reinvestment Plan (Included in the Prospectus as Appendix
A and incorporated herein by reference.)
5 Opinion of Shaw Pittman Potts & Trowbridge as to the legality of
the securities being registered by CNL Health Care Properties,
Inc. (Filed herewith.)
8 Opinion of Shaw Pittman Potts & Trowbridge regarding certain
material tax issues relating to CNL Health Care Properties, Inc.
(Filed herewith.)
10.1 Form of Escrow Agreement between CNL Health Care Properties, Inc.
and SouthTrust Asset Management Company of Florida, N.A. (Filed
herewith.)
10.2 Form of Advisory Agreement (Previously filed.)
10.3 Form of Joint Venture Agreement (Previously filed.)
10.4 Form of Indemnification and Put Agreement (Previously filed.)
10.5 Form of Unconditional Guaranty of Payment and Performance
(Previously filed.)
10.6 Form of Purchase Agreement (Previously filed.)
10.7 Form of Lease Agreement including Rent Addendum, Construction
Addendum and Memorandum of Lease (Previously filed.)
10.8 Form of Reinvestment Plan (Included in the Prospectus as Appendix
A and incorporated herein by reference.)
10.9 Form of Indemnification Agreement (Filed herewith.)
23.1 Consent of PricewaterhouseCoopers, LLP, Certified Public
Accountants, dated September 9, 1998 (Filed herewith.)
<PAGE>
23.2 Consent of Shaw Pittman Potts & Trowbridge (Contained in its
opinions filed herewith as Exhibits 5 and 8 and incorporated
herein by reference.)
24 Power of Attorney (See "Signatures.")
<PAGE>
27.1 Financial Data Schedule as of December 31, 1997 (Previously
filed.)
27.2 Financial Data Schedule as of April 30, 1998 (Previously filed.)
27.3 Financial Data Schedule as of June 30, 1998 (Filed herewith.)
<PAGE>
EXHIBIT 1.2
Form of Participating Broker Agreement
<PAGE>
PARTICIPATING BROKER AGREEMENT
CNL HEALTH CARE PROPERTIES, INC.
THIS PARTICIPATING BROKER AGREEMENT (the "Agreement") is made and
entered into as of the day indicated on Exhibit A attached hereto and by this
reference incorporated herein, between CNL SECURITIES CORP., a Florida
corporation (the "Managing Dealer"), and the Participating Broker (the "Broker")
identified in Exhibit A hereto.
WHEREAS, CNL HEALTH CARE PROPERTIES, INC. is a Maryland corporation
(the "Company"); and
WHEREAS, the Company proposes to offer and sell up to 15,500,000 shares
of Common Stock of the Company (the "Shares") to the general public, pursuant to
a public offering (the "Offering") of the Shares pursuant to a prospectus (the
"Prospectus") filed with the Securities and Exchange Commission ("SEC"); and
WHEREAS, the Managing Dealer, which has heretofore entered into a
Managing Dealer Agreement with the Company pursuant to which it has been
designated the managing dealer to sell and manage the sale by others of the
Shares pursuant to the terms of such agreement and the Offering, is a
corporation incorporated in and presently in good standing in the State of
Florida, and is presently registered with the Florida Securities Commission and
with the National Association of Securities Dealers, Inc. ("NASD") as a
securities broker-dealer qualified to offer and sell to members of the public
securities of the type represented by the Shares; and
WHEREAS, the Broker is an entity, as designated in Exhibit A hereto,
organized and presently in good standing in the state or states designated in
Exhibit A hereto, presently registered as a broker-dealer with the NASD, and
presently licensed by the appropriate regulatory agency of each state in which
it will offer and sell the Shares as a securities broker-dealer qualified to
offer and sell to members of the public securities of the type represented by
the Shares or exempt from all such registration requirements; and
WHEREAS, the Company has filed with the SEC a registration statement on
Form S-11, including a preliminary or final prospectus, for the registration of
the Shares under the Securities Act of 1933, as amended (such registration
statement, as it may be amended, and the prospectus and exhibits on file with
the SEC at the time the registration statement becomes effective, including any
post-effective amendments or supplements
<PAGE>
to such registration statement or prospectus after the effective date of
registration, being herein respectively referred to as the "Registration
Statement" and the "Prospectus"); and
WHEREAS, the offer and sale of the Shares shall be made pursuant to the
terms and conditions of the Registration Statement and the Prospectus and,
further, pursuant to the terms and conditions of all applicable securities laws
of all states in which the Shares are offered and sold; and
WHEREAS, the Managing Dealer desires to retain the Broker to use its
best efforts to sell the Shares, and the Broker is willing and desires to serve
as a broker for the Managing Dealer for the sale of the Shares upon the
following terms and conditions;
NOW, THEREFORE, in consideration of the premises and terms and
conditions thereof, it is agreed between the Managing Dealer and the Broker as
follows.
1. Employment.
(a) Subject to the terms and conditions herein set forth, the
Managing Dealer hereby employs the Broker to use its best efforts to sell for
the account of the Company a portion of the Shares described in the Registration
Statement, as specified on Exhibit A hereto. The Broker hereby accepts such
employment and covenants, warrants and agrees to sell the Shares according to
all of the terms and conditions of the Registration Statement, all applicable
state and federal laws, including the Securities Act of 1933, as amended, and
any and all regulations and rules pertaining thereto, heretofore or hereafter
issued by the SEC and the NASD. Neither the Broker nor any other person shall
have any authority to give any information or make any representations in
connection with any offer or sale of the Shares other than as contained in the
Prospectus, as amended and supplemented, and as is otherwise expressly
authorized in writing by the Managing Dealer.
(b) The Broker shall use its best efforts, promptly following
receipt of written notice from the Managing Dealer of the effective date of the
Registration Statement, to sell the Shares in such quantities and for the
account of Company as shall be agreed between the Broker and the Managing Dealer
and specified on Exhibit A hereto, and to such persons and according to all such
terms as are contained in the Registration Statement and the Prospectus. The
Broker shall comply with all requirements set forth in the Registration
Statement and the Prospectus. The Broker shall use and distribute, in connection
with the offer and sale of the Shares, only the Prospectus and such sales
literature and advertising as shall conform in all respects to any restrictions
of local law and the applicable requirements of the Securities Act of 1933, as
amended, and which has been approved in writing by the Company or the Managing
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Dealer. The Managing Dealer reserves the right to establish such additional
procedures as it may deem necessary to ensure compliance with the requirements
of the Registration Statement, and the Broker shall comply with all such
additional procedures to the extent that it has received written notice thereof.
(c) The Broker shall be permitted to accept subscriptions for
the Shares by telephone from residents of those states identified on Schedule A
attached hereto and made a part hereof provided that: (1) the registered
representative and branch manager of the Broker execute the subscription
agreement on behalf of any investor who subscribes for Shares by telephone; and
(2) the Broker does not charge any additional fees, including but not limited to
fees relating to opening an account with the Broker, to any investor who
telephonically or orally subscribes for Shares. It is understood and agreed
between the Managing Dealer and the Broker that the Managing Dealer may, in its
discretion, change, modify, add to or delete from the list of states identified
on Schedule A. Any such modification shall be effective ten days from the date
written notice to the Broker has been mailed by the Managing Dealer. The Broker
shall not execute a subscription agreement on behalf of any investor who
subscribes for Shares by telephone unless such investor has specifically
authorized the registered representative and the branch manager of the Broker to
execute the subscription agreement on behalf of such investor and has made or
agreed to make full payment for all Shares covered by such subscription
agreement. Notwithstanding anything contained herein to the contrary, the Broker
shall have no authority to make representations on behalf of an investor or to
initial representations contained in the subscription agreement on behalf of an
investor. In connection with telephonic or other oral subscriptions for Shares,
the Broker represents and warrants as follows: (i) that a Prospectus was
delivered to the investor before the investor made a decision to invest; (ii)
that the investor meets the suitability requirements set forth in the
Prospectus; and (iii) that, in compliance with the NASD's Conduct Rules, the
Broker has reasonable grounds to believe that the investment in the Company is
suitable for the investor, based upon information supplied by the investor to
such Broker. Further, the Broker shall explain to any investor from a state
identified in the Prospectus as having such additional requirements, that: (i)
the investor has the right to rescind such subscription for a period of at least
ten days following the date written confirmation of the subscription has been
received by the investor from the Managing Dealer; and (ii) unless the investor
rescinds such subscription within the applicable period of time, the investor
shall be bound by the subscription agreement.
(d) Notwithstanding anything to the contrary contained in
Section 2 of this Agreement, in the event that the Managing Dealer pays any
commission to the Broker for sale of one or more Shares, including, but not
limited to, those Shares sold pursuant to a telephonic or other oral
subscription therefor, where
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<PAGE>
representatives of the Broker execute the subscription agreement relating to
such Shares, and the subscription is rescinded as to one or more of the Shares
covered by such subscription, the Managing Dealer shall decrease the next
payment of commissions or other compensation otherwise payable to the Broker by
the Managing Dealer under this Agreement by an amount equal to the commission
rate established in Section 2 and Exhibit A of this Agreement, multiplied by the
number of Shares as to which the subscription is rescinded. In the event that no
payment of commissions or
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<PAGE>
other compensation is due to the Broker after such withdrawal occurs, the Broker
shall pay the amount specified in the preceding sentence to the Managing Dealer
within ten (10) days following mailing of notice to the Broker by the Managing
Dealer stating the amount owed as a result of rescinded subscriptions.
(e) All monies received for purchase of any of the Shares
shall be forwarded by the Broker to the Managing Dealer for delivery to
SouthTrust Asset Management Company of Florida, N.A. (the "Escrow Agent"), where
such monies will be deposited in an escrow account established by the Company
solely for such subscriptions, except that, until such time (if any) that such
monies are deliverable to the Company pursuant to the Escrow Agreement between
the Company and the Escrow Agent, the Broker shall return any check not made
payable to "SouthTrust Asset Management Company of Florida, N.A., Escrow Agent"
directly to the subscriber who submitted the check. Thereafter, the Broker may
accept checks made payable to either the Company or the Escrow Agent.
Subscriptions will be executed as described in the Registration Statement or as
directed by the Managing Dealer. The monies shall be deposited or transmitted by
the Broker to the Managing Dealer no later than the close of business of the
first business day after receipt of the subscription documents by the Broker;
provided, however, that if the Broker maintains a branch office, the branch
office shall transmit the subscription documents and check to the Broker by the
close of business on the first business day following their receipt by the
branch office and the Broker shall review the subscription documents and check
to ensure their proper execution and form and, if they are acceptable, transmit
the check to the Managing Dealer by the close of business on the first business
day after their receipt by the Broker. Pursuant to the terms of the Managing
Dealer Agreement, the Managing Dealer will transmit the check or monies to the
Escrow Agent by no later than the close of business on the first business day
after the check is received from the Broker.
(f) During the full term of this Agreement the Managing Dealer
shall have full authority to take such action as it may deem advisable in
respect to all matters pertaining to the performance of the Broker under this
Agreement.
(g) The Shares shall be offered and sold by the Broker only
where the Shares may be legally offered and sold, and only to such persons in
such states who shall be legally qualified to purchase the Shares. The Managing
Dealer shall give the Broker written notice at the time of effectiveness of
those states in which the offering and sale of Shares may be made, and shall
amend such notice thereafter as additional states are added; no Shares shall be
offered or sold in any other states.
(h) The Broker shall have no obligation under this Agreement
to purchase any of the Shares for its own account.
(i) The Broker will use every reasonable effort to assure
that Shares are sold only to investors who:
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(1) meet the investor suitability standards,
including the minimum income and net worth standard established by the
Company, and minimum purchase requirements set forth in the
Registration Statement;
(2) can reasonably benefit from the Company based on
the prospective investor's overall investment objectives and portfolio
structure;
(3) are able to bear the economic risk of the
investment based on each prospective investor's overall financial
situation; and
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<PAGE>
(4) have apparent understanding of: (a) the
fundamental risks of the investment; (b) the risk that the prospective
investor may lose the entire investment; (c) the lack of liquidity of
the Shares; (d) the restrictions on transferability of the Shares; (e)
the background and qualifications of the officers and directors of CNL
Health Care Advisors, Inc., the advisor to the Company (the "Advisor");
and (f) the tax consequences of an investment in the Shares.
(5) The Broker will make the determinations required
to be made by it pursuant to subparagraph (i) based on information it
has obtained from a prospective investor, including, at a minimum, but
not limited to, the prospective investor's age, investment objectives,
investment experience, income, net worth, financial situation, other
investments of the prospective investor, as well as any other pertinent
factors deemed by the Broker to be relevant.
(j) In addition to the complying with the provisions of
subparagraph (i) above, and not in limitation of any other obligations of the
Broker to determine suitability imposed by state or federal law, the Broker
agrees that it will comply fully with all of the applicable provisions of the
NASD's Conduct Rules, and the following provisions:
(1) The Broker shall have reasonable grounds to
believe, based upon information provided by the investor concerning his
investment objectives, other investments, financial situation and
needs, and upon any other information known by the Broker, that (A)
each investor to whom the Broker sells Shares is or will be in a
financial position appropriate to enable him to realize to a
significant extent the benefits (including tax benefits) of an
investment in the Shares, (B) each investor to whom the Broker sells
Shares has a fair market net worth sufficient to sustain the risks
inherent in an investment in the Shares (including potential loss and
lack of liquidity), and (C) the Shares otherwise are or will be a
suitable investment
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<PAGE>
for each investor to whom it sells Shares, and the Broker shall
maintain files disclosing the basis upon which the determination of
suitability was made;
(2) The Broker shall not execute any transaction
involving the purchase of Shares in a discretionary account without
prior written approval of the transactions by the investor;
(3) The Broker shall have reasonable grounds to
believe, based upon the information made available to it, that all
material facts are adequately and accurately disclosed in the
Registration Statement and provide a basis for evaluating the Shares;
(4) In making the determination set forth in
subparagraph (3) above, the Broker shall evaluate items of
compensation, physical properties, tax aspects, financial stability and
experience of the sponsor, conflicts of interest and risk factors,
appraisals, as well as any other information deemed pertinent by it;
(5) If the Broker relies upon the results of any
inquiry conducted by another member of the NASD with respect to the
obligations set forth in subparagraphs (3) or (4) above, the Broker
shall have reasonable grounds to believe that such inquiry was
conducted with due care, that the member or members conducting or
directing the inquiry consented to the disclosure of the results of the
inquiry and that the person who participated in or conducted the
inquiry is not a sponsor or an affiliate of the sponsor of the Company;
and
(6) Prior to executing a purchase transaction in the
Shares, the Broker shall have informed the prospective investor of all
pertinent facts relating to the liquidity and marketability of the
Shares.
(k) The Broker agrees that it will comply with Rules 2730,
2740 and 2750 of the NASD's Conduct Rules.
(l) The Broker agrees to retain in its files, for a period of
at least six years, information which will establish that each purchaser of
Shares falls within the permitted class of investors.
(m) The Broker shall not, directly or indirectly, pay or award
any finder's fees, commissions or other compensation to any persons engaged by a
potential investor for investment advice as an inducement to such advisor to
advise the potential investor to purchase Shares in the Company.
(n) The Broker either (i) shall not purchase Shares for its
own account or (ii) shall hold for investment any Shares purchased for its own
account.
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(o) The Broker hereby confirms that it is familiar with
Securities Act Release No. 4968 and Rule 15c2-8 under the Securities Exchange
Act of 1934, relating to the distribution of preliminary and final prospectuses,
and confirms that it has and will comply therewith.
(p) The Broker shall deliver a copy of the Articles of
Incorporation of the Company with each Prospectus that is delivered to potential
investors in Mississippi.
(q) The Broker shall not in any way participate in, or effect
the sale or transfer of Shares in connection with, a tender offer with respect
to shares of the Company's common stock, whether or not such offer is subject to
Section 14(d)(1) of the Securities Exchange Act of 1934, as amended, other than
with the written consent of the Company and/or the Managing Dealer.
2. Compensation of Broker.
The Managing Dealer shall pay the Broker, as compensation for all
services to be rendered by the Broker hereunder, a commission equal to 7.0% on
sales of Shares by such Broker, as set forth in Exhibit A hereto, subject to
reduction as specified in this Section 2 and the Prospectus. The Managing
Dealer, in its sole discretion, may reallow to the Broker, from its marketing
support and due diligence expense reimbursement fee, up to an additional 0.5% on
sales of Shares by such Broker, based on such factors as the number of Shares
sold by the Broker, the assistance of the Broker in marketing the Offering, and
bona fide due diligence expenses incurred by the Broker. Such commission rates
shall remain in effect during the full term of this Agreement unless otherwise
changed by a written agreement between the parties hereto. A sale of Shares
shall be deemed to be completed only after the Company receives a properly
completed subscription agreement for Shares from the Broker evidencing the fact
that the investor had received a final Prospectus for a period of not less than
five full business days, together with payment of the full purchase price of
each purchased Share from a buyer who satisfies each of the terms and conditions
of the Registration Statement and Prospectus, and only after such subscription
agreement has been accepted in writing by the Company. Such compensation shall
be payable to the Broker by the Managing Dealer after such acceptance of the
subscription agreement; provided, however, that compensation or commissions
shall not be paid by the Managing Dealer: (i) other than from funds received as
compensation or commissions from the Company for the sale of its Shares; (ii)
until such time as subscriptions for a minimum of 250,000 Shares ($2,500,000),
excluding subscriptions from Pennsylvania investors, have been received and
approved by the Company, and deposited into the escrow account provided for in
Paragraph 1(e) hereof; (iii) until any and all compensation or commissions
payable by the Company to the
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Managing Dealer have been received by the Managing Dealer; and (iv) if the
commission payable to any broker-dealer or salesman exceeds the amount allowed
by any regulatory agency. The Broker shall not reallow any commissions to
non-NASD members. The Company (and the Managing Dealer) may pay reduced
commissions or may eliminate commissions on certain sales of Shares, including
the reduction or elimination of commissions in accordance with the following
paragraph of this Section 2. Any such reduction or elimination of commissions
will not, however, change the net proceeds to the Company.
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<PAGE>
The Company also shall issue to the Managing Dealer a warrant (the
"Soliciting Dealer Warrants") for every 25 Shares sold through the Offering, up
to a maximum of 600,000 Soliciting Dealer Warrants to purchase an equivalent
number of shares of common stock of the Company. The Soliciting Dealer Warrants
will be issued quarterly commencing 60 days after the date on which the Shares
are first sold pursuant to the Offering. All or any part of such Soliciting
Dealer Warrants may be reallowed to certain Brokers with prior written approval
from, and in the sole discretion of, the Managing Dealer unless prohibited by
federal or state securities laws. The Company will not issue Soliciting Dealer
Warrants to the Managing Dealer, and the Managing Dealer will not transfer
Soliciting Dealer Warrants, in connection with the sale of Shares to residents
of Minnesota or Texas. Each Soliciting Dealer Warrant will entitle the holder to
purchase one share of common stock from the Company for $12.00 during the
five-year period commencing with the date the Offering begins (the "Exercise
Period"); provided however, that Soliciting Dealer Warrants will not be
exercisable until one year from the date of issuance. Holders of Soliciting
Dealer Warrants may not exercise the Soliciting Dealer Warrants to the extent
such exercise would jeopardize the Company's status as a REIT. No Soliciting
Dealer Warrants will be issued relating to the Shares sold through the Company's
Reinvestment Plan.
A registered principal or representative of the Managing Dealer or a
Broker, employees, officers, Directors, and directors of the Company or the
Advisor, or any of their Affiliates (and the families of any of the foregoing
persons), and any Plan (as defined in the Prospectus) established exclusively
for the benefit of such persons may purchase Shares net of 7% commissions, at a
per Share purchase price of $9.30. In addition, clients of an investment adviser
registered under the Investment Advisers Act of 1940, as amended, who have been
advised by such adviser on an ongoing basis regarding investments other than in
the Company, and who are not being charged by such adviser or its Affiliates,
through the payment of commissions or otherwise, for the advice rendered by such
adviser in connection with the purchase of the Shares, may purchase the Shares
net of commissions. In addition, brokers that have a contractual arrangement
with their clients for the payment of fees which is consistent with accepting
selling commissions, in their sole discretion, may elect not to accept any
selling commissions
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<PAGE>
offered by the Company for Shares that they sell. In that event, such Shares
shall be sold to the investor net of all selling commissions, at a per share
purchase price of $9.30.
Certain stockholders may agree with their participating Broker and the
Managing Dealer to have commissions relating to their Shares paid over a seven
year period pursuant to a deferred commission arrangement (the "Deferred
Commission Option"). Stockholders electing the Deferred Commission Option will
be required to pay a total of $9.40 per Share purchased upon subscription,
rather than $10.00 per Share, with respect to which $0.15 per Share will be
payable as commissions due upon subscription, $0.10 of which may be reallowed to
the Broker by the Managing Dealer. For each of the six years following such
subscription on a date to be determined by the Managing Dealer, $0.10 per Share
will be paid by the Company as deferred commissions with respect to Shares sold
pursuant to the Deferred Commission Option, which amounts will be deducted from
and paid out of distributions otherwise payable to such stockholders holding
such Shares and may be reallowed to the Broker by the Managing Dealer. The net
proceeds to the Company will not be affected by the election of the Deferred
Commission Option. Under this arrangement, a stockholder electing the Deferred
Commission Option will pay a 1% Broker commission per year thereafter for the
next six years which will be deducted from and paid by the Company out of
distributions otherwise payable to such stockholder. At such time, if any, that
the Company's Shares are listed on a national securities exchange or
over-the-counter market, the Company shall have the right to require the
acceleration of all outstanding payment obligations under the Deferred
Commission Option.
The Managing Dealer shall pay the Broker commissions on Shares
purchased pursuant to the Company's Reinvestment Plan on the same basis as
commissions paid for Shares otherwise purchased in the Offering. No Broker
commissions will be paid in connection with shares of common stock issued upon
the exercise of the Soliciting Dealer Warrants.
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<PAGE>
3. Association with Other Dealers.
It is expressly understood between the Managing Dealer and the Broker
that the Managing Dealer may cooperate with other broker-dealers who are
registered as broker-dealers with the NASD and duly licensed by the appropriate
regulatory agency of each state in which they will offer and sell the Shares or
with broker-dealers exempt from all such registration requirements. Such other
participating broker-dealers may be employed by the Managing Dealer as brokers
on terms and conditions identical or similar to this Agreement and shall receive
such rates of commission as are agreed to between the Managing Dealer and the
respective other participating broker-dealers and as are in accordance with the
terms of the Registration Statement. The Broker understands that, to that
extent, such other participating
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broker-dealers shall compete with the Broker in the sale of the
Shares.
4. Conditions of the Broker's Obligations.
The Broker's obligations hereunder are subject, during the full term of
this Agreement and the Offering, to (a) the performance by the Managing Dealer
of its obligations hereunder; and (b) the conditions that: (i) the Registration
Statement shall become and remain effective; and (ii) no stop order shall have
been issued suspending the effectiveness of the Offering.
5. Conditions to the Managing Dealer's Obligations.
The obligations of the Managing Dealer hereunder are subject, during
the full term of this Agreement and the Offering, to the conditions that: (a) at
the effective date of the Registration Statement and thereafter during the term
of this Agreement while any Shares remain unsold, the Registration Statement
shall remain in full force and effect authorizing the offer and sale of the
Shares; (b) no stop order suspending the effectiveness of the Offering or other
order restraining the offer or sale of the Shares shall have been issued nor
proceedings therefor initiated or threatened by any state regulatory agency or
the SEC; and (c) the Broker shall have satisfactorily performed all of its
obligations hereunder.
6. Covenants of the Managing Dealer.
The Managing Dealer covenants, warrants and represents, during the full
term of this Agreement, that:
(a) It shall use its best efforts to prevent the sale of the
Shares through persons other than registered NASD broker-dealers.
(b) It shall use its best efforts to cause the Company to
maintain the effectiveness of the Registration Statement and to file such
applications or amendments to the Registration Statement as may be reasonably
necessary for that purpose.
(c) It shall advise the Broker whenever and as soon as it
receives or learns of any order issued by the SEC, any state regulatory agency
or any other regulatory agency which suspends the effectiveness of the
Registration Statement or prevents the use of the Prospectus or which otherwise
prevents or suspends the offering or sale of the Shares, or receives notice of
any proceedings regarding any such order.
(d) It shall use its best efforts to prevent the issuance of
any order described herein at subparagraph (c) hereof and to obtain the lifting
of any such order if issued.
(e) It shall give the Broker written notice when the
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Registration Statement becomes effective and shall deliver to the Broker such
number of copies of the Prospectus, and any supplements and amendments thereto,
which are finally approved by the SEC, as the Broker may reasonably request for
sale of the Shares.
(f) It shall promptly notify the Broker of any post-effective
amendments or supplements to the Registration Statement or Prospectus, and shall
furnish the Broker with copies of any revised Prospectus and/or supplements and
amendments to the Prospectus.
(g) To the extent to which the Managing Dealer has knowledge,
it shall keep the Broker fully informed of any material development to which the
Company is a party or which concerns the business and condition of the Company.
(h) In conjunction with the Company, it shall use its best
efforts to cause, at or prior to the time the Registration Statement becomes
effective, the qualification of the Shares for offering and sale under the
securities laws of such states as the Company shall elect.
7. Payment of Costs and Expenses.
The Broker shall pay all costs and expenses incident to the performance
of its obligations under this Agreement, including:
(a) All expenses incident to the preparation, printing
and filing of all advertising originated by it related to the
sale of the Shares; and
(b) All other costs and expenses incurred in connection with
its sales efforts related to the sales of the Shares which are not expressly
assumed by the Company in its Managing Dealer Agreement with the Managing
Dealer.
8. Indemnification.
The Broker agrees to indemnify, defend and hold harmless the Company,
its affiliates and their or its officers, directors, trustees, employees and
agents, including the Managing Dealer, against all losses, claims, demands,
liabilities and expenses, joint or several, including reasonable legal and other
expenses incurred in defending such claims or liabilities, whether or not
resulting in any liability to the Company, its affiliates and their or its
officers, directors, trustees, employees or agents, which they or any of them
may incur arising out of the offer or sale by the Broker, or any person acting
on its behalf, of any Shares pursuant to this Agreement if such loss, claim,
demand, liability, or expense arises out of or is based upon (i) an untrue
statement or alleged untrue statement of a material fact, or any omission or
alleged omission of a material fact, other than a statement, omission, or
alleged omission by the Broker
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which is also, as the case may be, contained in or omitted from the Prospectus
or the Registration Statement and which statement or omission was not based on
information supplied to the Company or the Managing Dealer by such Broker, or
(ii) the breach by the Broker, or any person acting on its behalf, of any of the
terms and conditions of this Agreement. This indemnity provision shall survive
the termination of this Agreement.
(a) The Managing Dealer agrees to indemnify, defend and hold
harmless the Broker, its officers, directors, employees and agents, against all
losses, claims, demands, liabilities and expenses, including reasonable legal
and other expenses incurred in defending such claims or liabilities, which they
or any of them may incur, including, but not limited to, alleged violations of
the Securities Act of 1933, as amended, but only to the extent that such losses,
claims, demands, liabilities and expenses shall arise out of or be based upon
(i) any untrue statement of a material fact contained in the Prospectus or the
Registration Statement, as filed and in effect with the SEC, or in any amendment
or supplement thereto, or in any application prepared or approved in writing by
counsel to the Company and filed with any state regulatory agency in order to
register or qualify the Shares under the securities laws thereof (the "Blue Sky
applications"), or (ii) any omission or alleged omission to state therein a
material fact required to be stated in the Prospectus or the Registration
Statement or the Blue Sky applications, or necessary to make such statements,
and any part thereof, not misleading; provided, further, that any such untrue
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statement, omission or alleged omission is not based on information included in
any such document which was supplied to the Managing Dealer, the Company, or any
officer of the Company by such Broker. This indemnity provision shall survive
the termination of this Agreement.
(b) No indemnifying party shall be liable under the indemnity
agreements contained in subparagraphs (a) and (b) above unless the party to be
indemnified shall have notified such indemnifying party in writing promptly
after the summons or other first legal process giving information of the nature
of the claim shall have been served upon the party to be indemnified, but
failure to notify an indemnifying party of any such claim shall not relieve it
from any liabilities which it may have to the indemnified party against whom
action is brought other than on account of its indemnity agreement contained in
subparagraphs (a) and (b) above. In the case of any such claim, if the party to
be indemnified notified the indemnifying party of the commencement thereof as
aforesaid, the indemnifying party shall be entitled to participate at its own
expense in the defense of such claim. If it so elects, in accordance with
arrangements satisfactory to any other indemnifying party or parties similarly
notified, the indemnifying party has the option to assume the entire defense of
the claim, with counsel who shall be satisfactory to such indemnified party and
all other indemnified parties who are defendants in such action; and after
notice from the indemnifying party of its election so to assume the defense
thereof and the retaining of such counsel by the indemnifying party, the
indemnifying party shall not be liable to such indemnified party under
subparagraphs (a) and (b) above for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof, other
than for the reasonable costs of investigation.
9. Term of Agreement.
This Agreement shall become effective at 8:00 A.M. (Eastern Standard
Time) on the first full business day following the day on which the Registration
Statement becomes effective, or if later, the date on which this Agreement is
executed by the Managing Dealer and the Broker. The Broker and the Managing
Dealer may each prevent this Agreement from becoming effective, without
liability to the other, by written notice before the time this Agreement would
otherwise become effective. After this Agreement becomes effective, either party
may terminate it at any time for any reason by giving thirty (30) days' written
notice to the other party; provided, however, that this Agreement shall in any
event automatically terminate at the first occurrence of any of the following
events: (a) the Registration Statement for offer and sale of the Shares shall
cease to be effective; (b) the Company shall be terminated; or (c) the Broker's
license or registration to act as a broker-dealer shall be revoked or suspended
by any federal, self-regulatory or state agency and such revocation or
suspension is not cured within ten (10) days
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from the date of such occurrence. In any event, this Agreement shall be deemed
suspended during any period for which such license is revoked or suspended.
10. Notices.
All notices and communications hereunder shall be in writing and shall
be deemed to have been given and delivered when deposited in the United States
mail, postage prepaid, registered or certified mail, to the applicable address
set forth below.
If sent to the Managing Dealer:
CNL SECURITIES CORP.
400 East South Street
Orlando, Florida 32801
Attention: Robert A. Bourne, President
If sent to the Broker: to the person whose name and address are
identified in Exhibit A hereto.
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11. Successors.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto, and shall not be assigned or transferred by the Broker by
operation of law or otherwise.
12. Miscellaneous.
(a) This Agreement shall be construed in accordance with the
applicable laws of the State of Florida.
(b) Nothing in this Agreement shall constitute the Broker as
in association with or in partnership with the Managing Dealer. Instead, this
Agreement shall only authorize the Broker to sell the Shares according to the
terms as expressly set forth herein; provided, further, that the Broker shall
not in any event have any authority to act as the agent or broker of the
Managing Dealer except according to the terms expressly set forth herein.
(c) This Agreement, including Exhibit A and Schedule A hereto,
embodies the entire understanding between the parties to the Agreement, and no
variation, modification or amendment to this Agreement shall be deemed valid or
effective unless it is in writing and signed by both parties hereto.
(d) If any provision of this Agreement shall be deemed void,
invalid or ineffective for any reason, the remainder of the Agreement shall
remain in full force and effect.
(e) This Agreement may be executed in counterpart copies, each
of which shall be deemed an original but all of which together shall constitute
one and the same instrument comprising this Agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement on the
date and year indicated on Exhibit A hereto.
MANAGING DEALER FOR:
BROKER: CNL HEALTH CARE PROPERTIES, INC.
________________________________ CNL SECURITIES CORP.
(Name of Broker)
By:_____________________________ By:_____________________________
Print Name:_____________________ Print Name:_____________________
Title:__________________________ Title:__________________________
Witness:________________________ Witness:________________________
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EXHIBIT A
TO
PARTICIPATING BROKER AGREEMENT
OF
CNL HEALTH CARE PROPERTIES, INC.
This Exhibit A is attached to and made a part of that certain
Participating Broker Agreement, dated as of the ___ day of ___________________,
19__, by and between CNL SECURITIES CORP., as Managing Dealer, and
__________________________________, as Broker.
1. Date of Agreement:_____________________________________________________
2. Identity of Broker:
Name:__________________________________________________________________
Firm NASD (CRD) No:____________________________________________________
Type of Entity_________________________________________________________
(To be completed by Broker, e.g., corporation, partnership
or sole proprietorship.)
State Organized in:____________________________________________________
(To be completed by Broker)
Qualified To Do Business and in Good Standing in the Following
Jurisdictions (including your state of organization) (Note:
Qualification to do business in any jurisdiction is generally a
requirement imposed by the secretary of state or other authority of
jurisdictions in which you do business, and is not related to your
holding a license as a securities broker-dealer in such jurisdictions.
Questions concerning this matter should be directed to you or your
legal counsel.):
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
(To be completed by Broker)
Licensed as Broker-Dealer in The Following States:_____________________
_______________________________________________________________________
_______________________________________________________________________
(To be completed by Broker)
3. Schedule of Commissions Payable to Participating Broker (see Section 2
of Agreement):
Number of Shares
Purchased In Sales Price As a Percentage
Individual Order To Subscriber of the Sales Price1 Dollar Amount
---------------- ------------- ------------------- -------------
1 or more $10.00 7.0% $0.70
_____________________
(1) Subject to reduction as set forth in Section 2 of the Participating Broker
Agreement.
Exhibit A
Page 1 of 3
<PAGE>
4. Name and Address for Notice Purposes (see Paragraph 10 of Agreement):
Name:__________________________________________________________________
Title:_________________________________________________________________
Company:_______________________________________________________________
Address:_______________________________________________________________
City, State and Zip Code:______________________________________________
Telephone Number (including area code):________________________________
5. Please complete the following for our records:
(a) Please name those individuals who hold the following positions:
President:_____________________________________________________
Due Diligence Officer:_________________________________________
Marketing Director:____________________________________________
In-House Editor:_______________________________________________
(b) Does your company hold national or regional conferences?
Yes _____ No _____
If so, when?___________________________________________________
Who is the coordinator?________________________________________
(c) How many representatives are registered with your broker-
dealer?________________________________________________________
PLEASE ENCLOSE A CURRENT LIST. ALL INFORMATION WILL BE HELD IN
CONFIDENCE.
(d) Does your firm publish a newsletter? Yes _____ No _____
What is/are the frequency of the publication(s)?
_____ Weekly _____ Monthly _____ Quarterly
_____ Bi-weekly _____ Bi-monthly _____ Other (please specify)
PLEASE PLACE CNL ON YOUR MAILING LIST AND PROVIDE A SAMPLE OF
THE PUBLICATION IF AVAILABLE.
(e) Does your firm have regular internal mailings, or bulk package
mailings to representatives? Yes _____ No _____
PLEASE PLACE CNL ON YOUR MAILING LIST AND PROVIDE A SAMPLE OF
THE PUBLICATION IF AVAILABLE.
Exhibit A
Page 2 of 3
<PAGE>
(f) Does your firm have a computerized electronic mail (E-Mail)
system for your representatives? Yes _____ No _____
If so, please provide e-mail address:__________________________
(g) Website address:_______________________________________________
Person responsible:____________________________________________
Exhibit A
Page 3 of 3
<PAGE>
SCHEDULE A
TO
PARTICIPATING BROKER AGREEMENT
OF
CNL HEALTH CARE PROPERTIES, INC.
TELEPHONIC SUBSCRIPTION AUTHORIZATION
This Schedule A is attached to and made a part of that certain
Participating Broker Agreement, dated as of the ___ day of ____________________,
19__, by and between CNL SECURITIES CORP., as Managing Dealer, and
_____________________________________________, as Broker.
The list of states in which the Broker is permitted to accept
telephonic subscriptions shall be those states identified by Item 2 of Exhibit
A, as amended from time to time, to the Broker Agreement between the parties
hereto, as states in which the Broker is licensed as a Broker-Dealer, except for
the following states in which the Broker is specifically prohibited from
accepting telephonic subscriptions: Florida, Iowa, Maine, Massachusetts,
Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Mexico, North
Carolina, Ohio, Oregon, South Dakota, Tennessee and Washington.
Initials: ______________ -- CNL SECURITIES CORP.
______________ -- PARTICIPATING BROKER
DEFERRED COMMISSION OPTION AUTHORIZATION
Authorization is hereby given for registered representatives to select,
at the request of the investor, the deferred commission option, as explained in
Section 2, paragraph 4 of the Participating Broker Agreement.
Initials: ______________ -- CNL SECURITIES CORP.
______________ -- PARTICIPATING BROKER
<PAGE>
Exhibit 3.2
Form of CNL Health Care Properties, Inc.
Amended and Restated Articles of Incorporation
<PAGE>
ARTICLES OF AMENDMENT AND RESTATEMENT
OF
CNL HEALTH CARE PROPERTIES, INC.
CNL Health Care Properties, Inc., a Maryland corporation having its
principal office at 32 South Street, Baltimore, Maryland 21202 (hereinafter, the
"Company"), hereby certifies to the Department of Assessments and Taxation of
the State of Maryland, that:
FIRST: The Company desires to amend and restate its articles of
incorporation as currently in effect.
SECOND: The provisions of the articles of incorporation, dated December
22, 1997, which are now in effect and as amended hereby, in accordance with the
Maryland General Corporation Law (the "MGCL"), are as follows.
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
CNL HEALTH CARE PROPERTIES, INC.
* * * * * * * * * *
ARTICLE 1
THE COMPANY; DEFINITIONS
SECTION 1.1 Name. The name of the corporation (the "Company") is:
CNL Health Care Properties, Inc.
So far as may be practicable, the business of the Company shall be
conducted and transacted under that name, which name (and the word "Company"
wherever used in these Articles of Amendment and Restatement of CNL Health Care
Properties, Inc. (these "Articles of Incorporation"), except where the context
otherwise requires) shall refer to the Directors collectively but not
individually or personally and shall not refer to the Stockholders or to any
officers, employees or agents of the Company or of such Directors.
Under circumstances in which the Directors determine that the use of
the name "CNL Health Care Properties, Inc." is not practicable, they may use any
other designation or name for the Company.
-1-
<PAGE>
SECTION 1.2 Resident Agent. The name and address of the resident agent
for service of process of the Company in the State of Maryland is The
Corporation Trust Incorporated, 32 South Street, Baltimore, Maryland 21202. The
Company may have such principal office within the State of Maryland as the
Directors may from time to time determine.
The Company may also have such other offices or places of business
within or without the State of Maryland as the Directors may from time to time
determine.
SECTION 1.3 Nature of Company. The Company is a Maryland corporation
within the meaning of the MGCL.
SECTION 1.4 Purposes. The purposes for which the Company is formed are
to conduct any business for which corporations may be organized under the laws
of the State of Maryland including, but not limited to, the following: (i) to
acquire, hold, own, develop, construct, improve, maintain, operate, sell, lease,
transfer, encumber, convey, exchange and otherwise dispose of or deal with real
and personal property; (ii) to engage in the business of offering furniture,
fixture, and equipment financing to operators of Health Care Facilities; (iii)
to engage in the business of offering mortgage financing secured by Real
Property; and (iv) to enter into any partnership, joint venture or other similar
arrangement to engage in any of the foregoing.
SECTION 1.5 Definitions. As used in these Articles of Incorporation,
the following terms shall have the following meanings unless the context
otherwise requires (certain other terms used in Article VII hereof are defined
in Sections 7.2, 7.3, 7.6, and 7.7 hereof):
"Acquisition Expenses" means any and all expenses incurred by the
Company, the Advisor, or any Affiliate of either in connection with the
selection or acquisition of any Property or the making of any Mortgage Loan,
whether or not acquired, including, without limitation, legal fees and expenses,
travel and communications expenses, costs of appraisals, nonrefundable option
payments on property not acquired, accounting fees and expenses, and title
insurance.
"Acquisition Fees" means any and all fees and commissions, exclusive of
Acquisition Expenses, paid by any Person or entity to any other Person or entity
(including any fees or commissions paid by or to any Affiliate of the Company or
the Advisor) in connection with making or investing in Mortgage Loans or the
purchase, development or construction of a Property, including, without
limitation, real estate commissions, acquisition fees, finder's fees, selection
fees, Development Fees, Construction Fees, nonrecurring management fees,
consulting fees, loan fees, points, the Secured Equipment Lease Servicing Fee,
or any other fees or commissions of a similar nature. Excluded shall be
development fees and construction fees paid to any Person or entity not
affiliated with the Advisor in connection with the actual development and
construction of any Property.
-2-
<PAGE>
"Advisor" or "Advisors" means the Person or Persons, if any, appointed,
employed or contracted with by the Company pursuant to Section 4.1 hereof and
responsible for directing or performing the day-to-day business affairs of the
Company, including any Person to whom the Advisor subcontracts substantially all
of such functions.
"Advisory Agreement" means the agreement between the Company and the
Advisor pursuant to which the Advisor will direct or perform the day-to-day
business affairs of the Company.
"Affiliate" or "Affiliated" means, as to any individual, corporation,
partnership, trust or other association (other than the Excess Shares Trust),
(i) any Person or entity directly or indirectly through one or more
intermediaries controlling, controlled by, or under common control with another
Person or entity; (ii) any Person or entity, directly or indirectly owning,
controlling, or holding with power to vote ten percent (10%) or more of the
outstanding voting securities of another Person or entity; (iii) any officer,
director, partner or trustee of such Person or entity; (iv) any Person ten
percent (10%) or more of whose outstanding voting securities are directly or
indirectly owned, controlled or held, with power to vote, by such other Person;
and (v) if such other Person or entity is an officer, director, partner, or
trustee of a Person or entity, the Person or entity for which such Person or
entity acts in any such capacity.
"Asset Management Fee" means the fee payable to the Advisor for
day-to-day professional management services in connection with the Company and
its investments in Properties, and Mortgage Loans pursuant to the Advisory
Agreement.
"Assets" means Properties, Mortgage Loans and Secured Equipment Leases,
collectively.
"Average Invested Assets" means, for a specified period, the average of
the aggregate book value of the assets of the Company invested, directly or
indirectly, in equity interests in and loans secured by real estate before
reserves for depreciation or bad debts or other similar non-cash reserves,
computed by taking the average of such values at the end of each month during
such period.
"Bylaws" means the bylaws of the Company, as the same are in effect
from time to time.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or any successor statute thereto. Reference to any provision of the Code
shall mean such provision as in effect from time to time, as the same may be
amended, and any successor provision thereto, as interpreted by any applicable
regulations as in effect from time to time.
"Company Property" means any and all property, real, personal or
otherwise, tangible or intangible, including Secured Equipment Leases and
Mortgage Loans, which is transferred or conveyed to the Company (including all
rents, income, profits and gains therefrom), which is owned or held by, or for
the account of, the Company.
-3-
<PAGE>
"Competitive Real Estate Commission" means a real estate or brokerage
commission for the purchase or sale of property which is reasonable, customary,
and competitive in light of the size, type, and location of the property. The
total of all real estate commissions paid by the Company to all Persons
(including the subordinated real estate disposition fee payable to the Advisor)
in connection with any Sale of one or more of the Company's Properties shall not
exceed the lesser of (i) a Competitive Real Estate Commission or (ii) six
percent (6%) of the gross sales price of the Property or Properties.
"Construction Fee" means a fee or other remuneration for acting as a
general contractor and/or construction manager to construct improvements,
supervise and coordinate projects or provide major repairs or rehabilitation on
a Property.
"Development Fee" means a fee for such activities as negotiating and
approving plans and undertaking to assist in obtaining zoning and necessary
variances and necessary financing for a specific Property, either initially or
at a later date.
"Directors," "Board of Directors" or "Board" means, collectively, the
individuals named in Section 2.4 of these Amended and Restated Articles of
Incorporation so long as they continue in office and all other individuals who
have been duly elected and qualify as Directors of the Company hereunder.
"Distributions" means any distributions of money or other property,
pursuant to Section 7.2(iv) hereof, by the Company to owners of Shares,
including distributions that may constitute a return of capital for federal
income tax purposes. The Company will make no distributions other than
distributions of money or readily marketable securities unless the requirements
of Section 7.2(iv) hereof are satisfied.
"Equipment" shall mean the furniture, fixtures and equipment used at
Health Care Facilities by operators of Health Care Facilities.
"Equity Shares" means transferable shares of beneficial interest of the
Company of any class or series, including Common Shares or Preferred Shares.
"Gross Proceeds" means the aggregate purchase price of all Shares sold
for the account of the Company, without deduction for Selling Commissions,
volume discounts, the marketing support and due diligence expense reimbursement
fee or Organizational and Offering Expenses. For the purpose of computing Gross
Proceeds, the purchase price of any Share for which reduced Selling Commissions
are paid to the Managing Dealer or a Soliciting Dealer (where net proceeds to
the Company are not reduced) shall be deemed to be $10.00.
"Health Care Facilities" means facilities at which health care services
are provided, including, but not limited to, congregate living, assisted living,
and skilled nursing facilities, continuing care retirement communities and life
care communities, and medical office buildings and walk-in clinics.
-4-
<PAGE>
"Independent Director" means a Director who is not, and within the last
two (2) years has not been, directly or indirectly associated with the Advisor
by virtue of (i) ownership of an interest in the Advisor or its Affiliates, (ii)
employment by the Advisor or its Affiliates, (iii) service as an officer or
director of the Advisor or its Affiliates, (iv) performance of services, other
than as a Director, for the Company, (v) service as a director or trustee of
more than three (3) real estate investment trusts advised by the Advisor, or
(vi) maintenance of a material business or professional relationship with the
Advisor or any of its Affiliates. An indirect relationship shall include
circumstances in which a Director's spouse, parents, children, siblings,
mothers- or fathers-in-law, sons- or daughters-in-law or brothers- or
sisters-in-law is or has been associated with the Advisor, any of its Affiliates
or the Company. A business or professional relationship is considered material
if the gross revenue derived by the Director from the Advisor and Affiliates
exceeds five percent (5%) of either the Director's annual gross revenue during
either of the last two (2) years or the Director's net worth on a fair market
value basis.
"Independent Expert" means a Person or entity with no material current
or prior business or personal relationship with the Advisor or the Directors and
who is engaged to a substantial extent in the business of rendering opinions
regarding the value of assets of the type held by the Company.
"Initial Public Offering" means the offering and sale of Equity Shares
of the Company pursuant to the Company's first effective registration statement
covering such Common Shares filed under the Securities Act of 1933, as amended.
"Invested Capital" means the amount calculated by multiplying the total
number of Shares purchased by Stockholders by the issue price, reduced by the
portion of any Distribution that is attributable to Net Sales Proceeds and by
any amounts paid by the Company to repurchase Shares pursuant to the Company's
plan for redemption of Shares.
"Joint Ventures" means those joint venture or general partnership
arrangements in which the Company is a co-venturer or general partner which are
established to acquire Properties.
"Leverage" means the aggregate amount of indebtedness of the Company
for money borrowed (including purchase money mortgage loans) outstanding at any
time, both secured and unsecured.
"Line of Credit" means a line of credit initially in an amount up to
$45,000,000, the proceeds of which will be used to acquire Properties and make
Mortgage Loans and Secured Equipment Leases.
"Listing" means the listing of the Shares of the Company on a national
securities exchange or over-the-counter market.
-5-
<PAGE>
"Managing Dealer" means CNL Securities Corp., an Affiliate of the
Advisor, or such other Person or entity selected by the Board of Directors to
act as the managing dealer for the offering. CNL Securities Corp. is a member of
the National Association of Securities Dealers, Inc.
"MGCL" means the Maryland General Corporation Law as contained in the
Corporations and Associations Article of the Annotated Code of Maryland.
"Mortgage Loans" means, in connection with mortgage financing provided
by the Company, notes or other evidences of indebtedness or obligations which
are secured or collateralized by real estate owned by the borrowers.
"Mortgages" means mortgages, deeds of trust or other security interests
on or applicable to Real Property.
"NASAA REIT Guidelines" means the guidelines for Real Estate Investment
Trusts published by the North American Securities Administrators Association.
"Net Assets" means the total assets of the Company (other than
intangibles), at cost, before deducting depreciation or other non-cash reserves,
less total liabilities, calculated quarterly by the Company on a basis
consistently applied.
"Net Income" means for any period, the total revenues applicable to
such period, less the total expenses applicable to such period excluding
additions to reserves for depreciation, bad debts or other similar non-cash
reserves; provided, however, Net Income for purposes of calculating total
allowable Operating Expenses shall exclude the gain from the sale of the
Company's assets.
"Net Sales Proceeds" means in the case of a transaction described in
clause (i)(A) of the definition of Sale, the proceeds of any such transaction
less the amount of all real estate commissions and closing costs paid by the
Company. In the case of a transaction described in clause (i)(B) of such
definition, Net Sales Proceeds means the proceeds of any such transaction less
the amount of any legal and other selling expenses incurred in connection with
such transaction. In the case of a transaction described in clause (i)(C) of
such definition, Net Sales Proceeds means the proceeds of any such transaction
actually distributed to the Company from the Joint Venture. In the case of a
transaction or series of transactions described in clause (i)(D) of the
Definition of Sale, Net Sales Proceeds means the proceeds of any such
transaction less the amount of all commissions and closing costs paid by the
Company. In the case of a transaction described in clause (ii) of the definition
of Sale, Net Sales Proceeds means the proceeds of such transaction or series of
transactions less all amounts generated thereby and reinvested in one or more
Properties within one hundred eighty (180) days thereafter and less the amount
of any real estate commissions, closing costs, and legal and other selling
expenses incurred by or allocated to the Company in connection with such
transaction or series of transactions. Net Sales Proceeds shall also include, in
the case of any lease of a Property consisting of a building only, any Mortgage
Loan or any Secured Equipment Lease, any amounts
-6-
<PAGE>
from tenants, borrowers or lessees that the Company determines, in its
discretion, to be economically equivalent to the proceeds of a Sale. Net Sales
Proceeds shall not include, as determined by the Company in its sole discretion,
any amounts reinvested in one or more Properties, Mortgage Loans, Secured
Equipment Leases or other assets, to repay outstanding indebtedness, or to
establish reserves.
"Operating Expenses" mean all costs and expenses incurred by the
Company, as determined under generally accepted accounting principles, which in
any way are related to the operation of the Company or to Company business,
including (a) advisory fees, (b) the Asset Management Fee, (c) the Performance
Fee, and (d) the Subordinated Incentive Fee, but excluding (i) the expenses of
raising capital such as Organizational and Offering Expenses, legal, audit,
accounting, underwriting, brokerage, listing, registration, and other fees,
printing and other such expenses and tax incurred in connection with the
issuance, distribution, transfer, registration and Listing of the Shares, (ii)
interest payments, (iii) taxes, (iv) non-cash expenditures such as depreciation,
amortization and bad debt reserves, (v) the Advisor's subordinated ten percent
(10%) share of Net Sales Proceeds, and (vi) Acquisition Fees and Acquisition
Expenses, real estate commissions on the Sale of property, and other expenses
connected with the acquisition and ownership of real estate interests, mortgage
loans, or other property (such as the costs of foreclosure, insurance premiums,
legal services, maintenance, repair, and improvement of property).
"Organizational and Offering Expenses" means any and all costs and
expenses, other than Selling Commissions, the Soliciting Dealer Warrants and the
0.5% marketing support and due diligence expense reimbursement fee incurred by
the Company, the Advisor or any Affiliate of either in connection with the
formation, qualification and registration of the Company and the marketing and
distribution of Shares, including, without limitation, the following: legal,
accounting and escrow fees; printing, amending, supplementing, mailing and
distributing costs; filing, registration and qualification fees and taxes;
telegraph and telephone costs; and all advertising and marketing expenses,
including the costs related to investor and broker-dealer sales meetings. The
Organizational and Offering Expenses paid by the Company in connection with
formation of the Company, together with all Selling Commissions, the Soliciting
Dealer Warrants and the 0.5% marketing support and due diligence reimbursement
fee incurred by the Company, will not exceed thirteen percent (13%) of the
proceeds raised in connection with such offering.
"Performance Fee" means the fee payable to the Advisor under certain
circumstances if certain performance standards have been met and the
Subordinated Incentive Fee has not been paid.
"Permanent Financing" means financing (i) to acquire Assets, (ii) to
pay the Secured Equipment Lease Servicing Fee, (iii) to pay a fee of 4.5% of any
Permanent Financing, excluding amounts to fund Secured Equipment Leases, as
Acquisition Fees, and (iv) refinance outstanding amounts on the Line of Credit.
-7-
<PAGE>
"Person" means an individual, corporation, partnership, estate, trust
(including a trust qualified under Section 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, or any government or any agency or political subdivision
thereof, and also includes a group as that term is used for purposes of Section
13(d)(3) of the Securities Exchange Act of 1934, as amended, but does not
include (i) an underwriter that participates in a public offering of Equity
Shares for a period of sixty (60) days following the initial purchase by such
underwriter of such Equity Shares in such public offering, or (ii) CNL Health
Care Advisors, Inc., during the period ending December 31, 1998, provided that
the foregoing exclusions shall apply only if the ownership of such Equity Shares
by an underwriter or CNL Health Care Advisors, Inc. would not cause the Company
to fail to qualify as a REIT by reason of being "closely held" within the
meaning of Section 856(a) of the Code or otherwise cause the Company to fail to
qualify as a REIT.
"Property" or "Properties" means (i) the real properties, including the
buildings located thereon, (ii) the real properties only, or (iii) the buildings
only, which are acquired by the Company, either directly or through joint
venture arrangements or other partnerships.
"Prospectus" means the same as that term is defined in Section 2(10) of
the Securities Act of 1933, including a preliminary prospectus, an offering
circular as described in Rule 256 of the General Rules and Regulations under the
Securities Act of 1933 or, in the case of an intrastate offering, any document
by whatever name known, utilized for the purpose of offering and selling
securities to the public.
"Real Estate Asset Value" or "Contract Purchase Price" means the amount
actually paid or allocated to the purchase, development, construction or
improvement of a Property, exclusive of Acquisition Fees and Acquisition
Expenses.
"Real Property" or "Real Estate" means land, rights in land (including
leasehold interests), and any buildings, structures, improvements, furnishings,
fixtures and equipment located on or used in connection with land and rights or
interests in land.
"REIT" means real estate investment trust as defined pursuant to
Sections 856 through 860 of the Code.
"REIT Provisions of the Code" means Sections 856 through 860 of the
Code and any successor or other provisions of the Code relating to real estate
investment trusts (including provisions as to the attribution of ownership of
beneficial interests therein) and the regulations promulgated thereunder.
"Roll-Up Entity" means a partnership, real estate investment trust,
corporation, trust or similar entity that would be created or would survive
after the successful completion of a proposed Roll-Up Transaction.
-8-
<PAGE>
"Roll-Up Transaction" means a transaction involving the acquisition,
merger, conversion, or consolidation, directly or indirectly, of the Company and
the issuance of securities of a Roll- Up Entity. Such term does not include: (i)
a transaction involving securities of the Company that have been listed on a
national securities exchange or included for quotation on the National Market
System of the National Association of Securities Dealers Automated Quotation
System for at least 12 months; or (ii) a transaction involving the conversion to
corporate, trust, or association form of only the Company if, as a consequence
of the transaction, there will be no significant adverse change in Stockholder
voting rights, the term of existence of the Company, compensation to the Advisor
or the investment objectives of the Company.
"Sale" or "Sales" (i) means any transaction or series of transactions
whereby: (A) the Company sells, grants, transfers, conveys or relinquishes its
ownership of any Property or portion thereof, including the lease of any
Property consisting of the building only, and including any event with respect
to any Property which gives rise to a significant amount of insurance proceeds
or condemnation awards; (B) the Company sells, grants, transfers, conveys or
relinquishes its ownership of all or substantially all of the interest of the
Company in any Joint Venture in which it is a co-venturer or partner; (C) any
Joint Venture in which the Company as a co-venturer or partner sells, grants,
transfers, conveys or relinquishes its ownership of any Property or portion
thereof, including any event with respect to any Property which gives rise to
insurance claims or condemnation awards; or (D) the Company sells, grants,
conveys, or relinquishes its interest in any Mortgage Loan, Secured Equipment
Lease, or other asset, or portion thereof, including any event with respect to
any Mortgage Loan, Secured Equipment Lease or other asset which gives rise to a
significant amount of insurance proceeds or similar awards, but (ii) shall not
include any transaction or series of transactions specified in clause (i)(A),
(i)(B), or (i)(C) above in which the proceeds of such transaction or series of
transactions are reinvested in one or more Properties within one hundred eighty
(180) days thereafter.
"Secured Equipment Leases" means the Equipment financing made available
by the Company to operators of Health Care Facilities pursuant to which the
Company will finance, through loans or direct financing leases, the Equipment.
"Secured Equipment Lease Servicing Fee" means the fee payable to the
Advisor by the Company out of the proceeds of the Line of Credit or Permanent
Financing for negotiating Secured Equipment Leases and supervising the Secured
Equipment Lease program equal to 2% of the purchase price of the Equipment
subject to each Secured Equipment Lease and paid upon entering into such lease
or loan.
"Securities" means Equity Shares, Excess Shares, any other stock,
shares or other evidences of equity or beneficial or other interests, voting
trust certificates, bonds, debentures, notes or other evidences of indebtedness,
secured or unsecured, convertible, subordinated or otherwise, or in general any
instruments commonly known as "securities" or any certificates of interest,
shares or participations in, temporary or interim certificates for, receipts
for, guarantees of, or warrants, options or rights to subscribe to, purchase or
acquire, any of the foregoing.
-9-
<PAGE>
"Selling Commissions" means any and all commissions payable to
underwriters, managing dealers, or other broker-dealers in connection with the
sale of Shares, including, without limitation, commissions payable to CNL
Securities Corp.
"Shares" means the Common Shares, as such term is defined in Section
7.2 hereof.
"Soliciting Dealers" means those broker-dealers that are members of the
National Association of Securities Dealers, Inc., or that are exempt from
broker-dealer registration, and that, in either case, enter into participating
broker or other agreements with the Managing Dealer to sell Shares.
"Sponsor" means any Person directly or indirectly instrumental in
organizing, wholly or in part, the Company or any Person who will control,
manage or participate in the management of the Company, and any Affiliate of
such Person. Not included is any Person whose only relationship with the Company
is that of an independent property manager of Company assets, and whose only
compensation is as such. Sponsor does not include wholly independent third
parties such as attorneys, accountants, and underwriters whose only compensation
is for professional services. A Person may also be deemed a Sponsor of the
Company by:
a. taking the initiative, directly or indirectly, in founding or
organizing the business or enterprise of the Company, either
alone or in conjunction with one or more other Persons;
b. receiving a material participation in the Company in
connection with the founding or organizing of the business of
the Company, in consideration of services or property, or both
services and property;
c. having a substantial number of relationships and contacts with
the Company;
d. possessing significant rights to control Company properties;
e. receiving fees for providing services to the Company which are
paid on a basis that is not customary in the industry; or
f. providing goods or services to the Company on a basis which
was not negotiated at arms length with the Company.
"Stock Option Plan" means a plan that provides for the matters set
forth in Rule 260.140.41 of Section 25140 of the Corporations Code of
California, as in effect as of the date of these Articles of Incorporation.
"Stockholders' 8% Return," as of each date, means an aggregate amount
equal to an eight percent (8%) cumulative, noncompounded, annual return on
Invested Capital.
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"Stockholders" means the registered holders of the Company's Equity
Shares.
"Subordinated Incentive Fee" means the fee payable to the Advisor under
certain circumstances if the Shares are listed on a national securities exchange
or over-the-counter market.
"Successor" means any successor in interest of the Company.
"Termination Date" means the date of termination of the Advisory
Agreement.
"Total Proceeds" means Gross Proceeds plus loan proceeds from Permanent
Financing and amounts outstanding on the Line of Credit, if any, at the time of
Listing, but excluding loan proceeds used to finance Secured Equipment Leases.
"Unimproved Real Property" means Property in which the Company has an
equity interest that is not acquired for the purpose of producing rental or
other operating income, that has no development or construction in process and
for which no development or construction is planned, in good faith, to commence
within one year.
ARTICLE 2
BOARD OF DIRECTORS
SECTION 2.1 Number. The number of Directors initially shall be five
(5), which number may be increased or decreased from time to time by resolution
of the Directors then in office or by a majority vote of the Stockholders
entitled to vote: provided, however, that the total number of Directors shall be
not fewer than three (3) and not more than fifteen (15), subject to the Bylaws
and to any express rights of any holders of any series of Preferred Shares to
elect additional directors under specified circumstances. A majority of the
Board of Directors will be Independent Directors except for a period of 90 days
after the death, removal or resignation of an Independent Director. Independent
Directors shall nominate replacements for vacancies in the Independent Director
positions. No reduction in the number of Directors shall cause the removal of
any Director from office prior to the expiration of his term. Any vacancy
created by an increase in the number of Directors will be filled, at any regular
meeting or at any special meeting of the Directors called for that purpose, by a
majority of the Directors. Any other vacancy will be filled at any annual
meeting or at any special meeting of the Stockholders called for that purpose,
by a majority of the Common Shares present in person or by proxy and entitled to
vote. For the purposes of voting for Directors, each Share of stock may be voted
for as many individuals as there are directors to be elected and for whose
election the Share is entitled to be voted, or as may otherwise be required by
the MGCL or other applicable law as in effect from time to time.
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SECTION 2.2 Experience. A Director shall have had at least three (3)
years of relevant experience demonstrating the knowledge and experience required
to successfully acquire and manage the type of assets being acquired by the
Company. At least one of the Independent Directors shall have three (3) years of
relevant real estate experience.
SECTION 2.3 Committees. Subject to the MGCL, the Directors may
establish such committees as they deem appropriate, in their discretion,
provided that the majority of the members of each committee are Independent
Directors.
SECTION 2.4 Initial Board; Term. The initial Directors are James M.
Seneff, Jr., Robert A. Bourne, David W. Dunbar, Timothy S. Smick and Edward A.
Moses. Each Director shall hold office for one (1) year, until the next annual
meeting of Stockholders and until his successor shall have been duly elected and
shall have qualified. Directors may be elected to an unlimited number of
successive terms.
The names and address of the initial Directors are as follows:
Name Address
---- -------
James M. Seneff, Jr. 400 E. South Street
Orlando, Florida 32801
Robert A. Bourne 400 E. South Street
Orlando, Florida 32801
David W. Dunbar 400 E. South Street
Orlando, Florida 32801
Timothy S. Smick 400 E. South Street
Orlando, Florida 32801
Edward A. Moses 400 E. South Street
Orlando, Florida 32801
SECTION 2.5 Fiduciary Obligations. The Directors serve in a fiduciary
capacity to the Company and have a fiduciary duty to the Stockholders of the
Company, including a specific fiduciary duty to supervise the relationship of
the Company with the Advisor.
SECTION 2.6 Approval by Independent Directors. A majority of
Independent Directors must approve all matters to which Sections 2.1, 3.2(vii)
and (xii), 3.3, 4.1, 4.2, 4.6, 4.7, 4.8, 4.10, 4.13, 5.2, 5.4 and (xvi), 6.3,
6.4, 8.1, 8.2, 9.2 and 9.4 herein apply.
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SECTION 2.7 Resignation, Removal or Death. Any Director may resign by
written notice to the Board of Directors, effective upon execution and delivery
to the Company of such written notice or upon any future date specified in the
notice. A Director may be removed from office with or without cause only at a
meeting of the Stockholders called for that purpose, by the affirmative vote of
the holders of not less than a majority of the Equity Shares then outstanding
and entitled to vote, subject to the rights of any Preferred Shares to vote for
such Directors. The notice of such meeting shall indicate that the purpose, or
one of the purposes, of such meeting is to determine if a Director should be
removed.
SECTION 2.8 Business Combination Statute. Notwithstanding any other
provision of these Articles of Incorporation or any contrary provision of law,
the Maryland Business Combination Statute, found in Title 3, subtitle 6 of the
MGCL, as amended from time to time, or any successor statute thereto, shall not
apply to any "business combination" (as defined in Section 3-601(e) of the MGCL,
as amended from time to time, or any successor statute thereto) of the Company
and any Person.
SECTION 2.9 Control Share Acquisition Statute. Notwithstanding any
other provision of these Articles of Incorporation or any contrary provision of
law, the Maryland Control Share Acquisition Statute, found in Title 3, subtitle
7 of the MGCL, as amended from time to time, or any successor statute thereto
shall not apply to any acquisition of Securities of the Company by any Person.
ARTICLE 3
POWERS OF DIRECTORS
SECTION 3.1 General. Subject to the express limitations herein or in
the Bylaws and to the general standard of care required of directors under the
MGCL and other applicable law, (i) the business and affairs of the Company shall
be managed under the direction of the Board of Directors and (ii) the Directors
shall have full, exclusive and absolute power, control and authority over the
Company Property and over the business of the Company as if they, in their own
right, were the sole owners thereof, except as otherwise limited by these
Articles of Incorporation. The Directors have established the written policies
on investments and borrowing set forth in this Article III and Article V hereof
and shall monitor the administrative procedures, investment operations and
performance of the Company and the Advisor to assure that such policies are
carried out. The Directors may take any actions that, in their sole judgment and
discretion, are necessary or desirable to conduct the business of the Company. A
majority of the Board of Directors, including a majority of Independent
Directors, hereby ratify these Articles of Incorporation, which shall be
construed with a presumption in favor of the grant of power and authority to the
Directors. Any construction of these Articles of Incorporation or determination
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made in good faith by the Directors concerning their powers and authority
hereunder shall be conclusive. The enumeration and definition of particular
powers of the Directors included in this Article III shall in no way be limited
or restricted by reference to or inference from the terms of this or any other
provision of these Articles of Incorporation or construed or deemed by inference
or otherwise in any manner to exclude or limit the powers conferred upon the
Directors under the general laws of the State of Maryland as now or hereafter in
force.
SECTION 3.2 Specific Powers and Authority. Subject only to the express
limitations herein, and in addition to all other powers and authority conferred
by these Articles of Incorporation or by law, the Directors, without any vote,
action or consent by the Stockholders, shall have and may exercise, at any time
or times, in the name of the Company or on its behalf the following powers and
authorities:
(i) Investments. Subject to Article V and Section 9.5 hereof,
to invest in, purchase or otherwise acquire and to hold real, personal or mixed,
tangible or intangible, property of any kind wherever located, or rights or
interests therein or in connection therewith, all without regard to whether such
property, interests or rights are authorized by law for the investment of funds
held by trustees or other fiduciaries, or whether obligations the Company
acquires have a term greater or lesser than the term of office of the Directors
or the possible termination of the Company, for such consideration as the
Directors may deem proper (including cash, property of any kind or Securities of
the Company); provided, however, that the Directors shall take such actions as
they deem necessary and desirable to comply with any requirements of the MGCL
relating to the types of assets held by the Company.
(ii) REIT Qualification. The Board of Directors shall use its
best efforts to cause the Company and its Stockholders to qualify for U.S.
federal income tax treatment in accordance with the provisions of the Code
applicable to REITs (as those terms are defined in Section 1.5 hereof). In
furtherance of the foregoing, the Board of Directors shall use its best efforts
to take such actions as are necessary, and may take such actions as it deems
desirable (in its sole discretion) to preserve the status of the Company as a
REIT; provided, however, that in the event that the Board of Directors
determines, by vote of at least two-thirds (2/3) of the Directors, that it no
longer is in the best interests of the Company to qualify as a REIT, the Board
of Directors shall take such actions as are required by the Code, the MGCL and
other applicable law, to cause the matter of termination of qualification as a
REIT to be submitted to a vote of the Stockholders of the Company pursuant to
Section 8.2.
(iii) Sale, Disposition and Use of Company Property. Subject
to Article V and Sections 9.5 and 10.3 hereof, the Board of Directors shall have
the authority to sell, rent, lease, hire, exchange, release, partition, assign,
mortgage, grant security interests in, encumber, negotiate, dedicate, grant
easements in and options with respect to, convey, transfer (including transfers
to entities wholly or partially owned by the Company or the Directors) or
otherwise dispose of any or all of the Company Property by deeds (including
deeds in lieu of foreclosure with or without consideration), trust deeds,
assignments, bills of sale, transfers, leases, mortgages, financing statements,
security agreements and other instruments for any of such purposes executed
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and delivered for and on behalf of the Company or the Directors by one or more
of the Directors or by a duly authorized officer, employee, agent or nominee of
the Company, on such terms as they deem appropriate; to give consents and make
contracts relating to the Company Property and its use or other property or
matters; to develop, improve, manage, use, alter or otherwise deal with the
Company Property; and to rent, lease or hire from others property of any kind;
provided, however, that the Company may not use or apply land for any purposes
not permitted by applicable law.
(iv) Financings. To borrow or, in any other manner, raise
money for the purposes and on the terms they determine, which terms may (i)
include evidencing the same by issuance of Securities of the Company and (ii)
may have such provisions as the Directors determine; to reacquire such
Securities of the Excess Shares Trust; to enter into other contracts or
obligations on behalf of the Excess Shares Trust; to guarantee, indemnify or act
as surety with respect to payment or performance of obligations of any Person;
to mortgage, pledge, assign, grant security interests in or otherwise encumber
the Company Property to secure any such Securities of the Company, contracts or
obligations (including guarantees, indemnifications and suretyships); and to
renew, modify, release, compromise, extend, consolidate or cancel, in whole or
in part, any obligation to or of the Company or participate in any
reorganization of obligors to the Company; provided, however, that the Company's
Leverage, may not exceed 300% of Net Assets.
(v) Lending. Subject to the provisions of Section 9.5 hereof,
to lend money or other Company Property on such terms, for such purposes and to
such Persons as they may determine.
(vi) Secured Equipment Leases. To engage in the business of
offering furniture, fixture, and equipment financing to the operators of Health
Care Facilities, provided, however, that the Company shall use its best efforts
to ensure that the total value of Secured Equipment Leases, in the aggregate
will not exceed 25% of the Company's total assets and that Secured Equipment
Leases to a single lessee or borrower, in the aggregate, will not exceed 5% of
the Company's total assets.
(vii) Issuance of Securities. Subject to the provisions of
Article VII hereof, to create and authorize and direct the issuance (on either a
pro rata or a non-pro rata basis) by the Company, in shares, units or amounts of
one or more types, series or classes, of Securities of the Company, which may
have such voting rights, dividend or interest rates, preferences,
subordinations, conversion or redemption prices or rights; maturity dates,
distribution, exchange, or liquidation rights or other rights as the Directors
may determine, without vote of or other action by the Stockholders, to such
Persons for such consideration, at such time or times and in such manner and on
such terms as the Directors determine, to list any of the Securities of the
Company on any securities exchange; and to purchase or otherwise acquire, hold,
cancel, reissue, sell and transfer any Securities of the Company.
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(viii) Expenses and Taxes. To pay any charges, expenses or
liabilities necessary or desirable, in the sole discretion of the Directors, for
carrying out the purposes of these Articles of Incorporation and conducting
business of the Company, including compensation or fees to Directors, officers,
employees and agents of the Company, and to Persons contracting with the
Company, and any taxes, levies, charges and assessments of any kind imposed upon
or chargeable against the Company, the Company Property or the Directors in
connection therewith; and to prepare and file any tax returns, reports or other
documents and take any other appropriate action relating to the payment of any
such charges, expenses or liabilities.
(ix) Collection and Enforcement. To collect, sue for and
receive money or other property due to the Company; to consent to extensions of
the time for payment, or to the renewal, of any Securities or obligations; to
engage or to intervene in, prosecute, defend, compound, enforce, compromise,
release, abandon or adjust any actions, suits, proceedings, disputes, claims,
demands, security interests or things relating to the Company, the Company
Property or the Company's affairs; to exercise any rights and enter into any
agreements and take any other action necessary or desirable in connection with
the foregoing.
(x) Deposits. To deposit funds or Securities constituting part
of the Company Property in banks, trust companies, savings and loan
associations, financial institutions and other depositories, whether or not such
deposits will draw interest, subject to withdrawal on such terms and in such
manner as the Directors determine.
(xi) Allocation; Accounts. To determine whether moneys,
profits or other assets of the Company shall be charged or credited to, or
allocated between, income and capital, including whether or not to amortize any
premium or discount and to determine in what manner any expenses or
disbursements are to be borne as between income and capital (regardless of how
such items would normally or otherwise be charged to or allocated between income
and capital without such determination); to treat any dividend or other
distribution on any investment as, or apportion it between, income and capital;
in their discretion to provide reserves for depreciation, amortization,
obsolescence or other purposes in respect of any Company Property in such
amounts and by such methods as they determine; to determine what constitutes net
earnings, profits or surplus; to determine the method or form in which the
accounts and records of the Company shall be maintained; and to allocate to the
Stockholders' equity account less than all of the consideration paid for
Securities and to allocate the balance to paid-in capital or capital surplus.
(xii) Valuation of Property. To determine the value of all or
any part of the Company Property and of any services, Securities, property or
other consideration to be furnished to or acquired by the Company, and to
revalue all or any part of the Company Property, all in accordance with such
appraisals or other information as are reasonable, in their sole judgment.
(xiii) Ownership and Voting Powers. To exercise all of the
rights, powers, options and privileges pertaining to the ownership of any
Mortgages, Securities, Real Estate, Secured Equipment Leases and other Company
Property to the same extent that an individual
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owner might, including without limitation to vote or give any consent, request
or notice or waive any notice, either in person or by proxy or power of
attorney, which proxies and powers of attorney may be for any general or special
meetings or action, and may include the exercise of discretionary powers.
(xiv) Officers, Etc.; Delegation of Powers. To elect, appoint
or employ such officers for the Company and such committees of the Board of
Directors with such powers and duties as the Directors may determine, the
Company's Bylaws provide or the MGCL requires; to engage, employ or contract
with and pay compensation to any Person (including subject to Section 9.5
hereof, any Director and Person who is an Affiliate of any Director) as agent,
representative, Advisor, member of an advisory board, employee or independent
contractor (including advisors, consultants, transfer agents, registrars,
underwriters, accountants, attorneys-at-law, real estate agents, property and
other managers, appraisers, brokers, architects, engineers, construction
managers, general contractors or otherwise) in one or more capacities, to
perform such services on such terms as the Directors may determine; to delegate
to one or more Directors, officers or other Persons engaged or employed as
aforesaid or to committees of Directors or to the Advisor, the performance of
acts or other things (including granting of consents), the making of decisions
and the execution of such deeds, contracts, leases or other instruments, either
in the names of the Company, the Directors or as their attorneys or otherwise,
as the Directors may determine; and to establish such committees as they deem
appropriate.
(xv) Associations. Subject to Section 9.5 hereof, to cause the
Company to enter into joint ventures, general or limited partnerships,
participation or agency arrangements or any other lawful combinations,
relationships or associations of any kind.
(xvi) Reorganizations, Etc. Subject to Sections 10.2 and 10.3
hereof, to cause to be organized or assist in organizing any Person under the
laws of any jurisdiction to acquire all or any part of the Company Property,
carry on any business in which the Company shall have an interest or otherwise
exercise the powers the Directors deem necessary, useful or desirable to carry
on the business of the Company or to carry out the provisions of these Articles
of Incorporation, to merge or consolidate the Company with any Person; to sell,
rent, lease, hire, convey, negotiate, assign, exchange or transfer all or any
part of the Company Property to or with any Person in exchange for Securities of
such Person or otherwise; and to lend money to, subscribe for and purchase the
Securities of, and enter into any contracts with, any Person in which the
Company holds, or is about to acquire, Securities or any other interests.
(xvii) Insurance. To purchase and pay for out of Company
Property insurance policies insuring the Stockholders, Company and the Company
Property against any and all risks, and insuring the Directors, Advisors and
Affiliates of the Company individually (each an "Insured") against all claims
and liabilities of every nature arising by reason of holding or having held any
such status, office or position or by reason of any action alleged to have been
taken or omitted by the Insured in such capacity, whether or not the Company
would have the power to indemnify against such claim or liability, provided that
such insurance be limited to the indemnification permitted by Section 9.2 hereof
in regard to any liability or loss resulting from
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negligence, gross negligence, misconduct, willful misconduct or an alleged
violation of federal or state securities laws. Nothing contained herein shall
preclude the Company from purchasing and paying for such types of insurance,
including extended coverage liability and casualty and workers' compensation, as
would be customary for any Person owning comparable assets and engaged in a
similar business, or from naming the Insured as an additional insured party
thereunder, provided that such addition does not add to the premiums payable by
the Company. The Board of Directors' power to purchase and pay for such
insurance policies shall be limited to policies that comply with all applicable
state laws and the NASAA REIT Guidelines.
(xviii) Distributions. To declare and pay dividends or other
Distributions to Stockholders, subject to the provisions of Section 7.2 hereof.
(xix) Discontinue Operations; Bankruptcy. To discontinue the
operations of the Company (subject to Section 10.2 hereof); to petition or apply
for relief under any provision of federal or state bankruptcy, insolvency or
reorganization laws or similar laws for the relief of debtors; to permit any
Company Property to be foreclosed upon without raising any legal or equitable
defenses that may be available to the Company or the Directors or otherwise
defending or responding to such foreclosure; to confess judgment against the
Excess Shares Trust (as hereinafter defined); or to take such other action with
respect to indebtedness or other obligations of the Directors, the Company
Property or the Company as the Directors, in such capacity, and in their
discretion may determine.
(xx) Termination of Status. To terminate the status of the
Company as a real estate investment trust under the REIT Provisions of the Code;
provided, however, that the Board of Directors shall take no action to terminate
the Company's status as a real estate investment trust under the REIT Provisions
of the Code until such time as (i) the Board of Directors adopts a resolution
recommending that the Company terminate its status as a real estate investment
trust under the REIT Provisions of the Code, (ii) the Board of Directors
presents the resolution at an annual or special meeting of the Stockholders and
(iii) such resolution is approved by the holders of a majority of the issued and
outstanding Common Shares (as defined in Section 7.2(ii) hereof).
(xxi) Fiscal Year. Subject to the Code, to adopt, and from
time to time change, a fiscal year for the Company.
(xxii) Seal. To adopt and use a seal, but the use of a seal
shall not be required for the execution of instruments or obligations of the
Company.
(xxiii) Bylaws. To adopt, implement and from time to time
alter, amend or repeal the Bylaws of the Company relating to the business and
organization of the Company, provided that such amendments are not inconsistent
with the provisions of these Articles of Incorporation, and further provided
that the Directors may not amend the Bylaws, without the affirmative vote of a
majority of the Equity Shares, to the extent that such amendments adversely
affect the rights, preferences and privileges of Stockholders.
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(xxiv) Listing Shares. To cause the Listing of the Shares at
any time after completion of the Initial Public Offering but in no event shall
such Listing occur more than ten (10) years after completion of the offering.
(xxv) Further Powers. To do all other acts and things and
execute and deliver all instruments incident to the foregoing powers, and to
exercise all powers which they deem necessary, useful or desirable to carry on
the business of the Company or to carry out the provisions of these Articles of
Incorporation, even if such powers are not specifically provided hereby.
SECTION 3.3 Determination of Best Interest of Company. In determining
what is in the best interest of the Company, a Director shall consider the
interests of the Stockholders of the Company and, in his or her sole and
absolute discretion, may consider (i) the interests of the Company's employees,
suppliers, creditors and customers, (ii) the economy of the nation, (iii)
community and societal interests, and (iv) the long-term as well as short-term
interests of the Company and its Stockholders, including the possibility that
these interests may be best served by the continued independence of the Company.
ARTICLE 4
ADVISOR
SECTION 4.1 Appointment and Initial Investment of Advisor. The
Directors are responsible for setting the general policies of the Company and
for the general supervision of its business conducted by officers, agents,
employees, advisors or independent contractors of the Company. However, the
Directors are not required personally to conduct the business of the Company,
and they may (but need not) appoint, employ or contract with any Person
(including a Person Affiliated with any Director) as an Advisor and may grant or
delegate such authority to the Advisor as the Directors may, in their sole
discretion, deem necessary or desirable. The term of retention of any Advisor
shall not exceed one (1) year, although there is no limit to the number of times
that a particular Advisor may be retained. The Advisor is the holder of 20,000
Shares, representing an initial investment of $200,000. The Advisor or any
Affiliate may not sell this initial investment while the Advisor remains a
Sponsor but may transfer the 20,000 Shares to other Affiliates.
SECTION 4.2 Supervision of Advisor. The Directors shall evaluate the
performance of the Advisor before entering into or renewing an advisory contract
and the criteria used in such evaluation shall be reflected in the minutes of
meetings of the Board. The Directors may exercise broad discretion in allowing
the Advisor to administer and regulate the operations of the Company, to act as
agent for the Company, to execute documents on behalf of the Company and to make
executive decisions which conform to general policies and principles established
by the Directors.
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The Directors shall establish written policies on investments and
borrowing and shall monitor the administrative procedures, investment operations
and performance of the Company and the Advisor to assure that such procedures,
operations and programs are in the best interests of the Stockholders and are
fulfilled.
The Board of Directors is also responsible for reviewing the fees and
expenses of the Company at least annually or with sufficient frequency to
determine that the expenses incurred are in the best interests of the
Stockholders and each such determination shall be reflected in the minutes of
the meeting of the Board of Directors. In addition, a majority of the
Independent Directors and a majority of Directors not otherwise interested in
the transaction must approve each transaction with the Advisor or its
Affiliates. A majority of the Independent Directors also will be responsible for
reviewing the performance of the Advisor and determining that compensation to be
paid to the Advisor is reasonable in relation to the nature and quality of
services to be performed and the investment performance of the Company and that
the provisions of the Advisory Agreement are being carried out and each such
determination shall be reflected in the minutes of the meeting of the Board of
Directors. Specifically, the Independent Directors will consider factors such as
the Net Assets and Net Income of the Company, the amount of the fee paid to the
Advisor in relation to the size, composition and performance of the Company's
portfolio, the success of the Advisor in generating opportunities that meet the
investment objectives of the Company, rates charged to other REITs and to
investors other than REITs by advisors performing the same or similar services,
additional revenues realized by the Advisor and its Affiliates through their
relationship with the Company, whether paid by the Company or by others with
whom the Company does business, the quality and extent of service and advice
furnished by the Advisor, the performance of the investment portfolio of the
Company, including income, conservation or appreciation of capital, frequency of
problem investments and competence in dealing with distress situations, and the
quality of the portfolio of the Company relative to the investments generated by
the Advisor for its own account. The Independent Directors also shall determine
whether any successor Advisor possesses sufficient qualifications to perform the
advisory function for the Company and whether the compensation provided for in
its contract with the Company is justified.
SECTION 4.3 Fiduciary Obligations. The Advisor has a fiduciary
responsibility to the Company and to the Stockholders.
SECTION 4.4 Affiliation and Functions. The Directors, by resolution or
in the Bylaws, may provide guidelines, provisions, or requirements concerning
the affiliation and functions of the Advisor.
SECTION 4.5 Termination. Either a majority of the Independent Directors
or the Advisor may terminate the advisory contract on sixty (60) days' written
notice without cause or penalty, and, in such event, the Advisor will cooperate
with the Company and the Directors in making an orderly transition of the
advisory function.
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SECTION 4.6 Real Estate Commission on Sale of Property. The Company
shall pay the Advisor a deferred, subordinated real estate disposition fee upon
Sale of one or more Properties, in an amount equal to the lesser of (i) one-half
(1/2) of a Competitive Real Estate Commission, or (ii) three percent (3%) of the
sales price of such Property or Properties. Payment of such fee shall be made
only if the Advisor provides a substantial amount of services in connection with
the Sale of a Property or Properties and shall be subordinated to receipt by the
Stockholders of Distributions equal to the sum of (i) their aggregate
Stockholders' 8% Return and (ii) their aggregate Invested Capital. If, at the
time of a Sale, payment of such disposition fee is deferred because the
subordination conditions have not been satisfied, then the disposition fee shall
be paid at such later time as the subordination conditions are satisfied. Upon
Listing, if the Advisor has accrued but not been paid such real estate
disposition fee, then for purposes of determining whether the subordination
conditions have been satisfied, Stockholders will be deemed to have received a
Distribution in the amount equal to the product of the total number of Shares
outstanding and the average closing price of the Shares over a period, beginning
180 days after Listing, of 30 days during which the Shares are traded.
SECTION 4.7 Subordinated Share of Net Sales Proceeds. The Company shall
pay the Advisor a deferred, subordinated share from Sales of assets of the
Company, whether or not in liquidation of the Company, equal to 10% of Net Sales
Proceeds payable after receipt by the Stockholders of Distributions equal to the
sum of (i) the Stockholders' 8% Return and (ii) 100% of Invested Capital.
Following Listing, no share of Net Sales Proceeds will be paid to the Advisor.
SECTION 4.8 Incentive Fees.
(i) At such time, if any, as Listing occurs, the Advisor shall
be paid the Subordinated Incentive Fee in an amount equal to ten percent (10%)
of the amount by which (i) the market value of the Company (as defined below)
plus the total Distributions paid to Stockholders from the Company's inception
until the date of Listing exceeds (ii) the sum of (A) one hundred percent (100%)
of Invested Capital and (B) the total Distributions required to be paid to the
Stockholders in order to pay the Stockholders' 8% Return from inception through
the date the market value is determined. For purposes of calculating the
Subordinated Incentive Fee, the market value of the Company shall be the average
closing price or average of bid and asked price, as the case may be, over a
period of thirty (30) days during which the Shares are traded with such period
beginning one hundred eighty (180) days after Listing. In the case of multiple
Advisors, Advisors and any Affiliate shall be allowed incentive fees provided
such fees are distributed by a proportional method reasonably designed to
reflect the value added to Company assets by each respective Advisor or any
Affiliate. The Subordinated Incentive Fee will be reduced by the amount of any
prior payment to the Advisor of a deferred, subordinated share of Net Sales
Proceeds from Sales of assets of the Company.
(ii) In no event shall the Company pay a single Advisor both
the Subordinated Incentive Fee and the Performance Fee.
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(iii) In the event that the Company becomes a perpetual life
entity, which will occur if the Shares become listed on a national securities
exchange or over-the-counter market, the Company and the Advisor will negotiate
in good faith a fee structure appropriate for an entity with a perpetual life,
subject to approval by a majority of the Independent Directors. In negotiating a
new fee structure, the Independent Directors shall consider all of the factors
they deem relevant. These are expected to include, but will not necessarily be
limited to: (i) the amount of the advisory fee in relation to the asset value,
composition, and profitability of the Company's portfolio; (ii) the success of
the Advisor in generating opportunities that meet the investment objectives of
the Company; (iii) the rates charged to other REITs and to investors other than
REITs by Advisors that perform the same or similar services; (iv) additional
revenues realized by the Advisor and its Affiliates through their relationship
with the Company, including loan administration, underwriting or broker
commissions, servicing, engineering, inspection and other fees, whether paid by
the Company or by others with whom the Company does business; (v) the quality
and extent of service and advice furnished by the Advisor; (vi) the performance
of the investment portfolio of the Company, including income, conservation or
appreciation of capital, and number and frequency of problem investments; and
(vii) the quality of the Property portfolio of the Company in relationship to
the investments generated by the Advisor for its own account. The Board of
Directors, including a majority of the Independent Directors, may not approve a
new fee structure that, in its judgment, is more favorable to the Advisor than
the current fee structure.
SECTION 4.9 Performance Fee. Upon termination of the Advisory
Agreement, the Advisor shall be entitled to receive a Performance Fee if
performance standards satisfactory to a majority of the Board of Directors,
including a majority of the Independent Directors, when compared to (a) the
performance of the Advisor in comparison with its performance for other
entities; and (b) the performance of other advisors for similar entities, have
been met. If Listing has not occurred, the Performance Fee, if any, shall equal
ten percent (10%) of the amount, if any, by which (i) the appraised value of the
assets of the Company on the Termination Date, less the amount of all
indebtedness secured by such assets, plus the total Distributions paid to
Stockholders from the Company's inception through the Termination Date, exceeds
(ii) Invested Capital plus an amount equal to the Stockholders' 8% Return from
inception through the Termination Date. The Advisor shall be entitled to receive
all accrued but unpaid compensation and expense reimbursements in cash within
thirty (30) days of the Termination Date. All other amounts payable to the
Advisor in the event of a termination shall be evidenced by a promissory note
and shall be payable from time to time. The Performance Fee shall be paid in
twelve (12) equal quarterly installments without interest on the unpaid balance,
provided, however, that no payment will be made in any quarter in which such
payment would jeopardize the Company's REIT status, in which case any such
payment or payments will be delayed until the next quarter in which payment
would not jeopardize REIT status. Notwithstanding the preceding sentence, any
amounts which may be deemed payable at the date the obligation to pay the
Performance Fee is incurred which relate to the appreciation of the Company's
assets shall be an amount which provides compensation to the terminated Advisor
only for that portion of the holding period for the respective assets during
which such terminated Advisor provided services to the Company. Upon Listing,
the Performance Fee, if any, payable thereafter will be as negotiated between
the
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Company and the Advisor. The Advisor shall not be entitled to payment of the
Performance Fee in the event the Advisory Agreement is terminated because of
failure of the Company and the Advisor to establish a fee structure appropriate
for a perpetual-life entity at such time, if any, as the Shares become listed on
a national securities exchange or over-the-counter market. The Performance Fee,
to the extent payable at the time of Listing, will not be paid in the event that
the Subordinated Incentive Fee is paid.
SECTION 4.10 Acquisition Fee and Acquisition Expenses. The Company
shall pay the Advisor a fee in the amount of 4.5% of Total Proceeds as
Acquisition Fees. Acquisition Fees shall be reduced to the extent that, and if
necessary to limit, the total compensation paid to all persons involved in the
acquisition of any Property to the amount customarily charged in arms-length
transactions by other persons or entities rendering similar services as an
ongoing public activity in the same geographical location and for comparable
types of Properties, and to the extent that other acquisition fees, finder's
fees, real estate commissions, or other similar fees or commissions are paid by
any person in connection with the transaction. The Company shall reimburse the
Advisor for Acquisition Expenses incurred in connection with the initial
selection and acquisition of Properties, provided that reimbursement shall be
limited to the actual cost of goods and services used by the Company and
obtained from entities not affiliated with the Advisor, or the lesser of the
actual cost or 90% of the competitive rate charged by unaffiliated persons
providing similar goods and services in the same geographic location for goods
or services provided by the Advisor or its Affiliates. The total of all
Acquisition Fees and any Acquisition Expenses shall be reasonable and shall not
exceed an amount equal to six percent (6%) of the Real Estate Asset Value or the
Contract Purchase Price of a Property, or in the case of a Mortgage Loan, six
percent (6%) of the funds advanced, unless a majority of the Board of Directors,
including a majority of the Independent Directors not otherwise interested in
the transaction, approves fees in excess of these limits subject to a
determination that the transaction is commercially competitive, fair and
reasonable to the Company.
SECTION 4.11 Asset Management Fee. The Company shall pay the Advisor a
monthly Asset Management Fee in an amount equal to one-twelfth of .60% of the
Company's Real Estate Asset Value and the outstanding principal amount of any
Mortgage Loans, as of the end of the preceding month. Specifically, Real Estate
Asset Value equals the amount invested in the Properties wholly owned by the
Company, determined on the basis of cost, plus, in the case of Properties owned
by any Joint Venture or partnership in which the Company is a co-venturer or
partner, the portion of the cost of such Properties paid by the Company,
exclusive of Acquisition Fees and Acquisition Expenses. The Asset Management
Fee, which will not exceed fees which are competitive for similar services in
the same geographic area, may or may not be taken, in whole or in part as to any
year, in the sole discretion of the Advisor. All or any portion of the Asset
Management Fee not taken as to any fiscal year shall be deferred without
interest and may be taken in such other fiscal year as the Advisor shall
determine.
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SECTION 4.12 Secured Equipment Lease Servicing Fee. The Company shall
pay the Advisor a fee out of the proceeds of the Line of Credit or Permanent
Financing for negotiating Secured Equipment Leases and supervising the Secured
Equipment Lease program equal to 2% of the purchase price of the Equipment
subject to each Secured Equipment Lease and paid upon entering into such lease
or loan.
SECTION 4.13 Reimbursement for Operating Expenses. The Company shall
not reimburse the Advisor at the end of any fiscal quarter for Operating
Expenses that, in the four consecutive fiscal quarters then ended (the "Expense
Year") exceed the greater of 2% of Average Invested Assets or 25% of Net Income
(the "2%/25% Guidelines") for such year. Within 60 days after the end of any
fiscal quarter of the Company for which total Operating Expenses for the Expense
Year exceed the 2%/25% Guidelines, the Advisor shall reimburse the Company the
amount by which the total Operating Expenses paid or incurred by the Company
exceed the 2%/25% Guidelines.
ARTICLE 5
INVESTMENT OBJECTIVES AND LIMITATIONS
SECTION 5.1 Investment Objectives. The Company's primary investment
objectives are to preserve, protect, and enhance the Company's assets; while (i)
making Distributions commencing in the initial year of Company operations; (ii)
obtaining fixed income through the receipt of base rent, and increasing the
Company's income (and Distributions) and providing protection against inflation
through automatic fixed increases in base rent or increases in the base rent
based on increases in consumer price indices over the term of the lease and
obtaining fixed income through the receipt of payments on Mortgage Loans and
Secured Equipment Leases; (iii) qualifying and remaining qualified as a REIT for
federal income tax purposes; and (iv) providing Stockholders of the Company with
liquidity of their investment within five (5) to ten (10) years after
commencement of the offering, either in whole or in part, through (a) Listing,
or, (b) if Listing does not occur within ten (10) years after commencement of
the offering, the commencement of orderly Sales of the Company's assets (outside
the ordinary course of business and consistent with its objective of qualifying
as a REIT) and distribution of the proceeds thereof. The sheltering from tax of
income from other sources is not an objective of the Company. Subject to Section
3.2(v) hereof and to the restrictions set forth herein, the Directors will use
their best efforts to conduct the affairs of the Company in such a manner as to
continue to qualify the Company for the tax treatment provided in the REIT
Provisions of the Code; provided, however, no Director, officer, employee or
agent of the Company shall be liable for any act or omission resulting in the
loss of tax benefits under the Code, except to the extent provided in Section
9.2 hereof.
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SECTION 5.2 Review of Objectives. The Independent Directors shall
review the investment policies of the Company with sufficient frequency and at
least annually to determine that the policies being followed by the Company at
any time are in the best interests of its Stockholders. Each such determination
and the basis therefor shall be set forth in the minutes of the meetings of the
Board of Directors.
SECTION 5.3 Certain Permitted Investments.
(i) The Company may invest in Properties including, but not
limited to, Properties to be leased to operators of Health Care Facilities in
various locations across the United States.
(ii) The Company may invest in Joint Ventures with the
Advisor, one or more Directors or any Affiliate, if a majority of Directors
(including a majority of Independent Directors) not otherwise interested in the
transaction, approve such investment as being fair and reasonable to the Company
and on substantially the same terms and conditions as those received by the
other joint venturers.
(iii) The Company may invest in equity securities, and
Mortgage Loans, if a majority of Directors (including a majority of Independent
Directors) not otherwise interested in the transaction approve such investment
as being fair, competitive and commercially reasonable.
(iv) The Company may offer Secured Equipment Leases to
operators of Health Care Facilities provided that a majority of Directors
(including a majority of Independent Directors) approve the Secured Equipment
Leases as being fair, competitive and commercially reasonable.
SECTION 5.4 Investment Limitations. In addition to other investment
restrictions imposed by the Directors from time to time, consistent with the
Company's objective of qualifying as a REIT, the following shall apply to the
Company's investments:
(i) Not more than 10% of the Company's total assets shall be
invested in unimproved real property or mortgage loans on unimproved real
property. For purposes of this paragraph, "unimproved real property" does not
include any Property or Real Estate under construction, under contract for
development or planned for development within one year.
(ii) The Company shall not invest in commodities or commodity
future contracts. This limitation is not intended to apply to interest rate
futures, when used solely for hedging purposes.
(iii) The Company shall not invest in or make mortgage loans
unless an appraisal is obtained concerning the underlying property. Mortgage
indebtedness on any property shall not exceed such property's appraised value.
In cases in which a majority of Independent Directors so determine, and in all
cases in which the mortgage loan involves the Advisor,
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Directors, or Affiliates, such appraisal of the underlying property must be
obtained from an Independent Expert. Such appraisal shall be maintained in the
Company's records for at least five (5) years and shall be available for
inspection and duplication by any Stockholder. In addition to the appraisal, a
mortgagee's or owner's title insurance policy or commitment as to the priority
of the mortgage or condition of the title must be obtained.
(iv) The Company shall not make or invest in mortgage loans,
including construction loans, on any one (1) property if the aggregate amount of
all mortgage loans outstanding on the property, including the loans of the
Company would exceed an amount equal to eighty-five percent (85%) of the
appraised value of the property as determined by appraisal unless substantial
justification exists because of the presence of other underwriting criteria. For
purposes of this subsection, the "aggregate amount of all mortgage loans
outstanding on the Property, including the loans of the Company" shall include
all interest (excluding contingent participation in income and/or appreciation
in value of the mortgaged property), the current payment of which may be
deferred pursuant to the terms of such loans, to the extent that deferred
interest on each loan exceeds five percent (5%) per annum of the principal
balance of the loan.
(v) The Company shall not invest in indebtedness ("Junior
Debt") secured by a mortgage on real property which is subordinate to the lien
or other indebtedness ("Senior Debt"), except where such amount of such Junior
Debt, plus the outstanding amount of Senior Debt, does not exceed 90% of the
appraised value of such property, if after giving effect thereto, the value of
all such mortgage loans of the Company (as shown on the books of the Company in
accordance with generally accepted accounting principles, after all reasonable
reserves but before provision for depreciation) would not then exceed 25% of the
Company's Net Assets. The value of all investments in Junior Debt of the Company
which does not meet the aforementioned requirements shall be limited to 10% of
the Company's tangible assets (which would be included within the 25%
limitation).
(vi) The Company shall not engage in any short sale, or
borrow, on an unsecured basis, if such borrowing will result in an Asset
Coverage of less than 300%, except that such borrowing limitation shall not
apply to a first mortgage trust. "Asset Coverage," for the purpose of this
Section 5.4(vi) means the ratio which the value of the total assets of an
issuer, less all liabilities and indebtedness except indebtedness for unsecured
borrowings, bears to the aggregate amount of all unsecured borrowings of such
issuer.
(vii) The Company shall not make or invest in any mortgage
loans that are subordinate to any mortgage, other indebtedness or equity
interest of the Advisor, the Directors or an Affiliate of the Company.
(viii) The Company shall not invest in equity securities
unless a majority of the Directors (including a majority of Independent
Directors) not otherwise interested in such transaction approve the transaction
as being fair, competitive and commercially reasonable and determine that the
transaction will not jeopardize the Company's ability to qualify and remain
qualified as a REIT. Investments in entities affiliated with the Advisor, a
Director, the Company
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or their Affiliates are subject to restrictions on Joint Venture investments. In
addition, the Company shall not invest in any security of any entity holding
investments or engaging in activities prohibited by these Articles of
Incorporation.
(ix) The Company shall not issue (A) equity securities
redeemable solely at the option of the holder (except that Stockholders may
offer their Common Shares to the Company pursuant to that certain redemption
plan adopted or to be adopted by the Board of Directors on terms outlined in the
section relating to Common Shares entitled "Redemption of Shares" in the
Company's Prospectus relating to the Initial Public Offering); (B) debt
securities unless the historical debt service coverage (in the most recently
completed fiscal year) as adjusted for known charges is sufficient to properly
service that higher level of debt; (C) Equity Shares on a deferred payment basis
or under similar arrangements; (D) non-voting or assessable securities; (E)
options, warrants, or similar evidences of a right to buy its securities
(collectively, "Options") unless (1) issued to all of its Stockholders ratably,
(2) as part of a financing arrangement, or (3) as part of a Stock Option Plan
available to Directors, officers or employees of the Company or the Advisor.
Options may not be issued to the Advisor, Director or any Affiliate thereof
except on the same terms as such Options are sold to the general public. Options
may be issued to persons other than the Advisor, Directors or any Affiliate
thereof but not at exercise prices less than the fair market value of the
underlying securities on the date of grant and not for consideration that in the
judgment of the Independent Directors has a market value less than the value of
such Option on the date of grant. Options issuable to the Advisor, Directors or
any Affiliate thereof shall not exceed 10% of the outstanding Shares on the date
of grant. The voting rights per share of Equity Shares of the Company (other
than the publicly held Equity Shares of the Company) sold in a private offering
shall not exceed the voting rights which bear the same relationship to the
voting rights of the publicly held Equity Shares as the consideration paid to
the Company for each privately offered Equity Share of the Company bears to the
book value of each outstanding publicly held Equity Share.
(x) The Company shall not invest in real estate contracts of
sale unless such contracts of sale are in recordable form and appropriately
recorded in the chain of title.
(xi) A majority of the Directors shall authorize the
consideration to be paid for each Property, based on the fair market value of
the Property. If a majority of the Independent Directors determine, or if the
Property is acquired from the Advisor, a Director, or their Affiliates, such
fair market value shall be determined by an Independent Expert selected by the
Independent Directors.
(xii) The Company shall not engage in underwriting or the
agency distribution of securities issued by others or in trading, as compared to
investment activities.
(xiii) The Company shall not invest in any foreign currency or
bullion or engage in short sales.
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(xiv) The Company shall not issue senior securities except
notes to banks and other lenders and Preferred Shares.
(xv) The aggregate Leverage of the Company shall be reasonable
in relation to the Net Assets of the Company and shall be reviewed by the
Directors at least quarterly. The maximum amount of such Leverage in relation to
the Net Assets shall not exceed three hundred percent (300%).
(xvi) The Company may borrow money from the Advisor, Director
or any Affiliate thereof, upon a finding by a majority of Directors (including a
majority of Independent Directors) not otherwise interested in the transaction
that such transaction is fair, competitive and commercially reasonable and no
less favorable to the Company than loans between unaffiliated parties under the
same circumstances. Notwithstanding the foregoing, the Advisor and its
Affiliates shall be entitled to reimbursement, at cost, for actual expenses
incurred by the Advisor or its Affiliates on behalf of the Company or Joint
Ventures in which the Company is a co-venturer, subject to subsection xviii)
below.
(xvii) The Company shall not make loans to the Advisor or its
Affiliates.
(xviii) The Company shall not operate so as to be classified
as an "investment company" under the Investment Company Act of 1940, as amended.
(xix) The Company will not make any investment that the
Company believes will be inconsistent with its objectives of qualifying and
remaining qualified as a REIT.
The foregoing investment limitations may not be modified or eliminated
without the approval of Stockholders owning a majority of the outstanding Equity
Shares.
ARTICLE 6
CONFLICTS OF INTEREST
SECTION 6.1 Sales and Leases to Company. The Company may purchase or
lease a Property or Properties from the Advisor, Director, or any Affiliate upon
a finding by a majority of Directors (including a majority of Independent
Directors) not otherwise interested in the transaction that such transaction is
fair and reasonable to the Company and at a price to the Company no greater than
the cost of the asset to such Advisor, Director or Affiliate, or, if the price
to the Company is in excess of such cost, that substantial justification for
such excess exists and such excess is reasonable. In no event shall the cost of
such asset to the Company exceed its current appraised value.
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SECTION 6.2 Sales and Leases to the Advisor, Directors or Affiliates.
An Advisor, Director or Affiliate may acquire or lease assets from the Company
if a majority of Directors (including a majority of Independent Directors) not
otherwise interested in the transaction determine that the transaction is fair
and reasonable to the Company.
SECTION 6.3 Multiple Programs.
(i) Until completion of the Initial Public Offering of Shares
by the Company, the Advisor and its Affiliates will not offer or sell interests
in any subsequently formed public program that has investment objectives and
structure similar to those of the Company and that intends to (a) invest, on a
cash and/or leveraged basis, in a diversified portfolio of health care
properties to be leased on a "triple-net" basis to operators of Health Care
Facilities; (b) offer Mortgage Loans; and (c) offer Secured Equipment Leases.
The Advisor and its Affiliates also will not purchase a property or offer or
invest in a mortgage loan or secured equipment lease for any such subsequently
formed public program that has investment objectives and structure similar to
the Company and that intends to invest on a cash and/or leveraged basis
primarily in a diversified portfolio of health care properties to be leased on a
"triple-net" basis to operators of Health Care Facilities until substantially
all (generally, eighty percent (80%)) of the funds available for investment (net
offering proceeds) by the Company have been invested or committed to investment.
(For purposes of the preceding sentence only, funds are deemed to have been
committed to investment to the extent written agreements in principle or letters
of understanding are executed and in effect at any time, whether or not any such
investment is consummated, and also to the extent any funds have been reserved
to make contingent payments in connection with any Property, whether or not any
such payments are made). The Advisor or its Affiliates currently are and in the
future may offer interests in one or more public or private programs organized
to purchase properties of the type to be acquired by the Company, to offer
mortgage loans and/or to offer secured equipment leases.
(ii) In the event that an investment opportunity becomes
available which is suitable for both the Company and a public or private entity
with which the Advisor or its Affiliates are affiliated for which both entities
have sufficient uninvested funds, then the entity which has had the longer
period of time elapse since it was offered an investment opportunity will first
be offered the investment opportunity. An investment opportunity will not be
considered suitable for a program if the requirements of subparagraph (i) above
could not be satisfied if the program were to make the investment. In
determining whether or not an investment opportunity is suitable for more than
one program, the Advisor will examine such factors, among others, as the cash
requirements of each program, the effect of the acquisition both on
diversification of each program's investments by types of health care facilities
and geographic area, and on diversification of the tenants of its properties
(which also may affect the need for one of the programs to prepare or produce
audited financial statements for a property or a tenant), the anticipated cash
flow of each program, the size of the investment, the amount of funds available
to each program, and the length of time such funds have been available for
investment. If a subsequent development, such as a delay in the closing of a
property or a delay in the construction of a property, causes any such
investment, in the opinion of the Advisor and its
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Affiliates, to be more appropriate for an entity other than the entity which
committed to make the investment, however, the Advisor has the right to agree
that the other entity affiliated with the Advisor or its Affiliates may make the
investment.
SECTION 6.4 Other Transactions.
(i) No goods or services will be provided by the Advisor or
its Affiliates to the Company except for transactions in which the Advisor or
its Affiliates provide goods or services to the Company in accordance with these
Articles of Incorporation or if a majority of the Directors (including a
majority of the Independent Directors) not otherwise interested in such
transactions approve such transactions as fair and reasonable to the Company and
on terms and conditions not less favorable to the Company than those available
from unaffiliated third parties.
(ii) The Company will not make any loans to Affiliates. Any
loans to the Company by the Advisor or its Affiliates must be approved by a
majority of the Directors (including a majority of Independent Directors) not
otherwise interested in such transaction as fair, competitive, and commercially
reasonable, and no less favorable to the Company than comparable loans between
unaffiliated parties.
ARTICLE 7
SHARES
SECTION 7.1 Authorized Shares. The beneficial interest in the Company
shall be divided into Equity Shares. The total number of Equity Shares which the
Company is authorized to issue is two hundred six million (206,000,000) shares
of beneficial interest, consisting of one hundred million (100,000,000) Common
Shares (as defined and described in Section 7.2(ii) hereof), three million
(3,000,000) Preferred Shares (as defined in Section 7.3 hereof) and one hundred
three million (103,000,000) Excess Shares (as defined in Section 7.7 hereof).
All Shares shall be fully paid and nonassessable when issued. Shares may be
issued for such consideration as the Directors determine or, if issued as a
result of a Share dividend or Share split, without any consideration.
SECTION 7.2 Common Shares.
(i) Common Shares Subject to Terms of Preferred Shares. The
Common Shares shall be subject to the express terms of any series of Preferred
Shares.
(ii) Description. Common Shares (herein so called) shall have
a par value of $.01 per share and shall entitle the holders to one (1) vote per
share on all matters upon which Stockholders are entitled to vote pursuant to
Section 8.2 hereof, and shares of a particular class of issued Common Shares
shall have equal dividend, distribution, liquidation and other rights, and shall
have no preference, cumulative, preemptive, appraisal, conversion or exchange
rights. The Directors may classify or reclassify any unissued Common Shares by
setting or changing the
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number, designation, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or terms or conditions
of redemption of any such Common Shares and, in such event, the Company shall
file for record with the State Department of Assessments and Taxation of the
State of Maryland amended articles in substance and form as prescribed by Title
2 of the MGCL.
(iii) Distribution Rights. The holders of Common Shares shall
be entitled to receive such Distributions as may be declared by the Board of
Directors of the Company out of funds legally available therefor.
(iv) Dividend or Distribution Rights. The Directors from time
to time may declare and pay to Stockholders such dividends or Distributions in
cash or other property as the Directors in their discretion shall determine. The
Directors shall endeavor to declare and pay such dividends and Distributions as
shall be necessary for the Company to qualify as a real estate investment trust
under the REIT Provisions of the Code; provided, however, Stockholders shall
have no right to any dividend or Distribution unless and until declared by the
Directors. The exercise of the powers and rights of the Directors pursuant to
this section shall be subject to the provisions of any class or series of Equity
Shares at the time outstanding. The receipt by any Person in whose name any
Equity Shares are registered on the records of the Company or by his duly
authorized agent shall be a sufficient discharge for all dividends or
Distributions payable or deliverable in respect of such Equity Shares and from
all liability to see to the application thereof. Distributions in kind shall not
be permitted, except for distributions of readily marketable securities;
distributions of beneficial interests in a liquidating trust established for the
dissolution of the Company and the liquidation of its assets in accordance with
the terms of these Articles of Incorporation; or distributions of in-kind
property as long as the Directors (i) advise each Stockholder of the risks
associated with direct ownership of the property; (ii) offer each Stockholder
the election of receiving in-kind property distributions; and (iii) distribute
in-kind property only to those Stockholders who accept the Directors' offer.
(v) Rights Upon Liquidation. In the event of any voluntary or
involuntary liquidation, dissolution or winding up, or any distribution of the
assets of the Company, the aggregate assets available for distribution to
holders of the Common Shares (including holders of Excess Shares resulting from
the exchange of Common Shares pursuant to Section 7.6(iii) hereof) shall be
determined in accordance with applicable law. Except as provided below as a
consequence of the limitations on distributions to holders of Excess Shares,
each holder of Common Shares shall be entitled to receive, ratably with (i) each
other holder of Common Shares and (ii) each holder of Excess Shares resulting
from the exchange of Common Shares, that portion of such aggregate assets
available for distribution as the number of the outstanding Common Shares held
by such holder bears to the total number of outstanding Common Shares and Excess
Shares resulting from the exchange of Common Shares then outstanding. Anything
herein to the contrary notwithstanding, in no event shall the amount payable to
a holder of Excess Shares exceed (i) the price per share such holder paid for
the Common Shares in the purported Transfer or Acquisition (as those terms are
defined in Section 7.6(i)) or change in capital structure or other transaction
or event that resulted in the Excess Shares or (ii) if the holder did
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not give full value for such Excess Shares (as through a gift, a devise or other
event or transaction), a price per share equal to the Market Price (as that term
is defined in Section 7.6(i)) for the Common Shares on the date of the purported
Transfer, Acquisition, change in capital structure or other transaction or event
that resulted in such Excess Shares. Any amount available for distribution in
excess of the foregoing limitations shall be paid ratably to the holders of
Common Shares and other holders of Excess Shares resulting from the exchange of
Common Shares to the extent permitted by the foregoing limitations.
(vi) Voting Rights. Except as may be provided in these
Articles of Incorporation, and subject to the express terms of any series of
Preferred Shares, the holders of the Common Shares shall have the exclusive
right to vote on all matters (as to which a common Stockholder shall be entitled
to vote pursuant to applicable law) at all meetings of the Stockholders of the
Company, and shall be entitled to one (1) vote for each Common Share entitled to
vote at such meeting.
SECTION 7.3 Preferred Shares. The Directors are hereby expressly
granted the authority to authorize from time to time the issuance of one or more
series of Preferred Shares. The issuance of Preferred Shares shall be approved
by a majority of the Independent Directors who do not have an interest in the
transaction and who have access, at the expense of the Company, to the Company's
or independent legal counsel. Prior to the issuance of each such series, the
Board of Directors, by resolution, shall fix the number of shares to be included
in each series, and the terms, rights, restrictions and qualifications of the
shares of each series, however, the voting rights for each share of the
Preferred Shares shall not exceed voting rights which bear the same relationship
to the voting rights of the Common Shares as the consideration paid to the
Company for each of Preferred Shares bears to the book value of the Common
Shares on the date that such Preferred Shares are issued. The authority of the
Board of Directors with respect to each series shall include, but not be limited
to, determination of the following:
(i) The designation of the series, which may be by
distinguishing number, letter or title.
(ii) The dividend rate on the shares of the series, if any,
whether any dividends shall be cumulative and, if so, from which date or dates,
and the relative rights of priority, if any, of payment of dividends on shares
of the series.
(iii) The redemption rights, including conditions and the
price or prices, if any, for shares of the series.
(iv) The terms and amounts of any sinking fund for the
purchase or redemption of shares of the series.
(v) The rights of the shares of the series in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the Company, and the relative rights of priority, if any, of payment of
shares of the series.
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(vi) Whether the shares of the series shall be convertible
into shares of any other class or series, or any other security, of the Company
or any other corporation or other entity, and, if so, the specification of such
other class or series of such other security, the conversion price or prices or
rate or rates, any adjustments thereof, the date or dates on which such shares
shall be convertible and all other terms and conditions upon which such
conversion may be made.
(vii) Restrictions on the issuance of shares of the same
series or of any other class or series.
(viii) The voting rights of the holders of shares of the
series subject to the limitations contained in this Section 7.3.
(ix) Any other relative rights, preferences and limitations on
that series.
Subject to the express provisions of any other series of Preferred
Shares then outstanding, and notwithstanding any other provision of these
Articles of Incorporation, the Board of Directors may increase or decrease (but
not below the number of shares of such series then outstanding) the number of
shares, or alter the designation or classify or reclassify any unissued shares
of a particular series of Preferred Shares, by fixing or altering, in one or
more respects, from time to time before issuing the shares, the terms, rights,
restrictions and qualifications of the shares of any such series of Preferred
Shares.
SECTION 7.4 General Nature of Shares. All Shares shall be personal
property entitling the Stockholders only to those rights provided in these
Articles of Incorporation, the MGCL or in the resolution creating any class or
series of Shares. The legal ownership of the Company Property and the right to
conduct the business of the Company are vested exclusively in the Directors; the
Stockholders shall have no interest therein other than the beneficial interest
in the Company conferred by their Shares and shall have no right to compel any
partition, division, dividend or Distribution of the Company or any of the
Company Property. The death of a Stockholder shall not terminate the Company or
give his legal representative any rights against other Stockholders, the
Directors or the Company Property, except the right, exercised in accordance
with applicable provisions of the Bylaws, to require the Company to reflect on
its books the change in ownership of the Shares. Holders of Shares shall not
have any preemptive or other right to purchase or subscribe for any class of
securities of the Company which the Company may at any time issue or sell.
SECTION 7.5 No Issuance Of Share Certificates. The Company shall not
issue share certificates except to Stockholders who make a written request to
the Company. A Stockholder's investment shall be recorded on the books of the
Company. To transfer his or her Shares a Stockholder shall submit an executed
form to the Company, which form shall be provided by the Company upon request.
Such transfer will also be recorded on the books of the Company. Upon issuance
or transfer of shares, the Company will provide the Stockholder with information
concerning his or her rights with regard to such stock, in a form substantially
similar to Section 7.6(xii), and required by the Bylaws and the MGCL or other
applicable law.
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SECTION 7.6 Restrictions On Ownership and Transfer.
(i) Definitions. For purposes of Sections 7.6 and 7.7, the
following terms shall have the following meanings:
"Acquire" means the acquisition of Beneficial or Constructive Ownership
of Equity Shares by any means, including, without limitation, the exercise of
any rights under any option, warrant, convertible security, pledge or other
security interest or similar right to acquire shares, but shall not include the
acquisition of any such rights unless, as a result, the acquiror would be
considered a Beneficial Owner or Constructive Owner. The terms "Acquires" and
"Acquisition" shall have correlative meanings.
"Beneficial Ownership" means ownership of Shares by an individual who
would be treated as an owner of such Shares under Section 542(a)(2) of the Code,
either directly or constructively through the application of Section 544 of the
Code, as modified by Section 856(h)(1)(B) of the Code. For purposes of this
definition, the term "individual" shall include any organization, trust, or
other entity that is treated as an individual for purposes of Section 542(a)(2)
of the Code. The terms "Beneficial Owner," "Beneficially Owns" and "Beneficially
Owned" shall have correlative meanings.
"Beneficiary" means a beneficiary of the Excess Shares Trust as
determined pursuant to Section 7.7(v)(a) hereof.
"Closing Price" on any day shall mean the last sale price, regular way
on such day, or, if no such sale takes place on that day, the average of the
closing bid and asked prices, regular way, in either case as reported on the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the New York Stock Exchange, or if the affected
class or series of Equity Shares are not so listed or admitted to trading, as
reported in the principal consolidated transaction reporting system with respect
to securities listed on the principal national securities exchange (including
the National Market System of the National Association of Securities Dealers,
Inc. Automated Quotation System) on which the affected class or series of Equity
Shares are listed or admitted to trading, or, if the affected class or series of
Equity Shares are not so listed or admitted to trading, the last quoted price
or, if not quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by the National Association of Securities
Dealers, Inc. Automated Quotation System or, if such system is no longer in use,
the principal automated quotation system then in use, or, if the affected class
or series of Equity Shares are not so quoted by any such system, the average of
the closing bid and asked prices as furnished by a professional market maker
selected by the Board of Directors making a market in the affected class or
series of Equity Shares, or, if there is no such market maker or such closing
prices otherwise are not available, the fair market value of the affected class
or series of Equity Shares as of such day, as determined by the Board of
Directors in its discretion.
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"Common Share Ownership Limit" means, with respect to the Common
Shares, nine point eight percent (9.8%) of the outstanding Common Shares,
subject to adjustment pursuant to Section 7.6(x) (but not more than nine point
nine percent (9.9%) of the outstanding Common Shares, as so adjusted) and to the
limitations contained in Section 7.6(xi).
"Constructive Ownership" means ownership of Equity Shares by a person
who would be treated as an owner of such shares, either actually or
constructively, directly or indirectly, through the application of Section 318
of the Code, as modified by Section 856(d)(5) thereof. The terms "Constructive
Owner," "Constructively Owns" and "Constructively Owned" shall have correlative
meanings.
"Excess Shares Trust" means the trust created pursuant to Section
7.7(i) hereof.
"Excess Shares Trustee" means the Company as trustee for the Excess
Shares Trust, and any successor trustee appointed by the Company.
"Market Price" means, during the offering, the price per Equity Share
and thereafter, until the Equity Shares are listed for trading on an exchange or
market, a price determined on the basis of the quarterly valuation of the
Company's assets. Upon listing of the Shares, market price shall mean the
average of the Closing Prices for the ten (10) consecutive Trading Days
immediately preceding such day (or those days during such ten (10)-day period
for which Closing Prices are available).
"Ownership Limit" means the Common Share Ownership Limit or the
Preferred Share Ownership Limit, or both, as the context may require.
"Preferred Share Ownership Limit" means, with respect to the Preferred
Shares, nine point eight percent (9.8%) of the outstanding Shares of a
particular series of Preferred Shares of the Company, subject to adjustment
pursuant to Section 7.6(x) (but not more than nine point nine percent (9.9%) of
the outstanding Preferred Shares, as so adjusted) and to the limitations
contained in this Section 7.6.
"Purported Beneficial Holder" means, with respect to any event or
transaction other than a purported Transfer or Acquisition which results in
Excess Shares, the Person for whom the applicable Purported Record Holder held
the Equity Shares that were, pursuant to paragraph (iii) of this Section 7.6,
automatically exchanged for Excess Shares upon the occurrence of such event or
transaction. The Purported Beneficial Holder and the Purported Record Holder may
be the same Person.
"Purported Beneficial Transferee" means, with respect to any purported
Transfer or Acquisition which results in Excess Shares, the purported beneficial
transferee for whom the Purported Record Transferee would have acquired Equity
Shares if such Transfer or Acquisition which results in Excess Shares had been
valid under Section 7.6(ii). The Purported Beneficial Transferee and the
Purported Record Transferee may be the same Person.
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"Purported Record Holder" means, with respect to any event or
transaction other than a purported Transfer or Acquisition which results in
Excess Shares, the record holder of the Equity Shares that were, pursuant to
Section 7.6(iii), automatically exchanged for Excess Shares upon the occurrence
of such an event or transaction. The Purported Record Holder and the Purported
Beneficial Holder may be the same Person.
"Purported Record Transferee" means, with respect to any purported
Transfer or Acquisition which results in Excess Shares, the record holder of the
Equity Shares if such Transfer or Acquisition which results in Excess Shares had
been valid under Section 7.6(ii). The Purported Record Transferee and the
Purported Beneficial Transferee may be the same Person.
"Restriction Termination Date" means the first day after the date of
the closing of the Initial Public Offering on which the Board of Directors of
the Company determines, pursuant to Section 3.2(xxii) hereof, that it is no
longer in the best interests of the Company to attempt or continue to qualify as
REIT.
"Trading Day" means a day on which the principal national securities
exchange on which the affected class or series of Equity Shares are listed or
admitted to trading is open for the transaction of business or, if the affected
class or series of Equity Shares are not listed or admitted to trading, shall
mean any day other than a Saturday, Sunday or other day on which banking
institutions in the State of New York are authorized or obligated by law or
executive order to close.
"Transfer" means any sale, transfer, gift, hypothecation, assignment,
devise or other disposition of a direct or indirect interest in Equity Shares or
the right to vote or receive dividends on Equity Shares (including (i) the
granting of any option (including any option to acquire an option or any series
of such options) or entering into any agreement for the sale, transfer or other
disposition of Equity Shares or the right to vote or receive dividends on Equity
Shares or (ii) the sale, transfer, assignment or other disposition of any
securities or rights convertible into or exchangeable for Equity Shares, whether
voluntary or involuntary, of record, constructively or beneficially, and whether
by operation of law or otherwise. The terms "Transfers," "Transferred" and
"Transferable" shall have correlative meanings.
(ii) Ownership and Transfer Limitations.
(a) Notwithstanding any other provision of these
Articles of Incorporation, except as provided in Section
7.6(ix) and Section 7.8, from the date of the Initial Public
Offering and prior to the Restriction Termination Date, no
Person shall Beneficially or Constructively Own Equity Shares
in excess of the Common or Preferred Share Ownership Limit.
(b) Notwithstanding any other provision of these
Articles of Incorporation, except as provided in Section
7.6(ix) and Section 7.8, from the date of the Initial Public
Offering and prior to the Restriction Termination Date, any
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Transfer, Acquisition, change in the capital structure of the
Company, other purported change in Beneficial or Constructive
Ownership of Equity Shares or other event or transaction that,
if effective, would result in any Person Beneficially or
Constructively Owning Equity Shares in excess of the Common or
Preferred Share Ownership Limit shall be void ab initio as to
the Transfer, Acquisition, change in the capital structure of
the Company, other purported change in Beneficial or
Constructive Ownership or other event or transaction with
respect to that number of Equity Shares which would otherwise
be Beneficially or Constructively Owned by such Person in
excess of the Common or Preferred Share Ownership Limit, and
none of the Purported Beneficial Transferee, the Purported
Record Transferee, the Purported Beneficial Holder or the
Purported Record Holder shall acquire any rights in that
number of Equity Shares.
(c) Notwithstanding any other provision of these
Articles of Incorporation, and except as provided in Section
7.8, from the date of the Initial Public Offering and prior to
the Restriction Termination Date, any Transfer, Acquisition,
change in the capital structure of the Company, or other
purported change in Beneficial or Constructive Ownership
(including actual ownership) of Equity Shares or other event
or transaction that, if effective, would result in the Equity
Shares being actually owned by fewer than 100 Persons
(determined without reference to any rules of attribution)
shall be void ab initio as to the Transfer, Acquisition,
change in the capital structure of the Company, other
purported change in Beneficial or Constructive Ownership
(including actual ownership) with respect to that number of
Equity Shares which otherwise would be owned by the
transferee, and the intended transferee or subsequent owner
(including a Beneficial Owner or Constructive Owner) shall
acquire no rights in that number of Equity Shares.
(d) Notwithstanding any other provision of these
Articles of Incorporation, except as provided in Section 7.8,
from the date of the Initial Public Offering and prior to the
Restriction Termination Date, any Transfer, Acquisition,
change in the capital structure of the Company, other
purported change in Beneficial or Constructive Ownership of
Equity Shares or other event or transaction that, if
effective, would cause the Company to fail to qualify as a
REIT by reason of being "closely held" within the meaning of
Section 856(h) of the Code or otherwise, directly or
indirectly, would cause the Company to fail to qualify as a
REIT shall be void ab initio as to the Transfer, Acquisition,
change in the capital structure of the Company, other
purported change in Beneficial or Constructive Ownership or
other event or transaction with respect to that number of
Equity Shares which would cause the Company to be "closely
held" within the meaning of Section 856(h) of the Code or
otherwise, directly or indirectly, would cause the Company to
fail to qualify as a REIT, and none of the Purported
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Beneficial Transferee, the Purported Record Transferee, the
Purported Beneficial Holder or the Purported Record Holder
shall acquire any rights in that number of Equity Shares.
(e) Notwithstanding any other provision of these
Articles of Incorporation, except as provided in Section 7.8,
from the date of the Initial Public Offering and prior to the
Restriction Termination Date, any Transfer, Acquisition,
change in capital structure of the Company, or other purported
change in Beneficial or Constructive Ownership of Equity
Shares or other event or transaction that, if effective, would
(i) cause the Company to own (directly or Constructively) an
interest in a tenant that is described in Section 856(d)(2)(B)
of the Code and (ii) cause the Company to fail to satisfy any
of the gross income requirements of section 856(c) of the
Code, shall be void ab initio as to the Transfer, Acquisition,
change in capital structure of the Company, other purported
change in Beneficial or Constructive Ownership or other event
or transaction with respect to that number of Equity Shares
which would cause the Company to own an interest (directly or
Constructively) in a tenant that is described in Section
856(d)(2)(B) of the Code, and none of the Purported Beneficial
Transferee, the Purported Record Transferee, the Purported
Beneficial Holder or the Purported Record Holder shall acquire
any rights in that number of Equity Shares.
(f) Notwithstanding any other provision of these
Articles of Incorporation, any person selling securities on
behalf of the Company in its Initial Public Offering may not
complete a sale of securities to a Stockholder until at least
five (5) business days after the date the Stockholder receives
a final Prospectus and shall send each Stockholder a
confirmation of his or her purchase.
(iii) Exchange for Excess Shares.
(a) If, notwithstanding the other provisions
contained in this Article VII, at any time from the date of
the Initial Public Offering and prior to the Restriction
Termination Date, there is a purported Transfer, Acquisition,
change in the capital structure of the Company, other
purported change in the Beneficial or Constructive Ownership
of Equity Shares or other event or transaction such that any
Person would either Beneficially or Constructively Own Equity
Shares in excess of the Common or Preferred Share Ownership
Limit, then, except as otherwise provided in Section 7.6(ix),
such Equity Shares (rounded up to the next whole number of
shares) in excess of the Common or Preferred Share Ownership
Limit automatically shall be exchanged for an equal number of
Excess Shares having terms, rights, restrictions and
qualifications identical thereto, except to the extent that
this Article VII requires different terms. Such exchange shall
be effective as of the close of business on the business day
next preceding the date
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of the purported Transfer, Acquisition, change in capital
structure, other change in purported Beneficial or
Constructive Ownership of Shares, or other event or
transaction.
(b) If, notwithstanding the other provisions
contained in this Article VII, at any time after the date of
the Initial Public Offering and prior to the Restriction
Termination Date, there is a purported Transfer, Acquisition,
change in the capital structure of the Company, other
purported change in the Beneficial or Constructive Ownership
of Equity Shares or other event or transaction which, if
effective, would result in a violation of any of the
restrictions described in subparagraphs (b), (c), (d) and (e)
of paragraph (ii) of this Section 7.6 or, directly or
indirectly, would cause the Company for any reason to fail to
qualify as a REIT by reason of being "closely held" within the
meaning of Section 856(h) of the Code, or otherwise, directly
or indirectly, would cause the Company to fail to qualify as a
REIT, then the Shares (rounded up to the next whole number of
Shares) being Transferred or which are otherwise affected by
the change in capital structure or other purported change in
Beneficial or Constructive Ownership and which, in any case,
would cause the Company to be "closely held" within the
meaning of such Section 856(h) or otherwise would cause the
Company to fail to qualify as a REIT automatically shall be
exchanged for an equal number of Excess Shares having terms,
rights, restrictions and qualifications identical thereto,
except to the extent that this Article VII requires different
terms. Such exchange shall be effective as of the close of
business on the business day prior to the date of the
purported Transfer, Acquisition, change in capital structure,
other purported change in Beneficial or Constructive Ownership
or other event or transaction.
(iv) Remedies For Breach. If the Board of Directors or its
designee shall at any time determine in good faith that a Transfer, Acquisition,
change in the capital structure of the Company or other purported change in
Beneficial or Constructive Ownership or other event or transaction has taken
place in violation of Section 7.6(ii) or that a Person intends to Acquire or has
attempted to Acquire Beneficial or Constructive Ownership of any Equity Shares
in violation of this Section 7.6, the Board of Directors or its designee shall
take such action as it deems advisable to refuse to give effect to or to prevent
such Transfer, Acquisition, change in the capital structure of the Company,
other attempt to Acquire Beneficial or Constructive Ownership of any Shares or
other event or transaction, including, but not limited to, refusing to give
effect thereto on the books of the Company or instituting injunctive proceedings
with respect thereto; provided, however, that any Transfer, Acquisition, change
in the capital structure of the Company, attempted Transfer or other attempt to
Acquire Beneficial or Constructive Ownership of any Equity Shares or other event
or transaction in violation of subparagraphs (b), (c), (d) and (e) of Section
7.6(ii) (as applicable) shall be void ab initio and where applicable
automatically shall result in the exchange described in Section 7.6(iii),
irrespective of any action (or inaction) by the Board of Directors or its
designee.
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(v) Notice of Restricted Transfer. Any Person who acquires or
attempts to Acquire Beneficial or Constructive Ownership of Equity Shares in
violation of Section 7.6(ii) and any Person who Beneficially or Constructively
Owns Excess Shares as a transferee of Equity Shares resulting in an exchange for
Excess Shares, pursuant to Section 7.6(iii), or otherwise shall immediately give
written notice to the Company, or, in the event of a proposed or attempted
Transfer, Acquisition, or purported change in Beneficial or Constructive
Ownership, shall give at least fifteen (15) days prior written notice to the
Company, of such event and shall promptly provide to the Company such other
information as the Company, in its sole discretion, may request in order to
determine the effect, if any, of such Transfer, attempted Transfer, Acquisition,
Attempted Acquisition or purported change in Beneficial or Constructive
Ownership on the Company's status as a REIT.
(vi) Owners Required To Provide Information. From the date of
the Initial Public Offering and prior to the Restriction Termination Date:
(a) Every Beneficial or Constructive Owner of more
than five percent (5%), or such lower percentages as
determined pursuant to regulations under the Code or as may be
requested by the Board of Directors, in its sole discretion,
of the outstanding shares of any class or series of Equity
Shares of the Company shall annually, no later than January 31
of each calendar year, give written notice to the Company
stating (i) the name and address of such Beneficial or
Constructive Owner; (ii) the number of shares of each class or
series of Equity Shares Beneficially or Constructively Owned;
and (iii) a description of how such shares are held. Each such
Beneficial or Constructive Owner promptly shall provide to the
Company such additional information as the Company, in its
sole discretion, may request in order to determine the effect,
if any, of such Beneficial or Constructive Ownership on the
Company's status as a REIT and to ensure compliance with the
Common or Preferred Share Ownership Limit and other
restrictions set forth herein.
(b) Each Person who is a Beneficial or Constructive
Owner of Equity Shares and each Person (including the
Stockholder of record) who is holding Equity Shares for a
Beneficial or Constructive Owner promptly shall provide to the
Company such information as the Company, in its sole
discretion, may request in order to determine the Company's
status as a REIT, to comply with the requirements of any
taxing authority or other governmental agency, to determine
any such compliance or to ensure compliance with the Common or
Preferred Share Ownership Limit and other restrictions set
forth herein.
(vii) Remedies Not Limited. Nothing contained in this Article
VII except Section 7.8 shall limit scope or application of the provisions of
this Section 7.6, the ability of the Company to implement or enforce compliance
with the terms thereof or the authority of the Board of Directors to take any
such other action or actions as it may deem necessary or advisable to protect
the Company and the interests of its Stockholders by preservation of the
Company's
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status as a REIT and to ensure compliance with the Ownership Limit for any class
or series of Equity Shares and other restrictions set forth herein, including,
without limitation, refusal to give effect to a transaction on the books of the
Company.
(viii) Ambiguity. In the case of an ambiguity in the
application of any of the provisions of this Section 7.6, including any
definition contained in Sections 1.5 and 7.6(i), the Board of Directors shall
have the power and authority, in its sole discretion, to determine the
application of the provisions of this Section 7.6 with respect to any situation
based on the facts known to it.
(ix) Exception. The Board of Directors, upon receipt of a
ruling from the Internal Revenue Service, an opinion of counsel or other
evidence satisfactory to the Board of Directors, in its sole discretion, in each
case to the effect that the restrictions contained in subparagraphs (c), (d) and
(e) of Section 7.6(ii) will not be violated, may waive or change, in whole or in
part, the application of the Common or Preferred Share Ownership Limit with
respect to any Person. In connection with any such waiver or change, the Board
of Directors may require such representations and undertakings from such Person
or affiliates and may impose such other conditions as the Board deems necessary,
advisable or prudent, in its sole discretion, to determine the effect, if any,
of the proposed transaction or ownership of Equity Shares on the Company's
status as a REIT.
(x) Increase in Common or Preferred Share Ownership Limit.
Subject to the limitations contained in Section 7.6(xi), the Board of Directors
may from time to time increase the Common or Preferred Share Ownership Limit.
(xi) Limitations on Modifications.
(a) The Ownership Limit for a class or series of
Equity Shares may not be increased and no additional ownership
limitations may be created if, after giving effect to such
increase or creation, the Company would be "closely held"
within the meaning of Section 856(h) of the Code (assuming
ownership of shares of Equity Shares by all Persons equal to
the greatest of (A) the actual ownership, (B) the Beneficial
Ownership of Equity Shares by each Person, or (C) the
applicable Ownership Limit with respect to such Person.
(b) Prior to any modification of the Ownership Limit
with respect to any Person, the Board of Directors may require
such opinions of counsel, affidavits, undertakings or
agreements as it may deem necessary, advisable or prudent, in
its sole discretion, in order to determine or ensure the
Company's status as a REIT.
(c) Neither the Preferred Share Ownership Limit nor
the Common Share Ownership Limit may be increased to a
percentage that is greater than nine point nine percent
(9.9%).
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(xii) Notice to Stockholders Upon Issuance or Transfer. Upon
issuance or transfer of Shares, the Company shall provide the recipient with a
notice containing information about the shares purchased or otherwise
transferred, in lieu of issuance of a share certificate, in a form substantially
similar to the following:
"The securities issued or transferred are subject to
restrictions on transfer and ownership for the purpose of
maintenance of the Company's status as a real estate
investment trust (a "REIT") under Sections 856 through 860 of
the Internal Revenue Code of 1986, as amended (the "Code").
Except as otherwise provided pursuant to the Articles of
Incorporation of the Company, no Person may (i) Beneficially
or Constructively Own Common Shares of the Company in excess
of 9.8% (or such greater percent as may be determined by the
Board of Directors of the Company) of the outstanding Common
Shares; (ii) Beneficially or Constructively Own shares of any
series of Preferred Shares of the Company in excess of 9.8% of
the outstanding shares of such series of Preferred Shares; or
(iii) Beneficially or Constructively Own Common Shares or
Preferred Shares (of any class or series) which would result
in the Company being "closely held" under Section 856(h) of
the Code or which otherwise would cause the Company to fail to
qualify as a REIT. Any Person who has Beneficial or
Constructive Ownership, or who Acquires or attempts to Acquire
Beneficial or Constructive Ownership of Common Shares and/or
Preferred Shares in excess of the above limitations and any
Person who Beneficially or Constructively Owns Excess Shares
as a transferee of Common or Preferred Shares resulting in an
exchange for Excess Shares (as described below) immediately
must notify the Company in writing or, in the event of a
proposed or attempted Transfer or Acquisition or purported
change in Beneficial or Constructive Ownership, must give
written notice to the Company at least 15 days prior to the
proposed or attempted transfer, transaction or other event.
Any Transfer or Acquisition of Common Shares and/or Preferred
Shares or other event which results in violation of the
ownership or transfer limitations set forth in the Company's
Articles of Incorporation shall be void ab initio and the
Purported Beneficial and Record Transferee shall not have or
acquire any rights in such Common Shares and/or Preferred
Shares. If the transfer and ownership limitations referred to
herein are violated, the Common Shares or Preferred Shares
represented hereby automatically will be exchanged for Excess
Shares to the extent of violation of such limitations, and
such Excess Shares will be held in trust by the Company, all
as provided by the Articles of Incorporation of the Company.
All defined terms used in this
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legend have the meanings identified in the Company's Articles
of Incorporation, as the same may be amended from time to
time, a copy of which, including the restrictions on transfer,
will be sent without charge to each Stockholder who so
requests."
SECTION 7.7 Excess Shares.
(i) Ownership In Trust. Upon any purported Transfer,
Acquisition, change in the capital structure of the Company, other purported
change in Beneficial or Constructive Ownership or event or transaction that
results in Excess Shares pursuant to Section 7.6(iii), such Excess Shares shall
be deemed to have been transferred to the Company, as Excess Shares Trustee of
an Excess Shares Trust for the benefit of such Beneficiary or Beneficiaries to
whom an interest in such Excess Shares may later be transferred pursuant to
Section 7.6(v). Excess Shares so held in trust shall be issued and outstanding
stock of the Company. The Purported Record Transferee (or Purported Record
Holder) shall have no rights in such Excess Shares except the right to designate
a transferee of such Excess Shares upon the terms specified in Section 7.6(v).
The Purported Beneficial Transferee shall have no rights in such Excess Shares
except as provided in Section 7.7(iii) and (v).
(ii) Distribution Rights. Excess Shares shall not be entitled
to any dividends or Distributions (except as provided in Section 7.7(iii)). Any
dividend or Distribution paid prior to the discovery by the Company that the
Equity Shares have been exchanged for Excess Shares shall be repaid to the
Company upon demand, and any dividend or Distribution declared but unpaid at the
time of such discovery shall be void ab initio with respect to such Excess
Shares.
(iii) Rights Upon Liquidation.
(a) Except as provided below, in the event of any
voluntary or involuntary liquidation, dissolution or winding
up, or any other distribution of the assets, of the Company,
each holder of Excess Shares resulting from the exchange of
Preferred Shares of any specified series shall be entitled to
receive, ratably with each other holder of Excess Shares
resulting from the exchange of Preferred Shares of such series
and each holder of Preferred Shares of such series, such
accrued and unpaid dividends, liquidation preferences and
other preferential payments, if any, as are due to holders of
Preferred Shares of such series. In the event that holders of
shares of any series of Preferred Shares are entitled to
participate in the Company's distribution of its residual
assets, each holder of Excess Shares resulting from the
exchange of Preferred Shares of any such series shall be
entitled to participate, ratably with (A) each other holder of
Excess Shares resulting from the exchange of Preferred Shares
of all series entitled to so participate; (B) each holder of
Preferred Shares of all series entitled to so participate; and
(C) each holder of Common Shares and Excess Shares resulting
from the exchange of Common Shares (to the extent permitted by
Section 7.6(iii) hereof), that portion of the aggregate assets
available for distribution (determined
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in accordance with applicable law) as the number of shares of
such Excess Shares held by such holder bears to the total
number of (1) outstanding Excess Shares resulting from the
exchange of Preferred Shares of all series entitled to so
participate; (2) outstanding Preferred Shares of all series
entitled to so participate; and (3) outstanding Common Shares
and Excess Shares resulting from the exchange of Common
Shares. The Company, as holder of the Excess Shares in trust,
or, if the Company shall have been dissolved, any trustee
appointed by the Company prior to its dissolution, shall
distribute ratably to the Beneficiaries of the Excess Shares
Trust, when determined, any such assets received in respect of
the Excess Shares in any liquidation, dissolution or winding
up, or any distribution of the assets, of the Company.
Anything to the contrary herein notwithstanding, in no event
shall the amount payable to a holder with respect to Excess
Shares resulting from the exchange of Preferred Shares exceed
(A) the price per share such holder paid for the Preferred
Shares in the purported Transfer, Acquisition, change in
capital structure or other transaction or event that resulted
in the Excess Shares or (B) if the holder did not give full
value for such Excess Shares (as through a gift, devise or
other event or transaction), a price per share equal to the
Market Price for the shares of Preferred Shares on the date of
the purported Transfer, Acquisition, change in capital
structure or other transaction or event that resulted in such
Excess Shares. Any amount available for distribution in excess
of the foregoing limitations shall be paid ratably to the
holders of Preferred Shares and Excess Shares resulting from
the exchange of Preferred Shares to the extent permitted by
the foregoing limitations.
(b) Except as provided below, in the event of any
voluntary or involuntary liquidation, dissolution or winding
up, or any other distribution of the assets, of the Company,
each holder of Excess Shares resulting from the exchange of
Common Shares shall be entitled to receive, ratably with (A)
each other holder of such Excess Shares and (B) each holder of
Common Shares, that portion of the aggregate assets available
for distribution to holders of Common Shares (including
holders of Excess Shares resulting from the exchange of Common
Shares pursuant to Section 7.6(iii)), determined in accordance
with applicable law, as the number of such Excess Shares held
by such holder bears to the total number of outstanding Common
Shares and outstanding Excess Shares resulting from the
exchange of Common Shares then outstanding. The Company, as
holder of the Excess Shares in trust, or, if the Company shall
have been dissolved, any trustee appointed by the Company
prior to its dissolution, shall distribute ratably to the
Beneficiaries of the Excess Shares, when determined, any such
assets received in respect of the Excess Shares in any
liquidation, dissolution or winding up, or any distribution of
the assets, of the Company. Anything herein to the contrary
notwithstanding, in no event shall the amount payable to a
holder with respect to Excess Shares exceed (A) the price per
share such holder paid for the Equity Shares in the purported
Transfer, Acquisition, change in capital structure or other
transaction or event that resulted in the Excess Shares or (B)
if the holder did not
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give full value for such Equity Shares (as through a gift,
devise or other event or transaction), a price per share equal
to the Market Price for the Equity Shares on the date of the
purported Transfer, Acquisition, change in capital structure
or other transaction or event that resulted in such Excess
Shares. Any amount available for distribution in excess of the
foregoing limitations shall be paid ratably to the holders of
Common Shares and Excess Shares resulting from the exchange of
Common Shares to the extent permitted by the foregoing
limitations.
(iv) Voting Rights. The holders of Excess Shares shall not be
entitled to vote on any matters (except as required by the MGCL).
(v) Restrictions on Transfer; Designation of Beneficiary.
(a) Excess Shares shall not be transferable. The
Purported Record Transferee (or Purported Record Holder) may
freely designate a Beneficiary of its interest in the Excess
Shares Trust (representing the number of Excess Shares held by
the Excess Shares Trust attributable to the purported Transfer
or Acquisition that resulted in the Excess Shares), if (A) the
Excess Shares held in the Excess Shares Trust would not be
Excess Shares in the hands of such Beneficiary and (B) the
Purported Beneficial Transferee (or Purported Beneficial
Holder) does not receive a price for designating such
Beneficiary that reflects a price per share for such Excess
Shares that exceeds (1) the price per share such Purported
Beneficial Transferee (or Purported Beneficial Holder) paid
for the Equity Shares in the purported Transfer, Acquisition,
change in capital structure, or other transaction or event
that resulted in the Excess Shares or (2) if the Purported
Beneficial Transferee (or Purported Beneficial Holder) did not
give value for such Excess Shares (as through a gift, devise
or other event or transaction), a price per share equal to the
Market Price for the Equity Shares on the date of the
purported Transfer, Acquisition, change in capital structure,
or other transaction or event that resulted in the Excess
Shares. Upon such transfer of an interest in the Excess Shares
Trust, the corresponding Excess Shares in the Excess Shares
Trust automatically shall be exchanged for an equal number of
Equity Shares (depending on the type and class of Shares that
were originally exchanged for such Excess Shares), and such
Equity Shares shall be transferred of record to the
Beneficiary of the interest in the Excess Shares Trust
designated by the Purported Record Transferee (or Purported
Record Holder), as described above, if such Equity Shares
would not be Excess Shares in the hands of such Beneficiary.
Prior to any transfer of any interest in the Excess Shares
Trust, the Purported Record Transferee (or Purported Record
Holder) must give advance written notice to the Company of the
intended transfer and the Company must have waived in writing
its purchase rights under Section 7.7(vi).
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(b) Notwithstanding the foregoing, if a Purported
Beneficial Transferee (or Purported Beneficial Holder)
receives a price for designating a Beneficiary of an interest
in the Excess Shares Trust that exceeds the amounts allowable
under subparagraph (i) of this Section 7.6(v), such Purported
Beneficial Transferee (or Purported Beneficial Holder) shall
pay, or cause the Beneficiary of the interest in the Excess
Shares Trust to pay, such excess in full to the Company.
(c) If any of the transfer restrictions set forth in
this Section 7.6(v), or any application thereof, are
determined to be void, invalid or unenforceable by any court
having jurisdiction over the issue, the Purported Record
Transferee (or Purported Record Holder) may be deemed, at the
option of the Company, to have acted as the agent of the
Company in acquiring the Excess Shares as to which such
restrictions would otherwise, by their terms, apply and to
hold such Excess Shares on behalf of the Company.
(vi) Purchase Right in Excess Shares. Excess Shares shall be
deemed to have been offered for sale to the Company, or its designee, at a price
per share equal to the lesser of (i) the price per share in the transaction that
created such Excess Shares (or, in the case of devise or gift or event other
than a Transfer or Acquisition which results in the issuance of Excess Shares,
the Market Price at the time of such devise or gift or event other than a
Transfer or Acquisition which results in the issuance of Excess Shares) and (ii)
the Market Price of the Equity Shares exchanged for such Excess Shares on the
date the Company, or its designee, accepts such offer. The Company and its
assignees shall have the right to accept such offer for a period of ninety (90)
days after the later of (i) the date of the purported Transfer, Acquisition,
change in capital structure of the Company, purported change in Beneficial
Ownership or other event or transaction which resulted in such Excess Shares and
(ii) the date on which the Board of Directors determines in good faith that a
Transfer, Acquisition, change in capital structure of the Company, purported
change in Beneficial or Constructive Ownership resulting in Excess Shares has
occurred, if the Company does not receive a notice pursuant to Section 7.6(v),
but in no event later than a permitted Transfer pursuant to and in compliance
with the terms of Section 7.7(v).
(vii) Remedies Not Limited. Nothing contained in this Article
VII except Section 7.8 shall limit scope or application of the provisions of
this Section 7.7, the ability of the Company to implement or enforce compliance
with the terms hereof or the authority of the Board of Directors to take any
such other action or actions as it may deem necessary or advisable to protect
the Company and the interests of its Stockholders by preservation of the
Company's status as a REIT and to ensure compliance with applicable Share
Ownership Limits and the other restrictions set forth herein, including, without
limitation, refusal to give effect to a transaction on the books of the Company.
(viii) Authorization. At such time as the Board of Directors
authorizes a series of Preferred Shares pursuant to Section 7.3 of this Article
VII, without any further or separate action of the Board of Directors, there
shall be deemed to be authorized a series of Excess Shares
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consisting of the number of shares included in the series of Preferred Shares so
authorized and having terms, rights, restrictions and qualifications identical
thereto, except to the extent that such Excess Shares are already authorized or
this Article VII requires different terms.
SECTION 7.8 Settlements. Nothing in Sections 7.6 and 7.7 shall preclude
the settlement of any transaction with respect to the Common Shares entered into
through the facilities of the New York Stock Exchange or other national
securities exchange on which the Common Shares are listed.
SECTION 7.9 Severability. If any provision of this Article VII or any
application of any such provision is determined to be void, invalid or
unenforceable by any court having jurisdiction over the issue, the validity and
enforceability of the remaining provisions of this Article VII shall not be
affected and other applications of such provision shall be affected only to the
extent necessary to comply with the determination of such court.
SECTION 7.10 Waiver. The Company shall have authority at any time to
waive the requirements that Excess Shares be issued or be deemed outstanding in
accordance with the provisions of this Article VII if the Company determines,
based on an opinion of nationally recognized tax counsel, that the issuance of
such Excess Shares or the fact that such Excess Shares are deemed to be
outstanding, would jeopardize the status of the Company as a REIT (as that term
is defined in Section 1.5).
ARTICLE 8
STOCKHOLDERS
SECTION 8.1 Meetings of Stockholders. There shall be an annual meeting
of the Stockholders, to be held at such time and place as shall be determined by
or in the manner prescribed in the Bylaws, at which the Directors shall be
elected and any other proper business may be conducted. The annual meeting will
be held at a location convenient to the Stockholders, on a date which is a
reasonable period of time following the distribution of the Company's annual
report to Stockholders but not less than thirty (30) days after delivery of such
report. A majority of Stockholders present in person or by proxy at an annual
meeting at which a quorum is present, may, without the necessity for concurrence
by the Directors, vote to elect the Directors. A quorum shall be 50% of the then
outstanding Shares. Special meetings of Stockholders may be called in the manner
provided in the Bylaws, including at any time by Stockholders holding, in the
aggregate, not less than ten percent (10%) of the outstanding Equity Shares
entitled to be cast on any issue proposed to be considered at any such special
meeting. If there are no Directors, the officers of the Company shall promptly
call a special meeting of the Stockholders entitled to vote for the election of
successor Directors. Any meeting may be adjourned and reconvened as the
Directors determine or as provided by the Bylaws.
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SECTION 8.2 Voting Rights of Stockholders. Subject to the provisions of
any class or series of Shares then outstanding and the mandatory provisions of
any applicable laws or regulations, the Stockholders shall be entitled to vote
only on the following matters; (a) election or removal of Directors as provided
in Sections 8.1, 2.4 and 2.7 hereof; (b) amendment of these Articles of
Incorporation as provided in Section 10.1 hereof; (c) termination of the Company
as provided in Section 11.2 hereof; (d) reorganization of the Company as
provided in Section 10.2 hereof; (e) merger, consolidation or sale or other
disposition of all or substantially all of the Company Property, as provided in
Section 10.3 hereof; and (f) termination of the Company's status as a real
estate investment trust under the REIT Provisions of the Code, as provided in
Section 3.2(xxii) hereof. The Stockholders may terminate the status of the
Company as a REIT under the Code by a vote of a majority of the Shares
outstanding and entitled to vote. Except with respect to the foregoing matters,
no action taken by the Stockholders at any meeting shall in any way bind the
Directors.
SECTION 8.3 Voting Limitations on Shares held by the Advisor, Directors
and Affiliates. With respect to Shares owned by the Advisor, the Directors, or
any of their Affiliates, neither the Advisor, nor the Directors, nor any of
their Affiliates may vote or consent on matters submitted to the Stockholders
regarding the removal of the Advisor, Directors or any of their Affiliates or
any transaction between the Company and any of them. In determining the
requisite percentage in interest of Shares necessary to approve a matter on
which the Advisor, Directors and any of their Affiliates may not vote or
consent, any Shares owned by any of them shall not be included.
SECTION 8.4 Stockholder Action to be Taken by Meeting. Any action
required or permitted to be taken by the Stockholders of the Company must be
effected at a duly called annual or special meeting of Stockholders of the
Company and may not be effected by any consent in writing of such Stockholders.
SECTION 8.5 Right of Inspection. Any Stockholder and any designated
representative thereof shall be permitted access to all records of the Company
at all reasonable times, and may inspect and copy any of them for a reasonable
charge. Inspection of the Company books and records by the office or agency
administering the securities laws of a jurisdiction shall be provided upon
reasonable notice and during normal business hours.
SECTION 8.6 Access to Stockholder List. An alphabetical list of the
names, addresses and telephone numbers of the Stockholders of the Company, along
with the number of Shares held by each of them (the "Stockholder List"), shall
be maintained as part of the books and records of the Company and shall be
available for inspection by any Stockholder or the Stockholder's designated
agent at the home office of the Company upon the request of the Stockholder. The
Stockholder List shall be updated at least quarterly to reflect changes in the
information contained therein. A copy of such list shall be mailed to any
Stockholder so requesting within ten (10) days of the request. The copy of the
Stockholder List shall be printed in alphabetical order, on white paper, and in
a readily readable type size (in no event smaller than 10-point type). The
Company may impose a reasonable charge for expenses incurred in
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reproduction pursuant to the Stockholder request. A Stockholder may request a
copy of the Stockholder List in connection with, without limitation, matters
relating to Stockholders' voting rights, and the exercise of Stockholder rights
under federal proxy laws.
If the Advisor or Directors neglect or refuse to exhibit, produce or
mail a copy of the Stockholder List as requested, the Advisor and the Directors
shall be liable to any Stockholder requesting the list for the costs, including
attorneys' fees, incurred by that Stockholder for compelling the production of
the Stockholder List, and for actual damages suffered by any Stockholder by
reason of such refusal or neglect. It shall be a defense that the actual purpose
and reason for the requests for inspection or for a copy of the Stockholder List
is to secure such list of Stockholders or other information for the purpose of
selling such list or copies thereof, or of using the same for a commercial
purpose other than in the interest of the applicant as a Stockholder relative to
the affairs of the Company. The Company may require the Stockholder requesting
the Stockholder List to represent that the list is not requested for a
commercial purpose unrelated to the Stockholder's interest in the Company. The
remedies provided hereunder to Stockholders requesting copies of the Stockholder
List are in addition, to and shall not in any way limit, other remedies
available to Stockholders under federal law, or the laws of any state.
SECTION 8.7 Reports. The Directors, including the Independent
Directors, shall take reasonable steps to insure that the Company shall cause to
be prepared and mailed or delivered to each Stockholder as of a record date
after the end of the fiscal year and each holder of other publicly held
securities of the Company within one hundred twenty (120) days after the end of
the fiscal year to which it relates an annual report for each fiscal year ending
after the initial public offering of its securities which shall include: (i)
financial statements prepared in accordance with generally accepted accounting
principles which are audited and reported on by independent certified public
accountants; (ii) the ratio of the costs of raising capital during the period to
the capital raised; (iii) the aggregate amount of advisory fees and the
aggregate amount of other fees paid to the Advisor and any Affiliate of the
Advisor by the Company and including fees or changes paid to the Advisor and any
Affiliate of the Advisor by third parties doing business with the Company; (iv)
the Operating Expenses of the Company, stated as a percentage of Average
Invested Assets and as a percentage of its Net Income; (v) a report from the
Independent Directors that the policies being followed by the Company are in the
best interests of its Stockholders and the basis for such determination; (vi)
separately stated, full disclosure of all material terms, factors, and
circumstances surrounding any and all transactions involving the Company,
Directors, Advisors and any Affiliate thereof occurring in the year for which
the annual report is made, and the Independent Directors shall be specifically
charged with a duty to examine and comment in the report on the fairness of such
transactions; and (vii) Distributions to the Stockholders for the period,
identifying the source of such Distributions, and if such information is not
available at the time of the distribution, a written explanation of the relevant
circumstances will accompany the Distributions (with the statement as to the
source of Distributions to be sent to Stockholders not later than sixty (60)
days after the end of the fiscal year in which the distribution was made).
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ARTICLE 9
LIABILITY OF STOCKHOLDERS, DIRECTORS, ADVISORS AND AFFILIATES;
TRANSACTIONS BETWEEN AFFILIATES AND THE COMPANY
SECTION 9.1 Limitation of Stockholder Liability. No Stockholder shall
be liable for any debt, claim, demand, judgment or obligation of any kind of,
against or with respect to the Company by reason of his being a Stockholder, nor
shall any Stockholder be subject to any personal liability whatsoever, in tort,
contract or otherwise, to any Person in connection with the Company Property or
the affairs of the Company by reason of his being a Stockholder. The Company
shall include a clause in its contracts which provides that Stockholders shall
not be personally liable for obligations entered into on behalf of the Company.
SECTION 9.2 Limitation of Liability and Indemnification.
(i) The Company shall indemnify and hold harmless a Director,
Advisor, or Affiliate (the "Indemnitee") against any or all losses or
liabilities reasonably incurred by the Indemnitee in connection with or by
reason of any act or omission performed or omitted to be performed on behalf of
the Company in such capacity, provided, that the Indemnitee has determined, in
good faith, that the course of conduct which caused the loss or liability was in
the best interests of the Company. The Company shall not indemnify or hold
harmless the Indemnitee if: (i) in the case that the Indemnitee is not an
Independent Director, the loss or liability was the result of negligence or
misconduct by the Indemnitee, or (ii) in the case that the Indemnitee is an
Independent Director, the loss or liability was the result of gross negligence
or willful misconduct by the Indemnitee. Any indemnification of expenses or
agreement to hold harmless may be paid only out of the Net Assets of the Company
and no portion may be recoverable from the Stockholders.
(ii) The Company shall not provide indemnification for any
loss, liability or expense arising from or out of an alleged violation of
federal or state securities laws by such party unless one or more of the
following conditions are met: (i) there has been a successful adjudication on
the merits of each count involving alleged securities law violations as to the
Indemnitee, (ii) such claims have been dismissed with prejudice on the merits by
a court of competent jurisdiction as to the Indemnitee; or (iii) a court of
competent jurisdiction approves a settlement of the claims against the
Indemnitee and finds that indemnification of the settlement and the related
costs should be made, and the court considering the request for indemnification
has been advised of the position of the Securities and Exchange Commission and
of the published position of any state securities regulatory authority in which
securities of the Company were offered or sold as to indemnification for
violations of securities laws.
(iii) Notwithstanding anything to the contrary contained in
the provisions of subsection (i) and (ii) above of this Section, the Company
shall not indemnify or hold harmless an Indemnitee if it is established that:
(a) the act or omission was material to the loss or liability and was committed
in bad faith or was the result of active or deliberate dishonesty, (b) the
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Indemnitee actually received an improper personal benefit in money, property, or
services, (c) in the case of any criminal proceeding, the Indemnitee had
reasonable cause to believe that the act or omission was unlawful, or (d) in a
proceeding by or in the right of the Company, the Indemnitee shall have been
adjudged to be liable to the Company.
(iv) The Directors may take such action as is necessary to
carry out this Section 9.2 and are expressly empowered to adopt, approve and
amend from time to time Bylaws, resolutions or contracts implementing such
provisions. No amendment of these Articles of Incorporation or repeal of any of
its provisions shall limit or eliminate the right of indemnification provided
hereunder with respect to acts or omissions occurring prior to such amendment or
repeal.
SECTION 9.3 Payment of Expenses. The Company shall pay or reimburse
reasonable legal expenses and other costs incurred by a Director, Advisor, or
Affiliate in advance of final disposition of a proceeding if all of the
following are satisfied: (i) the proceeding relates to acts or omissions with
respect to the performance of duties or services on behalf of the Company, (ii)
the Indemnitee provides the Company with written affirmation of his good faith
belief that he has met the standard of conduct necessary for indemnification by
the Company as authorized by Section 9.2 hereof, (iii) the legal proceeding was
initiated by a third party who is not a Stockholder or, if by a Stockholder of
the Company acting in his or her capacity as such, a court of competent
jurisdiction approves such advancement, and (iv) the Indemnitee provides the
Company with a written agreement to repay the amount paid or reimbursed by the
Company, together with the applicable legal rate of interest thereon, if it is
ultimately determined that the Indemnitee did not comply with the requisite
standard of conduct and is not entitled to indemnification. Any indemnification
payment or reimbursement of expenses will be furnished in accordance with the
procedures in Section 2-418(e) of the Maryland General Corporation Law.
SECTION 9.4 Express Exculpatory Clauses In Instruments. Neither the
Stockholders nor the Directors, officers, employees or agents of the Company
shall be liable under any written instrument creating an obligation of the
Company by reason of their being Stockholders, Directors, officers, employees or
agents of the Company, and all Persons shall look solely to the Company Property
for the payment of any claim under or for the performance of that instrument.
The omission of the foregoing exculpatory language from any instrument shall not
affect the validity or enforceability of such instrument and shall not render
any Stockholder, Director, officer, employee or agent liable thereunder to any
third party, nor shall the Directors or any officer, employee or agent of the
Company be liable to anyone as a result of such omission.
SECTION 9.5 Transactions with Affiliates. The Company shall not engage
in transactions with any Affiliates, except to the extent that each such
transaction has, after disclosure of such affiliation, been approved or ratified
by the affirmative vote of a majority of the Directors (including a majority of
the Independent Directors) not Affiliated with the person who is party to the
transaction and:
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(i) The transaction is fair and reasonable to the Company
and its Stockholders.
(ii) The terms of such transaction are at least as favorable
as the terms of any comparable transactions made on an arms-length basis and
known to the Directors.
(iii) The total consideration is not in excess of the
appraised value of the property being acquired, if an acquisition is involved.
(iv) Payments to the Advisor, its Affiliates and the Directors
for services rendered in a capacity other than that as Advisor or Director may
only be made upon a determination that:
(a) The compensation is not in excess of their
compensation paid for any comparable services; and
(b) The compensation is not greater than the charges
for comparable services available from others who are
competent and not Affiliated with any of the parties involved.
Transactions between the Company and its Affiliates are further subject
to any express restrictions in these Articles of Incorporation (including
Article IV and Section 7.7) or adopted by the Directors in the Bylaws or by
resolution, and further subject to the disclosure and ratification requirements
of MGCL Section 2-419 and other applicable law.
ARTICLE 10
AMENDMENT; REORGANIZATION; MERGER, ETC.
SECTION 10.1 Amendment.
(i) These Articles of Incorporation may be amended, without
the necessity for concurrence by the Directors, by the affirmative vote of the
holders of not less than a majority of the Equity Shares then outstanding and
entitled to vote thereon, except that (1) no amendment may be made which would
change any rights with respect to any outstanding class of securities, by
reducing the amount payable thereon upon liquidation, or by diminishing or
eliminating any voting rights pertaining thereto; and (2) Section 10.2 hereof
and this Section 10.1 shall not be amended (or any other provision of these
Articles of Incorporation be amended or any provision of these Articles of
Incorporation be added that would have the effect of amending such sections),
without the affirmative vote of the holders of two-thirds (2/3) of the Equity
Shares then outstanding and entitled to vote thereon.
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(ii) The Directors, by a two-thirds (2/3) vote, may amend
provisions of these Articles of Incorporation from time to time as necessary to
enable the Company to qualify as a real estate investment trust under the REIT
Provisions of the Code. With the exception of the foregoing, the Directors may
not amend these Articles of Incorporation.
(iii) An amendment to these Articles of Incorporation shall
become effective as provided in Section 12.5.
(iv) These Articles of Incorporation may not be amended except
as provided in this Section 10.1.
SECTION 10.2 Reorganization. Subject to the provisions of any class or
series of Equity Shares at the time outstanding, the Directors shall have the
power (i) to cause the organization of a corporation, association, trust or
other organization to take over the Company Property and to carry on the affairs
of the Company, or (ii) merge the Company into, or sell, convey and transfer the
Company Property to any such corporation, association, trust or organization in
exchange for Securities thereof or beneficial interests therein, and the
assumption by the transferee of the liabilities of the Company, and upon the
occurrence of (i) or (ii) above terminate the Company and deliver such
Securities or beneficial interests ratably among the Stockholders according to
the respective rights of the class or series of Equity Shares held by them;
provided, however, that any such action shall have been approved, at a meeting
of the Stockholders called for that purpose, by the affirmative vote of the
holders of not less than a majority of the Equity Shares then outstanding and
entitled to vote thereon.
SECTION 10.3 Merger, Consolidation or Sale of Company Property. Subject
to the provisions of any class or series of Equity Shares at the time
outstanding, the Directors shall have the power to (i) merge the Company into
another entity, (ii) consolidate the Company with one (1) or more other entities
into a new entity; (iii) sell or otherwise dispose of all or substantially all
of the Company Property; or (iv) dissolve or liquidate the Company, other than
before the initial investment in Company Property; provided, however, that such
action shall have been approved, at a meeting of the Stockholders called for
that purpose, by the affirmative vote of the holders of not less than a majority
of the Equity Shares then outstanding and entitled to vote thereon. Any such
transaction involving an Affiliate of the Company or the Advisor also must be
approved by a majority of the Directors (including a majority of the Independent
Directors) not otherwise interested in such transaction as fair and reasonable
to the Company and on terms and conditions not less favorable to the Company
than those available from unaffiliated third parties.
In connection with any proposed Roll-Up Transaction, which, in general
terms, is any transaction involving the acquisition, merger, conversion, or
consolidation, directly or indirectly, of the Company and the issuance of
securities of a Roll-Up Entity that would be created or would survive after the
successful completion of the Roll-Up Transaction, an appraisal of all Properties
shall be obtained from an Independent Expert. The Properties shall be appraised
on a consistent basis, and the appraisal shall be based on the evaluation of all
relevant information and shall
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indicate the value of the Properties as of a date immediately prior to the
announcement of the proposed Roll-Up Transaction. The appraisal shall assume an
orderly liquidation of Properties over a 12-month period. The terms of the
engagement of the Independent Expert shall clearly state that the engagement is
for the benefit of the Company and the Stockholders. A summary of the appraisal,
indicating all material assumptions underlying the appraisal, shall be included
in a report to Stockholders in connection with a proposed Roll-Up Transaction.
In connection with a proposed Roll-Up Transaction, the person sponsoring the
Roll-Up Transaction shall offer to Stockholders who vote against the proposed
Roll-Up Transaction the choice of:
(i) accepting the securities of a Roll-Up Entity offered
in the proposed Roll-Up Transaction; or
(ii) one of the following:
(a) remaining Stockholders of the Company and
preserving their interests therein on the same terms and
conditions as existed previously; or
(b) receiving cash in an amount equal to the
Stockholder's pro rata share of the appraised value of the net
assets of the Company.
The Company is prohibited from participating in any proposed Roll-Up
Transaction:
(iii) which would result in the Stockholders having democracy
rights in a Roll- Up Entity that are less than the rights provided for in
Sections 8.1, 8.2, 8.4, 8.5, 8.6 and 9.1 of these Articles of Incorporation;
(iv) which includes provisions that would operate as a
material impediment to, or frustration of, the accumulation of shares by any
purchaser of the securities of the Roll-Up Entity (except to the minimum extent
necessary to preserve the tax status of the Roll-Up Entity), or which would
limit the ability of an investor to exercise the voting rights of its Securities
of the Roll-Up Entity on the basis of the number of Shares held by that
investor;
(v) in which investor's rights to access of records of the
Roll-Up Entity will be less than those described in Sections 8.5 and 8.6 hereof;
or
(vi) in which any of the costs of the Roll-Up Transaction
would be borne by the Company if the Roll-Up Transaction is not approved by the
Stockholders.
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<PAGE>
ARTICLE 11
DURATION OF COMPANY
SECTION 11.1 The Company automatically will terminate and dissolve on
December 31, 2008, will undertake orderly liquidation and Sales of Company
assets and will distribute any Net Sales Proceeds to Stockholders, unless
Listing occurs, in which event the Company shall continue perpetually unless
dissolved pursuant to the provisions contained herein or pursuant to any
applicable provision of the MGCL.
SECTION 11.2 Dissolution of the Company by Stockholder Vote. The
Company may be terminated at any time, without the necessity for concurrence by
the Board of Directors, by the vote or written consent of a majority of the
outstanding Equity Shares.
ARTICLE 12
MISCELLANEOUS
SECTION 12.1 Governing Law. These Articles of Incorporation are
executed by the undersigned Directors and delivered in the State of Maryland
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 Maryland without regard to
conflicts of laws provisions thereof.
SECTION 12.2 Reliance by Third Parties. Any certificate shall be final
and conclusive as to any persons dealing with the Company if executed by an
individual who, according to the records of the Company or of any recording
office in which these Articles of Incorporation may be recorded, appears to be
the Secretary or an Assistant Secretary of the Company or a Director, and if
certifying to: (i) the number or identity of Directors, officers of the Company
or Stockholders; (ii) the due authorization of the execution of any document;
(iii) the action or vote taken, and the existence of a quorum, at a meeting of
the Directors or Stockholders; (iv) a copy of the Articles of Incorporation or
of the Bylaws as a true and complete copy as then in force; (v) an amendment to
these Articles of Incorporation; (vi) the dissolution of the Company; or (vii)
the existence of any fact or facts which relate to the affairs of the Company.
No purchaser, lender, transfer agent or other person shall be bound to make any
inquiry concerning the validity of any transaction purporting to be made on
behalf of the Company by the Directors or by any duly authorized officer,
employee or agent of the Company.
SECTION 12.3 Provisions in Conflict with Law or Regulations.
(i) The provisions of these Articles of Incorporation are
severable, and if the Directors shall determine that any one or more of such
provisions are in conflict with the REIT Provisions of the Code, or other
applicable federal or state laws, the conflicting provisions shall be deemed
never to have constituted a part of these Articles of Incorporation, even
without any
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<PAGE>
amendment of these Articles of Incorporation pursuant to Section 10.1 hereof;
provided, however, that such determination by the Directors shall not affect or
impair any of the remaining provisions of these Articles of Incorporation or
render invalid or improper any action taken or omitted prior to such
determination. No Director shall be liable for making or failing to make such a
determination.
(ii) If any provision of these Articles of Incorporation shall
be held invalid or unenforceable in any jurisdiction, such holding shall not in
any manner affect or render invalid or unenforceable such provision in any other
jurisdiction or any other provision of these Articles of Incorporation in any
jurisdiction.
SECTION 12.4 Construction. In these Articles of Incorporation, 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 both
genders. The title and headings of different parts are inserted for convenience
and shall not affect the meaning, construction or effect of these Articles of
Incorporation. In defining or interpreting the powers and duties of the Company
and its Directors and officers, reference may be made, to the extent
appropriate, to the Code and to Titles 1 through 3 of the Corporations and
Associations Article of the Annotated Code of Maryland, referred to herein as
the "MGCL."
SECTION 12.5 Recordation. These Articles of Incorporation and any
amendment hereto shall be filed for record with the State Department of
Assessments and Taxation of Maryland and may also be filed or recorded in such
other places as the Directors deem appropriate, but failure to file for record
these Articles of Incorporation or any amendment hereto in any office other than
in the State of Maryland shall not affect or impair the validity or
effectiveness of these Articles of Incorporation or any amendment hereto. A
restated Articles of Incorporation shall, upon filing, be conclusive evidence of
all amendments contained therein and may thereafter be referred to in lieu of
the original Declaration of Trust and the various amendments thereto.
* * * * * * * * * *
THIRD: This amendment and restatement of the Articles of Incorporation
of the Company has been approved by a majority of the Directors and approved by
the Stockholders as required by law.
FOURTH: The Company currently has authority to issue one hundred
thousand (100,000) shares of capital stock, all of one class of common stock,
par value $0.01 per share. The number, classes, par values and preferences,
rights, powers, restrictions, limitations, qualifications, terms and conditions
of the shares of capital stock that the Company will have authority to issue
upon effectiveness of this amendment and restatement of its Articles of
Incorporation are set forth in Article VII of the foregoing amendment and
restatement of such Articles of Incorporation.
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<PAGE>
IN WITNESS WHEREOF, these Articles of Amendment and Restatement have
been signed on this ___ day of ______________, 1998, by the undersigned
President and Secretary, each of whom acknowledges, under penalty of perjury,
that this document is his or her free act and deed, and that to the best of his
or her knowledge, information and belief, the matters and facts set forth herein
are true in all material respects.
CNL HEALTH CARE PROPERTIES, INC.
By: ______________________________
Name: Robert A. Bourne
Title: President
Attest:
By: ______________________________
Name: Lynn E. Rose
Title: Secretary
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SHAW PITTMAN POTTS & TROWBRIDGE
2300 N STREET, N.W.
WASHINGTON, D.C. 20037-1128
TELEPHONE: 202.663.8000
FAX: 202.663.8007
September 16, 1998
CNL Health Care Properties, Inc.
400 East South Street
Orlando, Florida 32801
Gentlemen:
We have acted as counsel for CNL Health Care Properties, Inc., a
Maryland corporation (the "Company"), in connection with the registration and
proposed sale of (i) up to 15,500,000 shares of common stock of the Company, par
value $.01 per share, having a per share purchase price of $10.00 (the
"Shares"), (ii) warrants (the "Warrants") to purchase up to 600,000 shares of
common stock of the Company, par value $.01 per share and (iii) up to 600,000
shares of common stock of the Company, par value $.01 per share (the "Warrant
Shares"), issuable upon the exercise of the Warrants and the payment of the
purchase price of $12.00 per share, in accordance with the Warrant Purchase
Agreement (the "Warrant Purchase Agreement") filed as Exhibit 1.3 to the
Registration Statement on Form S-11 (File No. 333-47411) which was filed by the
Company under the Securities Act of 1933 (the "Registration Statement").
Based upon an examination and review of such documents as we have
deemed necessary, relevant or appropriate, and with respect to the issuance of
the Warrants and the Warrant Shares, a review of the provisions of published
compilations of the Florida Business Corporation Act in effect as of the date
hereof, we are of the opinion that (i) the Company has the corporate power to
issue the Shares, the Warrants and the Warrant Shares, (ii) upon issuance and
delivery as provided in the Registration Statement (and, with respect to the
Warrant Shares, the Warrant Purchase Agreement), such Shares and Warrant Shares
will be validly issued, fully paid and nonassessable and (iii) upon issuance and
delivery as provided in the Registration Statement, the Warrants will be validly
issued.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Opinions" in the prospectus constituting a part of the Registration Statement.
Very truly yours,
/s/ SHAW PITTMAN POTTS & TROWBRIDGE
SHAW PITTMAN POTTS & TROWBRIDGE
<PAGE>
SHAW PITTMAN POTTS & TROWBRIDGE
2300 N STREET, N.W.
WASHINGTON, D.C. 20037-1128
TELEPHONE: 202.663.8000
FAX: 202.663.8007
September 16, 1998
CNL Health Care Properties, Inc.
400 East South Street
Orlando, Florida 32801
Ladies and Gentlemen:
You have requested certain opinions regarding the application of U.S.
federal income tax laws to CNL Health Care Properties, Inc. (the "Company") in
connection with the registration statement on Form S-11, No. 333-47411,
originally filed with the Securities and Exchange Commission on March 5, 1998,
and the amendments thereto (the "Registration Statement"). All capitalized terms
used but not otherwise defined herein shall have the respective meanings given
them in the prospectus included in the amendment to the Registration Statement
filed on or about September 16, 1998.
In rendering the following opinions, we have examined such statutes,
regulations, records, certificates and other documents as we have considered
necessary or appropriate as a basis for such opinions, including the following:
(1) the Registration Statement (including all Exhibits thereto and all
amendments made thereto through the date hereof), (2) the Articles of
Incorporation of the Company, together with all amendments, (3) certain written
representations of the Company contained in a letter to us dated on or about the
date hereof and (4) such other documents or information as we have deemed
necessary to render the opinions set forth in this letter. In our review, we
have assumed, with your consent, that the documents listed above that we
reviewed in proposed form will be executed in substantially the same form, all
of the representations and statements set forth in such documents are true and
correct, and all of the obligations imposed by any such documents on the parties
thereto, including obligations imposed under the Articles of Incorporation of
the Company, have been or will be performed or satisfied in accordance with
their terms. We also have assumed the genuineness of all signatures, the proper
execution of all documents, the authenticity of all documents submitted to us as
originals, the conformity to originals of documents submitted to us as copies,
and the authenticity of the originals from which any copies were made.
Unless facts material to the opinions expressed herein are specifically
stated to have been independently established or verified by us, we have relied
as to such facts solely upon the representations made by the Company. To the
extent that the representations of the Company are with respect to matters set
forth in the Code or Treasury Regulations, we have reviewed with the individuals
making such representations the relevant provisions of the Code, the applicable
Treasury Regulations and published administrative interpretations thereof.
Based upon, and subject to, the foregoing, we are of the opinion as follows:
1. Commencing with the Company's taxable year ending December 31, 1998, the
Company will be organized in conformity with the requirements for qualification
as a REIT, and the Company's proposed method of operation will enable it to meet
the requirements for qualification as a REIT under the Code.
2. The discussion of matters of law under the heading "FEDERAL INCOME TAX
CONSIDERATIONS" in the Registration Statement is accurate in all material
respects, and such discussion fairly summarizes the federal income tax
considerations that are likely to be material to a holder of Shares of the
Company.
<PAGE>
3. Assuming that there is no waiver of the restrictions on ownership of Shares
in the Articles of Incorporation of the Company and that a tax-exempt
stockholder does not finance the acquisition of its Shares with "acquisition
indebtedness" within the meaning of Section 524(c) of the Code or otherwise use
its Shares in an unrelated trade or business, the distributions of the Company
with respect to such tax-exempt shareholder will not constitute unrelated
business taxable income as defined in Section 512(a) of the Code.
4. Assuming (i) the Company leases the Properties on substantially the same
terms and conditions described in the "Business -- Description of Property
Leases" section of the Registration Statement, and (ii) the residual value of
the Properties for which the Company owns the underlying land remaining after
the end of their lease terms (including all renewal periods) may reasonably be
expected to be at least 20% of the Company's cost of such properties, and the
remaining useful lives of the Properties for which the Company owns the
underlying land at the end of their lease terms (including all renewal periods)
may reasonably be expected to be at least 20% of such properties' useful lives
at the beginning of their lease terms, the Company will be treated as the owner
of the Properties for which the Company owns the underlying land for federal
income tax purposes and will be entitled to claim depreciation and other tax
benefits associated with such ownership.
5. Assuming (i) the Mortgage Loans are made on the terms and conditions
described in the "Business -- Mortgage Loans" section of the Registration
Statement, and (ii) the amount of each loan does not exceed the fair market
value of the real property subject to the mortgage at the time of the loan
commitment, the income generated through the Company's investments in Mortgage
Loans will be treated as qualifying income under the 75 percent gross income
test.
6. Assuming (i) the Secured Equipment Leases are made on substantially the same
terms and conditions described in the "Business -- General" section of the
Registration Statement, and (ii) each of the Secured Equipment Leases will have
a term that equals or exceeds the useful life of the Equipment subject to the
lease, the Company will not be treated as the owner of the Equipment that is
subject to the Secured Equipment Leases and the Company will be able to treat
the Secured Equipment Leases as loans secured by personal property for federal
income tax purposes.
7. Assuming that each Joint Venture has the characteristics described in the
"Business -- Joint Venture Arrangements" section of the Registration Statement,
and is operated in the same manner as the Company operates with respect to
Properties that it owns directly, (i) the Joint Ventures will be treated as
partnerships, as defined in Sections 7701(a)(2) and 761(a) of the Code and not
as associations taxable as corporations, and the Company will be subject to tax
as a partner pursuant to Sections 701 through 761 of the Code and (ii) all
material allocations to the Company of income, gain, loss and deduction as
provided in the Joint Venture Agreements and as discussed in the Registration
Statement will be respected under Section 704(b) of the Code.
For a discussion relating the law to the facts and legal analysis
underlying the opinions set forth in this letter, we incorporate by reference
the discussion of federal income tax issues, which we assisted in preparing, in
the sections of the Registration Statement under the heading "FEDERAL INCOME TAX
CONSIDERATIONS."
The opinions set forth in this letter are based on existing law as
contained in the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury Regulations promulgated thereunder (including any Temporary and
Proposed Regulations), and interpretations of the foregoing by the Internal
Revenue Service ("IRS") and by the courts in effect (or, in case of certain
Proposed Regulations, proposed) as of the date hereof, all of which are subject
to change, both retroactively or prospectively, and to possibly different
interpretations. Moreover, the Company's ability to achieve and maintain
qualification as a REIT depends upon its ability to achieve and maintain certain
diversity of stock ownership requirements and, through actual annual operating
results, certain requirements under the Code regarding its income, assets and
distribution levels. No assurance can be given that the actual ownership of the
Company's stock and its actual operating results and distributions for any
taxable year will satisfy the tests necessary to achieve and maintain its status
as a REIT. We assume no obligation to update the opinions set forth in this
letter. We believe that the conclusions expressed herein, if challenged by the
IRS, would be sustained in court. Because our positions are not binding upon the
IRS or the courts, however, there can be no assurance that contrary positions
may not be successfully asserted by the IRS.
<PAGE>
The foregoing opinions are limited to the specific matters covered
thereby and should not be interpreted to imply the undersigned has offered its
opinion on any other matter.
We hereby consent to the use and filing of this opinion as an exhibit
to the Registration Statement and to all references to us in the Registration
Statement.
Very truly yours,
SHAW, PITTMAN, POTTS & TROWBRIDGE
By: /s/ Charles B. Temkin
Charles B. Temkin
<PAGE>
Exhibit 10.1
Form of Escrow Agreement between CNL Health Care Properties, Inc.
and SouthTrust Asset Management Company of Florida, N.A.
<PAGE>
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (the "Agreement") is dated this ___ day of
_____________, 1998, by and among CNL HEALTH CARE PROPERTIES, INC., a Maryland
corporation (the "Company"), CNL SECURITIES CORP., a Florida corporation (the
"Managing Dealer"), and SOUTHTRUST ASSET MANAGEMENT COMPANY OF FLORIDA, N.A.
(the "Escrow Agent"). This Agreement shall be effective as of the effective date
of the Company's Registration Statement filed with the Securities and Exchange
Commission (the "Effective Date").
WHEREAS, the Company proposes to offer and sell, on a best-efforts
basis through the Managing Dealer and selected broker-dealers registered with
the National Association of Securities Dealers, Inc. (the Managing Dealer and
such selected broker-dealers are hereinafter referred to collectively as the
"Soliciting Dealers") up to 15,500,000 shares of common stock of the Company
(the "Shares") to investors at $10.00 per Share pursuant to a registration
statement (the "Registration Statement") filed with the Securities and Exchange
Commission;
WHEREAS, the Company has agreed that the subscription price paid in
cash by subscribers for Shares will be refunded to such subscribers if less than
an aggregate of 250,000 Shares of the Company have been sold (which 250,000
Shares shall not include subscriptions from Pennsylvania investors unless
subscriptions for at least 777,500 Shares are received and accepted from all
investors), and payment therefor received, within one year of the initial
effective date of the Company's prospectus (each date referred to herein
individually as the "Closing Date"); and
WHEREAS, the Company and the Managing Dealer desire to establish an
escrow in which funds received from subscribers will be deposited until the
Closing Date or such earlier date on which subscriptions for at least 250,000
Shares have been received (which 250,000 Shares shall not include subscriptions
from Pennsylvania investors), and the Escrow Agent is willing to serve as Escrow
Agent upon the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the parties, the parties covenant and agree as follows.
1. Establishment of Escrow Accounts. On or prior to the Effective Date,
the Company and the Managing Dealer shall establish an interest-bearing escrow
account with the Escrow Agent, which escrow account shall be entitled "ESCROW
ACCOUNT FOR THE BENEFIT OF SUBSCRIBERS FOR COMMON STOCK OF CNL HEALTH CARE
PROPERTIES, INC." (the "Escrow Account"). All monies deposited in the Escrow
Account are hereinafter referred to as the "Escrowed Funds." The Managing Dealer
will, and will cause selected broker-dealers acting as Soliciting Dealers to,
instruct subscribers to make checks for subscriptions payable to the order of
the Escrow Agent until such time (if any) as the Escrowed Funds are deliverable
to the Company pursuant to the provisions of Paragraph 5(a) below. From and
after such time, checks may be made payable to either the Escrow Agent or the
Company. Any checks received prior to the time, if any, that the Escrowed Funds
are deliverable to the
--3--
<PAGE>
Company pursuant to the provisions of Paragraph 5(a) below that are made payable
to a party other than the Escrow Agent shall be returned to the Soliciting
Dealer who submitted the check. The Managing Dealer may authorize certain
Soliciting Dealers which are "$250,000 clearing broker-dealers" to instruct
their customers to make their checks for Shares subscribed for payable directly
to the Soliciting Dealer. In such case, the Soliciting Dealer will collect the
proceeds of the subscribers' checks and issue a check made payable to the order
of the Escrow Agent for the aggregate amount of the subscription proceeds.
2. Deposits into the Escrow Account. The Managing Dealer will promptly
deliver all monies received from subscribers for the payment of Shares to the
Escrow Agent for deposit in the Escrow Account. Until such time that the
Escrowed Funds are deliverable to the Company pursuant to the provisions of
Paragraph 5(a) below, the Managing Dealer also will deliver to the Escrow Agent
a written account of each sale, which account shall set forth, among other
things, the following information: (i) the subscriber's name and address, (ii)
the number of Shares purchased by such subscriber, and (iii) the amount paid for
by such subscriber for such Shares. The Company is aware and understands that,
during the escrow period, it is not entitled to any funds received into escrow
and no amounts deposited in the Escrow Account shall become the property of the
Company or any other entity, or be subject to the debts of the Company or any
other entity.
3. Collection Procedure.
(a) The Escrow Agent is hereby authorized to forward each
check for collection and, upon collection of the proceeds of each
check, to deposit the collected proceeds in the Escrow Account or,
alternatively, the Escrow Agent may telephone the bank on which the
check is drawn to confirm that the check has been paid.
(b) Any check returned unpaid to the Escrow Agent shall be
returned to the Soliciting Dealer that submitted the check. In such
cases the Escrow Agent will promptly notify the Company of such return.
(c) In the event that (i) the Company rejects any subscription
for Shares or (ii) an investor who has telephonically or orally
subscribed for Shares properly withdraws such subscription within
fifteen (15) days from the date written confirmation has been mailed to
the subscriber, and, in either such event, the Escrow Agent has already
collected funds for such subscription, the Escrow Agent shall promptly
issue a refund check to the drawer of the check submitted by or on
behalf of the rejected or withdrawing subscriber. If either of the
events specified in the clauses (i) or (ii) of the preceding sentence
occur and, in either such event, the Escrow Agent has not yet collected
funds for such subscription but has submitted the check relating to
such subscription for collection, the Escrow Agent shall promptly issue
a check in the amount of such check to the rejected
--2--
<PAGE>
or withdrawing subscriber after the Escrow Agent has cleared such
funds. If the Escrow Agent has not yet submitted the check relating to
the subscription of the rejected or withdrawing subscriber, the Escrow
Agent shall promptly remit such check directly to the drawer of the
check submitted by or on behalf of the subscriber.
4. Investment of Escrowed Funds. The Escrow Agent, immediately upon
receipt of each check remitted to it, shall deposit such check in
interest-bearing savings accounts, in short-term certificates of deposit issued
by a bank, or in other short-term securities directly or indirectly issued or
guaranteed by the United States government, all as directed by the Company.
Interest and dividends earned on such investments shall be similarly reinvested.
Following the distribution of Escrowed Funds to the Company pursuant to
Paragraph 5 below, any funds remaining in the Escrow Account shall be invested
in bank money market funds or other similar instruments as directed by the
Company.
5. Distribution of Escrowed Funds. The Escrow Agent shall distribute
the Escrowed Funds in the amounts, at the times, and upon the conditions
hereinafter set forth in this Agreement.
(a) Subject to the last three sentences of this Paragraph
5(a), if at any time on or prior to the Closing Date, an aggregate of
250,000 Shares of the Company have been sold, then upon the happening
of such event, the Escrow Agent shall deliver the Escrowed Funds to the
Company. An affidavit or certification from an officer of the Company
stating that, after excluding all Shares covered by the subscriptions
described in the last three sentences of this Paragraph 5(a), 250,000
Shares have been timely sold, together with the receipt by the Escrow
Agent of a minimum of $2,500,000 in cleared funds attributable to sales
of Shares shall constitute sufficient evidence for the purposes of this
Agreement that such event has occurred. Thereafter, the Escrow Agent
shall release from the Escrow Account to the Company any and all
Escrowed Funds therein, together with all interest earned thereon, upon
the written request of an officer of the Company, except as expressly
provided otherwise in the next three sentences. First, subscriptions
from investors who are Pennsylvania residents shall not be included in
determining whether the minimum 250,000 Shares have been sold, and such
subscription funds shall not be released from escrow until the Escrow
Agent has received $7,775,000 in Escrowed Funds (including any funds
included in reaching the $2,500,000 minimum) attributable to sales of
Shares. Second, subscriptions from investors who have subscribed for
Shares orally, where representatives of a Soliciting Dealer have
executed the Subscription Agreement relating to such Shares on behalf
of the investor, shall not be included in determining whether the
minimum 250,000 Shares have been sold for a period of ten (10) days
from the date written confirmation has been received by the subscriber,
provided that such subscriptions shall not be released from escrow
until the expiration of a period fifteen (15) days from the date
written confirmation has been mailed to the subscriber relating to such
subscriptions. Third, subscriptions from investors who received a
prospectus less than five (5) business days prior to the determination
under this subparagraph (a) of the
--3--
<PAGE>
number of available Shares to be released from escrow as evidenced by
the date of execution of such investor's subscription agreement shall
not be included in determining whether the minimum 250,000 Shares have
been sold.
(b) If the Escrowed Funds do not, on or prior to the Closing
Date, become deliverable to the Company pursuant to subparagraph (a)
above, the Escrow Agent shall return the Escrowed Funds to the
respective subscribers in amounts equal to the subscription amount
theretofore paid by each of them, together with interest calculated as
described in Paragraph 6 below and without deduction, penalty or
expense to the subscriber. The Escrow Agent shall notify the Company
and the Managing Dealer of any such return of subscription amounts. The
purchase money returned to each subscriber shall be free and clear of
any and all claims of the Company or any of its creditors.
(c) The Escrow Agent shall return to any California , Florida
or Iowa investor who properly withdraws his subscription in accordance
with the terms set forth in the Prospectus the Escrowed Funds of such
withdrawing investor, as the case may be, together with interest
calculated as described in Paragraph 6 below.
6. Distribution of Interest. If the Escrowed Funds become deliverable
to subscribers pursuant to Paragraphs 5(b) or 5(c) above, the Escrow Agent shall
compute and distribute to each investor a pro rata share of the investment
earnings of the Escrowed Funds. Each subscriber's pro rata share of investment
earnings shall be computed as follows:
Individual Subscription
amount x days held
Investment Earnings x Total subscription
amounts x days held
Such pro rata share of investment earnings shall be distributed to each
subscriber with the return of their subscription amounts.
7. Liability of Escrow Agent.
(a) In performing any of its duties under this Agreement, or
upon the claimed failure to perform its duties hereunder, the Escrow
Agent shall not be liable to anyone for any damages, losses, or
expenses which it may incur as a result of the Escrow Agent so acting,
or failing to act; provided, however, the Escrow Agent shall be liable
for damages arising out of its willful default or misconduct or its
gross negligence under this Agreement. Accordingly, the Escrow Agent
shall not incur any such liability with respect to (i) any action taken
or omitted to be taken in good faith upon advice of its counsel or
counsel for the Company which is given with respect to any questions
relating to the duties and responsibilities of the Escrow Agent
hereunder, or (ii) any action taken or omitted to be taken in reliance
upon any document, including any written notice or
--4--
<PAGE>
instructions provided for in this Escrow Agreement, not only as to its
due execution and to the validity and effectiveness of its provisions
but also as to the truth and accuracy of any information contained
therein, if the Escrow Agent shall in good faith believe such document
to be genuine, to have been signed or presented by a proper person or
persons, and to conform with the provisions of this Agreement.
(b) The Company hereby agrees to indemnify and hold harmless
the Escrow Agent against any and all losses, claims, damages,
liabilities and expenses, including, without limitation, reasonable
costs of investigation and counsel fees and disbursements which may be
incurred by it resulting from any act or omission of the Company;
provided, however, that the Company shall not indemnify the Escrow
Agent for any losses, claims, damages, or expenses arising out of the
Escrow Agent's willful default, misconduct, or gross negligence under
this Agreement.
(c) If a dispute ensues between any of the parties hereto
which, in the opinion of the Escrow Agent, is sufficient to justify its
doing so, the Escrow Agent shall be entitled to tender into the
registry or custody of any court of competent jurisdiction, including
the Circuit Court of Orange County, Florida, all money or property in
its hands under the terms of this Agreement, and to file such legal
proceedings as it deems appropriate, and shall thereupon be discharged
from all further duties under this Agreement. Any such legal action may
be brought in any such court as the Escrow Agent shall determine to
have jurisdiction thereof. The Company shall indemnify the Escrow Agent
against its court costs and attorneys' fees incurred in filing such
legal proceedings.
8. Inability to Deliver. In the event that checks for subscriptions
delivered to the Escrow Agent by the Company pursuant to this Agreement are not
cleared through normal banking channels within 120 days after such delivery, the
Escrow Agent shall deliver such uncleared checks to the Company unless the
Escrowed Funds are returned to subscribers pursuant to Paragraphs 5(b) or 5(c)
above, in which case the Escrow Agent shall mail such uncleared checks to the
subscribers.
9. Notice. All notices, requests, demands and other communications or
deliveries required or permitted to be given hereunder shall be in writing and
shall be deemed to have been duly given if delivered personally, given by
prepaid telegram or deposited for mailing, first class, postage prepaid,
registered or certified mail, as follows:
If to the subscribers for Shares: To their respective addresses as
specified in their Subscription
Agreements.
If to the Company: 400 East South Street
Orlando, Florida 32801
Attention: Mr. James M. Seneff, Jr.,
Chairman of the Board
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<PAGE>
If to the Managing Dealer: 400 East South Street
Orlando, Florida 32801
Attention: Mr. Robert A. Bourne,
President
If to the Escrow Agent: SOUTHTRUST ASSET MANAGEMENT
COMPANY OF FLORIDA, N.A.
135 West Central Boulevard, Suite 1200
Orlando, Florida 32801
Attention: Mr. William Legg
10. Fees to Escrow Agent. In consideration of the services to be
provided by the Escrow Agent hereunder, the Company agrees to pay the following
fees to the Escrow Agent.
(a) In the event that by the Closing Date an aggregate of
250,000 Shares have not been sold for the account of the Company, the
Company will pay the Escrow Agent a fee in an amount equal to $15 per
investor, with a minimum fee of $1,500, payable within 30 days
following the Closing Date.
(b) In the event that an aggregate of at least 250,000 Shares
are sold by the Closing Date, the Company will pay the Escrow Agent a
fee for its services hereunder (the "Escrow Fee"). The Escrow Fee shall
be $350 for each month or any portion thereof that the Escrow Account
continues for the Company. The first payment of the Escrow Fee by the
Company shall be due on the earlier of (i) the date on which the
Escrowed Funds become distributable to the Company pursuant to
Paragraph 5 hereof, or (ii) six months from the effective date of this
Agreement; or (iii) the closing of the offering of Shares in the
Company. Subsequent payments by the Company, if any, shall be due and
payable no less frequently than six-month intervals while the escrow
continues for the Company. In no event shall the total Escrow Fees
payable by the Company pursuant to this Agreement be less than $2,100,
nor more than $4,200, for any 12-month period. Notwithstanding anything
contained in this Agreement to the contrary, in no event shall any fee,
reimbursement for costs and expenses, indemnification for any damages
incurred by the Escrow Agent, or monies whatsoever be paid out of or
chargeable to the Escrowed Funds in the Escrow Account.
11. General.
(a) This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Florida.
(b) The section headings contained herein are for reference
purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
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<PAGE>
(c) This Agreement sets forth the entire agreement and
understanding of the parties with regard to this escrow transaction and
supersedes all prior agreements, arrangements and understandings
relating to the subject matter hereof.
(d) This Agreement may be amended, modified, superseded or
cancelled, and any of the terms or conditions hereof may be waived,
only by a written instrument executed by each party hereto or, in the
case of a waiver, by the party waiving compliance. The failure of any
party at any time or times to require performance of any provision
hereof shall in no manner affect the right at a later time to enforce
the same. No waiver in any one or more instances by any party of any
condition, or of the breach of any term contained in this Agreement,
whether by conduct or otherwise, shall be deemed to be, or construed
as, a further or continuing waiver of any such condition or breach, or
a waiver of any other condition or of the breach of any other terms of
this Agreement.
(e) This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
(f) This Agreement shall inure to the benefit of the parties
hereto and their respective administrators, successors, and assigns.
12. Representation of the Company. The Company hereby acknowledges that
the status of the Escrow Agent with respect to the offering of the Shares is
that of agent only for the limited purposes herein set forth, and hereby agrees
it will not represent or imply that the Escrow Agent, by serving as the Escrow
Agent hereunder or otherwise, has investigated the desirability or advisability
of an investment in the Shares, or has approved, endorsed or passed upon the
merits of the Shares, nor shall the Company use the name of the Escrow Agent in
any manner whatsoever in connection with the offer or sale of the Shares, other
than by acknowledgement that it has agreed to serve as Escrow Agent for the
limited purposes herein set forth.
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<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
"Company"
CNL HEALTH CARE PROPERTIES, INC.
By: ________________________________
JAMES M. SENEFF, JR.,
Chairman of the Board
"MANAGING DEALER"
CNL SECURITIES CORP.
Attest:_______________________ By: ________________________________
ROBERT A. BOURNE, President
"ESCROW AGENT"
SOUTHTRUST ASSET MANAGEMENT
COMPANY OF FLORIDA, N.A.
Attest:_______________________ By: _______________________________
Name: _______________________________
Title: _______________________________
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<PAGE>
EXHIBIT 10.9
Form of Indemnification Agreement
<PAGE>
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT ("Agreement") is made and entered into
as of the ____ day of September, 1998, by and among CNL Health Care Properties,
Inc., a Maryland corporation (the "Company") and ____________, a director and/or
officer of the Company (the "Indemnitee").
W I T N E S S E T H:
WHEREAS, the interpretation of ambiguous statutes, regulations,
articles of incorporation and bylaws regarding indemnification of directors and
officers may be too uncertain to provide such directors and officers with
adequate notice of the legal, financial and other risks to which they may be
exposed by virtue of their service as such; and
WHEREAS, damages sought against directors and officers in shareholder
or similar litigation by class action plaintiffs may be substantial, and the
costs of defending such actions and of judgments in favor of plaintiffs or of
settlement therewith may be prohibitive for individual directors and officers,
without regard to the merits of a particular action and without regard to the
culpability of, or the receipt of improper personal benefit by, any named
director or officer to the detriment of the corporation; and
WHEREAS, the issues in controversy in such litigation usually relate to
the knowledge, motives and intent of the director or officer, who may be the
only person with firsthand knowledge of essential facts or exculpating
circumstances who is qualified to testify in his defense regarding matters of
such a subjective nature, and the long period of time which may elapse before
final disposition of such litigation may impose undue hardship and burden on a
director or officer or his estate in launching and maintaining a proper and
adequate defense of himself or his estate against claims for damages; and
WHEREAS, the Company is organized under the Maryland General
Corporation Law (the "MGCL") and Section 2-418 of the MGCL empowers corporations
to indemnify and advance expenses of litigation to a person serving as a
director, officer, employee or agent of a corporation and to persons serving at
the request of the corporation, while a director of a corporation, as a
director, officer, partner, trustee, employee or agent of another foreign or
domestic corporation, partnership, joint venture, trust, other enterprise or
employee benefit plan, and further provides that the indemnification and
advancement of expenses set forth in said section, subject to certain
limitations are not "exclusive of any other rights, by indemnification or
otherwise, to which a director may be entitled under the charter, the bylaws, a
resolution of stockholders or directors, an agreement or otherwise, both as to
action in an official capacity and as to action in another capacity while
holding such office"; and
WHEREAS, the Articles of Incorporation of the Company, as they may be
amended or amended and restated from time to time (the "Articles of
Incorporation"), provide that the Company shall indemnify and hold harmless
directors, advisors, or affiliates, as such terms are defined in the Articles of
Incorporation; and
<PAGE>
WHEREAS, the Board of Directors of the Company (the "Board") has
concluded that it is reasonable and prudent for the Company contractually to
obligate itself to indemnify in a reasonable and adequate manner the Indemnitee
and to assume for itself maximum liability for expenses and damages in
connection with claims lodged against him for his decisions and actions as a
director and/or officer of the Company; and
NOW, THEREFORE, in consideration of the foregoing, and of other good
and valuable consideration, the receipt and sufficiency of which is acknowledged
by each of the parties hereto, the parties agree as follows:
I
DEFINITIONS
For purposes of this Agreement, the following terms shall have the
meanings set forth below:
A. "Board" shall mean the Board of Directors of the Company.
B. "Change in Control" shall mean a change in the ownership or power to
direct the Voting Securities of the Company or the acquisition by a person not
affiliated with the Company of the ability to direct the management of the
Company.
C. "Corporate Status" shall mean the status of a person who is or was a
director or officer of the Company, or a member of any committee of the Board,
and the status of a person who, while a director or officer of the Company, is
or was serving at the request of the Company as a director, officer, partner
(including service as a general partner of any limited partnership), trustee,
employee, or agent of another foreign or domestic corporation, partnership,
joint venture, trust, other incorporated or unincorporated entity or enterprise
or employee benefit plan.
D. "Disinterested Director" shall mean a director of the Company who
neither is nor was a party to the Proceeding in respect of which indemnification
is being sought by the Indemnitee.
E. "Expenses" shall mean without limitation expenses of Proceedings
including all attorneys' fees, retainers, court costs, transcript costs, fees of
experts, investigation fees and expenses, accounting and witness fees, travel
expenses, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees and all other disbursements or expenses of the
types customarily incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating or being or preparing to be a witness in a
Proceeding.
F. "Good Faith Act or Omission" shall mean an act or omission of the
Indemnitee reasonably believed by the Indemnitee to be in or not opposed to the
best interests of the Company and other than (i) one involving negligence or
misconduct, or, if the Indemnitee is an independent director, one involving
gross negligence or willful misconduct; (ii) one that was material to the loss
or liability and that was committed in bad faith or that was the result of
active
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<PAGE>
or deliberate dishonesty; (iii) one from which the Indemnitee actually received
an improper personal benefit in money, property or services; or (iv) in the case
of a criminal Proceeding, one as to which the Indemnitee had cause to believe
his conduct was unlawful.
G. "Liabilities" shall mean liabilities of any type whatsoever,
including, without limitation, any judgments, fines, excise taxes and penalties
under the Employee Retirement Income Security Act of 1974, as amended, penalties
and amounts paid in settlement (including all interest, assessments and other
charges paid or payable in connection with or in respect of such judgments,
fines, penalties or amounts paid in settlement) in connection with the
investigation, defense, settlement or appeal of any Proceeding or any claim,
issue or matter therein.
H. "Proceeding" shall mean any threatened, pending or completed action,
suit, arbitration, alternate dispute resolution mechanism, investigation,
administrative hearing or any other actual, threatened or completed proceeding
whether civil, criminal, administrative or investigative, or any appeal
therefrom.
I. "Voting Securities" shall mean any securities of the Company that
are entitled to vote generally in the election of directors.
II
TERMINATION OF AGREEMENT
This Agreement shall continue until, and terminate upon the later to
occur of (i) the death of the Indemnitee; or (ii) the final termination of all
Proceedings (including possible Proceedings) in respect of which the Indemnitee
is granted rights of indemnification or advancement of Expenses hereunder and of
any proceeding commenced by the Indemnitee regarding the interpretation or
enforcement of this Agreement.
III
SERVICE BY INDEMNITEE, NOTICE OF
PROCEEDINGS, DEFENSE OF CLAIMS
A. Notice of Proceedings. The Indemnitee agrees to notify the Company
promptly in writing upon being served with any summons, citation, subpoena,
complaint, indictment, information or other document relating to any Proceeding
or matter which may be subject to indemnification or advancement of Expenses
covered hereunder, but the Indemnitee's omission to so notify the Company shall
not relieve the Company from any liability which it may have to the Indemnitee
under this Agreement.
B. Defense of Claims. The Company will be entitled to participate, at
its own expense, in any Proceeding of which it has notice. The Company jointly
with any other indemnifying party similarly notified of any Proceeding will be
entitled to assume the defense of the Indemnitee therein, with counsel
reasonably satisfactory to the Indemnitee; provided, however, that the Company
shall not be entitled to assume the defense of the Indemnitee in any Proceeding
if there has been a Change in Control or if the Indemnitee has reasonably
concluded that there may be a conflict of interest between the Company and the
Indemnitee with respect to
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<PAGE>
such Proceeding. The Company will not be liable to the Indemnitee under this
Agreement for any Expenses incurred by the Indemnitee in connection with the
defense of any Proceeding, other than reasonable costs of investigation or as
otherwise provided below, after notice from the Company to the Indemnitee of its
election to assume the defense of the Indemnitee therein. The Indemnitee shall
have the right to employ his own counsel in any such Proceeding, but the fees
and expenses of such counsel incurred after notice from the Company of its
assumption of the defense thereof shall be at the expense of the Indemnitee
unless (i) the employment of counsel by the Indemnitee has been authorized by
the Company; (ii) the Indemnitee shall have reasonably concluded that counsel
employed by the Company may not adequately represent the Indemnitee and shall
have so informed the Company; or (iii) the Company shall not in fact have
employed counsel to assume the defense of the Indemnitee in such Proceeding or
such counsel shall not, in fact, have assumed such defense or such counsel shall
not be acting, in connection therewith, with reasonable diligence; and in each
such case the fees and expenses of the Indemnitee's counsel shall be advanced by
the Company in accordance with this Agreement.
C. Settlement of Claims. The Company shall not settle any Proceeding in
any manner which would impose any liability, penalty or limitation on the
Indemnitee without the written consent of the Indemnitee; provided, however,
that the Indemnitee will not unreasonably withhold or delay consent to any
proposed settlement. The Company shall not be liable to indemnify the Indemnitee
under this Agreement or otherwise for any amounts paid in settlement of any
Proceeding effected by the Indemnitee without the Company's written consent,
which consent shall not be unreasonably withheld or delayed.
IV
INDEMNIFICATION
A. In General. Upon the terms and subject to the conditions set forth
in this Agreement, the Company shall hold harmless and indemnify the Indemnitee
against any and all Liabilities actually incurred by or for him in connection
with any Proceeding (whether the Indemnitee is or becomes a party, a witness or
otherwise is a participant in any role) to the fullest extent required or
permitted by the Articles of Incorporation and by applicable law in effect on
the date hereof and to such greater extent as applicable law may hereafter from
time to time permit. For all matters for which the Indemnitee is entitled to
indemnification under this Article IV, the Indemnitee shall be entitled to
advancement of Expenses in accordance with Article V hereof.
B. Proceeding Other Than a Proceeding by or in the Right of the
Company. If the Indemnitee was or is a party or is threatened to be made a party
to any Proceeding (whether the Indemnitee is or becomes a party, a witness or
otherwise is a participant in any role) (other than a Proceeding by or in the
right of the Company) by reason of his Corporate Status, or by reason of alleged
action or inaction by him in any such capacity, the Company shall, subject to
the limitations set forth in Section IV.F. below, hold harmless and indemnify
him against any and all Expenses and Liabilities actually and reasonably
incurred by or for the Indemnitee in connection with the Proceeding if the
act(s) or omission(s) of the Indemnitee giving rise thereto were Good Faith
Act(s) or Omission(s).
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<PAGE>
C. Proceedings by or in the Right of the Company. If the Indemnitee was
or is a party or is threatened to be made a party to any Proceeding (whether the
Indemnitee is or becomes a party, a witness or otherwise is a participant in any
role) by or in the right of the Company to procure a judgment in its favor by
reason of his Corporate Status, or by reason of any action or inaction by him in
any such capacity, the Company shall, subject to the limitations set forth in
Section IV.F. below, hold harmless and indemnify him against any and all
Expenses actually incurred by or for him in connection with the investigation,
defense, settlement or appeal of such Proceeding if the act(s) or omission(s) of
the Indemnitee giving rise to the Proceeding were Good Faith Act(s) or
Omission(s); except that no indemnification under this Section IV.C. shall be
made in respect of any claim, issue or matter as to which the Indemnitee shall
have been finally adjudged to be liable to the Company, unless a court of
appropriate jurisdiction (including, but not limited to, the court in which such
Proceeding was brought) shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
regardless of whether the Indemnitee's act(s) or omission(s) were found to be a
Good Faith Act(s) or Omission(s), the Indemnitee is fairly and reasonably
entitled to indemnification for such Expenses which such court shall deem
proper.
D. Indemnification of a Party Who is Wholly or Partly Successful.
Notwithstanding any other provision of this Agreement, to the extent that the
Indemnitee is, by reason of the Indemnitee's Corporate Status, a party to and is
successful, on the merits or otherwise, in any Proceeding, the Indemnitee shall
be indemnified by the Company to the maximum extent consistent with applicable
law, against all Expenses and Liabilities actually incurred by or for him in
connection therewith. If the Indemnitee is not wholly successful in such
Proceeding but is successful, on the merits or otherwise, as to one or more but
less than all claims, issues or matters in such Proceeding, the Company shall
hold harmless and indemnify the Indemnitee to the maximum extent consistent with
applicable law, against all Expenses and Liabilities actually and reasonably
incurred by or for him in connection with each successfully resolved claim,
issue or matter in such Proceeding. Resolution of a claim, issue or matter by
dismissal, with or without prejudice, except as provided in subsection F hereof,
shall be deemed a successful result as to such claim, issue or matter, so long
as there has been no finding (either adjudicated or pursuant to Article VI
hereof) that the act(s) or omission(s) of the Indemnitee giving rise thereto
were not a Good Faith Act(s) or Omission(s).
E. Indemnification for Expenses of Witness. Notwithstanding any other
provision of this Agreement, to the extent that the Indemnitee, by reason of the
Indemnitee's Corporate Status, has prepared to serve or has served as a witness
in any Proceeding, or has participated in discovery proceedings or other trial
preparation, the Indemnitee shall be held harmless and indemnified against all
Expenses actually and reasonably incurred by or for him in connection therewith.
F. Specific Limitations on Indemnification. In addition to the other
limitations set forth in this Article IV, and notwithstanding anything in this
Agreement to the contrary, the Company shall not be obligated under this
Agreement to make any payment to the Indemnitee for indemnification with respect
to any Proceeding:
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<PAGE>
1. To the extent that payment is actually made to the
Indemnitee under any insurance policy or is made on behalf of the
Indemnitee by or on behalf of the Company otherwise than pursuant to
this Agreement.
2. If a court in such Proceeding has entered a judgment or
other adjudication which is final and has become nonappealable and
establishes that a claim of the Indemnitee for such indemnification
arose from: (i) a breach by the Indemnitee of the Indemnitee's duty of
loyalty to the Company or its shareholders; (ii) acts or omissions of
the Indemnitee that are not Good Faith Acts or Omissions or which are
the result of active and deliberate dishonesty; (iii) acts or omissions
of the Indemnitee which the Indemnitee had reasonable cause to believe
were unlawful; or (iv) a transaction in which the Indemnitee actually
received an improper personal benefit in money, property or services.
3. If there has been no Change in Control, for Liabilities in
connection with Proceedings settled without the consent of the Company
which consent, however, shall not be unreasonably withheld.
4. For any loss or liability arising from an alleged violation
of federal or state securities laws unless one or more of the following
conditions are met: (i) there has been a successful adjudication on the
merits of each count involving alleged securities law violations as to
the Indemnitee, (ii) such claims have been dismissed with prejudice on
the merits by a court of competent jurisdiction as to the Indemnitee;
or (iii) a court of competent jurisdiction approves a settlement of the
claims against the Indemnitee and finds that indemnification of the
settlement and the related costs should be made, and the court
considering the request for indemnification has been advised of the
position of the Securities and Exchange Commission and of the published
position of any state securities regulatory authority in which
securities of the Company were offered or sold as to indemnification
for violations of securities laws.
V
ADVANCEMENT OF EXPENSES
Notwithstanding any provision to the contrary in Article VI hereof, the
Company shall advance to the Indemnitee all Expenses which, by reason of the
Indemnitee's Corporate Status, were incurred by or for him in connection with
any Proceeding for which the Indemnitee is entitled to indemnification pursuant
to Article IV hereof, in advance of the final disposition of such Proceeding,
provided that all of the following are satisfied: (i) the Indemnitee was made a
party to the proceeding by reason of his service as a director or officer of the
Company, (ii) the Indemnitee provides the Company with written affirmation of
his good faith belief that he has met the standard of conduct necessary for
indemnification by the Company pursuant to Article IV hereof, (iii) the
Indemnitee provides the Company with a written agreement (the "Undertaking") to
repay the amount paid or reimbursed by the Company, together with the applicable
legal rate of interest thereon, if it is ultimately determined that the
Indemnitee did not comply with the requisite standard of conduct, and (iv) the
legal proceeding was initiated by a third party who is not a stockholder of the
Company or, if by a stockholder of the Company acting in his or her capacity as
such, a court of competent jurisdiction approves such advancement. The
Indemnitee shall be required to execute and submit the Undertaking to repay
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<PAGE>
Expenses advanced in the form of Exhibit A attached hereto or in such form as
may be required under applicable law as in effect at the time of execution
thereof. The Undertaking shall reasonably evidence the Expenses incurred by or
for the Indemnitee and shall contain the written affirmation by the Indemnitee,
described above, of his good faith belief that the standard of conduct necessary
for indemnification has been met. The Company shall advance such expenses within
five (5) business days after the receipt by the Company of the Undertaking. The
Indemnitee hereby agrees to repay any Expenses advanced hereunder if it shall
ultimately be determined that the Indemnitee is not entitled to be indemnified
against such Expenses. Any advances and the undertaking to repay pursuant to
this Article V shall be unsecured.
VI
PROCEDURE FOR PAYMENT OF LIABILITIES;
DETERMINATION OF RIGHT TO INDEMNIFICATION
A. Procedure for Payment. To obtain indemnification for Liabilities
under this Agreement, the Indemnitee shall submit to the Company a written
request for payment, including with such request such documentation as is
reasonably available to the Indemnitee and reasonably necessary to determine
whether, and to what extent, the Indemnitee is entitled to indemnification and
payment hereunder. The Secretary of the Company, or such other person as shall
be designated by the Board of Directors, promptly upon receipt of a request for
indemnification shall advise the Board of Directors, in writing, of such
request. Any indemnification payment due hereunder shall be paid by the Company
no later than five (5) business days following the determination, pursuant to
this Article VI, that such indemnification payment is proper hereunder.
B. No Determination Necessary when the Indemnitee was Successful. To
the extent the Indemnitee has been successful, on the merits or otherwise, in
defense of any Proceeding referred to in Sections IV.B. or IV.C. above or in the
defense of any claim, issue or matter described therein, the Company shall
indemnify the Indemnitee against Expenses actually and reasonably incurred by or
for him in connection with the investigation, defense or appeal of such
Proceeding.
C. Determination of Good Faith Act or Omission. In the event that
Section VI.B. is inapplicable, the Company also shall hold harmless and
indemnify the Indemnitee unless the Company shall prove by clear and convincing
evidence to a forum listed in Section VI.D. below that the act(s) or omission(s)
of the Indemnitee giving rise to the Proceeding were not Good Faith Act(s) or
Omission(s).
D. Forum for Determination. The Indemnitee shall be entitled to select
from among the following the forums, in which the validity of the Company's
claim under Section VI.C., above, that the Indemnitee is not entitled to
indemnification will be heard:
1. A quorum of the Board consisting of Disinterested
Directors;
2. The shareholders of the Company;
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<PAGE>
3. Legal counsel selected by the Indemnitee, subject to the
approval of the Board, which approval shall not be unreasonably delayed
or denied, which counsel shall make such determination in a written
opinion; or
4. A panel of three arbitrators, one of whom is selected by
the Company, another of whom is selected by the Indemnitee and the last
of whom is selected jointly by the first two arbitrators so selected.
As soon as practicable, and in no event later than thirty (30) days after
written notice of the Indemnitee's choice of forum pursuant to this Section
VI.D., the Company shall, at its own expense, submit to the selected forum in
such manner as the Indemnitee or the Indemnitee's counsel may reasonably
request, its claim that the Indemnitee is not entitled to indemnification, and
the Company shall act in the utmost good faith to assure the Indemnitee a
complete opportunity to defend against such claim. The fees and expenses of the
selected forum in connection with making the determination contemplated
hereunder shall be paid by the Company. If the Company shall fail to submit the
matter to the selected forum within thirty (30) days after the Indemnitee's
written notice or if the forum so empowered to make the determination shall have
failed to make the requested determination within thirty (30) days after the
matter has been submitted to it by the Company, the requisite determination that
the Indemnitee has the right to indemnification shall be deemed to have been
made.
E. Right to Appeal. Notwithstanding a determination by any forum listed
in Section VI.D. above that the Indemnitee is not entitled to indemnification
with respect to a specific Proceeding, the Indemnitee shall have the right to
apply to the court in which that Proceeding is or was pending, or to any other
court of competent jurisdiction, for the purpose of enforcing the Indemnitee's
right to indemnification pursuant to this Agreement. Such enforcement action
shall consider the Indemnitee's entitlement to indemnification de novo, and the
Indemnitee shall not be prejudiced by reason of a prior determination that the
Indemnitee is not entitled to indemnification. The Company shall be precluded
from asserting that the procedures and presumptions of this Agreement are not
valid, binding and enforceable. The Company further agrees to stipulate in any
such judicial proceeding that the Company is bound by all the provisions of this
Agreement and is precluded from making any assertion to the contrary.
F. Right to Seek Judicial Determination. Notwithstanding any other
provision of this Agreement to the contrary, at any time after sixty (60) days
after a request for indemnification has been made to the Company (or upon
earlier receipt of written notice that a request for indemnification has been
rejected) and before the third (3rd) anniversary of the making of such
indemnification request, the Indemnitee may petition a court of competent
jurisdiction, whether or not the court has jurisdiction over, or is the forum in
which is pending, the Proceeding, to determine whether the Indemnitee is
entitled to indemnification hereunder, and such court thereupon shall have the
exclusive authority to make such determination, unless and until such court
dismisses or otherwise terminates the Indemnitee's action without having made
such determination. The court, as petitioned, shall make an independent
determination of whether the Indemnitee is entitled to indemnification
hereunder, without regard to any prior determination in any other forum as
provided hereby.
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<PAGE>
G. Expenses under this Agreement. Notwithstanding any other provision
in this Agreement to the contrary, the Company shall indemnify the Indemnitee
against all Expenses incurred by the Indemnitee in connection with any hearing
or proceeding under this Section VI involving the Indemnitee and against all
Expenses incurred by the Indemnitee in connection with any other action between
the Company and the Indemnitee involving the interpretation or enforcement of
the rights of the Indemnitee under this Agreement, even if it is finally
determined that the Indemnitee is not entitled to indemnification in whole or in
part hereunder.
VII
PRESUMPTIONS AND EFFECT
OF CERTAIN PROCEEDINGS
A. Burden of Proof. In making a determination with respect to
entitlement to indemnification hereunder, the person, persons, entity or
entities making such determination shall presume that the Indemnitee is entitled
to indemnification under this Agreement and the Company shall have the burden of
proof to overcome that presumption.
B. Effect of Other Proceedings. The termination of any Proceeding or of
any claim, issue or matter therein, by judgment, order or settlement shall not
create a presumption that the act(s) or omission(s) giving rise to the
Proceeding were not Good Faith Act(s) or Omission(s). The termination of any
Proceeding by conviction, or upon a plea of nolo contendere, or its equivalent,
or an entry of an order of probation prior to judgment, shall create a
rebuttable presumption that the act(s) or omission(s) of the Indemnitee giving
rise to the Proceeding were not Good Faith Act(s) or Omission(s).
C. Reliance as Safe Harbor. For purposes of any determination of
whether any act or omission of the Indemnitee was a Good Faith Act or Omission,
each act of the Indemnitee shall be deemed to be a Good Faith Act or Omission if
the Indemnitee's action is based on the records or books of accounts of the
Company, including financial statements, or on information supplied to the
Indemnitee by the officers of the Company in the course of their duties, or on
the advice of legal counsel for the Company or on information or records given
or reports made to the Company by an independent certified public accountant or
by an appraiser or other expert selected with reasonable care by the Company.
The provisions of this Section VII.C. shall not be deemed to be exclusive or to
limit in any way the other circumstances in which the Indemnitee may be deemed
to have met the applicable standard of conduct set forth in this Agreement or
under applicable law.
D. Actions of Others. The knowledge and/or actions, or failure to act,
of any director, officer, agent or employee of the Company shall not be imputed
to the Indemnitee for purposes of determining the right to indemnification under
this Agreement.
-9-
<PAGE>
VIII
INSURANCE
In the event that the Company maintains officers' and directors' or
similar liability insurance to protect itself and any director or officer of the
Company against any expense, liability or loss, such insurance shall cover the
Indemnitee to at least the same degree as each other director and/or officer of
the Company.
IX
OBLIGATIONS OF THE COMPANY
UPON A CHANGE IN CONTROL
In the event of a Change in Control, upon written request of the
Indemnitee the Company shall establish a trust for the benefit of the Indemnitee
hereunder (a "Trust") and from time to time, upon written request from the
Indemnitee, shall fund the Trust in an amount sufficient to satisfy all amounts
actually paid hereunder as indemnification for Liabilities or Expenses
(including those paid in advance) or which the Indemnitee reasonably determines
and demonstrates, from time to time, may be payable by the Company hereunder.
The amount or amounts to be deposited in the Trust shall be determined by legal
counsel selected by the Indemnitee and approved by the Company, which approval
shall not be unreasonably withheld. The terms of the Trust shall provide that
(i) the Trust shall not be dissolved or the principal thereof invaded without
the written consent of the Indemnitee; (ii) the trustee of the Trust (the
"Trustee") shall be selected by the Indemnitee; (iii) the Trustee shall make
advances to the Indemnitee for Expenses within ten (10) business days following
receipt of a written request therefor (and the Indemnitee hereby agrees to
reimburse the Trust under the circumstances under which the Indemnitee would be
required to reimburse the Company under Article V hereof; (iv) the Company shall
continue to fund the Trust from time to time in accordance with its funding
obligations hereunder; (v) the Trustee promptly shall pay to the Indemnitee all
amounts as to which indemnification is due under this Agreement; (vi) unless the
Indemnitee agrees otherwise in writing, the Trust for the Indemnitee shall be
kept separate from any other trust established for any other person to whom
indemnification might be due by the Company; and (vii) all unexpended funds in
the Trust shall revert to the Company upon final, nonappealable determination by
a court of competent jurisdiction that the Indemnitee has been indemnified to
the full extent required under this Agreement.
X
NON-EXCLUSIVITY,
SUBROGATION AND MISCELLANEOUS
A. Non-Exclusivity. The rights of the Indemnitee hereunder shall not be
deemed exclusive of any other rights to which the Indemnitee may at any time be
entitled under any provision of law, the Articles of Incorporation, the Bylaws
of the Company, as the same may be in effect from time to time, any agreement, a
vote of shareholders of the Company or a resolution of directors of the Company
or otherwise, and to the extent that during the term of this Agreement the
rights of the then-existing directors and officers of the Company are more
favorable to such directors or officers than the rights currently provided to
the Indemnitee under this Agreement, the Indemnitee shall be entitled to the
full benefits of such more favorable rights.
-10-
<PAGE>
No amendment, alteration, rescission or replacement of this Agreement or any
provision hereof which would in any way limit the benefits and protections
afforded to an Indemnitee hereby shall be effective as to such Indemnitee with
respect to any action or inaction by such Indemnitee in the Indemnitee's
Corporate Status prior to such amendment, alteration, rescission or replacement.
B. Subrogation. In the event of any payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of the Indemnitee, who shall execute all documents required and take
all action necessary to secure such rights, including execution of such
documents as are necessary to enable the Company to bring suit to enforce such
rights.
C. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given (i) if
delivered by hand, by courier or by telegram and receipted for by the party to
whom said notice or other communication shall have been directed at the time
indicated on such receipt; (ii) if by facsimile at the time shown on the
confirmation of such facsimile transmission; or (iii) if by U.S. certified or
registered mail, with postage prepaid, on the third business day after the date
on which it is so mailed:
If to the Indemnitee, as shown with the Indemnitee's signature below.
If to the Company to:
CNL Health Care Properties, Inc.
400 East South Street
Orlando, FL 32801
Attention: President
Facsimile No. (407)423-2894
or to such other address as may have been furnished to the Indemnitee by the
Company or to the Company by the Indemnitee, as the case may be.
D. Governing Law. The parties agree that this Agreement shall be
governed by, and construed and enforced in accordance with, the substantive laws
of the State of Maryland, without application of the conflict of laws principles
thereof.
E. Binding Effect. Except as otherwise provided in this Agreement, this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their heirs, executors, administrators, successors, legal representatives
and permitted assigns. The Company shall require any successor or assignee
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of its respective assets or business, by written
agreement in form and substance reasonably satisfactory to the Indemnitee,
expressly to assume and agree to be bound by and to perform this Agreement in
the same manner and to the same extent as the Company would be required to
perform absent such succession or assignment.
F. Waiver. No termination, cancellation, modification, amendment,
deletion, addition or other change in this Agreement, or any provision hereof,
or waiver of any right or remedy herein, shall be effective for any purpose
unless specifically set forth in a writing signed by the
-11-
<PAGE>
party or parties to be bound thereby. The waiver of any right or remedy with
respect to any occurrence on one occasion shall not be deemed a waiver of such
right or remedy with respect to such occurrence on any other occasion.
G. Entire Agreement. This Agreement, constitutes the entire agreement
and understanding among the parties hereto in reference to the subject matter
hereof; provided, however, that the parties acknowledge and agree that the
Amended and Restated Articles of Incorporation of the Company contain provisions
on the subject matter hereof and that this Agreement is not intended to, and
does not, limit the rights or obligations of the parties hereto pursuant to such
instruments.
H. Titles. The titles to the articles and sections of this Agreement
are inserted for convenience of reference only and should not be deemed a part
hereof or affect the construction or interpretation of any provisions hereof.
I. Invalidity of Provisions. Every provision of this Agreement is
severable, and the invalidity or unenforceability of any term or provision shall
not effect the validity or enforceability of the remainder of this Agreement.
J. Pronouns and Plurals. Whenever the context may require, any pronoun
used in this Agreement shall include the corresponding masculine, feminine or
neuter forms, and the singular form of nouns, pronouns and verbs shall include
the plural and vice versa.
K. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together constitute one agreement binding on all the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
CNL HEALTH CARE PROPERTIES, INC.
By: __________________________________
Name: __________________________________
Title: __________________________________
________________________, as INDEMNITEE
Name: ________________________________
Title: ________________________________
Address: ________________________________
Facsimile No.: __________________________
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<PAGE>
EXHIBIT A
FORM OF UNDERTAKING TO REPAY EXPENSES ADVANCED
The Board of Directors of CNL Health Care
Properties, Inc.
Re: Undertaking to Repay Expenses Advanced
Ladies and Gentlemen:
This undertaking is being provided pursuant to that certain
Indemnification Agreement dated the ____ day of September, 1998, by and among
CNL Health Care Properties, Inc. and the undersigned Indemnitee (the
"Indemnification Agreement"), pursuant to which I am entitled to advancement of
expenses in connection with [Description of Proceeding] (the "Proceeding").
Terms used herein and not otherwise defined shall have the meanings specified in
the Indemnification Agreement.
I am subject to the Proceeding by reason of my Corporate Status or by
reason of alleged actions or omissions by me in such capacity. During the period
of time to which the Proceeding relates I was _____________________ [name of
office(s) held] of CNL Health Care Properties, Inc. Pursuant to Section IV of
the Indemnification Agreement, the Company is obligated to reimburse me for
Expenses that are actually and reasonably incurred by or for me in connection
with the Proceeding, provided that I execute and submit to the Company an
Undertaking in which I (i) undertake to repay any Expenses paid by the Company
on my behalf, together with the applicable legal rate of interest thereon, if it
shall be ultimately determined that I am not entitled to be indemnified thereby
against such Expenses; (ii) affirm my good faith belief that I have met the
standard of conduct necessary for indemnification; and (iii) reasonably evidence
the Expenses incurred by or for me.
[Description of expenses incurred by or for Indemnitee]
This letter shall constitute my undertaking to repay to the Company any
Expenses paid by it on my behalf, together with the applicable legal rate of
interest thereon, in connection with the Proceeding if it is ultimately
determined that I am not entitled to be indemnified with respect to such
Expenses as set forth above. I hereby affirm my good faith belief that I have
met the standard of conduct necessary for indemnification and that I am entitled
to such indemnification.
----------------------------------
Signature
----------------------------------
Print Name
----------------------------------
Date
<PAGE>
EXHIBIT 23.1
Consent of PricewaterhouseCoopers LLP,
Certified Public Accountants,
dated September 9, 1998
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-11 of our
report dated January 20, 1998 on our audit of the financial statements of CNL
Health Care Properties, Inc. We also consent to the reference to our Firm under
the caption "Experts".
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Orlando, Florida
September 9, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of CNl Health Care Properties, Inc. at June 30, 1998, and its statement of
stockholder's equity for the six months then ended and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 77
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 200
<OTHER-SE> 199800
<TOTAL-LIABILITY-AND-EQUITY> 468816
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Due to the nature of its industry, CNL Health Care Properties, Inc. has an
unclassified balance sheet; therefore, no values are shown above for current
assets and current liabilities.
</FN>
</TABLE>