As filed with the Securities and Exchange Commission on May 12, 1999
Registration No. 333-47411
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. ONE
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
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. [ ]
<PAGE>
Prospectus
CNL HEALTH CARE PROPERTIES, INC.
15,500,000 Shares of Common Stock
250,000 Shares - 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
Of the 15,500,000 shares of common stock that we have registered, we
are offering 15,000,000 shares to investors who meet our suitability standards
and 500,000 shares only to participants in our reinvestment plan.
An investment in our shares involves significant risks. See "Risk
Factors" beginning on page 8 for a discussion of material risks that you should
consider before you invest in the common stock being sold with this Prospectus,
including;
o We currently own no properties, so you will not have the opportunity to
evaluate the properties that will be in our portfolio.
o If we raise only $2,500,000 from sales of shares, we will acquire no
more than two medical office buildings or walk-in clinics. This will
reduce the diversification of our investments and leave us exposed to a
potential adverse effect from an underperforming tenant or an
underperforming facility type. We will not provide mortgage financing
if we raise only $2,500,000 from sales of shares.
o We will rely on CNL Health Care Advisors, Inc., with respect to all
investment decisions. CNL Health Care Advisors, Inc. and its affiliates
have no previous experience in investing in health care properties,
which could adversely affect our business.
o Some of the officers of CNL Health Care Advisors, Inc. and its
affiliates are or will be engaged in other activities that will result
in conflicts of interest with the services that CNL Health Care
Advisors, Inc. will provide to us. Those officers could take actions
that are more favorable to other entities than to us. The resolution of
conflicts in favor of other entities could have a negative impact on
our financial performance .
o There is currently no public trading market for the shares, and there
is no assurance that one will develop. If the shares are not listed on
a national securities exchange or over-the-counter market within ten
years from the date the offering commences, we will sell our assets and
distribute the proceeds.
o We have not obtained a financing commitment and may be unable to do so
on satisfactory terms. Without financing, it could be more difficult
for us to acquire properties and make mortgage loans and equipment
financing. The secured equipment lease program is not funded through
offering proceeds and is therefore dependent upon our obtaining
financing.
o We are subject to risks arising out of government regulation of the
health care industry, which may reduce the value of our investments and
the amount of revenues we receive from tenants. Some of our tenants may
be dependent upon government reimbursements and other tenants may be
dependent on their success in attracting seniors with sufficient
independent means to pay for the tenants' services.
o We may, without the approval of a majority of our independent
directors, incur debt totalling up to 300% of the value of our net
assets , including debt to make distributions to stockholders in order
to maintain our status as a REIT. If we are unable to meet our debt
service obligations, we may lose our investment in any properties that
secure underlying indebtedness on which we have defaulted.
o If we do not qualify or remain qualified as a REIT for federal income
tax purposes, we could be subject to taxation on our income at regular
corporate rates, which would reduce the amount of funds available for
distributions to stockholders.
o We expect to pay substantial fees to some of our affiliates and
estimate that approximately 9% of the proceeds from the sale of shares
will be paid in fees and expenses to our affiliates for services and as
reimbursement for organizational and offering and acquisition related
expenses incurred on our behalf. We will not have as much of the
offering proceeds to purchase properties and make mortgage loans as a
result of such payments. Of the proceeds from the sale of shares, we
will use approximately 84% to acquire properties and to make mortgage
loans.
Per Share Total Minimum Total Maximum
--------- ------------- -------------
Public Offering Price................. $ 10.00 $2,500,000 $155,000,000
Selling Commissions $ 0.75 $ 187,500 $ 11,625,000
Proceeds to the Company............... $ 9.25 $2,312,500 $143,375,000
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this Prospectus. In addition, the Attorney General of
the State of New York has not passed on or endorsed the merits of this offering.
Any representation to the contrary is a criminal offense.
CNL SECURITIES CORP.
, 1999
<PAGE>
o The managing dealer, CNL Securities Corp., is our affiliate. The managing
dealer is not required to sell any specific number or dollar amount of
shares but will use its best efforts to sell the shares.
o This offering will end no later than September 18, 1999, unless we elect to
extend it to a date no later than September 18, 2000, in states that permit
us to make this extension.
We will deposit subscription funds for our shares in an
interest-bearing account with SouthTrust Asset Management Company of Florida,
N.A., which will act as escrow agent for this offering, until we receive
subscription funds of at least $2,500,000. We will release subscription funds
from escrow within approximately 30 days after the minimum is reached. We will
not sell any shares unless subscriptions for at least 250,000 shares
($2,500,000) have been obtained by September 18, 1999. If the minimum is not
reached by September 18, 1999, we will promptly refund subscriptions with
interest and will not hold subscriptions in escrow for more than one year. We
must receive subscriptions for shares totalling at least $7,775,000 from all
sources before subscriptions from Pennsylvania residents may be released from
escrow or counted toward the $2,500,000 minimum. Your purchase cannot be
completed until five days after you receive this Prospectus.
PENNSYLVANIA INVESTORS: Because the minimum offering is less than
$15,500,000, all Pennsylvania investors are cautioned to evaluate carefully our
ability fully to accomplish our stated objectives and to inquire as to the
current dollar volume of subscriptions for the shares.
No one is authorized to make any statements about the offering
different from those that appear in this Prospectus. This Prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted. We will only
accept subscriptions from people who meet the suitability standards described in
this Prospectus. You should also be aware that the description of the Company
contained in this Prospectus was accurate on _____________, 19___ but may no
longer be accurate. We will amend or supplement this Prospectus; however, if
there is a material change in the affairs of the Company.
No one may make forecasts or predictions in connection with this
offering concerning the future performance of an investment in the shares.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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<S> <C>
TABLE OF CONTENTS........................................................................... ii
Questions and Answers About CNL Health Care
Properties, Inc.'s Public Offering..................................................... 1
PROSPECTUS SUMMARY.......................................................................... 5
CNL Health Care Properties, Inc........................................................ 5
Our Business.......................................................................... 5
Risk Factors.......................................................................... 5
Our REIT Status....................................................................... 7
Our Management and Conflicts of Interest.............................................. 7
Our Affiliates........................................................................ 8
Our Investment Objectives.............................................................. 8
Management Compensation................................................................ 8
The Offering........................................................................... 10
RISK FACTORS................................................................................ 11
Offering-Related Risks................................................................. 11
We may receive insufficient offering proceeds...................................... 11
This is an unspecified property offering........................................... 11
You cannot evaluate properties that we have
not yet acquired or identified for acquisition.............................. 11
We cannot assure you that we will obtain suitable investments................. 11
The managing dealer has not made an independent review of
the Company or the Prospectus............................................... 11
There is no limitation on the number of properties of a
particular facility type which we may acquire................................ 11
You will have no opportunity to evaluate procedures for
resolving conflicts of interest............................................. 11
You cannot evaluate secured equipment leases in which we
have not yet entered or that we have not yet identified..................... 12
There may be delays in investing the proceeds of this offering..................... 12
The sale of shares by stockholders could be difficult.............................. 12
Company-Related Risks.................................................................. 12
We have no operating history....................................................... 12
Our management has limited experience with investments in health
care facilities............................................................... 12
We are dependent on the advisor.................................................... 12
We will be subject to conflicts of interest........................................ 13
We will experience competition for properties................................. 13
There will be competing demands on our officers and directors................. 13
The timing of sales and acquisitions may favor
the advisor................................................................. 13
Our properties may be developed by affiliates................................. 13
We may invest with affiliates of the advisor.................................. 13
There is no separate counsel for the company, our affiliates
and investors............................................................... 13
We may not have sufficient working capital......................................... 13
Real Estate and Other Investment Risks................................................. 14
Possible lack of diversification increases the risk
of investment................................................................. 14
We do not have control over market and business conditions......................... 14
Adverse trends in the health care and seniors' housing industry
may impact our properties..................................................... 14
Health Care Facilities............................................................. 14
Some of our tenants and borrowers must attract senior citizens
with ability to pay......................................................... 14
Failure to comply with government regulations could negatively
affect our tenants and borrowers............................................ 14
Our properties may not be readily adaptable to other uses..................... 15
Our tenants and borrowers may rely on government
reimbursement............................................................... 15
Cost control and other health care reform measures may reduce
reimbursements to our tenants and borrowers................................. 16
Certificate of Need Laws may impose investment barriers for us............... 16
We will not control the management of our properties............................... 16
We may not control the joint ventures in which we enter............................ 16
Joint venture partners may have different interests than we have................... 16
It may be difficult for us to exit a joint venture after an impasse................ 16
We will not have control over properties under construction........................ 17
We will have no economic interest in ground lease properties....................... 17
Multiple property leases or mortgage loans with individual
tenants or borrowers increase our risks.......................................... 17
It may be difficult to re-lease our properties..................................... 17
We cannot control the sale of some properties...................................... 17
The liquidation of our assets may be delayed....................................... 17
Risks of Mortgage Lending.......................................................... 18
Our mortgage loans may be impacted by unfavorable
real estate market conditions............................................. 18
Our mortgage loans will be subject to interest rate
fluctuations.............................................................. 18
Delays in liquidating defaulted mortgage loans
could reduce our investment returns......................................... 18
Returns on our mortgage loans may be limited by regulations................... 18
Risks of Secured Equipment Leasing................................................. 18
Our collateral may be inadequate to secure leases............................. 18
Returns on our secured equipment leases may be
limited by regulations.................................................... 18
Our properties may be subject to environmental liabilities......................... 18
Financing Risks ....................................................................... 19
We have no commitments for financing............................................... 19
Anticipated borrowing creates risks................................................ 19
We can borrow money to make distributions.......................................... 19
Miscellaneous Risks.................................................................... 20
Our health care facilities may be unable to compete
successfully................................................................... 20
Inflation could adversely affect our investment returns............................ 20
We may not have adequate insurance................................................. 20
Possible effect of ERISA........................................................... 20
Our governing documents may discourage takeovers................................... 20
Our stockholders are subject to ownership limits................................... 21
Majority stockholder vote may discourage changes
of control....................................................................... 21
Investors in our Company may experience dilution................................... 21
The Board of Directors can take many actions without
stockholder approval............................................................. 21
We will rely on the advisor and Board of Directors to
manage the Company............................................................... 21
Our officers and directors have limited liability.................................. 21
Tax Risks.............................................................................. 22
We will be subject to increased taxation if we fail to
qualify as a REIT for federal income tax purposes............................. 22
Our leases may be recharacterized as financings which would
eliminate depreciation deductions on health care properties................... 22
Excessive non-real estate asset values may jeopardize our
REIT status................................................................... 22
We may have to borrow funds or sell assets to meet our
distribution requirements..................................................... 23
Ownership limits may discourage a change in control................................ 23
We may be subject to other tax liabilities......................................... 23
Changes in tax laws may prevent us from qualifying
as a REIT..................................................................... 23
SUITABILITY STANDARDS AND HOW TO SUBSCRIBE.................................................. 23
Suitability Standards.................................................................. 23
How to Subscribe....................................................................... 24
ESTIMATED USE OF PROCEEDS................................................................... 25
MANAGEMENT COMPENSATION..................................................................... 26
CONFLICTS OF INTEREST....................................................................... 32
Prior and Future Programs.............................................................. 33
Competition to Acquire Properties and Invest in
Mortgage Loans..................................................................... 33
Sales of Properties.................................................................... 34
Joint Investment With An Affiliated Program............................................ 34
Competition for Management Time........................................................ 34
Compensation of the Advisor............................................................ 34
Relationship with Managing Dealer...................................................... 35
Legal Representation................................................................... 35
Certain Conflict Resolution Procedures................................................. 35
SUMMARY OF REINVESTMENT PLAN................................................................ 37
General................................................................................ 37
Investment of Distributions............................................................ 38
Participant Accounts, Fees and Allocation of Shares.................................... 38
Reports to Participants................................................................ 39
Election to Participate or Terminate Participation..................................... 39
Federal Income Tax Considerations...................................................... 40
Amendments and Termination............................................................. 40
REDEMPTION OF SHARES........................................................................ 40
BUSINESS.................................................................................... 42
General................................................................................ 42
Investment of Offering Proceeds........................................................ 47
Site Selection and Acquisition of Properties........................................... 48
Standards for Investment in Properties................................................. 52
Description of Properties.............................................................. 52
Description of Property Leases......................................................... 54
Joint Venture Arrangements............................................................. 58
Mortgage Loans......................................................................... 59
Management Services.................................................................... 60
Borrowing.............................................................................. 60
Sale of Properties, Mortgage Loans and Secured
Equipment Leases.................................................................... 61
Competition............................................................................ 62
Regulation of Mortgage Loans and Secured
Equipment Leases.................................................................... 62
SELECTED FINANCIAL DATA..................................................................... 63
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................... 63
Liquidity and Capital Resources........................................................ 64
Results of Operations.................................................................. 65
MANAGEMENT.................................................................................. 67
General................................................................................ 67
Fiduciary Responsibility of the Board of Directors..................................... 67
Directors and Executive Officers....................................................... 68
Independent Directors.................................................................. 72
Committees of the Board of Directors................................................... 72
Compensation of Directors and Executive Officers....................................... 72
Management Compensation................................................................ 72
THE ADVISOR AND THE ADVISORY AGREEMENT...................................................... 72
The Advisor............................................................................ 72
The Advisory Agreement................................................................. 73
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................. 76
PRIOR PERFORMANCE INFORMATION............................................................... 76
INVESTMENT OBJECTIVES AND POLICIES.......................................................... 82
General................................................................................ 82
Certain Investment Limitations......................................................... 83
DISTRIBUTION POLICY......................................................................... 85
General................................................................................ 85
Distributions.......................................................................... 85
SUMMARY OF THE ARTICLES OF INCORPORATION
AND BYLAWS............................................................................... 86
General................................................................................ 86
Description of Capital Stock........................................................... 86
Board of Directors..................................................................... 88
Stockholder Meetings................................................................... 88
Advance Notice for Stockholder Nominations for Directors
and Proposals of New Business....................................................... 89
Amendments to the Articles of Incorporation............................................ 89
Mergers, Combinations and Sale of Assets............................................... 89
Control Share Acquisitions............................................................. 90
Termination of the Company and REIT Status............................................. 90
Restriction of Ownership............................................................... 90
Responsibility of Directors............................................................ 91
Limitation of Liability and Indemnification............................................ 92
Removal of Directors................................................................... 93
Inspection of Books and Records........................................................ 93
Restrictions on "Roll-Up" Transactions................................................. 93
FEDERAL INCOME TAX CONSIDERATIONS........................................................... 94
Introduction........................................................................... 94
Taxation of the Company................................................................ 95
Taxation of Stockholders............................................................... 99
State and Local Taxes.................................................................. 103
Property Leases........................................................................ 103
Characterization of Secured Equipment Leases........................................... 104
Investment in Joint Ventures........................................................... 104
REPORTS TO STOCKHOLDERS..................................................................... 105
THE OFFERING................................................................................ 106
General................................................................................ 106
Plan of Distribution................................................................... 107
Subscription Procedures................................................................ 109
<PAGE>
Escrow Arrangements.................................................................... 111
ERISA Considerations................................................................... 112
Determination of Offering Price........................................................ 113
SUPPLEMENTAL SALES MATERIAL................................................................. 113
LEGAL OPINIONS.............................................................................. 114
EXPERTS..................................................................................... 114
ADDITIONAL INFORMATION...................................................................... 114
DEFINITIONS................................................................................. 114
Form of Reinvestment Plan ............................................................Appendix A
Financial Information.................................................................Appendix B
Prior Performance Tables..............................................................Appendix C
Subscription Document.................................................................Appendix D
</TABLE>
<PAGE>
Questions and Answers About
CNL Health Care Properties, Inc.'s Public Offering
Q: What is CNL Health Care Properties, Inc.?
A: The Company is a real estate investment trust, or a REIT, that was
formed in 1997 to acquire properties related to health care and
seniors' housing facilities and lease them on a long-term, triple-net
basis to operators of health care facilities. 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. In
addition, the Company may provide mortgage financing loans and secured
equipment leases to operators of health care facilities.
Q: What is a REIT?
A: In general, a REIT is a company that:
o combines the capital of many investors to acquire or provide
financing for real estate,
o offers benefits of a diversified portfolio under professional
management,
o typically is not subject to federal corporate income taxes on its net
income, provided certain income tax requirements are satisfied. This
treatment substantially eliminates the "double taxation" (taxation at
both the corporate and stockholder levels) that generally results
from investments in a corporation, and
o must pay distributions to investors of at least 95% of its taxable
income.
Q: What kind of offering is this?
A: We are offering up to 15,000,000 shares of common stock on a "best
efforts" basis. In addition, we are offering up to 500,000 shares of
common stock to investors who want to participate in our reinvestment
plan.
Q: How does a "best efforts" offering work?
A: When shares are offered to the public on a "best efforts" basis, we are
not guaranteeing that we will sell any minimum number of shares. If you
choose to purchase stock in this offering, you will fill out a
Subscription Agreement, like the one attached to this Prospectus as
Appendix D, for a certain number of shares and pay for the shares at
the time you subscribe. The purchase price will be placed into escrow
with SouthTrust Asset Management Company of Florida, N.A. SouthTrust
will hold your funds, along with those of other subscribers, in an
interest-bearing account until such time as we receive subscriptions
for 250,000 shares and you are admitted by the Company as a
stockholder. Once we receive subscriptions for a minimum of 250,000
shares, we generally will admit stockholders no later than the last day
of the calendar month following acceptance of your subscription.
Q: How long will the offering last?
A: The offering will not last beyond September 18, 1999, unless we decide
to extend the offering until not later than September 18, 2000, in any
state that allows us to extend the offering.
Q: Who can buy shares?
A: Anyone who receives this Prospectus can buy shares provided that they
have a net worth (not including home, furnishings and personal
automobiles) of at least $45,000 and an annual gross income of at least
$45,000; or, a net worth (not including home, furnishings and personal
automobiles) of at least $150,000. However, these minimum levels may
vary from state to state, so you should carefully read the more
detailed description in the "Suitability Standards" section of this
Prospectus.
Q: Is there any minimum required investment?
A: Yes. Generally, individuals must initially invest at least $2,500 and
IRA, Keogh or other qualified plans must initially invest at least
$1,000. Thereafter, you may purchase additional shares in $10
increments. However, these minimum investment levels may vary from
state to state, so you should carefully read the more detailed
description of the minimum investment requirements appearing later in
the "Suitability Standards" section of this Prospectus.
Q: After I subscribe for shares, can I change my mind and withdraw my
money?
A: Once you have subscribed for shares and you have deposited the
subscription price with SouthTrust, your subscription is irrevocable,
unless the Company elects to permit you to revoke your subscription.
Q: If I buy shares in the offering, how can I sell them?
A: At the time you purchase shares, they will not be listed for trading on
any national securities exchange or over-the-counter market. In fact,
we expect that there will not be any public market for the shares when
you purchase them, and we cannot be sure if one will ever develop. As a
result, you may find that if you wish to sell your shares, you may not
be able to do so promptly or at a price equal to or greater than the
offering price.
We plan to list the shares on a national securities exchange or
over-the-counter market within five to ten years after commencement of
this offering, if market conditions are favorable. Listing does not
assure liquidity. If we have not listed the shares on a national
securities exchange or over-the-counter market by December 31, 2008, we
plan to sell the properties and other assets and return the proceeds
from the liquidation to our stockholders through distributions.
Beginning one year after you receive your shares, you may ask us to
redeem at least 25% of the shares you own. The redemption procedures
are described in the "Redemption of Shares" section of this Prospectus.
As a result, if a public market for the shares never develops, you may
be able to redeem your shares through the redemption plan beginning one
year from the date on which you received your stock, provided we have
sufficient funds available. If we have not listed and we liquidate our
assets, you will receive proceeds through the liquidation process.
Q: What will you do with the proceeds from this offering?
A: We plan to use approximately 84% of the proceeds to purchase health
care and seniors' housing properties and to make mortgage loans,
approximately 9% to pay fees and expenses to affiliates for their
services and as reimbursement of offering and acquisition-related
expenses, and the remaining proceeds to pay other expenses of this
offering. The payment of these fees will not reduce your invested
capital. Your initial invested capital amount will be $10 per share.
Until we invest the proceeds in real estate assets, we will invest them
in short-term, highly liquid investments. These short-term investments
may not earn as high a return as we hope to earn on our real estate
investments, and we cannot know how long it will be before we will be
able to fully invest the proceeds in real estate.
We commenced our public offering of common stock on September 18, 1998.
Assuming we sell 15,000,000 shares in this offering, we expect to be
able to invest approximately $126,000,000 in health care and senior's
housing properties and mortgage loans.
Q: What types of health care facilities will you invest in?
A: We intend to purchase primarily assisted living facilities, medical
office buildings and walk-in clinics. In addition, we may purchase
congregate living facilities, skilled nursing facilities, continuing
care retirement communities and life care communities.
Q: What are the terms of your leases?
A: The leases we expect to enter into are long-term (meaning generally 10
to 20 years, plus renewal options for an additional 10 to 20 years),
"triple-net" leases. "Triple-net" means that the tenant, not the
Company, is generally responsible for repairs, maintenance, property
taxes, utilities, and insurance. Under our leases, the tenant must pay
us minimum, base rent on a monthly basis. In addition, our leases
generally will provide for automatic fixed increases in the base rent
or increases in the base rent based on increases in consumer price
indices at predetermined intervals during the term of the lease.
Q: What is the experience of the Company's officers and directors?
A: Our management team has extensive previous experience investing in real
estate on a triple-net basis. Our Chief Executive Officer and President
each have over 25 and 20 years, respectively, of experience with other
CNL affiliates. In addition, our Chief Operating Officer has extensive
previous experience investing in health care and seniors' housing
properties.
Certain of our officers, directors and affiliates have operated several
other REITs and partnerships in the past. We have included the
investment results from certain of those funds in this Prospectus under
the heading "Prior Performance Information." Because those funds had
different goals and the managers had different amounts of experience
investing in the types of assets purchased by those funds, you cannot
assume that the Company's investment returns will be similar to those
described in the "Prior Performance Information" section. Our
affiliates and some of our directors have limited experience investing
in health care and seniors' housing properties.
Q: How will you choose which investments to make?
A: We have hired CNL Health Care Advisors, Inc. as our advisor. The
advisor has the authority, subject to the approval of our directors, to
make all of the Company's investment decisions.
Q: Is the advisor independent of the Company?
A: No. Some of our directors and all of our officers are directors and
officers of the advisor. The conflicts of interest the Company and the
advisor face are discussed under the heading "Conflicts of Interest"
later in this Prospectus.
Q: If I buy shares, will I receive distributions and, if so, how often?
A: We intend to make quarterly cash distributions to our stockholders
commencing not later than the close of the first full quarter after the
first release of funds from escrow. The Board of Directors determines
the amount of distributions. The amount typically depends on the amount
of distributable funds, current and projected cash requirements, tax
considerations and other factors. However, in order to qualify and
remain qualified as a REIT, we must make distributions equal to at
least 95% of our REIT taxable income each year.
Q: Are distributions I receive taxable?
A: Yes. Generally, distributions that you receive will be considered
ordinary income to the extent they are from current and accumulated
earnings and profits. In addition, because depreciation expense reduces
taxable income but does not reduce cash available for distribution, we
expect a portion of your distributions will be considered return of
capital for tax purposes. These amounts will not be subject to tax
immediately but will instead reduce the tax basis of your investment.
This in effect defers a portion of your tax until your investment is
sold or the Company is liquidated. However, because each investor's tax
implications are different, we suggest you consult with your tax
advisor.
Q: Do you have a reinvestment plan where I can reinvest my distributions
in additional shares?
A: Yes. We have adopted a reinvestment plan in which some investors can
reinvest their distributions in additional shares. For information on
how to participate in our reinvestment plan, see the section of the
Prospectus entitled "Summary of Reinvestment Plan."
<PAGE>
Who Can Help Answer Your Questions?
If you have more questions about the offering or if you would like
additional copies of this Prospectus, you should
contact your registered representative or:
CNL Marketing Services Department
400 East South Street
Orlando, Florida 32801
(800) 522-3863
(407) 650-1000
www.cnlgroup.com
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information from this Prospectus. It
is not complete and may not contain all of the information that you should
consider before investing in our common stock. To understand the offering fully,
you should read this entire Prospectus carefully, including the documents
attached as appendices.
CNL HEALTH CARE PROPERTIES, INC.
CNL Health Care Properties, Inc., which we sometimes refer to as the
"Company," is a Maryland corporation which intends to qualify for federal income
tax purposes as a real estate investment trust, or a REIT. Our address is 400
East South Street, Orlando, Florida 32801, and our telephone number is (407)
650-1000 or toll free (800) 522-3863.
OUR BUSINESS
Our Company plans to acquire health care and seniors' housing
properties located across the United States to be leased to operators of health
care facilities on a long-term, "triple-net" bases. This means that the tenant
generally will be responsible for repairs, maintenance, property taxes,
utilities and insurance. 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. We expect to structure the leases to provide for payment of
base annual rent with periodic increases over the terms of the leases. We may
also offer mortgage financing, and, to a lesser extent, furniture, fixtures and
equipment financing through secured equipment leases as loans or direct
financing leases, to operators of health care facilities. You can read the
section of this Prospectus under the caption "Business" for a description of the
types of properties that may be selected by our advisor, CNL Health Care
Advisors, Inc, the property selection and acquisition processes and the nature
of the mortgage loans and secured equipment leases. As of the date of this
Prospectus, we have not yet acquired any properties, made any mortgage loans, or
entered into any secured equipment leases.
We intend to borrow money to acquire properties, make mortgage loans,
enter into secured equipment leases and pay certain fees. We plan to obtain a
revolving line of credit initially in the amount of $45,000,000, which the Board
of Directors may increase in its discretion. In addition to the line of credit,
we may obtain permanent financing. The Board of Directors anticipates that we
will obtain the permanent financing from a bank at a competitive interest rate
and that the aggregate amount of that financing will not exceed 30% of our total
assets. We are engaged in preliminary discussions with potential lenders, but we
have not yet obtained a commitment letter for the line of credit or permanent
financing and we may not be able to obtain the line of credit or permanent
financing on satisfactory terms. We may repay the line of credit with offering
proceeds, working capital or permanent financing. The line of credit and
permanent financing are the only sources of funds for making secured equipment
leases.
Under our Articles of Incorporation, the Company will automatically
terminate and dissolve on December 31, 2008, unless the shares of common stock
of the Company, including the shares offered by this Prospectus, are listed on a
national securities exchange or over-the-counter market before that date. If the
shares are listed, the Company automatically will become a perpetual life
entity. If we are not listed by December 31, 2008, we will sell our assets,
distribute the net sales proceeds to stockholders and limit our activities to
those related to the Company's 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.
RISK FACTORS
An investment in our Company is subject to significant risks. We
summarize some of the more important risks below. A more detailed list of the
risk factors is found in the "Risk Factors" section, which begins on page 10.
You should read and understand all of the risk factors before making your
decision to invest.
o We currently own no properties, so you will not have the opportunity to
evaluate the properties that will be in our portfolio.
<PAGE>
o If we raise only $2,500,000 from sales of shares, we will acquire no
more than two medical office buildings or walk-in clinics, and we will
have reduced diversification of our investments. Reduced
diversification will increase the potential adverse effect on us from
an underperforming tenant or an underperforming facility type. In the
event we raise only $2,500,000 from sales of shares, we will not make
mortgage loans.
o We will rely on the advisor which, together with the Board of
Directors, will have responsibility for the management of our Company
and our investments. Not all of the officers and directors of the
advisor and the Company have extensive experience, and the advisor and
our affiliates have no previous experience , with acquiring and leasing
health care facilities, which could adversely affect our business.
o The advisor and its affiliates are or will be engaged in other
activities that will result in potential conflicts of interest with the
services that the advisor and affiliates will provide to us. Those
officers could take actions that are more favorable to other entities
than to us. The resolution of conflicts in favor of other entities
could have a negative impact on our financial performance.
o The Board of Directors will have significant flexibility regarding our
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 We 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 If you must sell your shares, you 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 We have not obtained a commitment for the line of credit or permanent
financing, and may be unable to do so on satisfactory terms. If we do
not obtain financing, we may not be able to acquire properties or make
mortgage loans or secured equipment leases.
o In addition to general market and economic conditions, we are subject
to risks arising out of government regulation of the health care
industry, which may reduce the value of our investments and the amount
of revenues we receive from tenants. Some of our tenants may be
dependent upon government reimbursements and other 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 We cannot predict the amount of revenues we will receive from tenants
and borrowers.
o We may, without the approval of a majority of the independent
directors, incur debt totalling up to 300% of the value of our net
assets, including debt to make distributions to stockholders in order
to maintain our status as a REIT. We cannot assure you that we will be
able to meet our debt service obligations, including interest costs
which may be substantial.
o In connection with any borrowing, we may mortgage or pledge our assets,
which would put us at risk of losing the assets if we are unable to pay
our debts.
o If our tenants or borrowers default, we will have less income with
which to make distributions.
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.
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o Restrictions on ownership of more than 9.8% of the shares of our 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 We may not qualify or remain qualified as a REIT for federal income tax
purposes, which would subject us to federal income tax on our taxable
income at regular corporate rates, and reduce the amount of funds
available for paying distributions to you as a stockholder.
o We expect to pay substantial fees to affiliates and estimate that
approximately 9% of the proceeds from the sale of shares will be paid
in fees and expenses to affiliates for services and as reimbursement
for organizational and offering and acquisition related expenses
incurred on our behalf. 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.
OUR REIT STATUS
We will make an election to be taxed as a REIT beginning our taxable
year ending December 31, 1999. As a REIT, we generally will not be subject to
federal income tax on income that we distribute to our stockholders. Under the
Internal Revenue Code of 1986, as amended, 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.
If we fail to qualify for taxation as a REIT in any year, our income will be
taxed at regular corporate rates, and we may not be able to qualify for
treatment as a REIT for that year and the next four years. Even if we qualify as
a REIT for federal income tax purposes, we may be subject to federal, state and
local taxes on our income and property and to federal income and excise taxes on
our undistributed income.
OUR MANAGEMENT AND CONFLICTS OF INTEREST
We have retained the advisor to provide us with management,
acquisition, advisory and administrative services. The members of our Board of
Directors oversee the management of the Company. The majority of the directors
are independent of the advisor and have responsibility for reviewing its
performance. The directors are elected annually to the Board of Directors by the
stockholders.
All of the executive officers and directors of the advisor also are
officers or directors of the Company. The advisor has responsibility for (i)
selecting the properties that we 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 tenants 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 any
long-term, permanent financing. All of the advisor's actions are subject to
approval by the Board of Directors. The advisor also has 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 by the Company 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.
You can read the sections of this Prospectus under the captions
"Management" and "The Advisor and The Advisory Agreement" for a description of
the business background of the individuals responsible for the management of the
Company and the advisor, as well as for a description of the services the
advisor will provide.
Some of our officers and directors, who are also officers or directors
of the advisor, may experience conflicts of interest in their management of the
Company. These arise principally from their involvement in other activities that
may conflict with our business and interests, including matters related to (i)
allocation of new investments and management time and services between us and
various other entities, (ii) the timing and terms of the investment in or sale
of an asset, (iii) development of our properties by affiliates, (iv) investments
with affiliates of the advisor, (v) compensation to the advisor, (vi) our
relationship with the managing dealer, CNL Securities Corp., which is an
affiliate of the Company and the advisor, and (vii) the fact that our securities
and tax counsel also serves as securities and tax counsel for some of our
affiliates, and that neither the Company nor the stockholders
<PAGE>
will have separate counsel. The "Conflicts of Interest" section of this
Prospectus 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.
OUR AFFILIATES
The "Prior Performance Information" section of this Prospectus contains
a narrative discussion of the public and private real estate programs sponsored
by our affiliates and affiliates of the advisor in the past, including 18 public
limited partnerships and two unlisted public REITs. As of December 31, 1998,
these entities, which invest in properties that are leased on a "triple-net"
basis, but do not invest in health care and seniors' housing properties, had
purchased 1,139 fast-food, family-style, and casual-dining restaurant properties
and two hotel properties. Based on an analysis of the operating results of the
90 real estate limited partnerships and two unlisted public REITs in which our
principals have served, individually or with others, as general partners or
officers and directors, we believe that each of these entities has met, or is in
the process of meeting, its principal investment objectives. Statistical data
relating to certain of the public limited partnerships and the unlisted REITs
are contained in Appendix C -- Prior Performance Tables.
OUR INVESTMENT OBJECTIVES
Our Company's primary investment objectives are to preserve, protect,
and enhance our assets, while:
o making distributions commencing in the initial year of operations.
o obtaining fixed income through the receipt of base rent and
payments on mortgage loans and secured equipment leases, and to
increase our income (and distributions) and provide protection
against inflation through automatic increases in base rent or
increases in the base rent based on increases in consumer price
indices over the terms of the leases.
o qualifying and remaining qualified as a REIT for federal income
tax purposes.
o providing you with liquidity for your investment within five to
ten years after commencement of this offering, either through (i)
listing our shares on a national securities exchange or
over-the-counter market or (ii) if listing does not occur within
ten years after commencement of the offering, selling our assets
and distributing the proceeds.
You can read the sections of this Prospectus under the captions
"Business -- General," "Business -- Site Selection and Acquisition of
Properties," "Business -- Description of Property Leases" and "Investment
Objectives and Policies" for a more complete description of the manner in which
the structure of our business will facilitate our ability to meet our investment
objectives.
MANAGEMENT COMPENSATION
We will pay the advisor, CNL Securities Corp., which is the managing
dealer for this offering, and other affiliates of the advisor compensation for
services they will perform for us. The Company will also reimburse them for
expenses they pay on our behalf . The following paragraphs summarize the more
significant items of compensation and reimbursement. See "Management
Compensation" for a complete description.
Organizational and Offering Stage.
Selling Commissions and Marketing Support and Due Diligence
Expense Reimbursement Fee. The Company will pay the managing dealer 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). The managing dealer in turn
may pass along 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 soliciting dealers who are not affiliates of the Company.
Soliciting Dealer Warrants. The Company will issue and sell to
the managing dealer one soliciting dealer warrant for every 25 shares sold
through this 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
managing dealer, in its sole discretion, may pass along all or any number of the
soliciting dealer warrants to soliciting dealers who are members of the selling
group, 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 a period beginning one year from the date the
soliciting dealer warrant is issued and ending on the fifth anniversary of the
commencement of this offering. 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 the Articles of
Incorporation and Bylaws -- Description of Capital Stock -- Soliciting Dealer
Warrants."
Acquisition Stage.
Acquisition Fees. The Company will pay the advisor a fee equal
to 4.5% of the total proceeds of this offering, loan proceeds from permanent
financing and amounts outstanding on the line of credit, if any, at the time of
listing ($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) for identifying the
properties, structuring the terms of the acquisition and leases of the
properties and structuring the terms of the mortgage loans. Amounts used to
finance secured equipment leases will not be used to calculate acquisition fees.
Operational Stage.
Asset Management Fee. The Company will pay the advisor a
monthly asset management fee of one-twelfth of 0.60% of an amount equal to the
total amount invested in the properties (exclusive of acquisition fees and
acquisition expenses) plus the total outstanding principal amounts of the
mortgage loans, as of the end of the preceding month, for managing the
properties and mortgage loans.
Secured Equipment Lease Servicing Fee. The Company will pay
the advisor 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
for negotiating secured equipment leases and supervising the secured equipment
lease program.
Operational or Liquidation Stage.
We will not pay the following fees until we have paid distributions to
stockholders equal to the sum of an aggregate, annual, cumulative, noncompounded
8% return on their invested capital plus 100% of the stockholders' aggregate
invested capital, which is what we mean when we call a fee "subordinated." In
general, we calculate the stockholders' invested capital by multiplying the
number of shares owned by stockholders by the offering price per share and
reducing the product by the portion of all prior distributions paid to
stockholders from the sale of our assets and by any amounts paid by us to
repurchase shares under the redemption plan.
Deferred, Subordinated Real Estate Disposition Fee. The
Company may pay the advisor a real estate disposition fee equal to the lesser of
one-half of a competitive real estate commission or 3% of the gross sales price
of the property for providing substantial services in connection with the sale
of any of its properties. You can read the section of this Prospectus under the
caption "The Advisor and the Advisory Agreement -- The Advisory Agreement" if
you want more information about real estate disposition fees that we may pay to
the advisor.
Deferred, Subordinated Share of Net Sales Proceeds from the
Sale of Assets. The Company will pay to the advisor a deferred, subordinated
share of net sales proceeds from the sale of assets of the Company in an amount
equal to 10% of net sales proceeds.
The Company's obligation to pay some fees may be subject to conditions
and restrictions or may change in some instances. The Company may reimburse the
advisor and its affiliates for out-of-pocket expenses that they incur on behalf
of the Company, subject to certain expense limitations. In addition, the Company
may pay the advisor and its affiliates a subordinated incentive fee if listing
of the Company's common stock on a national securities exchange or
over-the-counter market occurs.
<PAGE>
THE OFFERING
Offering Size.............. o Minimum-- $2,500,000
o Maximum-- $155,000,000
o $150,000,000 of common stock to be offered to
investors meeting certain suitability standards
and $5,000,000 of common stock available only
to investors who purchased their shares in this
offering and who choose to participate in our
reinvestment plan.
o No shares will be sold unless the Company
receives subscriptions totalling $2,500,000 by
September 18, 1999.
Minimum Investments........ o Individuals -- $2,500 -- Additional shares may
be purchased in ten dollar increments.
o IRA, Keogh and other qualified plans -- $1,000
-- Additional shares may be purchased in ten
dollar increments.
(Note: The amounts apply to most potential
investors, but minimum investments may vary
from state to state. Please see "The Offering"
section, which begins on page 101).
Suitability Standards...... o Net worth (not including home, furnishings and
personal automobiles) of at least $45,000 and
annual gross income of at least $45,000; or
o Net worth (not including home, furnishings and
personal automobiles) of at least $150,000.
(Note: Suitability standards may vary from
state to state. Please see the "Suitability
Standards and How to Subscribe" section, which
begins on page 20).
Duration and Listing....... Anticipated to be five to ten years from the
commencement of this offering. If the shares are
listed on a national securities exchange or over-the
-counter market, our Company will become a perpetual
life entity, and we will then reinvest proceeds from
the sale of assets.
Distribution Policy........ Consistent with our objective of qualifying as a
REIT, we expect to pay quarterly distributions and
distribute at least 95% of our REIT taxable income.
Our Advisor................ CNL Health Care Advisors, Inc. will administer the
day-to-day operations of our Company and select our
Company's real estate investments, mortgage loans
and secured equipment leases.
Estimated Use of Proceeds.. o 84% -- To acquire health care and seniors'
housing properties and make mortgage loans
o 9% -- To pay fees and expenses to affiliates
for their services and as reimbursement of
offering and acquisition-related expenses
o 7% -- To pay for other expenses of the offering
Our Reinvestment Plan...... We have adopted a reinvestment plan which will allow
some stockholders to have the full amount of their
distributions reinvested in additional shares that
may be available. We have registered 500,000 shares
of our common stock for this purpose. See the
"Summary of Reinvestment Plan" and the "Federal
Income Tax Considerations--Taxation of Stockholders"
sections and the Form of Reinvestment Plan
accompanying this Prospectus as Appendix A for more
specific information about the reinvestment plan.
<PAGE>
RISK FACTORS
An investment in our shares involves significant risks and therefore is
suitable only for persons who understand those risks and their consequences and
who are able to bear the risk of loss of their investment. You should consider
the following risks in addition to other information set forth elsewhere in this
Prospectus before making your investment decision.
We also caution you that this Prospectus contains forward-looking
statements. Such statements can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "anticipate," "estimate,"
"continue" or other similar words. Although we believe that our expectations
reflected in the forward-looking statements are based on reasonable assumptions,
these expectations may not prove to be correct. Important factors that could
cause our actual results to differ materially from the expectations reflected in
these forward-looking statements include those set forth below, as well as
general economic, business and market conditions, changes in federal and local
laws and regulations and increased competitive pressures.
OFFERING-RELATED RISKS
We may receive insufficient offering proceeds. We are making this
offering on a best efforts basis and we will not sell any shares unless we sell
at least 250,000 shares. Because we are making this offering on a best efforts
basis, our potential profitability and our ability to diversify our investments,
both geographically and by type of properties purchased, will be limited by the
amount of funds we raise. For example, if we raise only the minimum gross
proceeds of $2,500,000, we will be able to acquire no more than two medical
office buildings or walk-in clinics and we will make no mortgage loans. We
cannot assure you that we will sell the minimum number of shares.
This is an unspecified property offering.
You cannot evaluate properties that we have not yet acquired
or identified for acquisition. We have established certain criteria for
evaluating particular properties and the operators of the properties in which we
may invest. We have not set fixed minimum standards relating to creditworthiness
of tenants and therefore the Board of Directors has flexibility in assessing
potential tenants. In addition, as of the date of this Prospectus, we have not
entered into any arrangements that create a reasonable probability that we will
purchase any properties. Accordingly, this is an unspecified property offering,
and as a prospective investor, you have no information to assist you in
evaluating the merits of any property to be purchased or developed by the
Company. You can read the sections of this Prospectus under the captions
"Business -- General" and "Business -- Standards for Investment in Properties"
if you want more information about the types of properties in which we plan to
invest and our criteria for evaluating properties.
We cannot assure you that we will obtain suitable investments.
We cannot be sure that we will be successful in obtaining suitable investments
on financially attractive terms or that, if we make investments, our objectives
will be achieved. If we are unable to find suitable investments, our financial
condition and ability to pay distributions could be adversely affected.
The managing dealer has not made an independent review of the
Company or the Prospectus. The managing dealer, CNL Securities Corp., is an
affiliate of the Company and will not make an independent review of the Company
or the offering. Accordingly, you do not have the benefit of an independent
review of the terms of this offering.
There is no limitation on the number of properties of a
particular facility type which we may acquire. There is no limit on the number
of properties of a particular facility type which we may acquire, and we are 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 our
properties and potential investments in terms of geographic, facility type or
operator diversification.
You will have 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. programs. We
have adopted
<PAGE>
guidelines to minimize such conflicts which you can review in the section of
this Prospectus captioned "Conflicts of Interest -- Competition to Acquire
Properties and Invest in Mortgage Loans." You will not have the opportunity to
evaluate the manner in which these conflicts of interest are resolved.
You cannot evaluate secured equipment leases in which we have
not yet entered or that we have not yet identified. We have not yet made any
arrangements to enter into a secured equipment lease. Therefore, you will not
have any information with which to evaluate any individual secured equipment
lease or the secured equipment lease program in general. We cannot assure you
that we will be successful in choosing suitable operators who will fulfill their
obligations under secured equipment leases or that we will be able to negotiate
secured equipment leases on favorable terms.
There may be delays in investing the proceeds of this offering. We may
delay investing the proceeds of this offering for up to the later of two years
from the initial date of this Prospectus or one year after termination of the
offering; although, we expect to invest substantially all net offering proceeds
by the end of that period. The "Prior Performance Information" section provides
a summary description of the investment experience of affiliates of the advisor
in prior CNL programs, but you should be aware that previous experience is not
necessarily indicative of the rate at which the proceeds of this offering will
be invested.
We may delay investing the proceeds from this offering, and therefore
delay the receipt of any returns from investments, due to the inability of the
advisor to find suitable properties or mortgage loans for investment. Until we
invest in properties or make mortgage loans, our investment returns will be
limited to the rates of return available on short-term, highly liquid
investments that provide appropriate safety of principal. We expect these rates
of return, which affect the amount of cash available to make distributions to
stockholders, to be lower than we would receive for property investments or
mortgage loans. Further, if we are required to invest any funds in properties
and mortgage loans and we have not done so or reserved those funds for Company
purposes within the later of two years from the initial date of this Prospectus,
or one year after the termination of this offering, we will distribute the
remaining funds pro rata to the persons who are stockholders of the Company at
that time.
The sale of shares by stockholders could be difficult. Currently there
is no public market for the shares, so stockholders may not be able to sell
their shares promptly at a desired price. Therefore, you should consider
purchasing the shares as a long-term investment only. We do not know if we will
ever apply to list our shares on a national securities exchange or
over-the-counter market, or, if we do apply for listing, when such application
would be made or whether it would be accepted. If our shares are listed, we
cannot assure you a public trading market will develop. In any event, the
Articles of Incorporation provide that we will not apply for listing before the
completion or termination of this offering. We cannot assure you that the price
you would receive in a sale on a national securities exchange or
over-the-counter market would be representative of the value of the assets we
own or that it would equal or exceed the amount you paid for the shares.
COMPANY-RELATED RISKS
We have no operating history. As of the date of this Prospectus, the
Company is in its development stage and has no previous performance history. As
a result, you cannot be sure how the Company will be operated, whether it will
pursue the objectives described in this Prospectus or how it will perform
financially.
Our management has limited experience with investments in health care
facilities. None of the prior programs organized by our affiliates has invested
in health care facilities. While certain of our directors and officers have
experience in investing in health care facilities, the lack of experience of the
majority of our management team and the advisor and its affiliates in
purchasing, leasing and selling health care facilities may adversely affect our
results of operations.
We are dependent on the advisor. The advisor, with approval from the
Board of Directors, will be responsible for our daily management, including all
acquisitions, dispositions and financings. The Board of Directors may fire the
advisor, with or without cause, but only subject to payment and release of the
advisor from all guarantees and other obligations incurred as advisor, which are
referenced in the "Management Compensation" section of this Prospectus. We
cannot be sure that the advisor will achieve our objectives or that the Board of
<PAGE>
Directors will be able to act quickly to remove the advisor if it deems removal
necessary. As a result, it is possible that we would be managed for some period
by a company that was not acting in our best interests or not capable of helping
us achieve our objectives.
We will be subject to conflicts of interest.
We will be subject to conflicts of interest arising out of our
relationships with the advisor and its affiliates, including the material
conflicts discussed below. The "Conflicts of Interest" section provides a
further discussion of the conflicts of interest between us and the advisor and
its affiliates and our policies to reduce or eliminate certain potential
conflicts.
We will experience competition for properties. 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 us. The
selection of properties to be transferred by the advisor to us may be subject to
conflicts of interest. We cannot be sure that the advisor will act in our best
interests when deciding whether to allocate any particular property to us. You
will not have the opportunity to evaluate the manner in which these conflicts of
interest are resolved before making your investment.
There will be competing demands on our officers and directors.
Our officers and some of our directors and the officers and directors of the
advisor have management responsibilities for other companies, including
companies that may in the future invest in some of the same types of assets in
which we may invest. For this reason, these officers and directors will share
their management time and services among those companies and us, will not devote
all of their attention to us and could take actions that are more favorable to
the other companies than to us.
The timing of sales and acquisitions may favor the advisor.
The advisor may immediately realize substantial commissions, fees and other
compensation as a result of any investment in or sale of an asset by us. Our
Board of Directors must approve any investments and sales, but the advisor's
recommendation to the Board may be influenced by the impact of the transaction
on the advisor's compensation. The agreements between us and the advisor were
not the result of arm's-length negotiations. As a result, the advisor may not
always act in the Company's best interests, which could adversely affect our
results of operations.
Our properties may be developed by affiliates. Properties that
we acquire may require development prior to use by a tenant. Our affiliates 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 ours to serve as a developer. There is a risk, however, that we
would acquire properties that require development so that an affiliate would
receive the development fee.
We may invest with affiliates of the advisor. We may invest in
joint ventures with another program sponsored by the advisor or its affiliates.
The Board of Directors, including the independent directors, must approve the
transaction, but the advisor's recommendation may be affected by its
relationship with one or more of the co-venturers and may be more beneficial to
the other programs than to us.
There is no separate counsel for the Company, our affiliates
and investors. We may have interests that conflict with yours and those of our
affiliates, but none of us has the benefit of separate counsel.
We may not have sufficient working capital. We cannot assure you that
we will have sufficient working capital. As of December 31, 1998, we had
stockholder's equity of $200,000. If we do not have sufficient capital, we may
not be able to pay certain expenses or loan payments due on permanent financing
which could result in our defaulting under such loans.
<PAGE>
REAL ESTATE AND OTHER INVESTMENT RISKS
Possible lack of diversification increases the risk of investment.
Based on the estimated purchase price of each health care facility ranging from
$1,000,000 to $30,000,000, we anticipate 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 our present expectation of the prices of properties in which
we will most likely invest, and assuming maximum gross proceeds of $150,000,000
are raised, we would acquire or finance approximately 12 properties with the net
proceeds from this offering. Depending on the purchase price of each health care
facility, we may not be able to achieve diversification by tenant, facility type
or geographic location. Lack of diversification will increase the potential
adverse effect on us of a single underperforming tenant, an underperforming
facility type or a depressed geographic region.
We do not have control over market and business conditions. Changes in
general or local economic or market conditions, increased costs of energy,
increased costs of products, increased costs and shortages of labor, competitive
factors, fuel shortages, quality of management, the ability of a health care
facility to fulfill its obligations, limited alternative uses for the building,
changing consumer habits, condemnation or uninsured losses, changing
demographics, changing government regulations, inability to remodel outmoded
buildings as required by the franchise or lease agreement, voluntary termination
by a tenant of its obligations under a lease, bankruptcy of a tenant or
borrower, and other factors beyond our control may reduce the value of
properties that we acquire, the ability of tenants to pay rent on a timely
basis, the amount of the rent and the ability of borrowers to make mortgage loan
payments on time. If tenants are unable to make lease payments or borrowers are
unable to make mortgage loan payments as a result of any of these factors , we
might not have cash available to make distributions to our stockholders.
Adverse trends in the health care and seniors' housing industry may
impact our properties. The success of our properties will depend largely on the
property operators' 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. The "Business - General" section includes a description of the size
and nature of the health care and seniors' housing industry and current trends
in this industry. If operators of our properties are unable to adapt to dominant
trends in the health care and seniors' housing industry, our income and funds
available for distribution could be adversely impacted.
Health Care Facilities.
Some of our tenants and borrowers must attract senior citizens
with ability to pay. Some of the health care facilities which we intend to own
or finance, in particular, assisted living and independent living facilities,
depend 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, some payors, such as Medicare, limit the number of
days for which payment will be made in some 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 residents to continue to pay for the
services they receive. Although we do not anticipate that base lease and
mortgage loan payments will be linked to the fees or rates received by the
operators, certain leases and mortgage loans may provide that we will receive a
percentage of the fees or rates charged by the operator to residents. If
residents of health care facilities are unable to pay fees owed to the
facilities' operators, the operators could be adversely affected and may be
unable to make base lease and loan payments. This could have a material adverse
impact on the amount of lease and loan payments we receive in excess of base
amounts.
Failure to comply with government regulations could negatively
affect our tenants and borrowers. 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 a tenant's or borrower's ability to operate the health care
facilities that we own or finance. 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 our 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 our tenants
and borrowers. For example, a tenant's loss of licensure or Medicare/Medicaid
certification could result in our 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. We cannot assure you that we could contract with another tenant on a
timely basis or on acceptable terms. Our failure to do so could have an adverse
effect on our financial condition or results of operations.
Our properties may not be readily adaptable to other uses. We
anticipate that some of the properties in which we will invest 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. Therefore, if the
operation of any of our 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 any of these events occur, our income and funds
available for distribution could be reduced.
Our tenants and borrowers may rely on government
reimbursement. Our tenants and borrowers, particularly those operating skilled
nursing facilities, may derive a significant portion of their revenues from
governmentally funded programs, such as Medicaid and Medicare. Although , we do
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 those operators, such changes could adversely affect the
ability of the operators to make lease and loan payments to us and/or the amount
of such payments if and to the extent they are based on gross revenues. Failure
of the 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
our 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. We cannot assure you 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 some chronically disabled individuals, is not anticipated to be a major
source of revenue for the types of health care facilities in which we expect to
invest or make mortgage loans, we have 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, we 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.
<PAGE>
Cost control and other health care reform measures may reduce
reimbursements to our tenants and borrowers. 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. We
believe 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 our tenants and borrowers. We
cannot predict whether governmental reforms will be adopted and, if adopted,
whether the implementation of these reforms will have a material adverse effect
on our financial condition or results of operations.
Certificate of Need Laws may impose investment barriers for
us. Some states regulate the supply of some 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
our acquisition or development . In addition, we may invest in properties which
cannot be replaced if they become obsolete unless such replacement is approved
or exempt under a Certificate of Need Law.
We will not control the management of our properties. Our tenants will
be responsible for maintenance and other day-to-day management of the
properties. Because our revenues will largely be derived from rents, our
financial condition will be dependent on the ability of third-party tenants that
we do not control to operate the properties successfully. We intend to enter
into leasing agreements only with tenants having substantial prior experience in
the operation of health care facilities, but there can be no assurance that we
will be able to make such arrangements because, as of the date of this
Prospectus, we have not entered into any arrangements that create a reasonable
probability that we will purchase any properties. If our tenants are unable to
operate the properties successfully, they may not be able to pay their rent,
which could adversely affect our financial condition.
We may not control the joint ventures in which we enter. Our
independent directors must approve all joint venture or general partnership
arrangements in which we enter. Subject to that approval, we may enter into a
joint venture 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 we will share management control of the joint
venture with the unaffiliated party. In the event the joint venture or general
partnership agreement provides that we will have sole management control of the
joint venture, the agreement may be ineffective as to a third party who has no
notice of the agreement, and we therefore may be unable to control fully the
activities of the joint venture. If we enter into a joint venture with another
program sponsored by an affiliate, we do not anticipate that we will have sole
management control of the joint venture.
Joint venture partners may have different interests than we have.
Investments in joint ventures involve the risk that our co-venturer may have
economic or business interests or goals which, at a particular time, are
inconsistent with our interests or goals, that the co-venturer may be in a
position to take action contrary to our instructions, requests, policies or
objectives, or that the 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. If we do not have full
control over a joint venture, the value of our investment will be affected to
some extent by a third party that may have different goals and capabilities than
ours. As a result, joint ownership of investments may adversely affect our
returns on the investments and, therefore, our ability to pay distributions to
our stockholders.
It may be difficult for us to exit a joint venture after an impasse. If
we enter into a joint venture, there will be a potential risk of impasse in some
joint venture decisions since our approval and the approval of each co-venturer
will be required for some decisions. In any joint venture with an affiliated
program, however, we will have the right to buy the other co-venturer's interest
or to sell our own interest on specified terms and conditions in the event of an
impasse regarding a sale. In the event of an impasse, it is possible that
neither party will have the funds necessary to complete the buy-out. In
addition, we may experience difficulty in locating a third-party purchaser for
our joint venture interest and in obtaining a favorable sale price for the
interest. As a result, it is possible that we may not be able to exit the
relationship if an impasse develops. You can read the section of this Prospectus
under the caption "Business -- Joint Venture Arrangements" if you want more
information about the terms that our joint venture arrangements are likely to
include.
We will not have control over properties under construction. We intend
to acquire sites on which a property that we will own will be built, as well as
sites which have existing properties (including properties which require
renovation). If we acquire a property for development or renovation, we may be
subject to risks in connection with a developer's ability to control
construction costs and the timing of completion of construction or a developer's
ability to build in conformity with plans, specifications and timetables. Our
agreements with a developer will provide safeguards designed to minimize these
risks. In the event of a default by a developer, we generally will have the
right to require the tenant to purchase the property that is under development
at a pre-established price designed to reimburse us for all acquisition and
development costs. We cannot be sure, however, that the tenants will have
sufficient funds to fulfill their obligations under these agreements. You can
read the section of this Prospectus under the caption "Business -- Site
Selection and Acquisition of Properties" if you want more information about
property development and renovation.
We will have no economic interest in ground lease properties. If we
invest in ground lease properties, we will not own, or have a leasehold interest
in, the underlying land, unless we enter into an assignment or other agreement.
Therefore, 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, we generally will retain partial ownership of, and
will have the right to remove any equipment that we may own in the building. As
a result, though we will share in the income stream derived from the lease, we
will not share in any increase in value of the land associated with any ground
lease property.
Multiple property leases or mortgage loans with individual tenants or
borrowers increase our risks. The value of our 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 our interest to evict the tenant or foreclose
on the property of the borrower. Tenants may lease more than one property, and
borrowers may enter into more than one mortgage loan. As a result, a default by
or the financial failure of a tenant or borrower could cause more than one
property to become vacant or more than one loan to become non-performing in some
circumstances. Vacancies would reduce our cash receipts and could decrease the
properties' resale value until we are able to re-lease the affected properties.
It may be difficult to re-lease our properties. If a tenant vacates a
property, we 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. In addition, we could experience delays
in enforcing our rights against, and collecting rents (and, in some cases, real
estate taxes and insurance costs) due from, a defaulting tenant. Any delay we
experience in re-leasing a property or difficulty in re-leasing at acceptable
rates could affect our ability to pay distributions.
We cannot control the sale of some properties. We expect to give some
tenants the right, but not the obligation, to purchase their properties from us
beginning a specified number of years after the date of the lease. The leases
also generally will provide the tenant with a right of first refusal on any
proposed sale provisions. These policies may lessen the ability of the advisor
and the Board of Directors to freely control the sale of the property. See
"Business -- Description of Property Leases -- Right of Tenant to Purchase."
The liquidation of our assets may be delayed. If our shares are not
listed on a national securities exchange or over-the-counter market by December
31, 2008, we will undertake to sell our assets and distribute the net sales
proceeds to stockholders, and we will engage only in activities related to our
orderly liquidation, unless our stockholders elect otherwise. Neither the
advisor nor the Board of Directors may be able to control the timing of the sale
of our assets due to market conditions, and we cannot assure you that we will be
able to sell our assets so as to return our stockholders' aggregate invested
capital, to generate a profit for the stockholders or to fully satisfy our debt
obligations. We will only return all of our stockholders' invested capital if we
sell the properties 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. If we take a purchase
money obligation in partial payment of the sales price of a property, we will
realize the proceeds of the sale over a period of years. Further, any intended
liquidation of our Company may be delayed beyond the time of the sale of all of
the properties until all mortgage loans and secured equipment leases expire or
are sold, because we plan to enter into mortgage loans with terms of 10 to 20
years and secured equipment leases with terms of seven years, and those
obligations may not expire before all of the properties are sold.
Risks of Mortgage Lending.
Our mortgage loans may be impacted by unfavorable real estate
market conditions. If we make mortgage loans, we will be at risk of defaults on
those loans caused by many conditions beyond our control, including local and
other economic conditions affecting real estate values and interest rate levels.
We do not know whether the values of the properties securing the mortgage loans
will remain at the levels existing on the dates of origination of the mortgage
loans. If the values of the underlying properties drop, our risk will increase
and the values of our interests may decrease.
Our mortgage loans will be subject to interest rate
fluctuations. If we invest in fixed-rate, long-term mortgage loans and interest
rates rise, the mortgage loans will yield a return lower than then-current
market rates. If interest rates decrease, we will be adversely affected to the
extent that mortgage loans are prepaid, because we will not be able to make new
loans at the previously higher interest rate.
Delays in liquidating defaulted mortgage loans could reduce
our investment returns. If there are defaults under our mortgage loans, we may
not be able to repossess and sell the underlying properties quickly. The
resulting time delay could reduce the value of our investment in the defaulted
loans. An action to foreclose on a mortgaged property securing a loan is
regulated by state statutes and rules and is subject to many of the delays and
expenses of other lawsuits if the defendant raises defenses or counterclaims. In
the event of default by a mortgagor, these restrictions, among other things, may
impede our ability to foreclose on or sell the mortgaged property or to obtain
proceeds sufficient to repay all amounts due to us on the loan.
Returns on our mortgage loans may be limited by 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. We may determine not to make mortgage loans in any jurisdiction in
which we believe we have not complied in all material respects with applicable
requirements. If we decide not to make mortgage loans in several jurisdictions,
it could reduce the amount of income we would receive.
Risks of Secured Equipment Leasing.
Our collateral may be inadequate to secure leases. In the
event that a lessee defaults on a secured equipment lease, we may not be able to
sell the subject equipment at a price that would enable us to recover our costs
associated with the equipment. If we cannot recover our costs, it could affect
our results of operations.
Returns on our secured equipment leases may be limited by
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. We may determine not to operate the
secured equipment lease program in any jurisdiction in which we believe we have
not complied in all material respects with applicable requirements. If we decide
not to operate the secured equipment lease program in several jurisdictions, it
could reduce the amount of income we would receive.
The section of this Prospectus captioned " -- Tax Risks"
discusses certain federal income tax risks associated with the secured equipment
lease program.
Our properties may be subject to environmental liabilities. Under
various federal and state environmental laws and regulations, as an owner or
operator of real estate, we may be required to investigate and clean up certain
hazardous or toxic substances, asbestos-containing materials, or petroleum
product releases at our properties. We may also be held liable to a governmental
entity or to third parties for property damage and for investigation and cleanup
costs incurred by those 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 at any of our properties may adversely affect our 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, we or an
operator of a site may be liable under common law to third parties for damages
and injuries resulting from environmental contamination coming from the site.
All of our properties will be acquired subject to satisfactory Phase I
environmental assessments, which generally involve the 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 the testing of soil, groundwater or other
media and conditions. The Board of Directors and the advisor may determine that
we will acquire a property in which a 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 us and/or (ii) established in escrow cash funds equal to a
predetermined amount greater than the estimated costs to remediate the problem.
We cannot be sure, however, that any seller will be able to pay under an
indemnity we obtain or that the amount in escrow will be sufficient to pay all
remediation costs. Further, we cannot be sure that all environmental liabilities
have been identified or that no prior owner, operator or current occupant has
created an environmental condition not known to us. Moreover, we cannot be sure
(i) future laws, ordinances or regulations will not impose any material
environmental liability or (ii) the current environmental condition of our
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 (such as
the presence of underground storage tanks), or by third parties unrelated to us.
Environmental liabilities that we may incur could have an adverse effect on our
financial condition or results of operation.
FINANCING RISKS
We have no commitments for financing. We intend to obtain a line of
credit and long-term financing. We are engaged in preliminary discussions with
potential lenders but we have not yet obtained a commitment for the line of
credit or any long-term financing, and we cannot be sure that we will be able to
obtain either the line of credit or any long-term financing on satisfactory
terms. If we do not obtain the line of credit or long-term financing, we may not
be able to acquire as many properties or make as many loans and leases as we
anticipated, which could limit the diversification of our investments and our
ability to achieve our investment objectives. If we do not obtain a line of
credit or long-term financing, we will not enter into any secured equipment
leases.
Anticipated borrowing creates risks. We may borrow money to acquire
assets, to preserve our status as a REIT or for other corporate purposes. We may
mortgage or put a lien on one or more of our assets in connection with any
borrowing. The Board of Directors anticipates that we will obtain a line of
credit up to $45,000,000 to provide financing for the acquisition of assets. We
may also obtain long-term, permanent financing. The line of credit may be
increased at the discretion of the Board of Directors. We may repay the line of
credit with proceeds from this offering, working capital or permanent financing.
We may not borrow more than 300% of our net assets. Borrowing may be risky if
the cash flow from our real estate and other investments is insufficient to meet
its debt obligations. In addition, our lenders may seek to impose restrictions
on future borrowings, distributions and operating policies. If we mortgage or
pledge assets as collateral and we cannot meet our debt obligations, the lender
could take the collateral, and we would lose both the asset and the income we
were deriving from it. We are not limited on the amount of assets we may use as
security for the repayment of indebtedness.
We can borrow money to make distributions. We may borrow money as
necessary or advisable to assure that we maintain our qualification as a REIT
for federal income tax purposes. In such an event, it is possible that we could
make distributions in excess of our earnings and profits and, accordingly, that
the distributions could constitute a return of capital for federal income tax
purposes, although such distributions would not reduce stockholders' aggregate
invested capital.
<PAGE>
MISCELLANEOUS RISKS
Our health care facilities may be unable to compete successfully. We
anticipate that we 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, in
the acquisition, leasing and financing of health care facilities. We 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 some states,
health care facilities owned by non-profit entities are exempt from taxes on
real property. We cannot be sure we will be able to identify suitable
investments or that we will be able to consummate investments on commercially
reasonable terms.
In addition, the health care facilities in which we will invest are
highly competitive, and we anticipate that any property we acquire will compete
with other health care facilities in the vicinity. We cannot assure you that our
tenants will be able to compete effectively in any market that they enter. Our
tenants' inability to compete successfully would have a negative impact on our
financial condition and results of operations. In addition, due to the highly
competitive environment, it is possible that the markets in which we acquire
properties will be subject to over-building.
Inflation could adversely affect our investment returns. Inflation may
decrease the value of some of our investments. For example, a substantial rise
in inflation over the term of an investment in mortgage loans and secured
equipment leases may reduce the actual return on those investments, if they do
not otherwise provide for adjustments based upon inflation. Inflation could also
reduce the value of our investments in properties if the inflation rate is high
enough that percentage rent and automatic increases in base rent do not keep up
with inflation.
We may not have adequate insurance. If we, as landlord, incur any
liability which is not fully covered by insurance, we would be liable for the
uninsured amounts, and returns to the stockholders could be reduced. "Business -
Description of Property Leases - Insurance, Taxes, Maintenance and Repairs"
describes the types of insurance that the leases of the properties will require
the tenant to obtain.
Possible effect of ERISA. We believe that our assets will not be
deemed, under the Employee Retirement Income Security Act of 1974, as amended,
to be "plan assets" of any plan that invests in the shares, although we have not
requested an opinion of counsel to that effect. If our assets 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 our
transactions and (ii) the prudence standards of ERISA would apply to our
investments (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 Internal Revenue Code imposes nondeductible excise taxes on
prohibited transactions. If such excise taxes were imposed on us, the amount of
funds available for us to make distributions to stockholders would be reduced.
Our governing documents may discourage takeovers. Some provisions of
our 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 our Company by third
parties. Some other provisions of the Articles of Incorporation which exempt us
from the application of Maryland's Business Combinations Statute and Control
Share Acquisition Statute, may have the effect of facilitating (i) business
combinations between us and beneficial owners of 10% or more of the voting power
of our outstanding voting stock and (ii) the acquisition by any person of shares
entitled to exercise or direct the exercise of 20% or more of our total voting
power. Because we will not be subject to the provisions of the Business
Combinations Statute and the Control Share Acquisition Statute, it may be more
difficult for our stockholders 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 us to fail to qualify as a REIT. You can read the
sections of this Prospectus under the captions " -- Tax Risks -- We will be
subject to increased taxation if we fail to qualify as a REIT for federal income
tax purposes," " -- Tax Risks -- Ownership limits may discourage a change in
control," "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" if you want more
information about ownership limitations and transfer restrictions and the effect
of business combinations and acquisitions of large amounts of our stock on our
REIT status.
Our stockholders are subject to ownership limits. The Articles of
Incorporation generally restrict ownership of more than 9.8% of the outstanding
common stock or 9.8% of any series of outstanding preferred stock by one person.
If the ownership, transfer, acquisition or change in our corporate structure
would jeopardize our REIT status, that ownership, transfer, acquisition or
change in our corporate structure would be void as to the intended transferee or
owner and the intended transferee or owner would not have or acquire any rights
to the common stock.
Majority stockholder vote may discourage changes of control.
Stockholders may take some 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. If approved by the holders of the appropriate
number of shares, all actions taken would be binding on all of our stockholders.
Some of these provisions may discourage or make it more difficult for another
party to acquire control of us or to effect a change in our operations.
Investors in our Company may experience dilution. Stockholders have no
preemptive rights. If we (i) commence a subsequent public offering of shares or
securities convertible into shares or (ii) otherwise issue additional shares,
including shares issuable upon exercise of the soliciting dealer warrants,
investors purchasing shares in this offering who do not participate in future
stock issuances will experience dilution in the percentage of their equity
investment in our 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 our best interests. See
"Summary of the Articles of Incorporation and Bylaws -- Description of Capital
Stock -- Soliciting Dealer Warrants" and "The Offering -- Plan of Distribution."
The Board of Directors can take many actions without stockholder
approval. The Board of Directors has overall authority to conduct our
operations. This authority includes significant flexibility. For example, the
Board of Directors can (i) list our stock on a national securities exchange or
over-the-counter market without obtaining stockholder approval; (ii) prevent the
ownership, transfer and/or accumulation of shares in order to protect our status
as a REIT or for any other reason deemed to be in the best interests of the
stockholders; (iii) issue additional shares without obtaining stockholder
approval, which could dilute your ownership; (iv) change the advisor's
compensation, and employ and compensate affiliates; (v) direct our 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 (vi)
establish and change minimum creditworthiness standards with respect to tenants.
Any of these actions could reduce the value of our assets without giving you, as
a stockholder, the right to vote.
We will rely on the advisor and Board of Directors to manage the
Company. If you invest in the Company, you will be relying entirely on the
management ability of the advisor and on the oversight of our Board of
Directors. You will have no right or power to take part in the management of our
Company, except through the exercise of your voting rights. Thus, you should not
purchase any of the shares offered by this Prospectus unless you are willing to
entrust all aspects of our management to the advisor and the Board of Directors.
Our officers and directors have limited liability. The Articles of
Incorporation and Bylaws provide that an officer or director's liability for
monetary damages to us, our stockholders or third parties may be limited.
Generally, we are obligated under the Articles of Incorporation and the Bylaws
to indemnify our officers and directors against certain liabilities incurred in
connection with their services. We have executed indemnification agreements with
each officer and director and agreed to indemnify the officer or director for
any such liabilities that he or she incurs. These indemnification agreements
could limit our ability and the ability of our stockholders to effectively take
action against our directors and officers arising from their service to us. You
can read the section of this Prospectus under the caption "Summary of the
Articles of Incorporation and Bylaws -- Limitation of Liability and
Indemnification" for more information about the indemnification of our officers
and directors.
<PAGE>
TAX RISKS
We will be subject to increased taxation if we fail to qualify as a
REIT for federal income tax purposes. Our management intends to operate in a
manner that will enable us to meet the requirements for qualification and to
remain qualified as a REIT for federal income tax purposes. A REIT generally is
not taxed at the federal corporate level on income it distributes to its
stockholders, as long as it distributes annually at least 95% of its taxable
income to its stockholders. We have not requested, and do not plan to request, a
ruling from the Internal Revenue Service that we qualify as a REIT. We will
receive an opinion from our tax counsel, Shaw Pittman Potts & Trowbridge, that
we will be in a position to meet the requirements for qualification as a REIT
for the taxable year ended December 31, 1999.
You should be aware that opinions of counsel are not binding on the
Internal Revenue Service or on any court. Furthermore, the conclusions stated in
the opinion will be conditioned on, and our qualifying and continued
qualification as a REIT will depend on, our management meeting various
requirements, which are discussed in more detail under the heading "Federal
Income Tax Considerations -- Taxation of the Company -- Requirements for
Qualification as a REIT."
If we fail to qualify as a REIT, we would be subject to federal income
tax at regular corporate rates. In addition to these taxes, we may be subject to
the federal alternative minimum tax. Unless we are entitled to relief under
specific statutory provisions, we could not elect to be taxed as a REIT for four
taxable years following the year during which we were disqualified. Therefore,
if we lose our REIT status, the funds available for distribution to you, as a
stockholder, would be reduced substantially for each of the years involved.
Our leases may be recharacterized as financings which would eliminate
depreciation deductions on health care properties. Our tax counsel, Shaw Pittman
Potts & Trowbridge, is of the opinion, based upon certain assumptions, that the
leases of health care and seniors' housing facilities where we would own the
underlying land would constitute leases for federal income tax purposes.
However, with respect to the health care and seniors' housing facilities where
we would not own the underlying land, Shaw Pittman is unable to render this
opinion. If the lease of a health care and seniors' housing facility does not
constitute a lease for federal income tax purposes, it will be treated as a
financing arrangement. In the opinion of Shaw Pittman, the income derived from
such a financing arrangement would satisfy the 75% and the 95% gross income
tests for REIT qualification because it would be considered to be interest on a
loan secured by real property. Nevertheless, the recharacterization of a lease
in this fashion may have adverse tax consequences for us, in particular that we
would not be entitled to claim depreciation deductions with respect to the
health care facility (although we would be entitled to treat part of the
payments we would receive under the arrangement as the repayment of principal).
In such event, in some taxable years our taxable income, and the corresponding
obligation to distribute 95% of such income, would be increased. Any increase in
our distribution requirements may limit our ability to invest in additional
health care and seniors' housing facilities and to make additional mortgage
loans.
Excessive non-real estate asset values may jeopardize our REIT status.
In order to qualify as a REIT, at least 75% of the value of our assets must
consist of investments in real estate, investments in other REITs, cash and cash
equivalents, and government securities. Our secured equipment leases would not
be considered real estate assets for federal income tax purposes. Therefore, the
value of the secured equipment leases, together with any other property that is
not considered a real estate asset for federal income tax purposes, must
represent in the aggregate less than 25% of our total assets.
In addition, we may not own securities in, or make loans to, any one
company (other than a REIT) which has, in the aggregate, a value in excess of 5%
of our total assets. For federal income tax purposes, the secured equipment
leases would be considered loans. The value of the secured equipment leases
entered into with any particular tenant under a lease or entered into with any
particular borrower under a loan must not represent in excess of 5% of our total
assets.
The 25% and 5% tests are determined at the end of each calendar
quarter. If we fail to meet either test at the end of any calendar quarter, we
will cease to qualify as a REIT.
<PAGE>
We may have to borrow funds or sell assets to meet our distribution
requirements. Subject to some adjustments that are unique to REITs, a REIT
generally must distribute 95% of its taxable income. For the purpose of
determining taxable income, we may be required to accrue interest, rent and
other items treated as earned for tax purposes but that we have not yet
received. In addition, we may be required not to accrue as expenses for tax
purposes some items which actually have been paid or some of our deductions
might be disallowed by the Internal Revenue Service. As a result, we could have
taxable income in excess of cash available for distribution. If this occurs, we
may have to borrow funds or liquidate some of our assets in order to meet the
distribution requirement applicable to a REIT.
Ownership limits may discourage a change in control. For the purpose of
protecting our REIT status, our Articles of Incorporation generally limit the
ownership by any single stockholder of any class of our capital stock, including
common stock, to 9.8% of the outstanding shares of that class. The Articles also
prohibit anyone from buying shares if the purchase would result in our losing
our REIT status. For example, we would lose our REIT status if we had fewer than
100 different stockholders or if five or fewer stockholders, applying certain
broad attribution rules of the Internal Revenue Code, owned 50% or more of our
common stock. These restrictions may discourage a change in control, deter any
attractive tender offers for our common stock or limit the opportunity for you
or other stockholders to receive a premium for your common stock in the event a
stockholder is making purchases of shares of common stock in order to acquire a
block of shares.
We may be subject to other tax liabilities. Even if we qualify as a
REIT, we may be subject to some federal, state and local taxes on our income and
property that could reduce operating cash flow.
Changes in tax laws may prevent us from qualifying as a REIT. As we
have previously described, we are treated as a REIT for federal income tax
purposes. However, this treatment is based on the tax laws that are currently in
effect. We are unable to predict any future changes in the tax laws that would
adversely affect our status as a REIT. If there is a change in the tax laws that
prevents us from qualifying as a REIT or that requires REITs generally to pay
corporate level income taxes, we may not be able to make the same level of
distributions to our stockholders.
SUITABILITY STANDARDS AND HOW TO SUBSCRIBE
SUITABILITY STANDARDS
The shares of common stock offered through this Prospectus (the
"Shares") 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 the "Summary of the Articles of
Incorporation and Bylaws -- Restriction of 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 (not including
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 (not including 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 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 (not including 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.
<PAGE>
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 Internal Revenue Code of 1986, as amended (the "Code"). See
"The Offering -- ERISA Considerations." 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, 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"), who are engaged by CNL
Securities Corp. (the "Managing Dealer") to 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 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 -- Plan of Distribution" and "The Offering --
Subscription Procedures."
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."
<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
offering proceeds computed at $10 per share sold ("Gross Proceeds") will be
available for the purchase of properties (the "Properties") and the making of
mortgage loans ("Mortgage Loans"), and approximately 9% of Gross Proceeds will
be paid in fees and expenses to affiliates of the Company (the "Affiliates") for
their services and as reimbursement for organizational and offering expenses
(the "Organizational and Offering Expenses") and acquisition 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)
--------------------------- ---------------------------
<S> <C>
Amount Percent Amount Percent
----------- --------- -------------- ---------
GROSS PROCEEDS TO THE COMPANY (3).............. $2,500,000 100.0% $150,000,000 100.0%
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 ("Common Stock") by
CNL Health Care Advisors, Inc. (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 warrants (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 ("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 be 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 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 of, and in the
sole discretion of, the Managing Dealer, unless prohibited by federal or
state securities laws. See "Summary of the 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 ("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 ("Acquisition Expenses").
(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 are
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 of Company assets
("Sale").
(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 under the Company's Reinvestment Plan and the Soliciting Dealer Warrants.
See "The Advisor and the Advisory Agreement." For information concerning
compensation and fees paid to the Advisor and its Affiliates since the date of
inception of the Company, see "Certain Relationships and Related Transactions."
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 and reallowed to 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.
<PAGE>
<TABLE>
<CAPTION>
<S><C>
- ----------------------------------------------------------------------------------------------------------------------------------
Type of Method of Computation Estimated
Compensation Maximum Amount
and Recipient
- ----------------------------------------------------------------------------------------------------------------------------------
Organizational Stage
- ----------------------------------------------------------------------------------------------------------------------------------
Selling Commissions to Selling Commissions of 7.5% per Share on all Shares sold, subject Selling Commissions of $187,500
Managing Dealer and to reduction under certain circumstances as described in "The $187,500 if 250,000 Shares
Soliciting Dealers Offering -- Plan of Distribution." Soliciting Dealers may be are sold; $11,250,000 if
reallowed Selling Commissions of up to 7% with respect to Shares 15,000,000 Shares are sold.
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 $12,500 if 250,000 Shares
due diligence expense Dealer, all or a portion of which may be reallowed to Soliciting are sold; $750,000 if
reimbursement fee to Dealers with prior written approval from, and in the sole discretion 15,000,000 Shares are sold.
Managing Dealer and of, the Managing Dealer. The Managing Dealer will pay all sums
Soliciting Dealers attributable to bona fide due 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
Advisor and its expenses in excess of 3% of Gross Proceeds. The Organizational and at this time, but will not
Affiliates for Offering Expenses paid by the Company in connection with the exceed 3% of Gross Proceeds:
Organizational and formation of the Company, together with the 7.5% Selling $75,000 if 250,000 Shares
Offering Expenses Commissions and 0.5% marketing support and due diligence expense are sold; $4,500,000 if
diligence expense reimbursement fee, incurred by the Company will 15,000,000 Shares are sold.
not exceed 13% of the proceeds raised in connection with this
offering.
- -----------------------------------------------------------------------------------------------------------------------------------
Acquisition Stage
- -----------------------------------------------------------------------------------------------------------------------------------
Acquisition Fee to the 4.5% of Gross Proceeds, loan proceeds from permanent financing $112,500 if 250,000 Shares
Advisor and amounts outstanding on the line of credit, if any, at the time are sold plus $20,250 if
listing the Common Stock on a national securities exchange or Permanent Financing equals
over-the-counter market ("Listing"), but excluding loan proceeds $450,000; $6,750,000 if
used to finance secured equipment leases (collectively, "Total 15,000,000 Shares are sold
Proceeds") payable to the Advisor as Acquisition Fees. plus $2,025,000 if Permanent
Financing equals $45,000,000.
- -----------------------------------------------------------------------------------------------------------------------------------
Other Acquisition Fees Any fees paid to Affiliates of the Advisor in connection with the Amount is not determinable
to Affiliates of the financing, development, construction or renovation of a Property. at this time.
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 directors who are independent of
the Advisor (the "Independent Directors"), not otherwise
interested in the transaction.
<PAGE>
- -----------------------------------------------------------------------------------------------------------------------------------
Type of Method of Computation Estimated
Compensation Maximum Amount
and Recipient
- -----------------------------------------------------------------------------------------------------------------------------------
Reimbursement of Reimbursement to the Advisor and its Affiliates for expenses Acquisition Expenses, which
Acquisition Expenses to actually incurred. are based on a number of
the Advisor and its factors, including the
Affiliates The total of all Acquisition Fees and any Acquisition Expenses purchase price of the
payable to the Advisor and its Affiliates shall be reasonable and Properties, are not
shall not exceed an amount equal to 6% of the Real Estate Asset determinable at this time.
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 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. "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 to A monthly Asset Management Fee in an amount equal to one- Amount is not determinable
the Advisor twelfth of 0.60% of the Company's Real Estate Asset Value and the at this time. The amount of
outstanding principal amount of any Mortgage Loans, as of the end the Asset Management Fee
of the preceding month. Specifically, Real Estate Asset Value will depend upon, among
equals the amount invested in the Properties wholly owned by the other things, the cost of
Company, determined on the basis of cost, plus, in the case of the Properties and the
Properties owned by any joint venture or partnership in which amount invested in Mortgage
the Company is a co-venturer or partner ("Joint Venture"), the Loans.
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.
<PAGE>
- -----------------------------------------------------------------------------------------------------------------------------------
Type of Method of Computation Estimated
Compensation Maximum Amount
and Recipient
- -----------------------------------------------------------------------------------------------------------------------------------
Reimbursement to the Operating Expenses (which, in general, are those expenses relating Amount is not determinable
Advisor and Affiliates to administration of the Company on an ongoing basis) will be at this time.
for operating expenses reimbursed 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.
- -----------------------------------------------------------------------------------------------------------------------------------
Deferred, subordinated A deferred, subordinated real estate disposition fee, payable upon Amount is not determinable
real estate disposition Sale of one or more Properties, in an amount equal to the lesser of at this time. The amount of
fee payable to the (i) one-half of a Competitive Real Estate Commission, or (ii) 3% of this fee, if it becomes
Advisor from a Sale or the sales price of such Property or Properties. Payment of such payable, will depend upon
Sales of a Property not fee shall be made only if the Advisor provides a substantial the price at which
in liquidation of the amount of services in connection with the Sale of a Property or Properties are sold.
Company Properties and shall be subordinated to receipt by the
stockholders of Distributions equal to the sum of (i) their
aggregate Stockholders' 8% Return (as defined below) and
(ii) their aggregate investment in the Company ("Invested
Capital"). In general, Invested Capital is the amount of cash
paid by the stockholders to the Company for their Shares,
reduced by certain prior Distributions to the stockholders
from the sales of assets. 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
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.
<PAGE>
- -----------------------------------------------------------------------------------------------------------------------------------
Type of Method of Computation Estimated
Compensation Maximum Amount
and Recipient
- -----------------------------------------------------------------------------------------------------------------------------------
Subordinated incentive At such time, if any, as Listing occurs, the Advisor shall be paid Amount is not determinable
fee payable to the the subordinated incentive fee ("Subordinated Incentive Fee") in at this time.
Advisor at such time, if an amount equal to 10% of the amount by which (i) the market value
any, as Listing occurs of the Company (as defined below) plus the total Distributions
made 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 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 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 Amount is not determinable
share of Net Sales from Sales of assets of the Company payable after receipt by the at this time.
Proceeds from Sales of stockholders of Distributions equal to the sum of (i) the
assets of the Company not Stockholders' 8% Return and (ii) 100% of Invested Capital.
in liquidation of the Following Listing, no share of Net Sales Proceeds will be paid to
Company payable to the the Advisor.
Advisor
- -----------------------------------------------------------------------------------------------------------------------------------
Performance Fee payable Upon termination of the Advisory Agreement, if Listing has not Amount is not determinable
to the Advisor occurred and the Advisor has met applicable performance standards, at this time.
the Advisor 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 date of termination of the Advisory
Agreement (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.
- -----------------------------------------------------------------------------------------------------------------------------------
Secured Equipment Lease A fee paid to the Advisor out of the proceeds of the revolving Amount is not determinable
Servicing Fee to the line of credit (the "Line of Credit") or Permanent Financing for at this time.
Advisor negotiating furniture, fixtures and equipment ("Equipment")
loans or direct financing leases (the "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. No other fees will be payable in connection with the Secured
Equipment Lease program.
<PAGE>
- -----------------------------------------------------------------------------------------------------------------------------------
Type of Method of Computation Estimated
Compensation Maximum Amount
and Recipient
- -----------------------------------------------------------------------------------------------------------------------------------
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 Amount is not determinable at
real estate disposition Sale of one or more Properties, in an amount equal to the lesser this time. The amount of
fee payable to the of (i) one-half of a Competitive Real Estate Commission, or (ii) this fee, if it becomes
Advisor from a Sale or 3% of the sales price of such Property or Properties. Payment of payable, will depend upon
Sales in liquidation of such fee shall be made only if the Advisor provides a substantial the price at which
the Company amount of services in connection with the Sale of a Property or Properties are sold.
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 Amount is not determinable
share of Net Sales from Sales of assets of the Company payable after receipt by the at this time.
Proceeds from Sales of stockholders of Distributions equal to the sum of (i) the
assets of the Company in Stockholders' 8% Return and (ii) 100% of Invested Capital.
liquidation of the Following Listing, no share of Net Sales Proceeds will be paid to
Company payable to the the Advisor.
Advisor
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<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.
o CNL Investment Company (4)
Corporate Services Restaurant
------------------ ----------
o CNL Shared Services, Inc. (3) o CNL Fund Advisors, Inc.
(formerly CNL Corporate Services,
Inc.)
Hospitality
-----------
o CNL Hospitality Advisors, Inc.
o CNL Hotel Development Company
Health Care
-----------
o CNL Health Care Advisors, Inc. (5)
o CNL Health Care Development, Inc.
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 Shared Services, Inc. (formerly 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.
<PAGE>
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 no Affiliate of the Advisor currently owns, operates, leases or manages
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 properties that may be suitable for the Company.
Certain of these affiliated public or private real estate programs 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.
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 and seniors' housing facilities (the
"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 may
maintain lines of credit which enable them to acquire properties or make
mortgage loans on an interim basis. In the event Affiliates acquire such
properties, 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 the terms of a 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.
<PAGE>
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.
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 -- Real Estate and Other Investment Risks -- We may
not control the joint ventures in which we enter."
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.
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 or 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.
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 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 any of their Affiliates
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.
<PAGE>
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 some
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 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.
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 Company's record books 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 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
<PAGE>
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. The net redemption price
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.
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 of 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) the directors, in their sole
discretion, deem such suspension 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 -- Offering-Related Risks -- The sale of
shares by stockholders could be difficult."
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. Properties purchased by the Company are
expected to be leased under arrangements generally requiring base annual rent
equal to a specified percentage of the Company's cost of purchasing a particular
Property 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. See "Description of Property Leases -- Computation of Lease Payments,"
below.
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.
<PAGE>
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%.
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
<PAGE>
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 Health Care Financing Administration and the National
Health Statistics Group, the health care industry represents over 13.5% of the
United States' gross domestic product ("GDP") with at least $1.092 trillion 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 $14.5
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.
<PAGE>
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
2000 849 457 567
2005 887 492 619
2010 963 537 681
2015 1,108 597 752
2020 1,292 671 834
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, October
1996
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 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 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.
<TABLE>
<CAPTION>
<S> <C>
Continuum of long-term care facilities*
Retirement/Congregate Skilled Acute
Living Assisted Living Nursing Facility Care Hospitals
- --------------------- --------------- --------------- --------------
Informal concierge, 24-hour supervision, 24-hour medical Short-term acute medical
emergency call system, personal assistance care and protective care
housekeeping & main- as needed, emergency oversight, medication
tenance, some group response system, management, emergency
activities, food social activities, response system, 3
service and housekeeping and meals per day,
transportation maintenance, 3 meals assistance with ADLs
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 the value of
health care facilities in the United States to be $584 billion. 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 in Properties" 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 in Properties" below for a description of the standards which the
Board of Directors will employ in selecting operators and particular Properties
for investment.
<PAGE>
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 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 Properties, Mortgage Loans and
Secured Equipment Leases (collectively, the "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.
INVESTMENT OF OFFERINGS PROCEEDS
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. However, the initial disclosure
of any proposed acquisition 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 Properties. See " -- 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 "Joint Venture Arrangements" below and
"Risk Factors -- Real Estate and Other Investment Risks -- Possible lack of
diversification increases the risk of investment." Management cannot estimate
the number of Mortgage Loans that may be entered into. The Company may also
borrow money to make Mortgage Loans.
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 Property 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 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 Property 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 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 suitable for 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 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.
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 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 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 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
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 recover 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 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 Property Leases."
<PAGE>
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 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 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.
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 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 "Description of Property Leases -- 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 Other Investment Risks -- It may be difficult for us
to exit a joint venture after an impasse."
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, 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.
<PAGE>
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.
<PAGE>
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 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 0.60% 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.
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 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
<PAGE>
Company 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 Property 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 programs. 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.
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain financial information for the
Company, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations " and the Financial
Statements included in Appendix B.
<TABLE>
<CAPTION>
<S> <C>
Quarter Ended Year Ended
March 31, 1999 (1) March 31, 1998 (1) December 31,
(Unaudited) (Unaudited) 1998 (1) 1997 (1) (2)
----------------- ----------------- -------------- ------------
Revenues $ - $ - $ - $ -
Net earnings - - -
Cash distributions declared - - - -
March 31, 1999 March 31, 1998 December 31, December 31,
(Unaudited) (Unaudited) 1998 1997
----------- ----------- ------------ ------------
Total assets $1,115,219 $282,378 $976,579 $280,330
Total stockholder's equity 200,000 200,000 200,000 200,000
</TABLE>
(1) As of the date of this Prospectus, no significant operations had
commenced and 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).
(2) Selected financial data for 1997 represents the period December 22,
1997 (date of inception) through December 31, 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company is a Maryland corporation that was organized on December
22, 1997, to acquire Properties related to health care and seniors' housing
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. The Company may also provide 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 Secured Equipment Leases to operators of Health Care Facilities. The
aggregate principal amount of Secured Equipment Leases is not expected to exceed
10% of the Company's total assets.
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 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).
<PAGE>
In connection with this offering, the Company registered for sale an
aggregate of $155,000,000 of Shares (15,500,000 Shares at $10 per Share), with
500,000 of such Shares available only to stockholders who elect to participate
in the Company's Reinvestment Plan. The offering of Shares commenced on
September 18, 1998 and will terminate no later than September 18, 1999, unless
the Company elects to extend the offering to a date no later than September 18,
2000, in states that permit such extension.
This information contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933. Although the Company believes that
the expectations reflected in such forward-looking statements are based upon
reasonable assumptions, the Company's actual results could differ materially
from those set forth in the forward-looking statements. Certain factors that
might cause such a difference include the following: changes in general economic
conditions, changes in local real estate conditions, availability of proceeds
from the Company's offering, the ability of the Company to obtain a Line of
Credit or Permanent Financing on satisfactory terms, the ability of the Company
to locate suitable tenants for its Properties and borrowers for its Mortgage
Loans and Secured Equipment Leases, and the ability of tenants and borrowers to
make payments under their respective leases, Mortgage Loans or Secured Equipment
Leases.
LIQUIDITY AND CAPITAL RESOURCES
A capital contribution of $200,000 from the Advisor is the Company's
sole source of capital until the Company sells the minimum number of 250,000
Shares ($2,500,000). As of April 23, 1999, subscription funds totalling $905,990
had been deposited with the escrow agent for the offering. Until subscription
proceeds for the Company total at least $2,500,000 (250,000 Shares), the
proceeds will be held in escrow. In the event subscriptions for at least 250,000
Shares are not obtained by September 18, 1999, the subscriptions will be
returned promptly with interest to investors.
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
may 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.
Upon the receipt of subscriptions of at least 250,000 Shares and the
initial release of funds from escrow, 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, pending
investment in suitable Properties and Mortgage Loans. Management anticipates
that after the Company has invested in Assets, lease and mortgage payments paid
to the Company by the tenants and borrowers will be sufficient to pay operating
expenses, provide cash Distributions to the stockholders and service debt.
At March 31, 1999 and December 31, 1998 and 1997, the Company's total
assets were $1,115,219, $976,579 and $280,330, respectively. The increase in
total assets reflects deferred offering costs incurred during the quarter ended
March 31, 1999 and the year ended December 31, 1998, respectively.
During the year ended December 31, 1998 and the period December 22,
1997 (date of inception) through December 31, 1997, Affiliates of the Company
incurred $562,739 and $43,397, respectively, for certain Organizational and
Offering Expenses. As of December 31, 1998 and 1997, the Company owed the
Affiliates $685,372 and $58,600, respectively, for such amounts, unpaid fees and
administrative expenses. In addition, during the quarters ended March 31, 1999
and 1998, Affiliates of the Company incurred $128,789 and $146,489,
respectively, for certain organizational and offering expenses. As of March 31,
1999, the Company owed Affiliates $911,689 for such amounts, unpaid fees and
administrative expenses. In the event the minimum offering proceeds are not
received by the Company, the Company will have no obligation to repay such
amounts. Further, the Advisor has agreed to pay all Organizational and Offering
Expenses (excluding selling commissions and the marketing support and due
diligence expense reimbursement fee) in excess of three percent of Gross
Proceeds.
Due to anticipated low Operating Expenses, rental income expected to be
obtained from Properties after they are acquired, the fact that the Line of
Credit and Permanent Financing have not been obtained and that the Company has
not entered into Mortgage Loans or Secured Equipment Leases, management does not
believe that working capital reserves will be necessary at this time. Management
has the right to cause the Company to maintain reserves if, in their discretion,
they determine such reserves are required to meet the Company's working capital
needs.
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 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.
There currently are no material changes being considered in the
objectives and policies of the Company as set forth in this Prospectus.
Year 2000 Compliance. The Year 2000 problem concerns the inability of
information and non-information technology systems to properly recognize and
process date-sensitive information beyond January 1, 2000. The Company does not
have any information or non-information technology systems. The Advisor and
affiliates of the Advisor provide all services requiring the use of information
and non-information technology systems pursuant to an advisory agreement with
the Company. The information technology system of the Affiliates of the Advisor
consists of a network of personal computers and servers built using hardware and
software from mainstream suppliers. The non-information technology systems of
the Affiliates of the Advisor are primarily facility related and include
building security systems, elevators, fire suppressions, HVAC, electrical
systems and other utilities. The Affiliates of the Advisor have no internally
generated programmed software coding to correct, as substantially all of the
software utilized by the Advisor and Affiliates is purchased or licensed from
external providers.
In early 1998, the Advisor and Affiliates formed a Year 2000 committee
(the "Y2K Team") for the purpose of identifying, understanding and addressing
the various issues associated with Year 2000 compliance. The Y2K Team consists
of members from the Advisor and its Affiliates, including representatives from
senior management, information systems, telecommunications, legal, office
management, accounting and property management. The Y2K Team's initial step in
assessing the Company's Year 2000 ("Y2K") readiness consists of identifying any
systems that are date sensitive and, accordingly, could have potential Y2K
problems. The Y2K Team is in the process of conducting inspections, interviews
and tests to identify which of the Company's systems could have a potential Y2K
problem.
The information system of the Advisor and its Affiliates is comprised
of hardware and software applications from mainstream suppliers; accordingly,
the Y2K Team is in the process of contacting the respective vendors and
manufacturers to verify the Y2K compliance of their products. In addition, the
Y2K Team has also requested and is evaluating documentation from other companies
with which the Company has a material third party relationship, including the
Company's major vendors, financial institutions and transfer agent. The Company
depends on its financial institutions for availability of cash and financing and
its transfer agent to maintain and track investor information. The Y2K Team has
also requested and is evaluating documentation from the non-information
technology systems providers of the Advisor and Affiliates. Although the Advisor
continues to receive positive responses from its third party relationships
regarding their Y2K compliance, the Advisor cannot be assured that the financial
institutions, transfer agent, other vendors and non-information technology
system providers have adequately considered the impact of the Year 2000. The
Advisor is not able to measure the effect on the operations of the Advisor and
its Affiliates of any third party's failure to adequately address the impact of
the Year 2000.
The Advisor and its Affiliates have identified and have implemented
upgrades for certain hardware equipment. In addition, the Advisor and its
Affiliates have identified certain software applications which will require
upgrades to become Year 2000 compliant. The Advisor expects all of these
upgrades as well as any other necessary remedial measures on the information
technology systems used in the business activities and operations of the Company
to be completed by September 30, 1999, although, the Advisor cannot be assured
that the upgrade solutions provided by the vendors have addressed all possible
Year 2000 issues. The Advisor does not expect the aggregate cost of the Year
2000 remedial measures to be material to the results of operations of the
Company.
The Advisor and Affiliates have received certification from the
Company's transfer agent of its Y2K compliance. Due to the material relationship
of the Company with its transfer agent, the Y2K Team is evaluating the Year 2000
compliance of the systems of the transfer agent and expects to have the
evaluation completed by September 30, 1999. Despite the positive response from
the transfer agent and the evaluation of the transfer agent's system by the Y2K
Team, the Advisor cannot be assured that the transfer agent has addressed all
possible Year 2000 issues. In the event that the systems of the transfer agent
are not Y2K compliant, the worst case scenario of the Advisor would be that the
Advisor would have to allocate resources to internally perform the functions of
the transfer agent. The Advisor does not anticipate that the additional cost of
these resources would have a material impact on the Company.
Based upon the progress the Advisor and Affiliates have made in
addressing the Year 2000 issues and their plan and timeline to complete the
compliance program, the Advisor does not foresee significant risks associated
with its Year 2000 compliance at this time. The Advisor plans to address its
significant Y2K issues prior to being affected by them; therefore, it has not
developed a comprehensive contingency plan. However, if the Advisor identifies
significant risks related to its Year 2000 compliance or if its progress
deviates from the anticipated timeline, the Advisor will develop contingency
plans as deemed necessary at that time.
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.
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 Liability and Indemnification."
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 52 Director and President
David W. Dunbar 46 Independent Director
Timothy S. Smick 47 Independent Director
Edward A. Moses 57 Independent Director
Phillip M. Anderson, Jr. 39 Chief Operating Officer and Executive Vice
President
Daniel L. Simmons 46 Executive Vice President
Jeanne A. Wall 40 Executive Vice President
Lynn E. Rose 50 Secretary and Treasurer
James M. Seneff, Jr. Director, Chairman of the Board and Chief
Executive Officer. Mr. Seneff currently holds the position of director, Chairman
of the Board and Chief Executive Officer of CNL Health Care Advisors, Inc., the
Advisor , and CNL Health Care Development, Inc. Mr. Seneff also serves as a
director, Chairman of the Board and Chief Executive Officer of CNL American
Properties Fund, Inc. and CNL Hospitality Properties, Inc., public, unlisted
real estate investment trusts, and CNL Fund Advisors, Inc. and CNL Hospitality
Advisors, Inc., their advisors, respectively. Mr. Seneff is a principal
stockholder of CNL Group, Inc., a diversified real estate company, and has
served as a director, Chairman of the Board and Chief Executive Officer 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
Hospitality Advisors, Inc. Mr. Seneff has been a director, Chairman of the Board
and Chief Executive Officer of CNL Securities Corp. since its formation in 1979.
Mr. Seneff also has held the position of a director, Chairman of the Board,
Chief Executive Officer and President of CNL Management Company, a registered
investment advisor, since its formation in 1976. In addition, Mr. Seneff serves
as a director, Chairman of the Board and Chief Executive Officer of CNL
Investment Company. Mr. Seneff has served as Chairman of the Board and Chief
Executive Officer of Commercial Net Lease Realty, Inc. since 1992, and served as
Chairman of the Board and Chief Executive Officer of CNL Realty Advisors, Inc.
from its inception in 1991 through 1997 at which time such company merged with
Commercial Net Lease Realty, Inc., a public real estate investment trust that is
listed on the New York Stock Exchange. Mr. Seneff has also held the position of
a director, Chairman of the Board and Chief Executive Officer of CNL
Institutional Advisors, Inc., a registered investment advisor, since its
inception in 1990. Mr. Seneff also serves as a director of First Union National
Bank of Florida, N.A. 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 director and President of the Advisor and serves as a director,
President and Treasurer of CNL Health Care Development, Inc. Mr. Bourne has also
served as Vice Chairman of the Board and Treasurer of CNL American Properties
Fund, Inc. since February 1999 and serves as a director, Vice Chairman of the
Board and President of CNL Hospitality Properties, Inc. , public, unlisted real
estate investment trusts. Mr. Bourne has served as a director of CNL American
Properties Fund, Inc. since May 1994, and previously served as President from
May 1994 through February 1999. In addition, Mr. Bourne serves as a director,
Vice Chairman of the Board , and Treasurer of CNL Fund Advisors, Inc. and a
director, Vice Chairman of the Board and President of CNL Hospitality Advisors,
Inc., the advisors to the two REITs above, respectively. Mr. Bourne served as
President of CNL Fund Advisors, Inc. from the date of its inception in 1994
through October 1997. Mr. Bourne is President and Treasurer of CNL Group, Inc.,
a director, President, Treasurer and a registered principal of CNL Securities
Corp. (the Managing Dealer of this offering), a director, President and
Treasurer of CNL Investment Company, and a director, Treasurer and Chief
Investment Officer 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. In addition, Mr. Bourne served
as President from July 1992 to February 1996, served as Secretary and Treasurer
from February 1996 through December 1997, and has served as a director since
July 1992 and Vice Chairman of the Board since February 1996, of Commercial Net
Lease Realty, Inc. , a public real estate investment trust that is listed on the
New York Stock Exchange. Mr. Bourne also served as President from 1991 to
February 1996, as a director from 1991 through December 1997, and as Vice
Chairman of the Board and Treasurer from February 1996 through December 1997, of
CNL Realty Advisors, Inc. 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.
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 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.
Edward A. Moses. Independent Director. Dr. 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, Dr.
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. Dr. 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. Dr. Moses received a B.S. in Accounting from the Wharton School at
the University of Pennsylvania in 1965 and an M.B.A. (1967) and Ph.D. in finance
from the University of Georgia in 1971.
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 with revenues of $87 million. 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 & 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.
Phillip M. Anderson, Jr. Chief Operating Officer and Executive Vice
President. Mr. Anderson joined CNL Health Care Advisors, Inc. in January 1999
and is responsible for the planning and implementation of CNL's interest in
health care industry investments, including acquisitions, development, project
analysis and due diligence. He currently serves as the Chief Operating Officer
of both the Advisor and CNL Health Care Development, Inc. From 1987 through
1998, Mr. Anderson was employed by Classic Residence by Hyatt. Classic Residence
by Hyatt ("Classic") is affiliated with Hyatt Hotels and Chicago's Pritzker
family. Classic acquires, develops, owns and operates seniors' housing, assisted
living, skilled nursing and Alzheimer's facilities throughout the United States.
Mr. Anderson's responsibilities grew from overseeing construction of Classic's
first properties to acquiring and developing new properties. After assuming
responsibility for acquisitions, Mr. Anderson doubled the number of senior
living apartments/beds ("units") in the portfolio by adding over 1,200 units. In
addition, the development of an additional 1,000 units of seniors' housing
commenced under Mr. Anderson's direction. Mr. Anderson also served on Classic's
Executive Committee charged with the responsibility of monitoring performance of
existing properties and development projects. Mr. Anderson has been a member of
the American Senior Housing Association since 1994 and currently serves on the
executive board. He graduated from the Georgia Institute of Technology in 1982,
where he received a B.S. in Civil Engineering, with honors.
Daniel L. Simmons. Executive Vice President. Mr. Simmons serves as
Executive Vice President of the Advisor. Since 1996, Mr. Simmons has served as a
consultant to The Celebration Company, a subsidiary of The Walt Disney Company,
regarding seniors' housing issues. In addition, since 1997, Mr. Simmons has
consulted for Celebration Associates, Inc., a master planned community
development and advisory firm, on issues relating to health care, seniors'
housing and commercial projects. 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 300 skilled nursing beds, 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 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.
Jeanne A. Wall. Executive Vice President. Ms. Wall serves as Executive
Vice President of the Advisor. Ms. Wall is also Executive Vice President of CNL
American Properties Fund, Inc. and CNL Hospitality Properties, Inc., public,
unlisted real estate investment trusts, and Executive Vice President of CNL Fund
Advisors, Inc. and Executive Vice President and director of CNL Hospitality
Advisors, Inc., their advisors, respectively. Ms. Wall currently serves as
Executive Vice President of CNL Group, Inc., a diversified real estate company.
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. and in 1985, became Vice President. In 1987, she became a
Senior Vice President and in July 1997, 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 and communications
and investor services for programs offered through participating brokers. 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., a public real estate investment
trust that is listed on the New York Stock Exchange, 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 is a member of
the Corporate Advisory Council for the International Association for Financial
Planning and previously served on the Direct Participation Program committee for
the National Association of Securities Dealers, Inc.
Lynn E. Rose. Secretary and Treasurer. Ms. Rose serves as Secretary,
Treasurer and a director of the Advisor and Secretary of CNL Health Care
Development, Inc. Ms. Rose is also Secretary of CNL American Properties Fund,
Inc. and Secretary and Treasurer of CNL Hospitality Properties, Inc., public,
unlisted real estate investment trusts, and Secretary and director of CNL Fund
Advisors, Inc. and Secretary, Treasurer and a director of CNL Hospitality
Advisors, Inc., their advisors, respectively. Ms. Rose, a certified public
accountant, has served as Secretary since 1987, as Chief Financial Officer since
December 1993, and previously served as Controller from 1987 until December 1993
of CNL Group, Inc. In addition, Ms. Rose has served as Chief Financial Officer
and Secretary of CNL Securities Corp. since July 1994. She also previously
served as Chief Operating Officer and Vice President of CNL Shared Services,
Inc. (formerly CNL Corporate Services, Inc.) from November 1994 to January 1999
and has served as Secretary since November 1994. Ms. Rose also has served as
Chief Financial Officer and Secretary of CNL Institutional Advisors, Inc. since
its inception in 1990. In addition, she served 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.,
a public real estate investment trust listed on the New York Stock Exchange,
from 1992 to February 1996. Ms. Rose also currently serves as Secretary for
approximately 50 additional corporations. Ms. Rose oversees the legal
compliance, accounting, tenant compliance, and reporting for over 250
corporations, partnerships
<PAGE>
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. She was licensed as a certified public accountant in 1979.
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 immediate 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.
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
Phillip M. Anderson, Jr. Chief Operating Officer and Executive Vice
President
Daniel L. Simmons 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 of Common Stock 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
<PAGE>
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
Subordinated Incentive Fee payable to the Advisor under certain circumstances if
Listing occurs 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 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
<PAGE>
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, subject to successive
one-year renewals upon mutual consent of the parties. The current Advisory
Agreement expires on September 15, 1999. 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
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. 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.
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Managing Dealer is entitled to receive Selling Commissions
amounting to 7.5% of the total amount raised from the sale of Shares for
services in connection with the offering of Shares, a substantial portion of
which will be paid as commissions to other broker-dealers. For the quarter ended
March 31, 1999 and the year ended December 31, 1998, the Company had incurred
$16,763 and $1,912, respectively of such fees, of which $14,945 and $1,785,
respectively, will be paid by CNL Securities Corp. as commissions to other
broker-dealers. These fees will not be paid until subscriptions for at least
250,000 Shares ($2,500,000) have been obtained from the offering.
In addition, the Managing Dealer is entitled to receive a marketing
support and due diligence expense reimbursement fee equal to 0.5% of the total
amount raised from the sale of Shares, a portion of which may be reallowed to
other broker-dealers. For the quarter ended March 31, 1999 and the year ended
December 31, 1998, the Company had incurred $1,118 and $128, respectively, of
such fees, the majority of which will be reallowed to other broker-dealers and
from which all bona fide due diligence expenses will be paid. These fees will
not be paid until subscriptions for at least 250,000 Shares ($2,500,000) have
been obtained from the offering.
In addition, the Company has agreed to issue and sell 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 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. The
Company had not issued any Soliciting Dealer Warrants to the Managing Dealer as
of March 31, 1999. Mr. Seneff is Chairman of the Board of Directors and Chief
Executive Officer and Mr. Bourne is a director, President and Treasurer of the
Managing Dealer.
The Advisor is entitled to receive Acquisition Fees for services in
identifying the Properties and structuring the terms of the acquisition and
leases of the Properties and structuring the terms of the Mortgage Loans equal
to 4.5% of Total Proceeds. During the quarter ended March 31, 1999 and the year
ended December 31, 1998, the Company incurred $10,058 and $1,148, respectively,
of such fees. Such fees are included in other assets. These fees will not be
paid until subscriptions for at least 250,000 Shares ($2,500,000) have been
obtained from the offering.
The Advisor and its Affiliates provide various administrative services
to the Company, including services related to accounting; financial, tax and
regulatory compliance reporting; stockholder distributions and reporting; due
diligence and marketing; and investor relations (including administrative
services in connection with the offering of Shares) on a day-to-day basis. For
the quarter ended March 31, 1999, the year ended December 31, 1998 and the
period December 22, 1997 (date of inception) through December 31, 1997, the
Company incurred $70,291, $196,184 and $15,202, respectively, for these
services. Such amounts are included in deferred offering costs. Mr. Seneff is
Chairman of the Board of Directors and Chief Executive Officer and Mr. Bourne is
a director and President of the Advisor.
The Company believes that all amounts paid or payable by the Company to
Affiliates are fair and comparable to amounts that would be paid for similar
services provided by unaffiliated third parties.
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 hotel 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 will not thereby acquire any
ownership interest in any partnerships or corporations to which the following
information relates.
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 18 publicly offered
CNL Income Fund partnerships, and as directors and officers of two unlisted
public REITs. 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 . Messrs. Bourne
and Seneff also currently serve as directors and officers of CNL American
Properties Fund, Inc. , an unlisted public REIT, organized to invest in
fast-food, family-style and casual-dining restaurant properties, mortgage loans
and secured equipment leases; and CNL Hospitality Properties Inc., an unlisted
public REIT organized to invest in hotel properties, mortgage loans and secured
equipment leases. Both REITs have investment objectives similar to those of the
Company. As of December 31, 1998, the 18 partnerships and the two unlisted
public REITs had raised a total of $1,404,977,615 from a total of 82,982
investors, and had invested in 1,139 fast-food, family-style and casual-dining
restaurant properties, and two hotels. 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>
<S> <C>
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)
- ------ ---------- ----------- ----------- --------------
CNL Income $15,000,000 December 31, 1986 30,000 December 1986
Fund, Ltd. (30,000 units)
CNL Income $25,000,000 August 21, 1987 50,000 November 1987
Fund II, Ltd. (50,000 units)
CNL Income $25,000,000 April 29, 1988 50,000 June 1988
Fund III, Ltd. (50,000 units)
CNL Income $30,000,000 December 6, 1988 60,000 February 1989
Fund IV, Ltd. (60,000 units)
CNL Income $25,000,000 June 7, 1989 50,000 December 1989
Fund V, Ltd. (50,000 units)
CNL Income $35,000,000 January 19, 1990 70,000 May 1990
Fund VI, Ltd. (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 Income $40,000,000 April 22, 1992 4,000,000 June 1992
Fund X, Ltd. (4,000,000 units)
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)
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 Income $45,000,000 July 18, 1995 4,500,000 August 1995
Fund XVI, Ltd. (4,500,000 units)
CNL Income $30,000,000 October 10, 1996 3,000,000 December 1996
Fund XVII, Ltd. (3,000,000 units)
CNL Income $35,000,000 February 6, 1998 3,500,000 December 1997
Fund XVIII, Ltd (3,500,000 units)
CNL American $747,464,413 (3) (3) (3)
Properties Fund, Inc. (74,746,441 shares)
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 16,500,000 shares of common stock ($165,000,000). 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 $1,872,648 (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 December
31, 1998, CNL American Properties Fund, Inc. had received subscriptions
totalling $345,000,000 (34,500,000 shares), including $3,107,848 (310,785
shares) through the reinvestment plan, from the 1998 Offering and had
purchased 409 properties. As of December 31, 1998, net proceeds to CNL
American Properties Fund, Inc. from its Initial Offering, 1997 Offering,
1998 Offering and capital contributions from its advisor, after deduction
of stock issuance costs, totalled $670,336,817. Approximately $549,917,000
of such amount had been invested or committed for investment. The 1998
Offering closed in January 1999, upon receipt of the proceeds from the last
subscriptions.
(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 December 31, 1998, CNL
Hospitality Properties, Inc. had received subscriptions totalling
$43,019,080 (4,301,908 shares), including $37,299 (3,730 shares) through
the reinvestment plan. As of such date, CNL Hospitality Properties, Inc.
had purchased , directly or indirectly, two properties.
As of December 31, 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 all of these 69 nonpublic
limited partnerships had terminated as of December 31, 1998. These 69
partnerships raised a total of $185,927,353 from approximately 4,519 investors,
and purchased, directly or through participation in a joint venture or limited
partnership, interests in a total of 216 projects as of December 31, 1998. These
216 projects consist of 19 apartment projects (comprising 10% of the total
amount raised by all 69 partnerships), 13 office buildings (comprising 5% of the
total amount raised by all 69 partnerships), 169 fast-food, family-style, or
casual-dining restaurant property and business investments (comprising 69% of
the total amount raised by all 69 partnerships), one condominium development
(comprising 0.5% of the total amount raised by all 69 partnerships), four
hotels/motels (comprising 5% of the total amount raised by all 69 partnerships),
eight commercial/retail properties (comprising 10% of the total amount raised by
all 69 partnerships), and two tracts of undeveloped land (comprising 0.5% of the
total amount raised by all 69 partnerships).
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 90 real estate limited partnerships whose offerings had closed
as of December 31, 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, 39 invested in restaurant properties leased on a "triple-net" basis,
including eight which also invested in franchised restaurant businesses
(accounting for approximately 93% of the total amount raised by all 90 real
estate limited partnerships).
The following table sets forth summary information, as of December 31,
1998, regarding property acquisitions by the 18 limited partnerships and the two
unlisted REITs .
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Name of Type of Method of Type of
Entity Property Location Financing Program
- ------ -------- -------- --------- -------
CNL Income Fund, Ltd. 22 fast-food or AL, AZ, CA, FL, GA, All cash Public
family-style LA, MD, OK, PA, TX,
restaurants VA, WA
CNL Income Fund II, 49 fast-food or AL, AZ, CO, FL, GA, All cash Public
Ltd. family-style IL, IN, KS, LA, MI,
restaurants MN, MO, NC, NM, OH,
TN, TX, WA, WY
CNL Income Fund III, 37 fast-food or AZ, CA, CO, FL, GA, All cash Public
Ltd. family-style IA, IL, IN, KS, KY,
restaurants MD, MI, MN, MO, NC,
NE, OK, TX
<PAGE>
Name of Type of Method of Type of
Entity Property Location Financing Program
- ------ -------- -------- --------- -------
CNL Income Fund IV, 46 fast-food or AL, DC, FL, GA, IL, All cash Public
Ltd. family-style IN, KS, MA, MD, MI,
restaurants MS, NC, OH, PA, TN,
TX, VA
CNL Income Fund V, 35 fast-food or AZ, FL, GA, IL, IN, All cash Public
Ltd. family-style MI, NH, NY, OH, SC,
restaurants TN, TX, UT, WA
CNL Income Fund VI, 56 fast-food or AR, AZ, FL, GA, IL, All cash Public
Ltd. family-style IN, KS, MA, MI, MN,
restaurants NC, NE, NM, NY, OH,
OK, PA, TN, TX, VA,
WA, WY
CNL Income Fund VII, 49 fast-food or AZ, CO, FL, GA, IN, All cash Public
Ltd. family-style LA, MI, MN, NC, OH,
restaurants SC, TN, TX, UT, WA
CNL Income Fund 42 fast-food or AZ, FL, IN, LA, MI, All cash Public
VIII, Ltd. family-style MN, NC, NY, OH, TN,
restaurants TX, VA
CNL Income Fund IX, 43 fast-food or AL, CO, FL, GA, IL, All cash Public
Ltd. family-style IN, LA, MI, MN, MS,
restaurants NC, NH, NY, OH, SC,
TN, TX
CNL Income Fund X, 52 fast-food or AL, CA, CO, FL, ID, All cash Public
Ltd. family-style IL, LA, MI, MO, MT,
restaurants NC, NH, NM, NY, OH,
PA, SC, TN, TX
CNL Income Fund XI, 41 fast-food or AL, AZ, CA, CO, CT, All cash Public
Ltd. family-style FL, KS, LA, MA, MI,
restaurants MS, NC, NH, NM, OH,
OK, PA, SC, TX, VA, WA
CNL Income Fund XII, 50 fast-food or AL, AZ, CA, FL, GA, All cash Public
Ltd. family-style LA, MO, MS, NC, NM,
restaurants OH, SC, TN, TX, WA
CNL Income Fund 50 fast-food or AL, AR, AZ, CA, CO, All cash Public
XIII, Ltd. family-style FL, GA, IN, KS, LA,
restaurants MD, NC, OH, PA, SC,
TN, TX, VA
<PAGE>
Name of Type of Method of Type of
Entity Property Location Financing Program
- ------ -------- -------- --------- -------
CNL Income Fund XIV, 65 fast-food or AL, AZ, CO, FL, GA, All cash Public
Ltd. family-style KS, LA, MN, MO, MS,
restaurants NC, NJ, NV, OH, SC,
TN, TX, VA
CNL Income Fund XV, 55 fast-food or AL, CA, FL, GA, KS, All cash Public
Ltd. family-style KY, MN, MO, MS, NC,
restaurants NJ, NM, OH, OK, PA,
SC, TN, TX, VA
CNL Income Fund XVI, 48 fast-food or AZ, CA, CO, DC, FL, All cash Public
Ltd. family-style GA, ID, IN, KS, MN,
restaurants MO, NC, NM, NV, OH,
TN, TX, UT, WI
CNL Income Fund 29 fast-food, CA, FL, GA, IL, IN, All cash Public
XVII, Ltd. family-style or MI, NC, NV, OH, SC,
casual-dining TN, TX
restaurants
CNL Income Fund 24 fast-food, AZ, CA, FL, GA, IL, All cash Public
XVIII, Ltd. family-style or KY, MD, MN, NC, NV,
casual-dining NY, OH, TN, TX
restaurants
CNL American 409 fast-food, AL, AZ, CA, CO, CT, All cash Public REIT
Properties Fund, Inc. family-style, or DE, FL, GA, IA, ID,
casual-dining IL, IN, KS, KY, MD,
restaurants MI, MN, MO, MS, NC,
NE, NJ, NM, NV, NY,
OH, OK, OR, PA, RI,
SC, TN, TX, UT, VA,
WA, WI, WV
CNL Hospitality 2 limited service, GA (1) Public REIT
Properties, Inc. extended stay or
full service hotels
</TABLE>
- ------------------
(1) In connection with the acquisition of its two properties, CNL
Hospitality Properties, Inc. used proceeds from its line of credit in
addition to net offering proceeds. As of March 31, 1999, CNL
Hospitality Properties, Inc. had repaid amounts borrowed on its line of
credit using additional net offering proceeds.
A more detailed description of the acquisitions by real estate limited
partnerships and the 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 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 1994 and December 1998, 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
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 -- Real Estate and Other
Investment Risks -- Possible lack of diversification increases the risk of
investment." 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 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 limited to 10% of the Company's
tangible assets (which is included within the 25% limitation).
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. 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 not 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.
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.
<PAGE>
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.
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.
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
<PAGE>
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 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, $0.01 par value
per share, 3,000,000 shares of Preferred Stock ("Preferred Stock"), and
103,000,000 additional shares of excess stock ("Excess Shares"), $0.01 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." As of March 26, 1999,
the Company had 20,000 shares of Common Stock outstanding and no Preferred Stock
or 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.
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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.
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 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.
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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 ,
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 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 the
Soliciting Dealer Warrants 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).
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.
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
<PAGE>
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 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 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 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 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
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 has entered into indemnification agreements with each of
the Company's officers and Directors. The indemnification agreements 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 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:
(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
(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 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, 1999. 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
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. Seventh, if the
Company acquires any asset from a C corporation (i.e. a corporation generally
subject to full corporate level tax) in a transaction in which the basis of the
asset in the Company's hands is determined by reference to the basis of the
asset (or any other property) in the hands of the C corporation, and the Company
recognizes gain on the disposition of such asset during the 10-year period
beginning on the date on which such asset was acquired by the Company, then, to
the extent of such property's "built-in gain" (the excess of the fair market
value of such property at the time of acquisition by the Company over the
adjusted basis in the property at such time), such gain will be subject to tax
at the highest regular corporate rate applicable (as provided in regulations
promulgated by the United States Department of Treasury under the Code
("Treasury Regulations") that have not yet been promulgated). (The results
described above with respect to the recognition of "built-in gain" assume that
the Company will make an election pursuant to IRS Notice 88-19.)
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
<PAGE>
be eligible to elect REIT status for the four taxable years after the taxable
year during which 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,
1999, 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.
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 , but for Sections 856 through 860 of the Code,
would be taxable 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.
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
<PAGE>
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 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 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. However,
an amount received or accrued generally will not be excluded from the term
"rents from real property" solely by reason of being based on a fixed percentage
or percentages of receipts or sales. Second, the Code provides that 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 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 Property 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.
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
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
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
<PAGE>
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 either to 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 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.
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
Distributions 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 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 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 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 "Taxation of Stockholders -- 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 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 own tax advisors 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
distributions 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
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 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.
<PAGE>
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 "Taxation of the Company --
Distribution Requirements," above. Furthermore, in the event that the Company
was 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 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 Property 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 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."
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 704(b) of the
Code. The Company has represented that it will not become a
<PAGE>
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 "Taxation of the Company -- Asset Tests" and
"Taxation of the Company -- 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 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. For any period during which the Company
is making a public offering of shares of Common Stock, the statement will report
an estimated value of each share at the public offering price per share, which
during the term of this offering is $10 per share. If no public offering is
ongoing, and until Listing, the statement will report an estimated value of each
share, 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.
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 " -- General," " -- 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
<PAGE>
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 are being 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 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 the 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
<PAGE>
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>
<S> <C>
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
------------------------ ---------------------- ---------- ------------------
$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 $5,000,010 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.
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 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.
<PAGE>
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 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.
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.
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
<PAGE>
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 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.
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.
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.
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 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.
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.
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.
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 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 of 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.
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 sheets of the Company as of December 31, 1998 and
1997, and the related statements of stockholder's equity for the year ended
December 31, 1998 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 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,
<PAGE>
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
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 $0.01 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
<PAGE>
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 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.
"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.
"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.
<PAGE>
"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 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.
"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 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) 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 Securities, 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.
"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 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. No other fees will be payable in connection with the Secured Equipment
Lease program.
"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;
<PAGE>
f. or providing goods or services to the Company on a basis which
was not negotiated at arm's-length with the Company.
"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 the form
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.
<PAGE>
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 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 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
<PAGE>
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.
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.
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.
<PAGE>
APPENDIX B
FINANCIAL INFORMATION
<PAGE>
INDEX TO FINANCIAL STATEMENTS
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
Page
----
Updated Unaudited Financial Statements:
Balance Sheets as of March 31, 1999 and December 31, 1998 B-1
Statements of Stockholder's Equity for the quarter ended
March 31, 1999 and the year ended December 31, 1998 B-2
Notes to Financial Statements for the quarters ended March
31, 1999 and 1998 B-3
Audited Financial Statements:
Report of Independent Accountants B-6
Balance Sheets as of December 31, 1998 and 1997 B-7
Statements of Stockholder's Equity for the year ended
December 31, 1998, and the period December 22, 1997
(date of inception) through December 31, 1997 B-8
Notes to Financial Statements for the year ended December
31, 1998, and the period December 22, 1997 (date of
inception) through December 31, 1997 B-9
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------------- ----------------
<S> <C>
ASSETS
Cash $ 92 $ 92
Deferred offering costs 1,103,922 975,339
Other 11,205 1,148
-------------- ------------
1,115,219 $976,579
============== ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Due to related parties $911,689 $685,372
Accounts payable and accrued expenses 3,530 91,207
-------------- ------------
Total liabilities 915,219 776,579
-------------- ------------
Stockholder's equity:
Preferred stock, without par value.
Authorized and unissued 3,000,000 shares - -
Excess shares, $.01 par value per share.
Authorized and unissued 103,000,000 shares - -
Common stock, $.01 par value per share.
Authorized 100,000 shares, issued and
outstanding 20,000 shares 200 200
Capital in excess of par value 199,800 199,800
-------------- ------------
200,000 200,000
-------------- ------------
$1,115,219 $976,579
============== ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
STATEMENTS OF STOCKHOLDER'S EQUITY
Quarter Ended March 31, 1999 and
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Common stock
----------------------- Capital in
Number Par excess of
of Shares value par value Total
---------- --------- ------------- ------------
<S> <C>
Balance at December 31, 1997 20,000 $200 $199,800 $200,000
Subscriptions received for common
stock through public offering 2,550 26 25,474 25,500
Subscriptions held in escrow (2,550 ) (26 ) (25,474 ) (25,500 )
---------- -------- ------------ ------------
Balance at December 31, 1998 20,000 200 199,800 200,000
Subscriptions received for common
stock through public offering 22,350 224 223,276 223,500
Subscriptions held in escrow (22,350 ) (224 ) (223,276 ) (223,500 )
---------- -------- ------------ ------------
Balance at March 31, 1999 20,000 $200 $199,800 $200,000
========== ======== ============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
NOTES TO FINANCIAL STATEMENTS
Quarters Ended March 31, 1999 and 1998
1. Significant Accounting Policies:
Basis of Presentation - The accompanying unaudited financial statements
have been prepared in accordance with the instructions to Form 10-Q and
do not include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements
reflect all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of management, necessary to a fair statement
of the results for the interim period presented. Operating results for
the quarter ended March 31, 1999, may not be indicative of the results
that may be expected for the year ending December 31, 1999. Amounts as
of December 31, 1998, included in the financial statements, have been
derived from audited financial statements as of that date.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto included in Form 10-K of CNL
Health Care Properties, Inc. (the "Company") for the year ended
December 31, 1998.
The Company is in the development stage and has not begun operations.
New Accounting Standard - In April 1998, the American Institute of
Certified Public Accountants issued Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-Up Activities," which became effective
for the Company January 1, 1999. This SOP requires start-up and
organization costs to be expensed as incurred and also requires
previously deferred start-up costs to be recognized as a cumulative
effect adjustment in the statement of earnings. The Company plans to
expense $20,000 of organization costs once it becomes operational.
Management of the Company does not believe the adoption of this SOP
will have a material effect on the Company's financial position.
2. 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 affiliates
of the Company.
3. Related Party Arrangements:
Certain affiliates of the Company will receive fees and compensation in
connection with the offering, and the acquisition, management, and sale
of the assets of the Company.
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Quarters Ended March 31, 1999 and 1998
3. Related Party Arrangements - Continued:
CNL Securities Corp. is entitled to receive commissions amounting to
7.5% of the total amount raised from the sale of shares for services in
connection with the offering of the shares, a substantial portion of
which will be paid as commissions to other broker-dealers. During the
quarter ended March 31, 1999, the Company incurred $16,763 of such
fees, of which $14,945 will be paid by CNL Securities Corp. as
commissions to other broker-dealers. These fees will not be paid until
subscriptions for at least 250,000 shares ($2,500,000) have been
obtained from the offering.
In addition, CNL Securities Corp. is entitled to receive a marketing
support and due diligence expense reimbursement fee equal to 0.5% of
the total amount raised from the sale of shares, a portion of which may
be reallowed to other broker-dealers. During the quarter ended March
31, 1999, the Company incurred $1,118 of such fee, the majority of
which will be reallowed to other broker-dealers and from which all bona
fide due diligence expenses will be paid. These fees will not be paid
until subscriptions for at least 250,000 shares ($2,500,000) have been
obtained from the offering.
In addition, the Company has agreed to issue and sell soliciting dealer
warrants ("Soliciting Dealer Warrants") to CNL Securities Corp. 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.
CNL Health Care Advisors, Inc. is entitled to receive acquisition fees
for services in finding, negotiating the leases of and acquiring
properties on behalf of the Company 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 of the shares on a
national securities exchange or over-the-counter market, but excluding
that portion of the permanent financing used to finance secured
equipment leases. During the quarter ended March 31, 1999, the Company
incurred $10,058 of such fees. Such fees are included in other assets
at March 31, 1999. These fees will not be paid until subscriptions for
at least 250,000 shares ($2,500,000) have been obtained from the
offering.
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Quarters Ended March 31, 1999 and 1998
3. Related Party Arrangements - Continued:
CNL Health Care Advisors, Inc. and its affiliates provide various
administrative services to the Company, including services related to
accounting; financial, tax and regulatory compliance reporting;
stockholder distributions and reporting; due diligence and marketing;
and investor relations (including administrative services in connection
with the offering), on a day-to-day basis. For the quarters ended March
31, 1999 and 1998, $70,291 and $12,629, respectively, were classified
as deferred offering costs for these services.
Amounts due to related parties consisted of the following at:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------- ---------------
<S> <C>
Due to CNL Health Care Advisors, Inc.:
Expenditures incurred on behalf of the
Company $599,587 $470,798
Accounting and administrative services 281,677 211,386
Acquisition fees 11,205 1,148
--------------- ----------------
892,469 683,332
--------------- ----------------
Due to CNL Securities Corp.:
Commissions 17,975 1,912
Marketing support and due diligence
expense reimbursement fee 1,245 128
--------------- ----------------
19,220 2,040
---------------
----------------
$911,689 $685,372
=============== ================
</TABLE>
4. Subsequent Event:
During the period April 1, 1999 through April 23, 1999, the Company
received subscription proceeds of 65,699 shares ($656,990) of common
stock.
<PAGE>
Report of Independent Accountants
To the Board of Directors
CNL Health Care Properties, Inc.
In our opinion, the accompanying balance sheets and the related statements of
stockholder's equity present fairly in all material respects, the financial
position of CNL Health Care Properties, Inc. (a development stage Maryland
corporation) at December 31, 1998 and 1997 in conformity with generally accepted
accounting principles. 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 audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Orlando, Florida
January 15, 1999
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ -----------
<S> <C>
ASSETS
Cash $ 92 $200,000
Deferred offering costs 975,339 80,330
Other assets 1,148 --
----------- -----------
$976,579 $280,330
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Due to related parties $685,372 $58,600
Accounts payable and accrued expenses 91,207 21,730
----------- -----------
Total liabilities 776,579 80,330
----------- -----------
Stockholder's equity:
Preferred stock, without par value per share
Authorized and unissued 3,000,000 shares -- --
Excess shares, $.01 par value per share
Authorized and unissued 103,000,000 shares -- --
Common stock, $.01 par value per share
Authorized 100,000,000 and 100,000
shares, respectively; 20,000 shares
issued and outstanding 200 200
Capital in excess of par value 199,800 199,800
----------- -----------
Total stockholder's equity 200,000 200,000
----------- -----------
$976,579 $280,330
=========== ===========
See accompanying notes to financial statements.
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
STATEMENTS OF STOCKHOLDER'S EQUITY
Year Ended December 31, 1998 and the Period
December 22, 1997 (Date of Inception) through
December 31, 1997
Common stock
----------------------- Capital in
Number Par excess of
of Shares value par value Total
---------- --------- ------------ ------------
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
Subscriptions received for common
stock through public offering 2,550 26 25,474 25,500
Subscriptions held in escrow at
December 31, 1998 (2,550 ) (26 ) (25,474 ) (25,500 )
---------- --------- ------------ ------------
Balance at December 31, 1998 20,000 $ 200 $ 199,800 $ 200,000
========== ========= ============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 1998 and the Period
December 22, 1997 (Date of Inception) through
December 31, 1997
1. Significant Accounting Policies:
Organization and Nature of Business - CNL Health Care Properties, Inc.
(the "Company") was organized pursuant to the laws of the state of
Maryland on December 22, 1997. The Company intends to use the proceeds
from its public offering (the "Offering") (see Note 2), 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.
As of December 31, 1998, the Company was in the development stage and
had not begun operations.
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, 1999. 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. 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.
Use of Estimates - Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and
liabilities to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ
from those estimates.
New Accounting Standard - In April 1998, the American Institute of
Certified Public Accountants issued Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-Up Activities," which will be
effective for the Company as of January 1, 1999. This SOP requires
start-up and organization costs to be expensed as incurred and also
requires previously deferred start-up costs to be recognized as a
cumulative effect adjustment in the statement of earnings. Management
of the Company does not believe that adoption of this SOP will have a
material effect on the Company's financial position or results of
operations.
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Year Ended December 31, 1998 and the Period
December 22, 1997 (Date of Inception) through
December 31, 1997
2. Public Offering:
The Company has filed a currently effective registration statement on
Form S-11 with the Securities and Exchange Commission. A maximum of
15,500,000 shares ($155,000,000) may be sold, including 500,000 shares
($5,000,000) which are available only to stockholders who elect to
participate in the Company's reinvestment plan. The Company has adopted
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. In addition, the
Company has registered 600,000 shares issuable upon the exercise of
warrants granted to the managing dealer of the Offering. As of December
31, 1998, the Company had received subscription proceeds of $25,500
(2,550 shares). Until subscription proceeds for the Company total
$2,500,000 (250,000 shares), the proceeds will be held in escrow.
3. 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. CNL Health Care Advisors, Inc. (the "Advisor") has
agreed to pay all organizational and offering expenses (excluding
commissions and marketing support and due diligence expense
reimbursement fees) which exceed three percent of the gross offering
proceeds received from the sale of shares of the Company.
As of December 31, 1998, the Company had incurred $975,339 in
organizational and offering costs which has been treated as deferred
offering costs. Once the Company receives the minimum amount of
subscriptions, the offering costs will be charged to stockholders'
capital subject to the three percent cap described above.
4. Capitalization:
In September 1998, the Company amended the Articles of Incorporation to
increase the number of authorized shares of capital stock from 100,000
shares to 206,000,000 shares (consisting of 100,000,000 common shares,
3,000,000 preferred shares and 103,000,000 excess shares).
5. Related Party Arrangements:
On December 22, 1997 (date of inception), CNL Health Care Advisors,
Inc. contributed $200,000 in cash to the Company and became its sole
stockholder.
The Advisor and certain affiliates of the Company will receive fees and
compensation in connection with the Offering, and the acquisition,
management, and sale of the assets of the Company.
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Year Ended December 31, 1998 and the Period
December 22, 1997 (Date of Inception) through
December 31, 1997
5. Related Party Arrangements - Continued:
CNL Securities Corp. is entitled to receive commissions amounting to
7.5% of the total amount raised from the sale of shares for services in
connection with the offering of the shares, a substantial portion of
which will be paid as commissions to other broker-dealers. During the
year ended December 31, 1998, the Company incurred $1,912 of such fees
of which $1,785 will be paid by CNL Securities Corp. as commissions to
other broker-dealers. These fees will not be paid until subscriptions
for at least 250,000 shares ($2,500,000) have been obtained from the
Offering.
In addition, CNL Securities Corp. is entitled to receive a marketing
support and due diligence expense reimbursement fee equal to 0.5% of
the total amount raised from the sale of shares, a portion of which may
be reallowed to other broker-dealers. During the year ended December
31, 1998, the Company incurred $128 of such fee, the majority of which
will be reallowed to other broker-dealers and from which all bona fide
due diligence expenses will be paid. These fees will not be paid until
subscriptions for at least 250,000 shares ($2,500,000) have been
obtained from the Offering.
The Advisor is entitled to receive acquisition fees for services in
finding, negotiating the leases of and acquiring properties on behalf
of the Company 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. During
the year ended December 31, 1998, the Company incurred $1,148 of such
fees. Such fees are included in other assets at December 31, 1998.
These fees will not be paid until subscriptions for at least 250,000
shares ($2,500,000) have been obtained from the Offering.
In addition, the Company has agreed to issue and sell soliciting dealer
warrants ("Soliciting Dealer Warrants") to CNL Securities Corp. 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.
The Advisor and its affiliates provide various administrative services
to the Company, including services related to accounting; financial,
tax and regulatory compliance reporting; stockholder distributions and
reporting; due diligence and marketing; and investor relations
(including administrative services in connection with the Offering), on
a day-to-day basis. For the year ended December 31, 1998 and the period
December 22, 1997 (date of inception) through December 31, 1997,
$196,184 and $15,202, respectively, were classified as deferred
offering costs for these services.
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Year Ended December 31, 1998 and the Period
December 22, 1997 (Date of Inception) through
December 31, 1997
5. Related Party Arrangements - Continued:
Amounts due to related parties consisted of the following at:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------- -------------
<S> <C>
Due to the Advisor:
Expenditures incurred for organizational
and offering expenses on behalf
of the Company $470,798 $43,398
Accounting and administrative
services 211,386 15,202
Acquisition fees 1,148 --
------------- -----------
683,332 58,600
------------- -----------
Due to CNL Securities Corp.:
Commissions 1,912 --
Marketing support and due diligence
expense reimbursement fee 128 --
------------- -----------
2,040 --
------------- -----------
$685,372 $58,600
============= ===========
</TABLE>
6. Subsequent Event:
During the period January 1, 1999 through January 15, 1999, the Company
received subscription proceeds of 1,000 shares ($10,000) of common
stock.
<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., 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 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 December 31, 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 January 1994 and December 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 two of the Company's principals
and their Affiliates which sponsored 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 January 1994 and December 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 December 31, 1998.
Table III - Operating Results of Prior Programs
Table III presents a summary of operating results for the period from
inception through December 31, 1998, of the Prior Public Programs, the offerings
of which became fully subscribed between January 1994 and December 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 an investing or financing nature.
These items include proceeds from capital contributions of investors and
disbursements made from these sources of funds, such as syndication (or stock
issuance) and organizational costs, acquisition of the properties and other
costs which are related more to the organization of the entity and the
acquisition of properties than to the actual operations of the entities.
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 Prior
Public Programs have completed operations (meaning they no longer hold
properties).
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 January 1994 and December
1998.
The 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 American
Fund XIV, Fund XV, Fund XVI, Properties Fund,
Ltd. Ltd. Ltd. Inc.
---------- ---------- ---------- ----------------
(Note 1)
<S> <C>
Dollar amount offered $45,000,000 $40,000,000 $45,000,000 $745,000,000
=========== =========== =========== ============
Dollar amount raised 100.0% 100.0% 100.0% 100.0%
----------- ----------- ----------- ------------
Less offering expenses:
Selling commissions
and discounts (8.5) (8.5) (8.5) (7.5)
Organizational expenses (3.0) (3.0) (3.0) (2.2)
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) (10.2)
----------- ----------- ----------- -----------
Reserve for operations -- -- -- --
----------- ----------- ----------- -----------
Percent available for
investment 88.0% 88.0% 88.0% 89.8%
=========== =========== =========== ===========
Acquisition costs:
Cash down payment 82.5% 82.5% 82.5% 85.3%
Acquisition fees paid
to affiliates 5.5 5.5 5.5 4.5
Loan costs -- -- -- --
----------- ----------- ----------- -----------
Total acquisition costs 88.0% 88.0% 88.0% 89.8%
=========== =========== =========== ===========
Percent leveraged
(mortgage financing
divided by total
acquisition costs) -- -- -- --
Date offering began 8/27/93 2/23/94 9/02/94 4/19/95, 2/06/97
and 3/02/98
Length of offering (in
months) 6 6 9 22, 13 and 9,
respectively
Months to invest 90% of
amount available for
investment measured
from date of offering 11 10 11 23, 16 and 11,
respectively
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". The
1998 Offering of APF commenced
</TABLE>
C-3
<PAGE>
CNL Income CNL Income CNL Hospitality
Fund XVII, Fund XVIII, Properties,
Ltd. Ltd. Inc.
---------- ----------- ---------------
(Note 2)
$30,000,000 $35,000,000
100.0% 100.0%
----------- -----------
(8.5) (8.5)
(3.0) (3.0)
(0.5) (0.5)
----------- -----------
(12.0) (12.0)
----------- -----------
-- --
----------- -----------
88.0% 88.0%
=========== ===========
83.5% 83.5%
4.5 4.5
-- --
----------- -----------
88.0% 88.0%
=========== ===========
-- --
9/02/95 9/20/96
12 17
15 17
Note 1
(Continued): following the completion of the 1997 Offering on March 2,
1998. As of December 31, 1998, APF had received subscriptions
totalling approximately $345,000,000 from the 1998 Offering,
including $3,107,848 issued pursuant to the company's
reinvestment plan. The 1998 Offering became fully subscribed
in December 1998 and proceeds from the last subscriptions were
received in January 1999.
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 American
Fund XIV, Fund XV, Fund XVI, Properties Fund,
Ltd. Ltd. Ltd. Inc.
---------- ---------- ----------- ----------------
(Note 1)
<S> <C>
Date offering commenced 8/27/93 2/23/94 9/02/94 4/19/95, 2/06/97
and 3/02/98
Dollar amount raised $45,000,000 $40,000,000 $45,000,000 $747,253,675
=========== =========== =========== ============
Amount paid to sponsor from
proceeds of offering:
Selling commissions and
discounts 3,825,000 3,400,000 3,825,000 56,044,026
Real estate commissions - - - -
Acquisition fees 2,475,000 2,200,000 2,475,000 33,595,134
Marketing support and
due diligence expense
reimbursement fees
(includes amounts
reallowed to
unaffiliated entities) 225,000 200,000 225,000 3,736,268
----------- ----------- ----------- ------------
Total amount paid to sponsor 6,525,000 5,800,000 6,525,000 93,375,428
=========== =========== =========== ============
Dollar amount of cash generated
from operations before
deducting payments to
sponsor:
1998 3,662,593 3,343,292 3,765,104 42,216,874
1997 3,734,726 3,419,967 3,909,781 18,514,122
1996 3,841,163 3,557,073 3,911,609 6,096,045
1995 3,823,939 3,361,477 2,619,840 594,425
1994 2,897,432 1,154,454 212,171 -
1993 329,957 - - -
Amount paid to sponsor from operations
(administrative, accounting and
management fees):
1998 148,049 126,564 141,410 3,100,599
1997 128,536 113,372 129,357 1,437,908
1996 134,867 122,391 157,883 613,505
1995 114,095 122,107 138,445 95,966
1994 84,801 37,620 7,023 -
1993 8,220 - - -
Dollar amount of property sales and
refinancing before deducting payments
to sponsor:
Cash (Note 3) 5,168,000 3,312,297 1,385,384 9,046,652
Notes - - - -
Amount paid to sponsors
from property sales and
refinancing:
Real estate commissions - - - -
Incentive fees - - - -
Other (Note 2) - - - -
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"). The
1998 Offering of APF commenced following the completion of the 1997 Offering on March 2,
1998. As of December 31, 1998, APF had received subscriptions totalling approximately
$345,000,000 from the 1998 Offering, including $3,107,848 issued pursuant to the
company's reinvestment plan. The 1998 Offering became fully subscribed in December 1998
and proceeds from the last subscriptions were received in January 1999. The amounts
shown represent the combined results of the Initial Offering, the 1997 Offering and the
1998 Offering as of December 31, 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 years ended December 31, 1998, 1997 and 1996, APF incurred $54,998,
$87,665 and $70,070, respectively, in secured equipment lease servicing
fees.
</TABLE>
C-5
<PAGE>
CNL Income CNL Income CNL Hospitality
Fund XVII, Fund XVIII, Properties,
Ltd. Ltd. Inc.
---------- ----------- ---------------
(Note 4)
9/02/95 9/20/96
$30,000,000 $35,000,000
2,550,000 2,975,000
- -
1,350,000 1,575,000
150,000 175,000
--------- ---------
4,050,000 4,725,000
========= =========
2,638,733 2,964,628
2,611,191 1,459,963
1,340,159 30,126
11,671 -
- -
- -
117,814 132,890
116,077 98,207
107,211 2,980
2,659 -
- -
- -
- -
- -
- -
- -
- -
Note 3: Excludes properties sold and substituted with replacement
properties, as permitted under the terms of the lease agreements.
<TABLE>
<CAPTION>
<S> <C>
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
December 31, 1998, CNL Hospitality Properties, Inc. had sold 4,301,908 shares,
representing subscription proceeds of $43,019,080 from the offering, including 3,730
shares ($37,299) through the reinvestment plan. From the commencement of the
offering through December 31, 1998, total selling commissions and discounts were
$3,226,431, marketing support and due diligence expense reimbursement fees were
$215,095, and acquisition fees were $1,935,859, for a total amount paid to sponsor
of $5,377,385. CNL Hospitality Properties, Inc. had cash generated from operations
for the period October 15, 1997 (the date funds were originally released from
escrow) through December 31, 1998, of $2,799,434. CNL Hospitality Properties, Inc.
made payments of $215,379 to the sponsor from operations for this period.
</TABLE>
C-6
<PAGE>
TABLE III
Operating Results of Prior Programs
CNL INCOME FUND XIV, LTD.
<TABLE>
<CAPTION>
1992
(Note 1) 1993 1994 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <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, 6, 7, 8 and 9) 0 0 0 (66,518)
Provision for loss on building (Note 10) 0 0 0 0
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, 8 and 9) 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 (decrease) 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,
8 and 9) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Gross revenue $ 3,999,813 $ 3,918,582 $ 3,440,910
Equity in earnings of joint ventures 459,137 309,879 317,654
Profit (Loss) from sale of properties
(Notes 4, 6, 7, 8 and 9) 0 0 112,206
Provision for loss on building (Note 10) 0 0 (37,155)
Interest income 44,089 40,232 73,246
Less: Operating expenses (246,621) (262,592) (326,960)
Interest expense 0 0 0
Depreciation and amortization (340,089) (340,161) (380,814)
------------ ------------ ------------
Net income - GAAP basis 3,916,329 3,665,940 3,199,087
============ ============ ============
Taxable income
- from operations 3,236,329 3,048,675 3,230,884
============ ============ ============
- from gain (loss) on sale 0 47,256 53,034
============ ============ ============
Cash generated from operations
(Notes 2 and 3) 3,706,296 3,606,190 3,514,544
Cash generated from sales (Notes 4, 6,
7, 8 and 9) 0 318,592 1,648,110
Cash generated from refinancing 0 0 0
------------ ------------ ------------
Cash generated from operations, sales
and refinancing 3,706,296 3,924,782 5,162,654
Less: Cash distributions to investors
(Note 5)
- from operating cash flow (3,706,296) (3,606,190) (3,514,544)
- from sale of properties 0 0 0
- from cash flow from prior period (6,226) (106,330) (197,976)
------------ ------------ ------------
Cash generated (deficiency) after cash
distributions (6,226) 212,262 1,450,134
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 (605,712)
Investment in direct financing leases 0 0 (931,237)
Investment in joint ventures (7,500) (121,855) (568,498)
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 (decrease) in restricted cash 0 (318,592) 318,592
Other 0 0 0
------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items (13,726) (176,235) (336,721)
============ ============ =============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 71 67 71
============ ============ ============
- from recapture 0 0 0
============ ============ ============
Capital gain (loss) (Notes 4, 6, 7,
8 and 9) 0 1 1
============ ============ ============
</TABLE>
C-8
<PAGE>
TABLE III - CNL INCOME FUND XIV, LTD. (continued)
<TABLE>
<CAPTION>
1992
(Note 1) 1993 1994 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <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 11) 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 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, 6, 7, 8
and 9) N/A 100% 100% 100%
</TABLE>
C-9
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income
- from capital gain 83 81 68
- from return of capital 0 0 2
- from investment income from prior 0 0 0
period
0 2 12
Total distributions on GAAP basis (Note 5) ------------ ------------ ------------
83 83 82
============ ============ ============
Source (on cash basis)
- from sales
- from operations 0 0 4
- from cash flow from prior period 83 81 78
0 2 0
Total distributions on cash basis (Note 5) ------------ ------------ ------------
83 83 82
Total cash distributions as a percentage of ============ ============ ============
original $1,000 investment (Note 11)
Total cumulative cash distributions 8.25% 8.25% 8.25%
per $1,000 investment from inception
214 297 379
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, 6, 7, 8
and 9) 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 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 reinvested the net sales proceeds in a
property in Fayetteville, North Carolina.
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 reinvested the net sales proceeds in a
property in Fayetteville, North Carolina.
Note 9: In July 1998, the Partnership sold one of its properties in Richmond,
Virginia for $415,000 and received net sales proceeds of $397,970. Due
to the fact that during 1998 the partnership wrote off $12,060 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 July 1998
relating to this sale. In October 1998, the partnership reinvested the
net sales proceeds from the sale of the property in Richmond, Virginia
in a property in Fayetteville, North Carolina.
Note 10: At December 31, 1998, the Partnership recorded a provision for loss
on building in the amount of $37,155 for financial reporting purposes
relating to a Long John Silver's Property whose lease was rejected by
the tenant. The tenant of this Property filed for bankruptcy and ceased
payment of rents under the terms of its lease agreement. The allowance
represents the difference between the carrying value of the Property at
December 31, 1998 and the estimated net realizable value for the
Property.
C-10
<PAGE>
TABLE III
Operating Results of Prior Programs
CNL INCOME FUND XV, LTD.
<TABLE>
<CAPTION>
1993
(Note 1) 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <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
Provision for loss on land and buildings
(Note 7) 0 0 0 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 9)
- 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-11
<PAGE>
1997 1998
------------ ------------
Gross revenue $ 3,622,123 $ 3,179,911
Equity in earnings of joint ventures 239,249 236,553
Profit (Loss) from sale of properties
(Note 4) 0 0
Provision for loss on land and buildings
(Note 7) 0 (280,907)
Interest income 46,642 54,576
Less: Operating expenses (224,761) (265,748)
Interest expense 0 0
Depreciation and amortization (248,348) (281,888)
------------ ------------
Net income - GAAP basis 3,434,905 2,642,497
============ ============
Taxable income
- from operations 2,856,893 2,847,638
============ ============
- from gain on sale 47,256 0
============ ============
Cash generated from operations
(Notes 2 and 3) 3,306,595 3,216,728
Cash generated from sales (Note 4) 0 0
Cash generated from refinancing 0 0
Cash generated from operations, sales
and refinancing 3,306,595 3,216,728
Less: Cash distributions to investors
(Notes 5, 6 and 9)
- from operating cash flow (3,280,000) (3,216,728)
- from sale of properties 0 0
- from cash flow from prior period 0 (183,272)
Cash generated (deficiency) after cash
distributions 26,595 (183,272)
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 (216,992)
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 (400,264)
============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 71 70
============ ============
- from recapture 0 0
============ ============
Capital gain (loss) (Note 4) 1 0
============ ============
C-12
<PAGE>
TABLE III - CNL INCOME FUND XV, LTD. (continued)
<TABLE>
<CAPTION>
1993
(Note 1) 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <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,
8 and 9).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 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. During the year ended December 31, 1998, the Partnership established
an allowance for loss on land and buildings of $280,907 for financial
reporting purposes relating to two of the four Long John Silver's
properties whose leases were rejected by the tenant. The tenant of
these properties filed for bankruptcy and ceased payment of rents under
the terms of the lease agreements. The loss represents the difference
between the carrying value of the Properties at December 31, 1998 and
the current estimated net realizable value for these Properties.
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 5 above)
Note 9: 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.
C-13
<PAGE>
1997 1998
------------ ------------
Cash distributions to investors
Source (on GAAP basis)
- from investment income 82 65
- from capital gain 0 0
- from investment income from prior
period 0 20
------------ ------------
Total distributions on GAAP basis (Note 5) 82 85
============ ============
Source (on cash basis)
- from sales 0 0
- from refinancing 0 0
- from operations 82 80
- from investment income from prior period 0 5
------------ ------------
Total distributions on cash basis (Note 5) 82 85
============ ============
Total cash distributions as a percentage
of original $1,000 investment (Notes 6,
8 and 9).0.00% 8.00% 8.50%
Total cumulative cash distributions per
$1,000 investment from inception 249 334
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%
C-14
<PAGE>
TABLE III
Operating Results of Prior Programs
CNL INCOME FUND XVI, LTD.
<TABLE>
<CAPTION>
1993
(Note 1) 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <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
Provision for loss on building (Note 8) 0 0 0 0
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-15
<PAGE>
1997 1998
------------ ------------
Gross revenue $ 4,308,853 $ 3,901,555
Equity in earnings from joint venture 73,507 132,002
Profit from sale of properties (Notes 4
and 5) 41,148 0
Provision for loss on building (Note 8) 0 (266,257)
Interest income 73,634 60,199
Less: Operating expenses (272,932) (295,141)
Interest expense 0 0
Depreciation and amortization (563,883) (555,360)
------------ ------------
Net income - GAAP basis 3,660,327 2,976,998
============ ============
Taxable income
- from operations 3,178,911 3,153,618
============ ============
- from gain on sale (Notes 4 and 5) 64,912 0
============ ============
Cash generated from operations
(Notes 2 and 3) 3,780,424 3,623,694
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 3,623,694
Less: Cash distributions to investors
(Note 6)
- from operating cash flow (3,600,000) (3,623,694)
- from sale of properties 0 (66,306)
------------ ------------
Cash generated (deficiency) after cash
distributions 790,808 (66,306)
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) (3,545)
Investment in direct financing
leases (29,257) (28,403)
Investment in joint ventures 0 (744,058)
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 0 161,648
Other 0 0
------------ ------------
Cash generated (deficiency) after cash
distributions and special items 127,666 (70,280)
============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 70 69
============ ============
- from recapture 0 0
============ ============
Capital gain (loss) (Notes 4 and 5) 1 0
============ ============
C-16
<PAGE>
TABLE III - CNL INCOME FUND XVI, LTD. (continued)
<TABLE>
<CAPTION>
1993
(Note 1) 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <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
- from prior period 0 0 0 0
------------ ------------ ------------ ------------
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 9) 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 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: During the year ended December 31, 1998, the Partnership recorded a
provision for loss on building of $266,257 for financial reporting
purposes relating to a Long John Silver's property in Celina, Ohio. The
tenant of this property filed for bankruptcy and ceased payment of
rents under the terms of its lease agreement. The allowance represents
the difference between the Property's carrying value at December 31,
1998 and the estimated net realizable value for this 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 6 above)
C-17
<PAGE>
1997 1998
------------ ------------
Cash distributions to investors
Source (on GAAP basis) 80 65
- from investment income 0 0
- from capital gain
- from investment income from
prior period 0 17
------------ ------------
Total distributions on GAAP basis (Note 6) 80 82
============ ============
Source (on cash basis)
- from sales 0 0
- from refinancing 0 0
- from operations 80 81
- from prior period 0 1
----------- ------------
Total distributions on cash basis (Note 6) 80 82
============ ============
Total cash distributions as a percentage
of original $1,000 investment (Notes 7
and 9) 8.00% 8.20%
Total cumulative cash distributions per
$1,000 investment from inception 202 284
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%
C-18
<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> <C> <C> <C>
Gross revenue $ 0 $ 539,776 $ 4,363,456 $ 15,516,102
Equity in earnings of joint venture 0 0 0 0
Provision for loss on land and buildings
(Note 12) 0 0 0 0
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 cash flow from prior period 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
Retirement of shares of common stock
(Note 13) 0 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
Purchase of other investments 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 equipment notes receivable 0 0 0 (12,521,401)
Collections on equipment 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 intangibles and other assets 0 (628,142) (1,103,896) 0
Other 0 0 (54,533) 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-19
<PAGE>
1998
(Note 3)
--------------
Gross revenue $ 33,202,491
Equity in earnings of joint venture 16,018
Provision for loss on land and buildings
(Note 12) (611,534)
Interest income 8,984,546
Less: Operating expenses (5,354,859)
Interest expense 0
Depreciation and amortization (4,054,098)
Minority interest in income of
consolidated joint venture (30,156)
--------------
Net income - GAAP basis 32,152,408
==============
Taxable income
- from operations (Note 8) 33,553,390
==============
- from gain (loss) on sale (149,948)
==============
Cash generated from operations
(Notes 4 and 5) 39,116,275
Cash generated from sales (Note 7) 2,385,941
Cash generated from refinancing 0
-------------
Cash generated from operations, sales
and refinancing 41,502,216
Less: Cash distributions to investors
(Note 9)
- from operating cash flow (39,116,275)
- from sale of properties 0
- from cash flow from prior period (265,053)
- from return of capital (Note 10) (67,821)
------------
Cash generated (deficiency) after cash
distributions 2,053,067
Special items (not including sales of
real estate and refinancing):
Subscriptions received from
stockholders 385,523,966
Sale of common stock to CNL Fund
Advisors, Inc. 0
Retirement of shares of common stock
(Note 13) (639,528)
Contributions from minority interest 0
Distributions to holder of minority
interest (34,073)
Stock issuance costs (34,579,650)
Acquisition of land and buildings (200,101,667)
Investment in direct financing
leases (47,115,435)
Proceeds from sale of equipment direct
financing leases 0
Investment in joint venture (974,696)
Purchase of other investments (16,083,055)
Investment in mortgage notes
receivable (2,886,648)
Collections on mortgage notes
receivable 291,990
Investment in equipment notes receivable (7,837,750)
Collections on equipment notes receivable 1,263,633
Investment in certificate of deposit 0
Proceeds of borrowing on line of
credit 7,692,040
Payment on line of credit (8,039)
Reimbursement of organization,
acquisition, and deferred offering
and stock issuance costs paid on
behalf of CNL American Properties
Fund, Inc. by related parties (4,574,925)
Increase in intangibles and other assets (6,281,069)
Other (95,101)
--------------
Cash generated (deficiency) after cash
distributions and special items 75,613,060
==============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED (Note 6)
Federal income tax results:
Ordinary income (loss) (Note 11)
- from operations (Note 8) 63
==============
- from recapture 0
==============
Capital gain (loss) 0
==============
C-20
<PAGE>
TABLE III - CNL AMERICAN PROPERTIES FUND, INC. (continued)
<TABLE>
<CAPTION>
1994 1997
(Note 1) 1995 1996 (Note 2)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <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 cash flow from prior period 0 0 0 0
- 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"). The 1998 Offering of APF commenced following the
completion of the 1997 Offering on March 2, 1998. As of December 31,
1998, APF had received subscriptions totalling approximately
$345,000,000 from the 1998 Offering, including $3,107,848 issued
pursuant to the company's reinvestment plan. The 1998 Offering became
fully subscribed in December 1998 and proceeds from the last
subscriptions were received in January 1999. 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 and July 1998, APF sold two and one properties,
respectively, to third parties for $1,605,154 and $1,152,262,
respectively, (and received net sales proceeds of approximately
$1,233,700 and $629,435, respectively, 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 years ended December 31, 1998, 1997, 1996 and 1995, 84.87%,
93.33%, 90.25% and 59.82%, respectively, of the distributions received
by stockholders were considered to be ordinary income and 15.13%,
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 years ended December 31, 1998, 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-21
<PAGE>
1998
(Note 3)
--------------
Cash distributions to investors
Source (on GAAP basis)
- from investment income 60
- from capital gain 0
- from investment income from
prior period 0
- from return of capital (Note 10) 14
--------------
Total distributions on GAAP basis (Note 11) 74
==============
Source (on cash basis)
- from sales 0
- from refinancing 0
- from operations 73
- from cash flow from prior period 1
- from return of capital (Note 10) 0
--------------
Total distributions on cash basis (Note 11) 74
==============
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 246
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%
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.
Note 12: During the year ended December 31, 1998, APF recorded provisions
for losses on land and buildings in the amount of $611,534 for
financial reporting purposes relating to two Shoney's properties
and two Boston Market Properties. The tenants of these properties
experienced financial difficulties and ceased payment of rents
under the terms of their lease agreements. The allowances represent
the difference between the carrying value of the Properties at
December 31, 1998 and the estimated net realizable value for these
Properties.
Note 13: In October 1998, the Board of Directors of APF elected to implement
APF's redemption plan. Under the redemption plan, APF elected to
redeem shares, subject to certain conditions and limitations.
During the year ended December 31, 1998, 69,514 shares were
redeemed at $9.20 per share ($639,528) and retired from shares
outstanding of common stock.
C-22
<PAGE>
TABLE III
Operating Results of Prior Programs
CNL INCOME FUND XVII, LTD.
<TABLE>
<CAPTION>
1995
(Note 1) 1996 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Gross revenue $ 0 $ 1,195,263 $ 2,643,871 $ 2,816,845
Equity in earnings of unconsolidated
joint ventures 0 4,834 100,918 140,595
Interest income 12,153 244,406 69,779 51,240
Less: Operating expenses (3,493) (169,536) (181,865) (182,681)
Interest expense 0 0 0 0
Depreciation and amortization (309) (179,208) (387,292) (369,209)
Minority interest in income of
consolidated joint venture 0 (41,854) (62,632)
------------ ------------ ------------ ------------
Net income - GAAP basis 8,351 1,095,759 2,203,557 2,394,158
============ ============ ============ ============
Taxable income
- from operations 12,153 1,114,964 2,058,601 2,114,039
============ ============ ============ ============
- from gain on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 9,012 1,232,948 2,495,114 2,520,919
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 2,520,919
Less: Cash distributions to investors
(Note 4)
- from operating cash flow (1,199) (703,681) (2,177,584) (2,400,000)
- from sale of properties 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 7,813 529,267 317,530 120,919
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) (49,023)
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) (124,452)
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 0 306,100
Other (410) 410 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 4,198,859 517,860 (3,477,920) 253,544
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 36 37 69 70
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-23
<PAGE>
TABLE III - CNL INCOME FUND XVII, LTD. (continued)
<TABLE>
<CAPTION>
1995
(Note 1) 1996 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 4 23 73 79
- from capital gain 0 0 0 0
- from investment income from
prior period 0 0 0 1
------------ ------------ ------------ ------------
Total distributions on GAAP basis (Note 4) 0 23 73 80
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 4 23 73 80
------------ ------------ ------------ ------------
Total distributions on cash basis (Note 4) 4 23 73 80
============ ============ ============ ============
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 27 100 180
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% 98%
</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 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 $306,100
in reimbursements from the developer upon final reconciliation of total
construction costs relating to the properties in Aiken, South Carolina
and Weatherford, Texas, in accordance with the related development
agreements. The partnership intends to reinvest the funds in additional
properties.
C-24
<PAGE>
TABLE III
Operating Results of Prior Programs
CNL INCOME FUND XVIII, LTD.
<TABLE>
<CAPTION>
1995
(Note 1) 1996 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Gross revenue $ 0 $ 1,373 $ 1,291,416 $ 2,956,349
Equity in earnings of joint venture 0 0 0 0
Provision for loss on land (Note 5) 0 0 0 (197,466)
Interest income 0 30,241 161,826 141,408
Less: Operating expenses 0 (3,992) (156,403) (223,496)
Interest expense 0 0 0 0
Depreciation and amortization 0 (712) (142,079) (374,473)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 26,910 1,154,760 2,302,322
============ ============ ============ ============
Taxable income
- from operations 0 30,223 1,318,750 2,324,746
============ ============ ============ ============
- from gain on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 27,146 1,361,756 2,831,738
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 2,831,738
Less: Cash distributions to investors
(Note 4)
- from operating cash flow 0 (2,138) (855,957) (2,468,400)
- from sale of properties 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 25,008 505,799 363,338
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) (161,142)
Acquisition of land and buildings 0 (1,533,446) (18,581,999) (3,134,046)
Investment in direct financing leases 0 0 (5,962,087) (12,945)
Investment in joint venture 0 0 0 (166,025)
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) (37,135)
Increase in other assets 0 (276,848) 0 0
Other (20) (107) (66,893) (10,000)
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 980 5,370,345 (1,227,998) (2,303,714)
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 6 57 66
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-25
<PAGE>
TABLE III - CNL INCOME FUND XVIII, LTD. (continued)
<TABLE>
<CAPTION>
1995
(Note 1) 1996 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 0 38 65
- from capital gain 0 0 0 0
- from investment income from prior
period 0 0 0 6
------------ ------------ ------------ ------------
Total distributions on GAAP basis (Note 4) 0 0 38 71
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 0 38 71
------------ ------------ ------------ ------------
Total distributions on cash basis (Note 4) 0 0 38 71
============ ============ ============ ============
Total cash distributions as a percentage
of original $1,000 investment from
inception 0.00% 5.00% 5.75% 7.63%
Total cumulative cash distributions per
$1,000 investment (Note 6) 0 0 38 109
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% 96%
</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 1998 are
not included in the 1997 and 1998 totals, respectively.
Note 5: During the year ended December 31, 1998, the partnership established
an allowance for loss on land of $197,466 for financial reporting
purposes relating to the property in Minnetonka, Minnesota. The tenant
of this Boston Market property declared bankruptcy and rejected the
lease relating to this property. The loss represents the difference
between the Property's carrying value at December 31, 1998 and the
current estimate of net realizable value.
Note 6: 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 7: Certain data for columns representing less than 12 months have been
annualized.
C-26
<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> <C> <C> <C> <C> <C> <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> <C> <C> <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-27
<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> <C> <C> <C> <C> <C> <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
Denny's -
Hazard, KY 02/01/88 12/23/98 432,625 0 0 0 432,625
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
Perkins -
Leesburg, FL 01/11/89 07/09/98 529,288 0 0 0 529,288
Taco Bell -
Naples, FL 12/22/88 09/03/98 533,127 0 0 0 533,127
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
</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> <C> <C> <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)
Denny's -
Hazard, KY 0 647,622 647,622 (214,997)
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)
Perkins -
Leesburg, FL 0 737,260 737,260 (207,972)
Taco Bell -
Naples, FL 0 410,546 410,546 122,581
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
</TABLE>
C-28
<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> <C> <C> <C> <C> <C> <C>
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
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 1,236,971 0 0 0 1,236,971
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
</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> <C> <C> <C>
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
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
</TABLE>
C-29
<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> <C> <C> <C> <C> <C> <C>
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
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
</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> <C> <C> <C>
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
Church's Fried Chicken -
Jacksonville, FL (4) (14) 0 233,728 233,728 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
</TABLE>
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> <C> <C> <C> <C> <C> <C>
Jack in the Box -
Sacramento, CA 12/19/91 01/20/98 1,234,175 0 0 0 1,234,175
Pizza Hut -
Billings, MT 04/16/92 10/07/98 359,990 0 0 0 359,990
CNL Income Fund XI, Ltd.:
Burger King -
Philadelphia, PA 09/29/92 11/07/96 1,044,750 0 0 0 1,044,750
Burger King -
Columbus, OH (19) 06/29/92 09/30/98 795,264 0 0 0 795,264
Burger King -
Nashua, NH 06/29/92 10/07/98 1,630,296 0 0 0 1,630,296
CNL Income Fund XII, Ltd.:
Golden Corral -
Houston, TX 12/28/92 04/10/96 1,640,000 0 0 0 1,640,000
Long John Silver's -
Monroe, NC 06/30/93 12/31/98 483,550 0 0 0 483,550
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
Checkers -
Richmond, VA (#486) 03/31/94 07/27/98 397,985 0 0 0 397,985
</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> <C> <C> <C>
Jack in the Box -
Sacramento, CA 0 969,423 969,423 264,752
Pizza Hut -
Billings, MT 0 302,000 302,000 57,990
CNL Income Fund XI, Ltd.:
Burger King -
Philadelphia, PA 0 818,850 818,850 225,900
Burger King -
Columbus, OH (19) 0 795,264 795,264 0
Burger King -
Nashua, NH 0 1,217,015 1,217,015 413,281
CNL Income Fund XII, Ltd.:
Golden Corral -
Houston, TX 0 1,636,643 1,636,643 3,357
Long John Silver's -
Monroe, NC 0 239,788 239,788 243,762
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
Checkers -
Richmond, VA (#486) 0 352,034 352,034 45,951
</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> <C> <C> <C> <C> <C> <C>
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
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 (20) 08/18/95 04/14/98 950,361 0 0 0 950,361
Boston Market -
Grand Island, NE (21) 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
</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> <C> <C> <C>
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
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 (20) 0 950,361 950,361 0
Boston Market -
Grand Island, NE (21) 0 837,656 837,656 0
Burger King -
Indian Head Park, IL 0 670,867 670,867 3,453
</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> <C> <C> <C> <C> <C> <C>
Boston Market -
Dubuque, IA (22) 10/04/95 05/08/98 969,159 0 0 0 969,159
Boston Market -
Merced, CA (23) 10/06/96 05/08/98 930,834 0 0 0 930,834
Boston Market -
Arvada, CO (24) 07/21/97 07/28/98 1,152,262 0 0 0 1,152,262
</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> <C> <C> <C>
Boston Market -
Dubuque, IA (22) 0 969,159 969,159 0
Boston Market -
Merced, CA (23) 0 930,834 930,834 0
Boston Market -
Arvada, CO (24) 0 1,152,262 1,152,262 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.
(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 Burger King property in Columbus, OH was exchanged on September 30,
1998 for a Burger King property in Danbury, CT at the option of the tenant
as permitted under the terms of the lease agreement. Due to the exchange,
the Burger King property in Danbury, CT is being leased under the same
lease as the Burger King property in Columbus, OH.
C-33
<PAGE>
(20) 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 lease
as the Boston Market property in Franklin, TN.
(21) 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 lease as the Boston Market property in Grand Island, NE.
(22) 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 lease
as the Boston Market property in Dubuque, IA.
(23) 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.
(24) Cash received net of closing costs includes $522,827 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-34
<PAGE>
APPENDIX D
SUBSCRIPTION DOCUMENT
<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)
|_|ROTH IRA-custodian signature required (36)
|_|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)
<PAGE>
CNL Health Care Properties, Inc.
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 -------------
Post Office 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 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>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 36. Financial Statements and Exhibits.
(a) Financial Statements:
The following financial statements are included in the Prospectus.
(1) Balance Sheets as of March 31, 1999 and December 31, 1998
(2) Statements of Stockholder's Equity for the quarter ended
March 31, 1999 and the year ended December 31, 1998
(3) Notes to Financial Statements for the quarters ended March
31, 1999 and 1998
(4) Report of Independent Accountants for CNL Health Care
Properties, Inc.
(5) Balance Sheets as of December 31, 1998 and 1997
(6) Statements of Stockholder's Equity for the year ended
December 31, 1998 and the period December 22, 1997 (date
of inception) through December 31, 1997
(7) Notes to Financial Statements for the year ended December
31, 1998 and the period December 22, 1997 (date of
inception) through December 31, 1997
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
*1.2 Form of Participating Broker Agreement
*1.3 Form of Warrant Purchase Agreement
*3.1 CNL Health Care Properties, Inc. Articles of Incorporation
*3.2 Form of CNL Health Care Properties, Inc. Amended and
Restated Articles of Incorporation
*3.3 Form of CNL Health Care Properties, Inc. Bylaws
4.1 CNL Health Care Properties, Inc. Articles of Incorporation
(Filed as Exhibit 3.1 and incorporated herein by reference.)
* Previously filed.
<PAGE>
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.
*8 Opinion of Shaw Pittman Potts & Trowbridge regarding
certain material tax issues relating to CNL Health Care
Properties, Inc.
*10.1 Form of Escrow Agreement between CNL Health Care Properties,
Inc. and SouthTrust Asset Management Company of Florida, N.A.
*10.2 Form of Advisory Agreement
*10.3 Form of Joint Venture Agreement
*10.4 Form of Indemnification and Put Agreement
*10.5 Form of Unconditional Guaranty of Payment and Performance
*10.6 Form of Purchase Agreement
*10.7 Form of Lease Agreement including Rent Addendum, Construction
Addendum and Memorandum of Lease
10.8 Form of Reinvestment Plan (Included in the Prospectus as
Appendix A and incorporated herein by reference.)
*10.9 Form of Indemnification Agreement
23.1 Consent of PricewaterhouseCoopers LLP, Certified Public
Accountants, dated May 7, 1999 (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.)
*24 Power of Attorney (See "Signatures.")
*27.1 Financial Data Schedule as of December 31, 1997
*27.2 Financial Data Schedule as of April 30, 1998
*27.3 Financial Data Schedule as of June 30, 1998
* Previously filed.
<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 December 31, 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 46 units
total square feet
of units 80,314 s/f 185,717 s/f 158,819 s/f 163,754 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 9/15/98
Cash down payment (Note 1) $13,435,137 $26,654,961 $22,413,070 $28,110,326
Contract purchase price
plus acquisition fee $13,361,435 $26,501,721 $22,296,185 $28,006,046
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 73,702 153,240 116,885 104,280
----------- ----------- ----------- -----------
Total acquisition cost
(Note 1) $13,435,137 $26,654,961 $22,413,070 $28,110,326
=========== =========== =========== ===========
</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. With respect to CNL Hospitality
Properties, Inc., $8,600,000 of this amount was advanced under the line
of credit to facilitate the acquisition of these properties. These
advances were subsequently repaid with net offering proceeds.
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%, 68.87% and 35.71%
interest in six 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 56 units 49 units 42 units
total square feet
of units 143,344 s/f 226,561 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 9/15/98 12/31/97 5/31/96
Cash down payment (Note 1) $26,329,791 $40,842,686 $30,416,598 $31,985,071
Contract purchase price
plus acquisition fee $25,946,991 $40,313,586 $29,745,103 $31,450,507
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 382,800 529,100 671,495 534,564
----------- ----------- ----------- -----------
Total acquisition cost
(Note 1) $26,329,791 $40,842,686 $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%, 50% and 64.29%
interest in six 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 52 units 41 units 50 units
total square feet
of units 185,636 s/f 216,856 s/f 178,602 s/f 209,365 s/f
Dates of purchase 5/31/91- 10/01/91- 5/18/92- 11/20/92-
7/16/97 11/06/98 9/30/98 8/12/98
Cash down payment (Note 1) $32,812,908 $38,464,854 $36,964,521 $41,083,539
Contract purchase price
plus acquisition fee $32,068,289 $37,756,191 $36,363,563 $40,583,135
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 744,619 708,663 600,958 500,404
----------- ----------- ----------- -----------
Total acquisition cost
(Note 1) $32,812,908 $38,464,854 $36,964,521 $41,083,539
=========== =========== =========== ===========
</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%, 88% and 27.72%
interest in five 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 65 units 55 units 48 units
total square feet
of units 167,286 s/f 196,556 s/f 172,379 s/f 182,610 s/f
Dates of purchase 5/18/93- 9/27/93- 4/28/94- 10/21/94-
12/31/97 10/02/98 6/16/98 8/12/98
Cash down payment (Note 1) $36,388,084 $44,285,554 $38,446,910 $42,677,881
Contract purchase price
plus acquisition fee $36,019,958 $43,856,055 $38,054,069 $42,288,418
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 368,126 429,499 392,841 389,463
----------- ----------- ----------- -----------
Total acquisition cost
(Note 1) $36,388,084 $44,285,554 $38,446,910 $42,677,881
=========== =========== =========== ===========
</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 32.35% interest in a joint venture which
owns one restaurant. In addition, 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 CNL Hospitality
Properties Fund, Fund XVII, Fund XVIII, Properties,
Inc. Ltd. Ltd. Inc.
---- ---- ---- ----
(Note 18) (Note 19) (Note 20) (Note 21)
<S> <C>
AL,AZ,CA,CO,
CT,DE,FL,GA,
IA,ID,IL,IN,
KS,KY,MD,MI,
MN,MO,MS,NC,
NE,NJ,NM,NV,
NY,OH,OK,OR, AZ,CA,FL,GA,
PA,RI,SC,TN, CA,FL,GA,IL, IL,KY,MD,MN,
TX,UT,VA,WA, IN,MI,NC,NV, NC,NV,NY,OH,
Locations WI,WV OH,SC,TN,TX TN,TX GA
Type of property Restaurants Restaurants Restaurants Hotels
Gross leasable space
(sq. ft.) or number
of units and 420 units 29 units 24 units 2 units
total square feet
of units 2,019,216 s/f 119,664 s/f 125,855 s/f 199,290 s/f
Dates of purchase 6/30/95 - 12/20/95 - 12/27/96 - 7/31/98 -
12/31/98 6/16/98 12/31/98 12/31/98
Cash down payment (Note 1) $495,814,420 $25,525,954 $29,982,604 $28,752,549
Contract purchase price
plus acquisition fee $494,372,780 $25,490,918 $29,871,990 $28,705,900
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 1,441,640 35,036 110,614 46,649
------------ ----------- ----------- -----------
Total acquisition cost
(Note 1) $495,814,420 $25,525,954 $29,982,604 $28,752,549
============ =========== =========== ===========
</TABLE>
Note 18: CNL American Properties Fund, Inc. owns an 85.47% and a 55.38%
interest in two separate joint ventures. Each joint venture owns
one restaurant property. In addition, in May 1998, CNL American
Properties Fund, Inc. formed an operating partnership, CNL APF
Partners, LP, to acquire and hold all properties subsequent to the
formation of CNL APF Partners, LP. CNL American Properties Fund,
Inc. has a 100% ownership interest in the general and limited
partners (which are wholly owned subsidiaries) of CNL APF
Partners, LP.
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.
Note 20: The partnership owns a 39.93% interest in a joint venture which
owns one restaurant.
Note 21: In June 1998, CNL Hospitality Properties, Inc. formed an operating
partnership, CNL Hospitality Partners, LP, to acquire and hold
all properties subsequent to the formation of CNL Hospitality
Partners,LP. CNL Hospitality Properties, Inc. has a 100% ownership
interest in the general and limited partners (which are wholly
owned subsidiaries) of CNL Hospitality Partners, LP.
<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
Post-Effective Amendment No. 1 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 May 7, 1999.
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>
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 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 May 7, 1999
- ---------------------------- Chief Executive Officer
James M. Seneff, Jr. (Principal Executive Officer)
/s/ Robert A. Bourne Director and President May 7, 1999
- --------------------------- (Principal Financial and
Robert A. Bourne Accounting Officer)
/s/ David W. Dunbar Independent Director May 7, 1999
- --------------------------
David W. Dunbar
/s/ Edward A. Moses Independent Director May 7, 1999
- --------------------------
Edward A. Moses
/s/ Timothy S. Smick Independent Director May 7, 1999
- --------------------------
Timothy S. Smick
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibits
*1.1 Form of Managing Dealer Agreement
*1.2 Form of Participating Broker Agreement
*1.3 Form of Warrant Purchase Agreement
*3.1 CNL Health Care Properties, Inc. Articles of Incorporation
*3.2 Form of CNL Health Care Properties, Inc. Amended and Restated
Articles of Incorporation
*3.3 Form of CNL Health Care Properties, Inc. Bylaws
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.
*8 Opinion of Shaw Pittman Potts & Trowbridge regarding
certain material tax issues relating to CNL Health Care
Properties, Inc.
*10.1 Form of Escrow Agreement between CNL Health Care Properties,
Inc. and SouthTrust Asset Management Company of Florida, N.A.
*10.2 Form of Advisory Agreement
*10.3 Form of Joint Venture Agreement
*10.4 Form of Indemnification and Put Agreement
*10.5 Form of Unconditional Guaranty of Payment and Performance
*10.6 Form of Purchase Agreement
*10.7 Form of Lease Agreement including Rent Addendum, Construction
Addendum and Memorandum of Lease
10.8 Form of Reinvestment Plan (Included in the Prospectus as
Appendix A and incorporated herein by reference.)
* Previously filed.
<PAGE>
*10.9 Form of Indemnification Agreement
23.1 Consent of PricewaterhouseCoopers LLP, Certified Public
Accountants, dated May 7, 1999 (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.)
*24 Power of Attorney (See "Signatures.")
*27.1 Financial Data Schedule as of December 31, 1997
*27.2 Financial Data Schedule as of April 30, 1998
*27.3 Financial Data Schedule as of June 30, 1998
* Previously filed.
<PAGE>
EXHIBIT 23.1
Consent of PricewaterhouseCoopers LLP,
Certified Public Accountants,
dated May 7, 1999
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-11 of our
report dated January 15, 1999 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
May 7, 1999
