As filed with the Securities and Exchange Commission on December 24, 1998
Registration No. 333-58895
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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Mar Mar Realty Trust
(Exact name of registrant as specified in governing instrument)
Independence Office Park
6407 Idlewild Road, Building 2, Suite 111
Charlotte, North Carolina 28212
Telephone (704)566-4081
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
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Mr. Benjamin F. Bracy
President
Independence Office Park
6407 Idlewild Road, Building 2, Suite 111
Charlotte, North Carolina 28212
Telephone (704)566-4081
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
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Copies To:
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Peter J. Shea, Esq. David C. Wright, Esq.
Parker, Poe, Adams & Bernstein L.L.P. Charles R. Monroe, Jr., Esq.
2500 Charlotte Plaza Hunton & Williams
Charlotte, North Carolina 28244 Riverfront Plaza, East Tower
Telephone (704) 372-9000 951 East Byrd Street
Richmond, Virginia 23219-4074
Telephone (804) 788-8200
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Approximate date of commencement of the proposed sale of the securities to the
public:
As soon as practicable after this Registration Statement becomes effective.
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If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED , 1999
PROSPECTUS
10,000,000 Shares
[MAR MAR REALTY TRUST LOGO]
Class A Common Shares of Beneficial Interest
Mar Mar Realty Trust (the "Company") is a self-administered and
self-managed real estate investment trust ("REIT") that has been created to
capitalize on consolidation opportunities in the ownership of real estate used
by automobile dealerships, automotive parts and service retailers and other
related businesses. The Company intends to focus primarily on investing in real
estate associated with high quality, franchised motor vehicle dealerships
("Dealership Properties") and, to a lesser extent, properties associated with
other motor vehicle related businesses, including stand alone retail auto parts
and services stores, and auto collision repair facilities ("Related Business
Properties") located throughout North America. Upon completion of the Offering,
the Company will own 30 Dealership Properties, including related dealership
support facilities (the "Initial Dealership Properties"), 36 Advance Auto Parts
Stores (the "Advance Properties") and one collision repair facility (the
"Collision Repair Property" and, together with the Initial Dealership
Properties and the Advance Properties, the "Initial Properties" and together
with any future properties, the "Properties") located in 11 states.
Twenty-eight of the Initial Dealership Properties will be leased to Sonic
Automotive, Inc. ("Sonic Automotive"), the eighth largest automobile dealer
group in the United States based on 1997 revenues. The Advance Properties will
be leased to Advance Stores Company, Incorporated ("Advance Auto"), the second
largest specialty retailer of automotive parts and accessories in the United
States based on number of stores.
All of the Company's Class A common shares of beneficial interest, par
value $1.00 per share (the "Common Shares"), offered hereby (the "Offering")
are being offered by the Company. It currently is estimated that the initial
public offering price of the Common Shares will be between $14.00 and $16.00
per share. See "Underwriting" for a discussion of the factors to be considered
in determining the initial public offering price. Prior to the Offering, there
has been no public market for the Common Shares. The Company intends to apply
for listing of the Common Shares on the New York Stock Exchange (the "NYSE")
under the symbol "MMF." The Company's Declaration of Trust limits, subject to
certain exceptions, the ownership of Common Shares to 9.8% of the number or
value of the outstanding Common Shares. See "Description of Shares of
Beneficial Interest--Restrictions on Transfer; Excess Shares." For a diagram of
the Company's ownership, see the organizational chart appearing on page 8
hereof.
---------------
See "Risk Factors" beginning on page 12 for a discussion of certain
material risks to be considered by prospective investors in the Common Shares,
including, among others:
o Downturns in the business operations of automobile dealerships, retail
automotive parts stores or other automotive related businesses to which the
Company may lease Properties may reduce the ability of the lessees of
Properties to pay rent and fulfill other lease obligations;
o Any inability of the lessees of Properties to pay rent or fulfill other lease
obligations may reduce distributions to shareholders and cause the market
price of the Common Shares to decline;
o Conflicts of interest arising from O. Bruton Smith's position as Chairman of
the Board of Trustees of the Company and his capacity as chairman, chief
executive officer and controlling stockholder of Sonic Automotive may
influence the terms upon which the Company acquires Properties from and
leases Properties to Sonic Automotive, and decisions to enforce leases with
Sonic Automotive;
o The Company has no operating history and none of its officers or trustees has
any experience operating a REIT, which may adversely affect the financial
performance of the Company;
o Any significant inability by the Company to acquire additional Properties in
the future, whether due to competition or inability to finance such
acquisitions or otherwise, may inhibit the Company's ability to achieve its
investment objectives;
o Adverse tax consequences of failure to qualify as a REIT would decrease funds
available to pay distributions to shareholders and cause the market price of
the Common Shares to decline; and
o An increase in market interest rates may cause a decline in the market price
of the Common Shares.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<CAPTION>
Price to Underwriting Proceeds to the
Public Discount(1) Company(2)
<S> <C> <C> <C>
Per Common Share ......... $ $ $
Total(3) ................. $ $ $
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(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $ . See
"Use of Proceeds."
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 1,500,000 Common Shares to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and $ , respectively.
See "Underwriting."
---------------
The Common Shares are being offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the Common Shares will be made in Richmond, Virginia on or about
, 1999.
Wheat First Union NationsBanc Montgomery Securities LLC
The date of this Prospectus is , 1999.
<PAGE>
(continuation of cover page)
[Photographs of various Company properties showing car dealerships
and automotive parts stores and a map of the United States showing locations of
the Company's properties]
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This Prospectus contains forward looking statements that involve risks and
uncertainties. The Company's actual operations may differ significantly from
the results discussed in the forward-looking statements. Such statements can be
identified by the use of forward-looking terminology such as "may," "will,"
"could," "should," "expect," "anticipate," "estimate," or "continue" or the
negatives thereof or other variations thereon or comparable terminology. The
cautionary statements set forth under the caption "Risk Factors" and elsewhere
in the Prospectus identify important factors with respect to such
forward-looking statements, including certain risks and uncertainties, that
could cause actual results to differ materially from those described in such
forward-looking statements.
Certain persons participating in the Offering may engage in transactions
that stabilize, maintain, or otherwise affect the price of the Common Shares.
Such transactions may include stabilizing, the purchase of Common Shares to
cover syndicate short positions and the imposition of penalty bids. For a
description of these activities, see "Underwriting."
This Prospectus includes statistical industry data regarding automobile
dealerships and the automotive retail aftermarket. Unless otherwise indicated,
such data is taken or derived from information published by (i) the National
Automobile Dealers Association ("NADA") in its "Economic Impact of America's
New-Car and New-Truck Dealers," "Industry Analysis and Outlook" and "Automotive
Executive Magazine" publications and on the "NADANET" web-site located at
"www.nadanet.com/news/nadadata/econfyi.htm," (ii) Crain Communications Inc.
in its "Automotive News," "Automotive News 100-Year Almanac," "1997 Market Data
Book" and "1998 Market Data Book" publications, (iii) United States Census
Bureau, "The Official Statistics" dated June 29, 1998, or (iv) The Automotive
Parts and Accessories Association ("APAA") in its "1998 Aftermarket Fact Book"
and on its web-site located at "www.apaa.org/aftmkt.htm."
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<PAGE>
TABLE OF CONTENTS
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PROSPECTUS SUMMARY ................................................ 1
The Company .................................................... 1
Summary Risk Factors ........................................... 2
Business Strategies and Objectives ............................. 3
The Initial Properties and Initial Lessees ..................... 4
The Automotive Retailing and Aftermarket Industries ............ 6
Benefits to Related Parties .................................... 6
Formation Transactions ......................................... 7
Conflicts of Interest and Company Policies Regarding
Conflicts of Interest ........................................ 8
Distributions .................................................. 9
Tax Status of the Company ...................................... 9
The Offering ................................................... 10
Summary Financial Information .................................. 10
RISK FACTORS ...................................................... 12
Lessees May Be Unable to Pay Rent and Fulfill Other
Lease Obligations ............................................ 12
Lessees and Guarantors May Be Unable to Pay Rent
and Perform Lease Terms .................................... 12
Advance Auto is Highly Leveraged ............................. 12
The Company Will Have No Control Over Dealer
Franchise Agreements ....................................... 12
Leases Could Be Rejected in Bankruptcy ....................... 12
The Company May Be Unable to Sell or Re-Lease
Properties ................................................. 12
The Company Could Incur Uninsured Losses ..................... 13
The Performance of Automobile Dealerships May Affect
the Ability of Lessees to Fulfill Lease Obligations .......... 13
Dealerships are Dependent Upon Manufacturers for
Supply of Motor Vehicles ................................... 13
Terms of Franchise Agreements Affect the Performance
of Dealerships ............................................. 13
The Dealership Industry is Competitive and Cyclical .......... 14
The Performance of Retail Automotive Parts Stores May
Affect the Ability of Lessees to Fulfill Lease
Obligations .................................................. 14
Conflicts of Interest Between the Company and
Mr. Smith May Influence the Company's Decisions .............. 14
Purchase Prices of Properties May Exceed Their Fair
Market Values ................................................ 15
The Company Has No Operating History; Officers and
Trustees Have No Experience Operating a REIT ................. 15
The Company May Be Unable To Acquire Additional
Properties ................................................... 15
Limitations on Financial Resources Available for
Acquisitions ................................................. 16
The Amount of Debt the Company May Incur is Not
Limited ...................................................... 16
The Company's Performance is Dependent Upon Key
Personnel .................................................... 16
General Factors Affecting Real Estate Investments May
Affect the Company's Performance ............................. 16
Real Estate Investments are Subject to Certain General
Risks ...................................................... 16
Real Estate Investments are Affected By the Illiquidity
of Real Estate ............................................. 17
The Company May Be Subject to Risks Related to
Acquisition, Development and Construction
Activities ................................................. 17
Environmental and Other Governmental Regulations May
Affect the Company's Performance ............................. 17
Environmental Laws ........................................... 17
Americans With Disabilities Act of 1990 ...................... 18
Other Regulations ............................................ 18
The Company Will Compete With Other Companies
with Similar Business Objectives and Strategies .............. 18
Adverse Consequences of Failure to Qualify as a REIT
and Other Tax Risks Would Decrease Funds for
Distributions ................................................ 19
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Tax Liabilities as a Consequence of Failure to Qualify
as a REIT .................................................. 19
Adverse Effects of REIT Minimum Distribution
Requirements ............................................... 19
Consequences of Failure to Qualify as a Partnership .......... 20
Consequences of Recharacterization of Initial Leases ......... 20
Other Tax Liabilities ........................................ 20
The Ownership Limit May Reduce the Ability of
Shareholders to Receive a Premium Price ...................... 20
Certain Tax and Anti-takeover Provisions May Inhibit a
Change in Control of the Company ............................. 21
Ownership Limit .............................................. 21
Removal of Trustees; Vacancies ............................... 21
Classified Board ............................................. 21
Preferred Shares ............................................. 22
Number of Authorized Shares .................................. 22
Advance Notice Provisions .................................... 22
Maryland Business Combination Statute ........................ 22
Voting Rights of Class B Common Shares Held by
Mr. Smith May Enable Mr. Smith to Influence
Control of the Company ..................................... 22
Company Policies May Be Changed Without Shareholder
Approval ..................................................... 23
An Active Trading Market for Common Shares May Not
Develop ...................................................... 23
An Increase in Market Interest Rates May Cause Share
Prices to Decline ............................................ 23
Common Shares Eligible for Future Sale May Cause
Share Prices to Decline ...................................... 23
Purchasers of Shares in the Offering Will Experience
Dilution ..................................................... 24
USE OF PROCEEDS ................................................... 25
CAPITALIZATION .................................................... 25
DILUTION .......................................................... 26
SELECTED FINANCIAL INFORMATION .................................... 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ..................................................... 28
Overview ....................................................... 28
Results of Operations .......................................... 28
Pro Forma Results of Operations ................................ 28
Liquidity and Capital Resources ................................ 28
Inflation ...................................................... 29
Year 2000 Compliance ........................................... 29
BUSINESS OF THE COMPANY AND ITS PROPERTIES ........................ 31
Overview ....................................................... 31
Business Strategies and Objectives ............................. 32
Acquisition Strategy ......................................... 32
Development Strategy ......................................... 33
Financing Strategy ........................................... 33
The Initial Properties ......................................... 33
Ground Leases and Other Interests in Certain Advance
Properties ................................................... 35
Initial Lessees ................................................ 36
Dealership, Sonic and Bowers Leases ............................ 36
General ...................................................... 36
Typical Dealership Lease Terms ............................... 37
Use of the Properties ........................................ 37
Amounts Payable Under the Leases; Net Provisions ............. 37
Maintenance, Alterations, Capital Additions or
Improvements ............................................... 37
Insurance .................................................... 38
Damage to, or Condemnation of, a Property .................... 38
Financial Covenants .......................................... 39
Net Worth Covenant ........................................... 39
Assignment and Subletting .................................... 39
Indemnification .............................................. 39
Pre-Existing Conditions ...................................... 40
Events of Default ............................................ 40
Governing Law ................................................ 41
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Advance Leases ................................................. 41
General ...................................................... 41
Typical Advance Lease Terms .................................. 41
Use of the Properties ........................................ 41
Amounts Payable Under the Leases; Net Provisions ............. 41
Maintenance, Alterations, Capital Additions or
Improvements ............................................... 42
Noncompetition Covenant ...................................... 42
Insurance .................................................... 42
Damage to, or Condemnation of, a Property .................... 42
Assignment and Subletting .................................... 42
Indemnification .............................................. 42
Environmental Matters ........................................ 43
Events of Default ............................................ 43
Governing Law ................................................ 43
Governmental Regulations Affecting the Properties .............. 43
Environmental Laws ........................................... 43
Americans With Disabilities Act of 1990 ...................... 44
Dealership Franchise Agreements ................................ 44
Competition .................................................... 45
Employees ...................................................... 45
Legal Proceedings .............................................. 45
AUTOMOTIVE RETAILING AND MOTOR VEHICLE
AFTERMARKET INDUSTRIES ......................................... 46
Automotive Retailing Industry .................................. 46
Retail Automotive Aftermarket Industry ......................... 48
MANAGEMENT ........................................................ 49
Trustees, Executive Officers and Key Employees ................. 49
Committees of the Board ........................................ 50
Audit Committee .............................................. 50
Executive Committee .......................................... 50
Executive Compensation Committee ............................. 50
Compensation of Trustees ....................................... 50
Executive Compensation ......................................... 50
1999 Shares Option Plan ........................................ 51
1999 Formula Shares Option Plan ................................ 53
Limitation of Liability and Indemnification of Trustees
and Officers ................................................. 54
POLICIES AND OBJECTIVES WITH RESPECT TO
CERTAIN ACTIVITIES ............................................. 55
Investment Policies ............................................ 55
Conflicts of Interest Policies ................................. 55
Financing Policy ............................................... 55
Distributions Policy ........................................... 56
THE FORMATION TRANSACTIONS ........................................ 56
Benefits to Related Parties .................................... 57
Acquisition of the Initial Properties from the Sellers ......... 58
CERTAIN RELATIONSHIPS AND TRANSACTIONS ............................ 59
Formation of the Company ....................................... 59
Strategic Alliance with Sonic Automotive ....................... 59
Acquisition of Certain Initial Dealership Properties ........... 59
Sonic Leases ................................................... 60
Lock-Out Agreements ............................................ 60
Registration Rights ............................................ 60
PARTNERSHIP AGREEMENT ............................................. 60
Management ..................................................... 61
Indemnification ................................................ 62
Capital Contributions .......................................... 62
Tax Matters .................................................... 62
Operations ..................................................... 62
Duties and Conflicts ........................................... 62
Term ........................................................... 62
PRINCIPAL SHAREHOLDERS OF THE COMPANY ............................. 63
DESCRIPTION OF SHARES OF BENEFICIAL
INTEREST ....................................................... 63
General ........................................................ 63
The Common Shares .............................................. 64
Classification or Reclassification of Preferred Shares ......... 65
Restrictions on Transfer; Excess Shares ........................ 65
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CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S DECLARATION OF TRUST AND
BYLAWS ......................................................... 68
Classification of the Board .................................... 68
Vacancies ...................................................... 68
Removal of Trustees ............................................ 68
Business Combinations .......................................... 68
Control Share Acquisitions ..................................... 69
Shareholders' Meetings ......................................... 69
Annual Report .................................................. 69
Amendment ...................................................... 69
Limitation of Liability and Indemification ..................... 70
Operations; Maryland Asset Requirements ........................ 70
Terminations of the Trust and REIT Status ...................... 70
Advance Notice of Trustee Nominations and New
Business ..................................................... 71
Possible Antitakeover Effect of Certain Provisions of
Maryland Law and of the Declaration of Trust and
Bylaws ....................................................... 71
COMMON SHARES ELIGIBLE FOR FUTURE SALE ............................ 72
FEDERAL INCOME TAX CONSEQUENCES ................................... 73
Taxation of the Company ........................................ 74
General ...................................................... 74
Share Ownership Tests ........................................ 74
Asset Tests .................................................. 74
Gross Income Tests ........................................... 75
The 75% Test ............................................... 75
The 95% Test ............................................... 75
Characterization of Rent ..................................... 75
Rents from Real Property ..................................... 76
Foreclosure Property Rules and Certain Other Rules ........... 77
Annual Distribution Requirements ............................. 78
Failure to Qualify ........................................... 78
Tax Aspects of the Company's Investments in
Partnerships ................................................. 78
General ...................................................... 78
Entity Classification ........................................ 79
Tax Allocations with Respect to the Properties ............... 79
Sale of the Properties ....................................... 80
Taxation of Domestic Shareholders .............................. 80
Backup Withholding ........................................... 81
Taxation of Tax-Exempt Shareholders .......................... 81
Other Tax Considerations ....................................... 81
Tax Legislation and Other Law Changes ........................ 81
State and Local Taxes ........................................ 82
CERTAIN UNITED STATES TAX CONSIDERATIONS
FOR NON-U.S. SHAREHOLDERS ...................................... 82
Distributions From The Company ................................. 82
Ordinary Dividends ........................................... 82
Capital Gain Dividends ....................................... 83
Non-Dividend Distributions ................................... 83
Dispositions of Shares of Beneficial Interest .................. 83
Federal Estate Tax ............................................. 84
Information Reporting and Backup Withholding ................... 84
UNDERWRITING ...................................................... 85
LEGAL MATTERS ..................................................... 86
EXPERTS ........................................................... 86
ADDITIONAL INFORMATION ............................................ 86
GLOSSARY .......................................................... 88
INDEX TO FINANCIAL STATEMENTS ..................................... F-1
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including the historical and pro forma financial statements and
notes thereto, appearing elsewhere in this Prospectus. Unless otherwise
indicated, the information contained in this Prospectus assumes: (i) the
consummation of the transactions described under "The Formation Transactions"
(the "Formation Transactions") concurrently with the closing of the Offering,
(ii) an initial public offering price of $15.00 per Common Share, representing
the midpoint of the price range (the "Offering Price"), and (iii) that the
Underwriters' over-allotment option will not be exercised. Unless the context
otherwise requires, all references to the "Company" in this Prospectus include
Mar Mar Realty Trust, a Maryland REIT, and its wholly-owned corporate
subsidiary MMR QRS, Inc., a North Carolina corporation (the "Qualified REIT
Subsidiary"), and its affiliated partnership, Mar Mar Realty L.P., a Delaware
limited partnership (the "Operating Partnership"). The term "Operating
Partnership," unless the context requires otherwise, includes subsidiaries of
the Operating Partnership. See "Glossary" beginning on page 87 for the
definition of certain capitalized terms used in this Prospectus.
The Company
The Company is a self-administered and self-managed REIT that was
organized in April 1998 to capitalize on consolidation opportunities in the
ownership of real estate used by automobile dealerships, automotive parts and
service retailers and other businesses related to the automobile industry. The
Company's principal business strategy is to maximize cash available for
distribution to the Company's shareholders by acquiring Dealership Properties
and, to a lesser extent, Related Business Properties located throughout North
America. The Company believes that the automotive dealer industry and the
automotive parts and service retailing industry (the "automotive retail
aftermarket") are undergoing significant consolidation due to increasing
capital needs and the pursuit of economies of scale, which will create
attractive real estate acquisition opportunities for well-capitalized and
experienced real estate investors such as the Company.
The Company believes that its ability to identify and acquire Properties
will be enhanced by its strategic alliance with Sonic Automotive, one of the
fastest growing automobile dealership consolidators in the United States, and
the extensive real estate and automotive industry experience of the Company's
senior management and its Board of Trustees (the "Board"). O. Bruton Smith, the
Company's Board Chairman, is also chairman, chief executive officer and
controlling stockholder of Sonic Automotive and of Speedway Motorsports, Inc.
("Speedway Motorsports"), a NYSE-listed company, which owns motor speedways and
promotes, markets and sponsors motorsports activities.
The Company's initial portfolio will be comprised of 30 Initial Dealership
Properties, 36 Advance Properties and one Collision Repair Property located in
11 states. The Initial Dealership Properties and the Collision Repair Property
are currently owned, or under contract to be acquired, by MMR Holdings, L.L.C.,
a North Carolina limited liability company controlled by Mr. Smith ("MMR
Holdings") that will become a wholly-owned subsidiary of the Operating
Partnership upon completion of the Offering. As of December 15, 1998, MMR
Holdings had completed the acquisition of 17 Initial Dealership Properties and
the Collision Repair Property.
Twenty-eight of the Initial Dealership Properties will be leased to, and
are currently operated by, subsidiaries of Sonic Automotive (the "Sonic
Lessees"). The dealerships located on the Initial Dealership Properties sell 22
different brands of new automobiles, including Acura, BMW, Chevrolet, Chrysler,
Dodge, Ford, Honda, Hyundai, Infiniti, Isuzu, Jeep, KIA, Lincoln, Mercedes,
Mercury, Oldsmobile, Plymouth, Saturn, Subaru, Toyota, Volkswagen and Volvo.
Sonic Automotive, whose stock is traded on the NYSE under the symbol "SAH," is
the eighth largest automobile dealership group in the United States based on
1997 revenues and currently owns 44 dealerships and 15 collision repair
centers. Since the beginning of 1997, Sonic Automotive has been one of the
leading consolidators in the automobile industry, having purchased 33
dealerships in that time. After giving pro forma effect to such acquisitions,
Sonic Automotive's 1997 revenues were $1.8 billion, 1997 operating income was
$54.1 million and 1997 retail unit sales were 48,079 new and 34,278 used
vehicles. As of September 30, 1998, Sonic Automotive reported shareholders'
equity of $131.7 million, and total long-term debt of $131.2 million.
The Company believes that its relationship with Sonic Automotive will
provide it with unique competitive advantages in acquiring Dealership
Properties by providing the Company the opportunity to acquire Dealership
Properties on which dealerships acquired by Sonic Automotive are operated. The
Company has entered into a Strategic Alliance Agreement and Agreement for the
Mutual Referral of Acquisition Opportunities (the "Strategic Alliance
Agreement") with Sonic Automotive pursuant to which (i) Sonic Automotive has
agreed to refer to the Company real estate acquisition opportunities that arise
in connection with Sonic Automotive's dealership acquisitions, (ii) the Company
has agreed to refer to Sonic Automotive dealership acquisition opportunities
that arise in connection with Property acquisitions (providing sellers the
option to sell both the real estate and the operations associated with their
dealerships), (iii) the Company has agreed to provide or
1
<PAGE>
make available to Sonic Automotive certain real estate development,
maintenance, survey and inspection services and (iv) Sonic Automotive and the
Company have agreed to permit an affiliate of the Company to offer to its
future Lessees volume discounts, through participation with Sonic Automotive
and Speedway Motorsports, on insurance, office equipment and supplies,
telecommunications services and certain other products and services.
All of the Advance Properties are being acquired from Primax Properties,
L.L.C. and its affiliates ("Primax"), an unaffiliated third party, which is a
primary consultant to Advance Auto in connection with the selection, financing
and construction of new stores throughout the United States and owns additional
properties leased to Advance Auto. The Company believes that Primax will
provide the Company with opportunities to acquire additional Properties used by
Advance, although the Company has no formal agreement with Primax with respect
to future acquisitions.
All of the Company's Advance Properties will be leased to Advance Auto, an
unaffiliated third party (together with the Sonic Lessees and the other lessees
of the Company's Initial Properties, the "Initial Lessees," and together with
any future lessees, the "Lessees"). Advance Auto is the second largest
specialty retailer of automotive parts and accessories in the United States
based on number of stores. On November 2, 1998, Advance Auto acquired all 652
Parts America and Western Auto stores from Sears, Roebuck and Co. ("Sears"). As
a result of this transaction, Advance Auto operates over 1,500 stores in 37
states, Puerto Rico and the U.S. Virgin Islands. Sears currently owns
approximately 40.6% of Advance Auto's parent holding company. For fiscal 1997,
Advance Auto's net sales, net income and earnings before interest, taxes,
depreciation and amortization ("EBITDA") were $848.1 million, $20.4 million and
$65.4 million, respectively. Pro forma for the acquisition of the Parts America
and Western Auto stores, Advance Auto, as of July 18, 1998, reported
shareholders' equity of $222.4 million and long-term debt of $425.0 million.
The Initial Dealership Properties and the Collision Repair Property will
be leased pursuant to "triple-net" leases (the "Initial Dealership Leases"),
which require the Initial Lessees to pay all costs of operating the Properties,
as well as all taxes, utilities, insurance, repairs and maintenance and other
property-related expenses. The Leases with the Sonic Lessees (the "Sonic
Leases") have initial terms of ten years and generally require the Sonic
Lessees to maintain a minimum net worth (the excess of tangible assets over
liabilities) ("Net Worth"). In addition, each of the Sonic Leases is guaranteed
by Sonic Automotive. The Advance Properties are subject to existing modified
triple-net leases (the "Advance Leases" and together with the Initial
Dealership Leases, the "Initial Leases," and together with any future leases,
the "Leases") that require the Company to maintain certain portions of the
facilities and systems at the Advance Properties.
Mr. Smith, the Company's Chairman, Benjamin F. Bracy, the Company's
President, Mark J. Iuppenlatz, the Company's Executive Vice President -
Acquisitions and Chief Operating Officer, and Virginia R. Dunn, the Company's
Vice President and Chief Financial Officer, have significant collective
business and professional experience that will enhance the Company's
performance. Mr. Bracy has over 25 years of experience in the securities and
finance industries; Mr. Iuppenlatz has over 15 years of experience in the
acquisition, development, leasing and management of commercial real estate; and
Ms. Dunn has over 15 years of experience in the public accounting profession
with a focus on the real estate industry. The Company believes that Mr. Smith's
approximately 35 years of experience and informal business relationships with
automobile dealers, manufacturers and parts retailers, which he has developed
through his leadership of Sonic Automotive and Speedway Motorsports, will
benefit the Company by providing it with access to acquisition opportunities
and the expertise to evaluate such opportunities. None of the Company's
Trustees or officers has experience operating a REIT.
Summary Risk Factors
An investment in the Common Shares involves various risks. Prospective
shareholders should carefully consider the matters discussed under "Risk
Factors" prior to making an investment decision regarding the Common Shares
offered hereby. These risks include:
o Downturns in the business operations of automobile dealerships, retail
automotive parts stores or other automotive related businesses to which
the Company may lease Properties may reduce the ability of the Lessees to
pay rent and fulfill other lease obligations;
o Any inability of Lessees to pay rent or fulfill other lease obligations
may reduce distributions to shareholders and cause the market price of the
Common Shares to decline;
o Conflicts of interest arise from Mr. Smith's positions as the Company's
Chairman, as chairman, chief executive officer and controlling shareholder
of Sonic Automotive and as the seller of interests in certain Initial
Dealership Properties. MMR Holdings acquired two Initial Dealership
Properties from Mr. Smith and his affiliates in exchange for $425,000 in
cash, the repayment of approximately $1.4 million in debt secured by such
Properties and the issuance
2
<PAGE>
of 100% of the membership interests in MMR Holdings, which interests will
be exchanged for 377,802 Class A Units of limited partnership interests in
the Operating Partnership ("Class A Units") and 982,634 Class C units of
limited partnership interests in the Operating Partnership ("Class C
Units") upon completion of the Offering. MMR Holdings will also acquire
two Initial Dealership Properties from Sonic Automotive for $10.3 million
in cash. Twenty-eight of the Initial Dealership Properties will be leased
to the Sonic Lessees. The initial annual rent under the Sonic Leases will
be $9.9 million, representing approximately 74% of the Company's initial
annual rent revenues. Such conflicts may influence, among other things,
the terms upon which the Company acquires Properties from and leases
Properties to Sonic Automotive and its affiliates and decisions to enforce
leases and lease guaranties with Sonic Automotive and its affiliates;
o The Company has no operating history and none of its officers or trustees
has any experience operating a REIT, including operating in accordance
with the requirements for maintaining qualifications as a REIT, which may
adversely affect the financial performance of the Company;
o Any significant inability by the Company to acquire additional Properties
in the future, whether due to competition for or inability to finance such
acquisitions or otherwise, may inhibit the Company's ability to achieve
its investment objectives;
o Adverse tax consequences of a failure to qualify as a REIT would decrease
funds available to pay distributions to shareholders and cause the market
price of the Common Shares to decline;
o The purchase prices for certain of the Initial Properties were not based
on arms' length negotiation but were based primarily on capitalization of
pro forma cash flows from the Initial Lessees and may exceed fair market
value;
o The loss of key officers or Trustees of the Company, including Mr. Smith,
Mr. Bracy, Mr. Iuppenlatz or Ms. Dunn, could impair the operations of the
Company;
o General factors affecting commercial real estate ownership, development
and investment, including, but not limited to, economic and other
conditions affecting real estate investments, the general lack of
liquidity of real estate investments and unknown or future environmental
or other liabilities may have a material adverse effect on the performance
of the Company;
o The Board may change the policies of the Company, including investment,
financing, leverage and distribution policies, without the approval of the
shareholders;
o Certain provisions of the Company's Declaration of Trust and Bylaws, such
as staggered elections of Trustees and restrictions on ownership of Common
Shares or other classes of shares of beneficial interest (collectively,
the "Shares") intended to ensure the Company's qualification as a REIT,
may inhibit a change in control of the Company and reduce the ability of
shareholders to receive a market premium for their Common Shares;
o The (i) absence of a prior public market for the Common Shares, (ii) lack
of assurance that an active trading market will develop or that the Common
Shares will trade at or above the Offering Price, (iii) potential negative
effects of rising interest rates on the market price of the Common Shares
and (iv) effect of shares available for future sale may reduce the market
price of the Common Shares;
o As a result of, among other things, the annual income distribution
requirements applicable to REITs under applicable tax laws, the Company
expects to rely on borrowings and other external sources of financing to
fund the costs of new Property acquisitions, capital expenditures and
other items. Accordingly, the Company will be subject to (i) real estate
financing risks, including risks that such financing will not be available
or will not be available on acceptable terms, and (ii) increased interest
expense on variable rate debt in rising interest rate markets. The
Company's cash flow may not be sufficient to cover both required debt
service payments and distributions to shareholders at desired levels.
Business Strategies and Objectives
The Company's objectives are to maximize cash available for distribution
to shareholders, to enhance shareholder value by investing in additional
Properties that meet its investment criteria and to become one of the nation's
leading owners and lessors of Dealership Properties and Related Business
Properties.
The Company intends to capitalize on consolidation trends in the
automotive retailing and aftermarket industries by acquiring attractively
priced Properties that meet one or more of the following investment criteria:
3
<PAGE>
o Properties that are associated with well managed and financially sound
automobile dealerships, automotive parts stores and other automotive
related businesses with demonstrated operating histories;
o Properties that, because of their location and other characteristics,
are suitable for alternative uses;
o Well built Properties that have limited deferred maintenance;
o Properties that are located in diverse geographic regions in order to
minimize the potential adverse impacts of regional economic downturns; and
o Dealership Properties that are part of large affiliated dealer groups.
The Company intends to fund its growth strategy utilizing a selective
blend of financing sources, including internally generated funds, secured and
unsecured debt and a variety of equity or equity-linked securities.
Additionally, the Company will have the ability to offer sellers of Properties
units of limited partnership interest in the Operating Partnership ("Units") as
acquisition currency. Units will provide holders with distributions that are
identical to those paid on the Common Shares and will be redeemable for cash or
Common Shares, on a one for one basis, at the option of the Company. The
utilization of Units as acquisition currency will provide Sellers with the
ability to defer taxes, improve liquidity, facilitate estate planning and
diversify their investment in Dealership and Related Business Properties by
participating as an equity owner in the Company.
MMR Holdings has utilized the proceeds of a $150.0 million secured line of
credit from Ford Motor Credit Company ("Ford Motor Credit") to acquire certain
Initial Properties. In connection with the Company's acquisition of MMR
Holdings, the Company will use a portion of the net proceeds of the Offering to
repay all amounts outstanding under this line of credit and the line of credit
will terminate. The Company intends to obtain a new bank line of credit, which
will be used to finance the acquisition of additional Properties and working
capital following the completion of the Offering. The Company intends to
maintain a conservative capital structure with a debt to total market
capitalization ratio of not more than 50%. Following the completion of the
Offering, the Company's ratio of debt to total market capitalization will be
approximately 2%.
The Initial Properties and Initial Lessees
Upon completion of the Formation Transactions, the Company will own 67
Initial Properties located in 11 states. The following table presents certain
information regarding the Initial Properties.
<TABLE>
<CAPTION>
Initial Initial Lease
Property Location Base Rent Term Expiration
- ----------------------------------- ---------------------- ---------------- ----------------
<S> <C> <C> <C>
Higginbotham Acura-Mercedes Daytona Beach, FL $ 221,288 2008
Halifax Ford-Mercury New Smyrna Beach, FL 536,675(1) 2008
Halifax Ford Used Cars Edgewater, FL 72,875 2008
Higginbotham Chevy-Olds New Smyrna Beach, FL 650,000(2) 2009
Infiniti of Charlotte Charlotte, NC 432,000 2008
Town & Country Ford (Parcel #1) Charlotte, NC 409,200(3) 2009(3)
Town & Country Ford (Parcel #2) Charlotte, NC 108,513 2008
Town & Country Toyota Charlotte, NC 600,000 2008
Lake Norman Chrysler-Plymouth Cornelius, NC 590,250(1) 2007
Lake Norman Dodge Cornelius, NC 480,000(1) 2007
Westside Dodge Columbus, OH 600,000 2009
Toyota West Columbus, OH 480,000 2009
Hatfield Hyundai Columbus, OH 480,000 2009
Hatfield Lincoln-Mercury Columbus, OH 300,000 2009
VW & Jeep-Eagle West Columbus, OH 300,000 2009
Westside Chrysler-Plymouth Columbus, OH 300,000 2009
Fort Mill Ford Fort Mill, SC 480,000 2008
Century BMW Greenville, SC 420,000 2008
Heritage Lincoln-Mercury Greenville, SC 313,898 2008
Century BMW Spartanburg, SC 112,805 2008
Saturn of Chattanooga Chattanooga, TN 324,648 2007
Infiniti of Chattanooga Chattanooga, TN 344,224(1) 2007
BMW/Volvo of Chattanooga Chattanooga, TN 279,840(1) 2007
KIA/Volkswagen of Chattanooga Chattanooga, TN 132,840 2007
Toyota of Cleveland Cleveland, TN 252,000 2007
Town & Country Ford Cleveland, TN 304,424(1) 2007
Cleveland Honda Cleveland, TN 154,296 2007
Volkswagen of Nashville Nashville, TN 147,000 2008
Ron Craft Chrysler-Plymouth-Jeep Baytown, TX 262,500 2008
Lone Star Ford Houston, TX 360,000(3) 2009(3)
------------
INITIAL DEALERSHIP PROPERTIES SUBTOTAL 10,449,276
------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Initial Initial Lease
Property Location Base Rent Term Expiration
- -------------------------------- ---------------------- ----------------- ----------------
<S> <C> <C> <C>
Advance Auto Anniston, AL $ 69,856 2004
Advance Auto Bessemer, AL 72,500 2006
Advance Auto Birmingham, AL 77,621 2007
Advance Auto Boaz, AL 59,500 2003
Advance Auto Leeds, AL 60,200 2004
Advance Auto Montgomery, AL 76,440 2005
Advance Auto Selma, AL 58,619(4) 2004
Advance Auto Tarrant City, AL 72,000 2007
Advance Auto Troy, AL 62,016 2004
Advance Auto LaGrange, GA 56,000 2003
Advance Auto Monticello, KY 63,000 2006
Advance Auto High Point, NC 54,993(4) 2008
Advance Auto Greenville, OH 74,900 2007
Advance Auto Lima, OH 85,058 2007
Advance Auto Lima, OH 85,000 2007
Advance Auto Piqua, OH 66,862 2007
Advance Auto Springfield, OH 95,240 2007
Advance Auto Springfield, OH 82,500 2007
Advance Auto Troy, OH 70,445 2008
Advance Auto Belle Vernon, PA 95,775 2006
Advance Auto Brownsville, PA 73,000 2007
Advance Auto Chambersburg, PA 102,250 2007
Advance Auto Ebensburg, PA 72,750 2007
Advance Auto Greensburg, PA 73,540(4) 2007
Advance Auto Huntingdon, PA 61,335(4) 2008
Advance Auto Indiana, PA 84,000 2007
Advance Auto Jeanette, PA 88,000 2007
Advance Auto Leechburg, PA 81,720 2006
Advance Auto Murrysville, PA 95,428 2006
Advance Auto New Kensington, PA 99,950 2006
Advance Auto North Huntingdon, PA 84,595(5) 2006
Advance Auto Uniontown, PA 90,650 2006
Advance Auto Washington, PA 73,500 2006
Advance Auto Waynesburg, PA 84,510 2006
Advance Auto Dickson, TN 61,700 2005
Advance Auto Lynchburg, VA 51,950(4) 2007
------------
ADVANCE PROPERTIES SUBTOTAL 2,717,403
------------
ABRA Auto Body & Glass Chattanooga, TN 198,000 2007
------------
INITIAL PROPERTIES TOTAL $13,364,679
============
</TABLE>
- ---------
(1) Initial base rent ("Base Rent") indicated is the aggregate Base Rent
payable on more than one property parcel utilized by the dealership.
(2) The Higginbotham Chevy-Olds dealership is presently under construction and
is expected to be completed and available for leasing in January 1999. The
Company will acquire this Property after the completion of construction,
and the initial Base Rent indicated is an estimate.
(3) The existing Leases on these Properties will terminate by December 31,
1999. The Company and the Sonic Lessees have entered into new Leases that
will take effect on January 1, 2000, which provide for initial Base Rent
of $1,140,000 for each Property, and expire on December 31, 2009.
(4) These Advance Properties or portions of the interests therein are presently
subject to ground leases, which will be assigned to the Company. The
initial Base Rent figures shown are net of aggregate annual ground lease
payments of $96,899.
(5) The Company will be assigned certain rights under an easement agreement
pursuant to which the Company will receive all rents on the Property from
Advance Auto and will make an annual payment of $5,400 to the easement
grantor. The initial Base Rent figure shown is net of the required
easement payment.
5
<PAGE>
The Automotive Retailing and Aftermarket Industries
Automotive retailing is the largest consumer retail market in the United
States, with approximately $625 billion in 1997 sales. The industry is highly
fragmented, with over 22,000 new vehicle dealerships currently operating in the
United States. Dealerships are generally privately owned entities, with
publicly owned dealer groups owning only a small fraction of existing
dealerships. In 1997, the largest 100 dealer groups generated less than 10% of
total sales revenues and controlled less than 6% of all new vehicle
dealerships. The Company believes that the fragmented ownership, together with
the general illiquidity of real property assets, increasing capital
requirements of operating automobile dealerships, the lack of alternative exit
strategies (especially for larger dealerships) and the aging of many dealership
owners will provide attractive opportunities for the Company to acquire
Dealership Properties. In the past, dealers had limited options for financing
the real estate assets required to operate their businesses. The Company
believes that, due to the increasing demand for efficient deployment of capital
by increasingly sophisticated dealers, significant demand for the Company's
program exists.
The Company believes that similar opportunities exist to acquire
Properties used by other automotive related businesses. The "automotive
aftermarket" refers to products and services that are purchased for motor
vehicles after the original sale of the vehicles, such as accessories,
maintenance and repairs, replacement part and chemicals. The retail automotive
aftermarket products and services industry had sales of approximately $151
billion in 1997, up from approximately $143 billion in 1996. The automotive
aftermarket also is highly fragmented and is undergoing gradual consolidation.
The top ten automotive parts and services retail chains operated approximately
1,800 retail outlets in the early 1980s and now control over 5,000 stores or
approximately 1% of the total number of aftermarket outlets. The Company
believes that the general illiquidity of real estate assets, together with the
need for liquidity to support large inventories and capital investment
requirements needed to adapt the automotive aftermarket to the increased
complexity and computerization of the United States vehicle fleet, provide
opportunities for the Company to acquire attractively priced Related Business
Properties.
Benefits to Related Parties
The Company's executive officers and Trustees and certain of their
affiliates will receive the following benefits from the Formation Transactions:
Mr. Smith and Affiliates
o In connection with the formation of the Company, the Company issued to
Mr. Smith 463 Class B common shares of beneficial interest, par value
$1.00 per share ("Class B Common Shares"), in exchange for $660 in cash.
The Class B Common Shares are entitled to voting rights representing 6.6%
of the combined voting power of the Shares outstanding immediately after
the closing of the Offering (the "Class B Voting Percentage"). The Class B
Voting Percentage will be diluted proportionately by any additional
issuances of Common Shares after the closing of the Offering. The Class B
Common Shares are entitled to receive per share distributions equal to
those paid on Common Shares and are convertible, at the option of Mr.
Smith, for Common Shares, on a one-for-one basis. Any such conversion will
dilute the Class B Voting Percentage on a proportionate basis.
o In connection with the formation of the Operating Partnership, the
Operating Partnership issued to Mr. Smith 701,537 Class B units of limited
partnership interest in the Operating Partnership ("Class B Units") in
exchange for a subscription receivable of $999,340, which Units will have
a value of $10.5 million based on the Offering Price. The Class B Voting
Percentage was derived in a manner to reflect the approximate voting
percentage Mr. Smith would have had if his initial equity in the Company
had been in Common Shares rather than in Class B Units. The Class B Units
are redeemable, at the option of Mr. Smith, beginning one year after
completion of the Offering, for an equal number of Class B Common Shares
(or cash, at the Company's option), which, in turn, are convertible into
an equal number of Common Shares. Upon any such conversion into Common
Shares, the Class B Voting Percentage will be diluted proportionately.
o Mr. Smith formed MMR Holdings to acquire certain of the Initial
Properties before the Offering. Concurrent with the completion of the
Offering, MMR Holdings will become a wholly-owned subsidiary of the
Operating Partnership. Mr. Smith and his affiliates transferred two
Initial Dealership Properties to MMR Holdings in exchange for an aggregate
purchase price of $20.5 million, consisting of a 100% ownership interest
in MMR Holdings (which will be exchanged for 377,802 Class A Units and
982,634 Class C Units), $425,000 in cash and repayment of $1.4 million of
mortgage debt secured by these Properties. The number of Class A Units to
be received by Mr. Smith for these Properties was determined based upon
the rent under the existing Leases. The rents under these Leases are below
current market levels. Such existing Leases will terminate by December 31,
1999, and the Company and the relevant Sonic Lessees have entered into new
Leases at higher rent rates effective January 1, 2000. The number of Class
C
6
<PAGE>
Units was determined on the basis of such higher rent rates. The Class C
Units have no rights with respect to voting, allocations or distributions
until the effective date of the new Leases (at which time they will attain
rights identical to those of the Class A Units). For purposes of the
Company's pro forma financial statements, the Class C Units have a deemed
value of approximately $13.0 million. The Class A Units to be received by
Mr. Smith and his affiliates will have a value of approximately $5.7
million based on the Offering Price, are redeemable beginning one year
after the Offering, at the option of Mr. Smith and his affiliates, for an
equal number of Common Shares (or cash, at the Company's option) and will
be more liquid than such affiliates' interests in such Initial Dealership
Properties.
o In order to accomodate unaffiliated third party sellers who desired to
close the sale of their properties before consummation of the Offering,
Chartown, a North Carolina general partnership controlled by Mr. Smith
("Chartown"), acquired eight Initial Dealership Properties. Chartown has
sold these eight Initial Dealership Properties to MMR Holdings for
approximately $17.9 million in cash, which represents Chartown's
approximate cost of acquiring such properties from unaffiliated third
parties and maintaining such Properties prior to their acquisition by MMR
Holdings.
o Upon consummation of the Offering, the Company will repay with net
proceeds from the Offering approximately $109.5 million of indebtedness
incurred by MMR Holdings in connection with the acquisition of the Initial
Dealership Properties and the Collision Repair Property, which debt is
secured by, among other things, a pledge of certain securities owned by
Mr. Smith.
Sonic Automotive and Affiliates
o Subsidiaries of Sonic Automotive sold two Initial Dealership Properties
to MMR Holdings in exchange for approximately $10.3 million in cash. The
Company will repay debt incurred to finance these acquisitions upon its
acquisition of MMR Holdings at the closing of the Offering.
o The Sonic Lessees will lease 28 Initial Dealership Properties from the
Company and will continue to control the operations of the automobile
dealerships located on such properties.
Management
o In connection with the formation of the Company, the Company issued to
Mr. Bracy 6,557 Common Shares in exchange for $9,340 in cash, which shares
will have a value of $98,355 based on the Offering Price.
o The Company's Trustees and executive officers will receive options under
the Company's 1998 Shares Option Plan (the "Plan") to acquire an aggregate
of 465,000 Common Shares at the Offering Price.
Formation Transactions
The following Formation Transactions have been or will be undertaken in
organizing the Company and the Operating Partnership.
o Messrs. Smith and Bracy organized the Company as a REIT under Maryland
law and capitalized the Company with $10,000 in cash in exchange for 463
Class B Common Shares and 6,557 Common Shares, respectively.
o In connection with the formation of the Operating Partnership, the
Operating Partnership issued to Mr. Smith 701,537 Class B Units in
exchange for a subscription receivable in the amount of $999,340. The
Company is the Operating Partnership's sole general partner.
o MMR Holdings was formed by Mr. Smith to acquire certain of the Initial
Properties before the Offering and entered into a secured line of credit
with Ford Motor Credit to finance the acquisition of such properties.
o MMR Holdings has acquired or will acquire the following Properties:
o MMR Holdings acquired two Initial Dealership Properties from
subsidiaries of Sonic Automotive for $10.3 million in cash.
o MMR Holdings acquired eight Initial Dealership Properties from
Chartown for $17.9 million in cash.
o By the closing of the Offering, MMR Holdings will have acquired 19
Initial Dealership Properties and the Collision Repair Property from
unaffiliated third parties for $63.7 million in cash.
o MMR Holdings acquired two Initial Dealership Properties from Mr. Smith
and his affiliates in exchange for an aggregate purchase price of
$20.5 million, consisting of a 100% ownership interest in MMR Holdings
(which will be exchanged for 377,802 Class A Units and 982,634 Class C
Units), $425,000 in cash and refinancing of $1.4 million of mortgage
debt secured by these Properties.
7
<PAGE>
o The Company will sell 10,000,000 Common Shares in the Offering and
will contribute the net proceeds thereof and the proceeds from the
initial capitalization of the Company to the Operating Partnership in
exchange for 10,007,020 Class A Units.
o Concurrently with the closing of the Offering, the Operating Partnership
will acquire all of the ownership interests in MMR Holdings from Mr. Smith
and his affiliates in exchange for 377,802 Class A Units and 982,634 Class
C Units and the assumption and simultaneous repayment of the $109.5
million of MMR Holdings' indebtedness incurred in connection with the
acquisition of the Initial Dealership Properties and the Collision Repair
Property.
o The Company will acquire from Primax 36 Advance Properties for an
aggregate purchase price of approximately $26.3 million, consisting of
approximately $600,000 in cash, 492,585 Class A Units and the assumption
of approximately $18.3 million of mortgage debt secured by such
Properties, of which $15.0 million will be repaid with the proceeds from
the Offering.
o The Company will lease the Initial Properties to the Initial Lessees
pursuant to the Initial Leases.
Following the completion of the Formation Transactions, the relationship
among the Company, the Operating Partnership, the Initial Lessees and certain
other parties will be as follows:
<TABLE>
<CAPTION>
------------------------------------------------------
MAR MAR REALTY TRUST*
(the "Company")
(sole general partner)
------------------------------------------------------
79.7% General Partner Interest
<S> <C> <C> <C> <C>
----------------- ----------
Mr. Smith and -------------------------------------- Mar Mar --------------------------------------- PRIMAX
his affiliates 16.4% Limited Partner Realty L.P. 3.9% Limited Partner ----------
----------------- Interest (the "Operating Interest
Partnership")
------------------------
100% Ownership
--------------------
MMR Holdings, LLC
--------------------
Initial
Leases
----------
INITIAL
LESSEES
----------
</TABLE>
* Upon the completion of the Offering, management of the Company will own less
than 1% of the outstanding Shares. Mr. Smith, the Company's Chairman, owns
Class B Common Shares which initially are entitled to voting rights
representing 6.6% of the combined voting power of the Shares.
Conflicts of Interest and Company Policies Regarding Conflicts of Interest
Certain conflicts of interest result from Mr. Smith's positions as
Chairman of the Board of the Company, on the one hand, and as the chairman,
chief executive officer and controlling stockholder of Sonic Automotive and as
owner of certain other sellers of Properties, on the other hand. Mr. Smith has
significant influence on the business and operations of the Company in
connection with, among other things, the determination of purchase prices paid
to and lease terms provided to his affiliates. In an attempt to mitigate
conflicts of interest, the Company's Declaration of Trust contains a
requirement that any transaction involving the Company and a Trustee or an
affiliate of any Trustee requires the approval of a majority of
8
<PAGE>
the independent Trustees of the Company not otherwise interested in such
transaction. There can be no assurance, however, that such policies will be
successful in all cases in eliminating the influence of interested Trustees.
See "Risk Factors--Conflicts of Interest Between the Company and Mr. Smith May
Influence the Company's Decisions," "The Formation Transactions--Benefits to
Related Parties" and "Policies and Objectives with Respect to Certain
Activities--Conflicts of Interest Policies."
Distributions
The Company plans to pay regular quarterly distributions to its
shareholders of at least 95% of its taxable income determined without regard to
the deduction for dividends paid and by excluding net capital gains (as
determined under Section 857(a)(1) of the Internal Revenue Code of 1986, as
amended (the "Code")) each year so as to qualify as a REIT under the Code. The
Board may vary the distributions to holders of the Common Shares based upon the
actual results of operations of the Company. Distributions by the Company to
the extent of its current or accumulated earnings and profits for federal
income tax purposes will be taxable to shareholders as ordinary dividend
income. Distributions in excess of earnings and profits generally will be
treated as a non-taxable reduction of a shareholder's basis in his Common
Shares to the extent thereof, and thereafter as capital gain. Distributions
treated as a non-taxable reduction in basis will have the effect of deferring
taxation until the sale of a shareholder's Common Shares. See "Description of
Shares of Beneficial Interest", "Partnership Agreement" and "Federal Income Tax
Consequences."
Tax Status of the Company
The Company intends to qualify and will elect to be taxed as a REIT under
Sections 856-860 of the Code, commencing with its taxable year ending December
31, 1999. A REIT is subject to a number of organizational and operational
requirements, including a requirement that it currently distribute at least 95%
of its REIT taxable income each year, determined without regard to the
deduction for dividends paid and by excluding any net capital gains. If the
Company qualifies for taxation as a REIT, the Company generally will not be
subject to federal income tax at the corporate level on income it distributes
currently to its shareholders. If the Company fails to qualify as a REIT for
federal income tax purposes in any taxable year, the Company will be subject to
federal income tax (including any alternative minimum tax) on its taxable
income at regular corporate rates and distributions to the shareholders in any
such year will not be deductible by the Company. See "Risk Factors--Adverse
Consequences of Failure to Qualify as a REIT; Other Tax Liabilities" and
"Federal Income Tax Consequences--Failure to Qualify" for a more detailed
discussion of the consequences of the failure of the Company to qualify as a
REIT for federal income tax purposes. The Company does not intend to request a
ruling from the Internal Revenue Service (the "IRS") as to its REIT status. The
Company has received the opinion of Mayer, Brown & Platt, the Company's special
tax counsel, that, based on certain matters described in "Federal Income Tax
Consequences," the Company has been organized in conformity with the
requirements for qualification as a REIT beginning with its taxable year ending
December 31, 1999, and its proposed method of operation as represented by the
Company to such counsel and described in "Federal Income Tax Consequences" will
enable it to satisfy the requirements for such qualification. Investors should
be aware, however, that opinions of counsel are not binding on the IRS or any
court. The Company may be subject to certain federal, state and local taxes on
its income and property notwithstanding its qualification for federal income
taxation as REIT.
9
<PAGE>
The Offering
Common Shares Offered by
the Company 10,000,000 shares
Shares to be Outstanding After
the Offering.................... 11,578,944 shares (1)
Use of Proceeds................. Approximately $600,000 for the cash portion
of the consideration for the Initial
Properties, approximately $109.5 million for
the repayment of mortgage debt and unsecured
debt and the balance of $29.5 million for
working capital and general corporate
purposes, including the acquisition of
additional Properties. See "Use of Proceeds."
Listing......................... The Company intends to apply for listing of
the Common Shares on the NYSE, under the
symbol "MMF."
- ---------
(1) Includes 1,571,924 Common Shares issuable upon redemption of Class A Units
and Class B Units to be issued in the Formation Transactions and 6,557
Common Shares issued to Mr. Bracy in connection with the organization of
the Company. Also includes 463 Class B Common Shares issued to Mr. Smith
in connection with the organization of the Company which are convertible,
at Mr. Smith's option, into Common Shares on a one-for-one basis. The
Class B Common Shares are entitled to the Class B Voting Percentage.
Following completion of the Offering, the Class B Voting Percentage will
be proportionately reduced by any additional issuances of Common Shares by
the Company. Excludes 982,634 Common Shares reserved for issuance upon
redemption of Class C Units to be issued in the Formation Transactions,
1,100,000 Common Shares reserved for issuance pursuant to the Plan, of
which options to purchase 465,000 Common Shares at the Offering Price have
been granted to certain Trustees and executive officers of the Company,
and 200,000 Common Shares reserved for issuance pursuant to the Company's
1999 Formula Shares Option Plan (the "Formula Plan"). See "The Formation
Transactions," "Management--1999 Shares Option Plan" and "--1999 Formula
Shares Option Plan," "Certain Relationships and Transactions" and
"Partnership Agreement."
Summary Financial Information
The following table sets forth summary historical and pro forma financial
information for the Company. The unaudited pro forma operating information is
presented as if the Formation Transactions had occurred as of the beginning of
the periods indicated and therefore incorporates certain assumptions that are
included in the Company's Unaudited Pro Forma Consolidated Financial
Statements. The unaudited pro forma balance sheet information is presented as
if the Formation Transactions had occurred on August 31, 1998. The unaudited
pro forma financial information does not purport to represent what the
Company's financial position or results of operations actually would have been
had the Formation Transactions, in fact, occurred on such date or at the
beginning of the periods indicated, or to project the Company's financial
position or results of operations at any future date or for any future period.
The historical and unaudited pro forma financial information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
10
<PAGE>
Mar Mar Realty Trust
Summary Historical and Pro Forma Consolidated Financial Information
(in thousands, except per share and footnote data)
<TABLE>
<CAPTION>
Pro Forma
--------------------------------
Year ended Eight Months
December 31, ended August 31,
1997 1998
-------------- -----------------
<S> <C> <C>
Operating Data:
Lease revenue (1) ..................................................... $ 14,978 $ 9,986
Depreciation (2) ...................................................... 3,546 2,364
General and administrative expense (3) ................................ 2,000 1,333
Interest expense (4) .................................................. 280 187
Minority interest (5) ................................................. 1,352 901
Net income ............................................................ 7,800 5,201
Earnings per share -- basic and diluted ............................... $ .99 $ .66
Weighted average common shares outstanding -- basic and diluted (6) ... 7,893 7,893
</TABLE>
<TABLE>
<CAPTION>
Historical
---------------------------------- Pro Forma
April 14, 1998 August 31, August 31,
(Date of formation) 1998 1998
--------------------- ------------ -----------
<S> <C> <C> <C>
Balance Sheet Data:
Cash ............................... $ -- $ -- $ 29,513
Property ........................... -- -- 139,404
Total assets ....................... -- 840 168,917
Mortgages payable .................. -- -- 3,259
Total liabilities .................. -- 840 3,259
Minority interest .................. -- -- 33,629
Total shareholders' equity ......... -- -- 132,029
</TABLE>
- ---------
(1) Represents rental income, computed on a straight-line basis, from the
Initial Lessees based on the terms of the Initial Leases as if all Initial
Properties had been subject to the Initial Leases for the entire period.
The Company and the applicable Sonic Lessees have entered into new leases,
effective January 1, 2000, which provide that the annual lease payments on
the Town & Country Ford and Lone Star Ford properties will each be
increased to $1,140,000 as compared to their current levels of $409,200
and $360,000, respectively.
(2) Represents depreciation of the building and improvements as allocated from
the purchase prices of the Initial Properties over an assumed estimated
useful life of 20 years.
(3) Represents management's estimates of general and administrative expenses.
(4) Represents interest on mortgage debt.
(5) Represents approximately 14.8% of the Operating Partnership's pro forma net
income. The minority interest in pro forma net income reflects the
requirements under GAAP that pro forma lease revenue be computed on a
straight-line basis and a portion of such revenue be allocated to holders
of Class C Units, although the Class C Units have no voting, allocation or
distribution rights until the effectiveness of new leases described in
Note (1) above. The initial minority interest in contractual rents
allocated only to Class A and Class B Units is 13.6%. Upon effectiveness
of the new Leases described in note (1) above, the minority interest
allocable to the holders of the Class A, Class B and Class C Units will
be 20.3%.
(6) Represents the number of Common Shares issued to Mr. Bracy and Class B
Common Shares issued to Mr. Smith in connection with the organization of
the Company and the number of Common Shares issued in the Offering, the
proceeds from the sale of which will be used to acquire the Initial
Properties. If the total number of Common Shares issued in the Offering
had been used, pro forma weighted average Common Shares outstanding would
be 10,007,020 for both the year ended December 31, 1997 and the eight
months ended August 31, 1998, resulting in pro forma earnings per share of
$0.78 for the year ended December 31, 1997 and $0.52 for the eight months
ended August 31, 1998. The potential redemption of Units and the potential
exercise of options granted under the Plan are not dilutive to pro forma
earnings per share.
11
<PAGE>
RISK FACTORS
In addition to the other information presented in this Prospectus,
prospective shareholders should carefully consider the following material risks
before purchasing Common Shares in the Offering. Each of these factors could
adversely affect the ability of the Company to make expected distributions to
shareholders.
Lessees May Be Unable to Pay Rent and Fulfill Other Lease Obligations
Lessees and Guarantors May Be Unable to Pay Rent and Perform Lease Terms.
The Company will be dependent upon the payment of rent and the performance of
other Lease obligations, such as maintenance of the Properties, payment of
taxes, utilities and other charges and maintenance of insurance, by the Lessees
under the Leases. Nonperformance by the Lessees could adversely affect the
ability of the Company to pay distributions or otherwise operate its business.
If a Lessee defaults in the payment of rent or performance of other
obligations, the Company could be required to declare a default under the Lease
and pursue its legal and equitable remedies. Even if the Company successfully
pursued its legal or equitable remedies, it could incur substantial legal fees
and the costs of leasing the Property to a replacement Lessee. The failure of a
Lessee to perform under a Lease could require the Company to declare a default,
evict the Lessee, repossess the Property, find another tenant for the Property
or resell the Property.
Affiliates of certain Initial Lessees, including Sonic Automotive (the
"Guarantors"), will guarantee the payment of rent and performance of other
obligations of the Initial Lessees (the "Guaranties"). The Guaranties will be
of payment and not of collection. There is no assurance that upon a default any
or all of the Guarantors will perform under a Guaranty. In the event of a
default under a Guaranty, the Company's remedy will be limited to seeking
payment from such Guarantor. Because Mr. Smith is the Chairman of the Board of
Sonic Automotive as well as the Company, the Company's decision whether or not
to pursue Guaranty payments from Sonic Automotive could be influenced by Mr.
Smith in a manner detrimental to the Company's shareholders. See " -- Conflicts
of Interest Between the Company and Mr. Smith May Influence the Company's
Decisions."
The Company Will Have No Control Over Dealer Franchise Agreements. The
Company will have no rights under the franchise agreements ("Franchise
Agreements") between automobile dealers and the manufacturers supplying such
dealers with motor vehicle inventory (each a "Manufacturer"). Certain Franchise
Agreements impose restrictions relating to the sale or transfer of certain
assets or Property of dealerships without the consent or waiver of
Manufacturers, which could affect the Company's ability to acquire additional
Properties. Upon termination or non-renewal of any Franchise Agreement, the
Company will have no rights to require a Manufacturer to continue to operate a
dealership at a Property. Although a Lessee may be obligated under a Lease to
continue to pay rent and perform its other obligations, there is no assurance
that the Lessee will do so.
Leases Could Be Rejected in Bankruptcy. Any or all of the Lessees (or
Guarantors) may seek the protection of the federal Bankruptcy Code, which could
result in delays in rent payments or in the rejection and termination of a
Lease and thereby cause a reduction in the Company's cash flow and cash
available for distribution. No assurance can be given that any Lessee (or
Guarantor) will not seek protection under the Bankruptcy Code in the future or,
if any Lessee (or Guarantor) does seek such protection, that it or a trustee in
bankruptcy will assume its Lease (or Guaranty) and continue to make rent
payments in a timely manner. If any Lease (or Guaranty) is not assumed
following bankruptcy, the Company's cash flow and cash available for
distribution may be adversely affected.
The Company May Be Unable to Sell or Re-Lease Properties. In connection
with the acquisition of two of the Initial Dealership Properties and all of the
Advance Properties, the Company has agreed to certain restrictions on its
ability to sell such Properties for a period of ten years. The Company has also
agreed to restrictions on its ability to prepay approximately $3.3 million of
mortgage debt that it is assuming on certain Advance Properties. The Company
may agree to similar provisions in connection with future acquisitions of
Properties.
The Company may not be able to sell a Property when the Company decides to
do so. The real estate market is affected by many factors, such as general
economic downturns, availability of financing, interest rates and other
factors, including supply and demand, that are beyond the control of the
Company. The Company cannot predict the price of or terms on which it may be
able to sell any Property or the length of time required to sell a Property.
The number of competitive Properties operated as dealerships or related
automotive businesses in a particular area could have a material adverse effect
on the Company's ability to lease a Property in the event of loss of a Lessee.
In addition, the length of the Leases, including renewal terms, could adversely
affect the Company's ability to sell a Property that is subject to a Lease.
12
<PAGE>
If a Property is not occupied or if rent is not being paid or is being
paid in an amount that is insufficient to cover operating expenses, the Company
could be required to expend funds with respect to such Property, including
expenses relating to taxes, insurance, utilities and maintenance of the
Property. The Company may not be able to sell a Property as is. The Company may
be required to expend funds to correct defects, such as defects related to the
environment, health or safety or maintenance or repair. The Company may also be
required to make improvements before a Property can be sold. There is no
assurance that the Company will have funds available to correct defects or make
improvements. Furthermore, the expenditure of funds to correct defects or make
improvements may reduce the funds available for investment by the Company or
cash available for distribution to shareholders.
The failure of a Lessee to perform under a Lease could require the Company
to declare a default, repossess the Property, and find another tenant for the
Property. There is no assurance that the Company will be able to lease such
Property to a dealer or operator of a related automotive business, as the case
may be, or to successfully reposition the Property for other uses, or that a
replacement tenant or a different use would support the same or higher level of
lease payments. Moreover, there can be no assurance that any individual Lessee
will elect to extend a Lease upon expiration of its initial term, which would
also force the Company to find a suitable replacement tenant.
The Company Could Incur Uninsured Losses. Each Lease requires the Lessee
to maintain insurance on the Properties and insure against customary risks,
such as fire, vandalism and malicious mischief, extended coverage perils,
physical loss perils, commercial general liability, flood and workers'
compensation insurance. There are, however, certain types of losses (such as
from environmental events, pollution, hurricanes, earthquakes or wars) that may
be either uninsurable or not economically insurable (i.e., the cost of
insurance is higher than the potential loss considering the likelihood of such
loss). In addition, no assurance can be given that material losses in excess of
insurance proceeds will not occur. Although the Leases require the Lessees to
restore the Properties substantially to the condition they were in prior to any
loss, should a Lessee fail to restore a Property the Company could lose both
its capital invested in, and anticipated profits from, such Property. See
"Business Of The Company And Its Properties -- The Initial Properties --
Dealership, Sonic and Bowers Leases -- Insurance."
The Performance of Automobile Dealerships May Affect the Ability of Lessees to
Fulfill Lease Obligations
The Company's strategy is to concentrate on acquisitions of Properties
used in the operation of automobile dealerships. As a result, the Company will
be subject to risks inherent in investments in that industry. The effects on
cash available for distribution to shareholders resulting from a downturn of
business within the industry will be more pronounced than if the Company had
diversified its investments in Properties used for a variety of different
purposes. The success of the operations of a dealership depends on general
economic and other factors. The factors affecting motor vehicle sales include
rates of new employment, income growth, interest rates, credit availability,
other national and local economic conditions, automotive innovations and
general consumer sentiment.
Dealerships are Dependent Upon Manufacturers for Supply of Motor Vehicles.
The ability of each dealership Lessee to pay rent and perform its other
obligations under a Lease will be dependent to a significant extent on its
relationship with the Manufacturer on which it depends for its inventory of new
motor vehicles and parts. A reduction in the availability of new motor vehicles
or parts, and certain popular models in particular, could have an adverse
effect on dealer sales. In addition, the financial condition of the
Manufacturer, marketing programs and expenditures, vehicle design, production
capabilities and management of the Manufacturer affect sales. Events such as
strikes and other labor actions by unions, or negative publicity concerning a
particular Manufacturer or vehicle model, product recalls and litigation also
affect sales. Many of these factors are beyond the control of the Company and
the Lessees. Adverse conditions affecting some or all of the Manufacturers that
account for a significant portion of sales could materially adversely affect a
Lessee's ability to pay rent.
Certain motor vehicles and certain major components of vehicles are
imported. Accordingly, the revenues generated by dealerships could be adversely
affected by tariffs, import restrictions in certain jurisdictions, export
restrictions by certain jurisdictions, and could be dependent to some extent
upon general economic conditions in and political relations with foreign
countries, including Japan and Germany. Additionally, fluctuations in currency
exchange rates may adversely affect sales of imported motor vehicles. Imports
into the United States may also be adversely affected by increased
transportation costs or tariffs.
Terms of Franchise Agreements Affect the Performance of Dealerships.
Manufacturers exercise a great degree of control over dealerships, and the
Franchise Agreements provide for termination or non-renewal for a variety of
causes. These Franchise Agreements generally expire at various times between
one and five years. There can be no assurance that any of
13
<PAGE>
the Franchise Agreements will be renewed. If a Manufacturer terminates or
declines to renew one or more Franchise Agreements for dealerships operated on
any Property, such action could have a material adverse effect on the ability
of the Lessee to pay rent and perform its other obligations and, therefore, on
the ability of the Company to pay distributions. In addition, the terms of any
such renewals could also have a material adverse effect on the Company by
adversely affecting the ability of such Lessee to pay rent.
Certain Franchise Agreements may require the Manufacturer to consent to,
and may contain other restrictions on, the sale or transfer of assets or real
property necessary for operation of dealerships, or may contain rights of first
refusal in favor of certain Manufacturers to purchase such assets or real
property. There are no assurances that certain Manufacturers will consent to
the sale of, or waive prior rights to purchase, certain Properties that the
Company may negotiate to acquire. Failure to receive all or some of the
required consents or waivers could adversely affect on the ability of the
Company to acquire additional Properties. See "Business Of The Company And Its
Properties -- Dealership Franchise Agreements."
The Dealership Industry is Competitive and Cyclical. The operation of
dealerships is a highly competitive business. Dealers compete with other
dealerships selling the same or similar makes of new and used vehicles, dealers
offering other models, buyers and sellers of used vehicles, service center
chains and independent service and repair shops, some or all of which may offer
motor vehicles, services or repairs at a lower price, provide faster service or
offer faster delivery than dealerships operated by Lessees or affiliates of
Lessees. These competitors may be larger and have greater financial and
marketing resources than Lessees or affiliates of the Lessees. In addition, the
motor vehicle industry is cyclical and historically has experienced periodic
downturns, characterized by oversupply and weak demand. Many factors affect the
industry, including general economic conditions and consumer confidence, the
level of discretionary personal income, interest rates and credit availability.
The Performance of Retail Automotive Parts Stores May Affect the Ability of
Lessees to Fulfill Lease Obligations
In addition to acquiring Properties used in the operation of automobile
dealerships, the Company will also acquire Properties used in the operation of
retail automotive parts stores. Accordingly, the Company will be subject to the
risks inherent in that business. Operation of retail automotive parts stores
involves risks relating to customer demand and trends in the auto parts,
products and accessories industry, related inventory risks due to shifts in
customer demand, the effect of economic conditions, the impact of competitors'
locations and pricing, difficulties with respect to new technologies such as
point-of-sale systems, parts catalogs and supply constraints or difficulties.
The retail sale of automotive parts and accessories is highly competitive.
Automotive parts retailers, including Advance Auto, compete primarily with
national and regional retail automotive parts chains, wholesalers or jobber
stores (some of which are associated with national parts distributors or
associations), automobile dealers that supply manufacturer parts and mass
merchandisers that carry automotive replacement parts and accessories. The
increased presence of existing competitors or the entry of new competitors into
the markets where Advance Auto leases the Advance Properties could have a
material adverse impact upon Advance Auto's business. These factors may
adversely impact Advance Auto's ability to meet its lease obligations, which
may result in a decrease in the Company's cash available for distribution to
shareholders.
Automotive parts retailers are dependent upon developing and maintaining
close relationships with vendors and establishing an ability to purchase
products from these vendors on favorable price and other terms, including
obtaining financial incentives, such as cooperative advertising arrangements
and other marketing incentive programs, and non-financial benefits such as
improved packaging and distribution accommodations. A disruption of these
vendor relationships, or a material reduction in any of these advertising,
incentive or other programs could materially adversely affect the business of
automotive parts retailers, including Advance Auto. While alternative sources
of supply can generally be obtained for most automotive parts if necessary,
there is no assurance that they can be obtained on generally comparable terms.
Conflicts of Interest Between the Company and Mr. Smith May Influence the
Company's Decisions
Certain conflicts of interest could exist between the Company and Mr.
Smith in his capacity as Chairman of the Company's Board, on the one hand, and
as chairman, chief executive officer and controlling shareholder of Sonic
Automotive and as an owner of certain other sellers of Properties, on the other
hand. The terms of the contribution agreement between the Company and Mr. Smith
and the purchase agreements between the Company and Sonic Automotive, pursuant
to which the Company will acquire four Dealership Properties, and the Initial
Leases for such Properties were not negotiated on an arms' length basis.
Consequently, the purchase prices and lease terms for such Properties may not
reflect fair market terms. See "The Formation Transactions--Acquisition of the
Initial Properties from the Sellers."
14
<PAGE>
Mr. Smith could also significantly influence the future business and
operations of the Company in connection with (i) the terms of the contribution
or acquisition agreements and Leases for future Properties that may be acquired
from Sonic Automotive, which could result in the Company paying greater than
market purchase prices and/or receiving below market rents, (ii) decisions to
sell or refinance Properties contributed by his affiliates, which could
adversely affect the composition of the Company's real estate portfolio or
cause the Company to incur higher interest expense, (iii) decisions of Initial
Lessees affiliated with Mr. Smith to extend the terms of existing Leases and
the terms of any such extensions, which could adversely affect occupancy rates
for certain of the Company's Properties and result in less favorable lease
terms, (iv) the terms of "lock-out" restrictions that limit the ability of the
Company to sell or refinance Properties contributed by his affiliates, which
could preclude the Company from selling or refinancing a Property when it
desires, and (v) the enforcement of Initial Leases and agreements with Mr.
Smith and his affiliates, which could reduce the rental revenues of the
Company. See "The Formation Transactions--Benefits to Related Parties" and
"Policies and Objectives with Respect to Certain Activities--Conflicts of
Interest Policies."
Purchase Prices of Properties May Exceed Their Fair Market Values
Generally, the valuations of the Company's Properties have not, and in the
future may not, be determined by independent third-party appraisals. Therefore,
the consideration being paid by the Company for certain Properties may exceed
the value of such Properties if determined by third-party appraisals. The
Company considers several methods of valuation, including the review and
analyses of comparable properties and leases, discounted cash flow
calculations, valuing alternative uses of the Property and evaluating the
financial strength of prospective Lessees. The valuation of the Initial
Properties was based primarily upon a capitalization of pro forma cash flow,
considering the creditworthiness of the Initial Lessees, purchase prices for
similarly situated properties, the characteristics of the Initial Properties,
the cost of capital used to acquire the Initial Properties and the return the
Company could realize from alternative investments.
The market value of the Common Shares may exceed the fair market value of
the proportionate interest in the Company's portfolio of Properties and other
assets they represent. Accordingly, the liquidation value of the Company may be
less than the value of the Company as a going concern, and shareholders may
suffer a loss in the value of their Common Shares if the Company is required to
sell the Properties or any other assets.
The Company Has No Operating History; Officers and Trustees Have No Experience
Operating a REIT
The Company has been recently organized and has no operating history. The
Company's management has no experience operating a REIT, including operating in
accordance with the requirements for maintaining qualifications as a REIT, and
limited experience working together. There can be no assurance that the Company
will be able to generate sufficient revenue from operations to pay operating
expenses of the Company and make or sustain distributions to shareholders. See
"Policies And Objectives With Respect To Certain Activities -- Distributions
Policy." The Company also will be subject to the risks generally associated
with the formation of any new business.
The Company's ability to make and sustain cash distributions is based on
many factors, including the ability of the Company to make additional
acquisitions, investment of the proceeds of the Offering, ability to negotiate
favorable Lease terms, the Lessees' performances under Leases and anticipated
operating expense levels, which may not prove accurate and actual results may
vary substantially from estimates. Some of the factors are beyond the control
of the Company, and a change in any such factor could affect the Company's
ability to pay future distributions. No assurance can be given as to the
Company's ability to pay or maintain distributions. Neither is there an
assurance that the level of distributions will increase over time, that
contractual increases in rent under the leases of the Properties or that the
receipt of rental revenue in connection with future acquisitions of Properties
will increase the Company's cash available for distribution to shareholders. In
the event of a default or a lease termination, there could be a decrease or
cessation of rental payments and thereby a decrease in cash available for
distribution. See "Policies And Objectives With Respect To Certain Activities
- -- Distributions Policy."
The Company May Be Unable to Acquire Additional Properties
Other than the Initial Properties, the Company has no agreements to
acquire additional Properties. There can be no assurances that additional
acquisitions of Properties or opportunities to finance the development of
Properties on terms that meet the Company's investment criteria will be
available to the Company or that the Company will be successful in capitalizing
on such opportunities.
15
<PAGE>
Approximately 21% of the net proceeds of the Offering have not been
committed to the acquisition of Properties on the date of this Prospectus. The
Company cannot predict whether it will make future acquisitions for cash or
Units or any combination thereof.
Shareholders will not have an opportunity to approve or evaluate for
themselves any future Properties acquired by the Company, the terms of such
acquisitions or the terms of the related Leases. Shareholders must depend upon
the ability of management of the Company with respect to the selection of
Properties. Management has limited experience investing in Properties that are
used by dealerships and related automotive businesses.
Limitations on Financial Resources Available for Acquisitions
The Company intends to finance acquisitions with cash on hand, through the
issuance of equity or debt securities and through borrowings under credit
arrangements. The Company is currently negotiating new credit arrangements,
although none has been consummated and no assurance can be given that any
lending or credit arrangement will be consummated or that such arrangements
will adequately meet the Company's financing needs on acceptable terms.
Similarly, there is no assurance that the Company will be able to obtain
additional debt or equity securities financing. Using cash to complete
acquisitions could substantially limit the Company's operating or financial
flexibility, and limit the amount of distributions to shareholders. Using
shares to consummate acquisitions may result in significant dilutions of
shareholders' percentage interests in the Company. If the Company is unable to
obtain additional financing as necessary on acceptable terms, the Company may
be required to curtail its acquisition of additional Properties. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business of the Company and
Its Properties -- Business Strategies and Objectives -- Financing Strategy."
The Amount of Debt the Company May Incur is Not Limited
The Company currently has a general policy of limiting its borrowings to a
ratio of approximately 50% of long-term debt to total market capitalization.
The organizational documents of the Company contain no limitation on the amount
or percentage of indebtedness that the Company may incur. The Board, without a
vote of the shareholders, could therefore alter or eliminate at any time the
current policy on incurring indebtedness. If the Company's debt to
capitalization policy were changed, the Company could become more leveraged,
resulting in an increase in debt service that could adversely affect the
Company's operating cash flow and its ability to make expected distributions to
shareholders and could result in an increased risk of default on its
obligations.
Although the Company will consider factors other than total market
capitalization in making decisions regarding the incurrence of debt (such as
the purchase price of Properties to be acquired with debt financing, the
estimated market value of Properties upon refinancing, and the ability of
particular Properties and the Company, as a whole, to generate cash flow to
cover expected debt service), there can be no assurance that the ratio of
long-term debt to total market capitalization will be consistent with the
maintenance of the expected level of distributions to shareholders.
The Company's Performance is Dependent Upon Key Personnel
The loss of the services of Mr. Smith, the Company's Chairman, Mr. Bracy,
the Company's President, or Mr. Iuppenlatz, the Company's Executive Vice
President -- Acquisitions and Chief Operating Officer, and Ms. Dunn, the
Company's Vice President and Chief Financial Officer, could have a material
adverse effect on the Company, its operations and its business prospects. The
executive officers will receive substantial compensation from the Company. See
"Management--Executive Compensation." The Company's success also depends upon
its ability to attract and retain other qualified personnel.
General Factors Affecting Real Estate Investments May Affect the Company's
Performance
Real Estate Investments are Subject to Certain General Risks. The
Company's investments will be subject to the risks generally incident to the
ownership and, in certain instances, the development of commercial real
property, including: (i) reliance on the Lessees to pay rent and perform their
other obligations under the Lease, to generate revenues to meet fixed
obligations and cover debt service on borrowings; (ii) adverse changes in
national or local economic conditions; (iii) changes in the investment climate
for real estate; (iv) changes in real estate tax rates and other operating
expenses; (v) adverse changes in governmental rules and fiscal policies; (vi)
acts of God that may result in uninsured losses; (vii) the financial condition
of the sellers of Properties and Lessees; and (viii) other factors that are
beyond the control of the Company.
16
<PAGE>
Real Estate Investments are Affected By the Illiquidity of Real Estate.
Equity real estate investments are relatively illiquid and therefore may tend
to limit the ability of the Company to react promptly to changes in economic or
other conditions. In addition, certain significant expenditures associated with
equity real estate investments (such as interest payments, real estate taxes
and maintenance costs) are generally not reduced when circumstances cause a
reduction in income from the investments.
The Company May Be Subject to Risks Related to Acquisition, Development
and Construction Activities. The Company intends to acquire additional
Properties. Acquisitions of Properties entail general investment risks
associated with any real estate investment, including the risk that investments
will fail to perform in accordance with expectations or that estimates of the
costs of improvements to bring an acquired property up to the Company's
standards may prove inaccurate.
The Company also intends to grow through the selective development and
construction of Properties, including build-to-suit properties and land
acquisitions for development, as suitable opportunities arise. See "Business of
the Company and Its Properties -- Business Strategies and Objectives." Risks
associated with real estate development and construction activities include the
risk that the Company may abandon development activities after expending
significant resources to determine their feasibility; the construction cost of
a project may exceed original estimates; rents at a newly completed property
may not be sufficient to make the property profitable; financing may not be
available on favorable terms for development of a property; and the
construction and leasing of a property may not be completed on schedule
(resulting in increased debt service and construction costs). Development
activities are also subject to risks relating to inability to obtain, or delays
in obtaining, necessary zoning, land-use, building occupancy and other required
governmental permits and authorizations. If any of the above occur, the
Company's cash flow and ability to make distributions to shareholders could be
adversely affected. In addition, new development activities, regardless of
whether they are ultimately successful, may require a substantial portion of
management's time and attention.
Environmental and Other Governmental Regulations May Affect the Company's
Performance
Automobile dealers, related automotive businesses and the Company are
subject to a wide range of federal, state and local laws and regulations, such
as local licensing requirements, consumer protection laws and regulations
relating to gasoline storage, waste treatment and other environmental matters,
including:
Environmental Laws. All real property and the operations conducted on real
property are subject to federal, state and local laws and regulations relating
to environmental protection and human health and safety, including those
governing wastewater discharges, air emissions, the operation and removal of
underground and above-ground storage tanks, the use, storage, treatment,
transportation and disposal of solid and hazardous materials and wastes and the
remediation of contamination associated with such materials and wastes. Certain
of these laws and regulations may impose joint and several liability on certain
statutory classes of persons, including lessees, owners or operators, for the
costs of investigation and/or remediation of contaminated properties,
regardless of knowledge, fault or the legality of the original disposal or
release.
The past and present business operations of automobile dealers and related
automotive businesses that are subject to such laws and regulations include the
use, storage, handling and contracting for recycling or disposal of hazardous
or toxic substances or wastes, including environmentally sensitive materials
such as motor oil, waste motor oil and filters, transmission fluid, antifreeze,
freon, waste paint and lacquer thinner, batteries, solvents, lubricants,
degreasing agents, gasoline and diesel fuels. The Company, Lessees and sellers
of Properties may be subject to other laws and regulations as a result of the
past or present existence of certain underground and/or above-ground storage
tanks at the Properties. The Lessees or sellers of Properties, like many of
their competitors, have incurred, and will continue to incur, capital and
operating expenditures and other costs in complying with such laws and
regulations.
Certain laws and regulations, including those governing air emissions and
underground and above-ground storage tanks, have been amended so as to require
compliance with new or more stringent standards as of future dates. The Company
cannot predict what other environmental legislation or regulations will be
enacted in the future, how existing or future laws or regulations will be
administered or interpreted or what environmental conditions may be found to
exist in the future. Compliance with new or more stringent laws or regulations,
stricter interpretation of existing laws or the discovery of environmental
contamination may require expenditures by the Company or additional
expenditures by the sellers of Properties or Lessees and their affiliates, some
of which may be material. There can be no assurance that (i) future laws,
ordinances or regulations will not impose any material environmental liability,
or (ii) the current environmental condition of the Properties will not be
affected by the operations of the automobile dealerships, automotive parts
stores or other automotive related businesses or their affiliates, by the
condition of the land or operations in the vicinity of the Properties (such as
the presence or past presence of underground storage tanks) or by the
activities of unrelated third parties. Under various federal,
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state and local laws, ordinances and regulations, a current or previous owner,
developer or operator of real estate may be liable for the costs of removal or
remediation of certain hazardous or toxic substances at, on, under or in its
property. The costs of such removal or remediation could be material. See
"Business of the Company and Its Properties -- The Initial Properties," " --
Initial Lessees," " -- Government Regulations Affecting the Properties --
Environmental Laws."
Limited environmental assessments have been conducted or will be completed
prior to the consummation of the Offering at the Initial Properties, with the
results set out in "Reports" and, in certain circumstances, "Phase II reports"
(collectively, the "Reports") prepared by consultants retained by the Company,
Sonic Automotive, Primax and/or their respective affiliates. The Reports
describe environmental conditions of concern at certain of the Initial
Properties, including actual and potential releases of petroleum products from
underground storage tanks and the presence of asbestos-containing materials.
Based on the Reports, the Company estimates that the aggregate cost expected to
remedy identified environmental conditions of concern will not be material to
the Company. Although the Company is unaware of any environmental condition at
any of the Initial Properties that the Company believes would have a material
adverse effect on the Company's financial condition or results of operations,
no assurance can be given that such an environmental condition does not exist.
If such a condition exists or arises in the future, the Company may incur
substantial costs for the investigation, removal and/or remediation of the
condition.
With the exception of the sellers of 7 of the Initial Dealership
Properties and the Collision Repair Property (collectively, the "Bowers
Properties"), the sellers of the Initial Properties are obligated to indemnify
the Company for any third party claims based on environmental conditions,
including claims by subsequent purchasers of the Property, at least until such
time as any relevant statute of limitations has run. The Company has agreed to
purchase the Bowers Properties "as is," and has further agreed to release,
discharge and indemnify the sellers of the Bowers Properties with respect to
any liabilities that those sellers might otherwise have to the Company in any
way related to the Bowers properties and for any third party claims based on
environmental conditions. In addition, the Initial Lessees and their affiliates
are obligated to comply with, indemnify and hold harmless the Company and its
officers, Trustees, employees, shareholders, agents and affiliates from, and to
assume the cost of compliance with, all laws and regulations applicable to its
Property, including environmental laws and remediation requirements. In the
Leases for the Bowers Properties, the Company has agreed to remediate and be
responsible for, and indemnify the respective Lessees against, environmental
costs associated with conditions not caused by Lessees' acts or omissions. If
any seller or Lessee fails to comply with such requirements or if the Company
is otherwise required to do so, the Company could be forced to pay such costs,
which at such time could be significant, and then, as available, seek
reimbursement of those costs from the seller or the Lessee. Moreover, in the
event remedial action addressing environmental conditions of concern identified
in the Reports is not conducted by the sellers or Lessees or their affiliates
pursuant to environmental laws and regulations, it is possible that the
existence of those conditions could impede the Company's ability to sell,
re-lease or finance the affected Properties in the future or negatively impact
future sales or rental proceeds.
Americans With Disabilities Act of 1990. The Properties are required to
comply with Title III of the Americans with Disabilities Act of 1990 (the
"ADA") to the extent that such properties are "public accommodations" and/or
"commercial facilities" as defined by the ADA. Although the Company believes
that each of the Initial Properties is in substantial compliance with the ADA,
no assurance can be given that any investigation of the Initial Properties will
not reveal non-compliance with the ADA or that the requirements of the ADA will
not be changed. Compliance with the ADA could require the Company to make
significant capital expenditures at the Properties. Although the Lessees will
have primary responsibility for complying with the ADA, there is no assurance
that the Lessees will comply, or that the Company would be reimbursed by the
Lessees if the Company had to make expenditures to comply, with the ADA. See
"Business of the Company and Its Properties--Governmental Regulations Affecting
the Properties--Americans With Disabilities Act of 1990."
Other Regulations. The Properties are and will be subject to state and
local fire, life-safety and similar requirements. The Leases will require that
each Lessee comply with all regulatory requirements. Failure to comply with
those requirements could result in the imposition of fines by governmental
authorities, awards of damages to private litigants, or restrictions on the
ability to conduct business on such properties.
The Company Will Compete With Other Companies with Similar Business Objectives
and Strategies
Several REITs and other competitors of the Company have either begun or
announced intentions to begin acquiring properties used by automobile
dealerships, automotive parts stores and other related automotive businesses.
Other public or private entities may also target these types of properties for
acquisition, and some of those companies may have greater financial resources
or general real estate experience than the Company. Those entities will compete
with the Company in seeking Properties for acquisition and disposition and
re-leasing of Properties to automobile dealers or related automotive
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businesses as they become available. The Company believes that competition for
acquisition of Properties will be based primarily on the acquisition price and
rental rates. Competition could have the effect of increasing acquisition
prices and decreasing rents, which would have an adverse effect on the
financial results of the Company and distributions to shareholders.
Adverse Consequences of Failure to Qualify as a REIT and Other Tax Risks Would
Decrease Funds for Distributions
Tax Liabilities as a Consequence of Failure to Qualify as a REIT. The
Company intends to operate its business so as to qualify as a REIT under the
Code commencing with its taxable year ending December 31, 1999. Although
management believes that the Company will be organized and will operate in such
a manner, no assurance can be given that the Company will be able to operate in
a manner so as to qualify as a REIT or remain so qualified. Qualification as a
REIT depends on the Company's continuing ability to meet various requirements
concerning, among other things, the ownership of its outstanding Shares, the
nature of its assets, the sources of its income and the amount of its
distributions to its shareholders. Because management of the Company has no
history of operating an entity such that it would qualify as a REIT, there can
be no assurance that the Company will do so successfully. See "Federal Income
Tax Consequences--Taxation of the Company." In addition, no assurance can be
given that new legislation, regulations, administrative interpretations or
court decisions will not significantly change the tax laws with respect to
qualification as a REIT or the federal income tax consequences of such
qualification.
Subject to certain conditions described below, Mayer, Brown & Platt,
special tax counsel to the Company, will deliver its opinion to the Company
regarding the Company's ability to qualify as a REIT. See "Federal Income Tax
Consequences-- Taxation of the Company" and "Legal Matters." Such legal opinion
will be based on various assumptions and factual representations by the Company
regarding the Company's ability to meet the various requirements for
qualification as a REIT, and no assurance can be given that actual operating
results will enable the Company to meet these requirements. Mayer, Brown &
Platt has no obligation to advise of any subsequent change in the matters
stated, represented or assumed or of any subsequent change in applicable law.
Such legal opinion is not binding on the IRS or any court.
If the Company fails to qualify as a REIT in any taxable year, except as
to certain limited failures for which there may be statutory relief or
imposition of intermediate sanctions in the form of monetary penalties, the
Company will be subject to federal and state income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates and will not be allowed a deduction in computing its taxable income for
amounts distributed to its shareholders. This treatment would reduce the net
earnings of the Company available for investment or distribution to
shareholders because of the additional tax liability to the Company for the
years involved. In addition, unless entitled to relief under certain statutory
provisions, the Company also would be disqualified from treatment as a REIT for
the four taxable years following the year during which qualification is lost.
See "Federal Income Tax Consequences--Taxation of the Company--Failure to
Qualify." Although the Company currently intends to operate in a manner such
that it will qualify as a REIT, it is possible that future economic, market,
legal, tax or other considerations may cause the Company to fail to qualify as
a REIT or may cause the Board to revoke the Company's REIT election.
Adverse Effects of REIT Minimum Distribution Requirements. To obtain the
favorable tax treatment accorded to REITs under the Code, the Company generally
will be required each year to distribute to its shareholders at least 95% of
its REIT taxable income. The Company will be subject to income tax on any
undistributed REIT taxable income and net capital gain, and to a 4%
non-deductible excise tax on the amount, if any, by which certain distributions
paid by it with respect to any calendar year are less than the sum of (i) 85%
of its ordinary income for the calendar year, (ii) 95% of its capital gain net
income for such year, and (iii) 100% of its undistributed income from prior
years.
The Company intends, although there can be no assurance that it will be
able, to make distributions to its shareholders to comply with the distribution
provisions of the Code and to avoid having undistributed income resulting in
federal and state income taxes and the non-deductible 4% excise tax. The
Company's income will consist primarily of its share of the income of the
Operating Partnership, and the Company's cash flow will consist primarily of
its share of distributions from the Operating Partnership. Differences in
timing between the receipt of income and the payment of expenses in arriving at
taxable income (of the Company or the Operating Partnership) and the effect of
non-deductible capital expenditures, the creation of reserves or required debt
amortization payments could in the future require the Company or the Operating
Partnership to borrow funds on a short-term or long-term basis to meet the
distribution requirements that are necessary to continue to qualify as a REIT.
In such circumstances, the Company might need to borrow funds to avoid adverse
tax consequences even if management believes that the then prevailing market
conditions generally are not favorable for such borrowings or that such
borrowings are not advisable in the absence of such tax considerations.
Accordingly, the Company will be subject to real estate financing risks,
including adverse changes in the availability of such financing, increased
interest expense
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that may be incurred on variable rate debt in rising interest rate markets and
the risk that the Company's cash flow may not be sufficient to cover both
required debt service payments and distributions to shareholders at desired
levels.
Distributions by the Operating Partnership will be determined by the
Company, as general partner, and will be dependent on a number of factors,
including the amount of cash available for distribution, the Operating
Partnership's financial condition, any decision by the Company's Board to
reinvest funds rather than to distribute such funds, the Operating
Partnership's capital expenditure requirements, the annual distribution
requirements under the REIT provisions of the Code and such other factors as
the Board deems relevant. There can be no assurance that the Company will be
able to satisfy the annual distribution requirement so as to avoid corporate
income and excise taxation of the earnings that it distributes.
Consequences of Failure to Qualify as a Partnership. Subject to certain
conditions, Mayer, Brown & Platt will deliver an opinion to the Company stating
that, assuming that the Operating Partnership is being operated in accordance
with its organizational documents and satisfies certain conditions relating to
"publicly traded partnership" status under the Code, the Operating Partnership
will be treated as a partnership, and not as a corporation, for federal income
tax purposes. Such opinion is not binding on the IRS. If the IRS were to
challenge successfully the status of the Operating Partnership as a partnership
for federal income tax purposes, the Operating Partnership would be taxed as a
corporation. In such event, the Company would cease to qualify as a REIT for
federal income tax purposes. The imposition of a corporate tax on the Operating
Partnership, with a resulting loss of REIT status of the Company, would reduce
substantially the amount of cash available for distribution.
Consequences of Recharacterization of Initial Leases. Subject to certain
conditions described under "Federal Income Tax Consequences--Taxation of the
Company--Characterization of Rent," Mayer, Brown & Platt is of the opinion
that, subject to the receipt of certain documentation with respect to the
Advance Leases, each Initial Lease will be treated as a true lease for federal
income tax purposes. Such opinion is not binding on the IRS and is based upon
certain factors, assumptions and representations. If the IRS were to challenge
successfully the characterization of the Initial Leases as true leases, the
Operating Partnership would not be treated as the owner of the Property in
question for federal income tax purposes, would lose tax depreciation
deductions with respect to such Property, and could have non-qualified interest
income, which in turn could cause the Company to fail to qualify as a REIT.
Although the Company intends to structure any leasing transaction for
Properties acquired in the future such that the Lease will be characterized as
a "true lease" and the Operating Partnership will be treated as the owner of
the Property in question for federal income tax purposes, the Company will not
seek an advance ruling from the IRS and may not seek an opinion of counsel
(except with respect to the Initial Leases) that it will be treated as the
owner of any leased Properties for federal income tax purposes, and thus there
can be no assurance that future leases will be treated as true leases for
federal income tax purposes.
Other Tax Liabilities. Even if the Company qualifies as and maintains its
status as a REIT, it may be subject to certain federal income taxes if it has a
certain amount of non-qualified income. For example, if the Company has net
income from a "prohibited transaction," such income will be subject to a 100%
tax. See "Federal Income Tax Consequences-- Taxation of the Company." In
addition, the Company may be subject to state and local taxes on its income and
property.
The Ownership Limit May Reduce the Ability of Shareholders to Receive a Premium
Price
For the Company to maintain its qualification as a REIT under the Code,
not more than 50% in value of the outstanding Shares may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) at any time during the last half of the Company's taxable
year (other than the first taxable year for which the election to be treated as
a REIT has been made).
To ensure that the Company will not fail to qualify as a REIT under this
and other tests under the Code, the Company's Declaration of Trust, subject to
certain exceptions, authorizes the Board to take such actions as are necessary
and desirable to preserve its qualification as a REIT and to limit any person
to direct or indirect ownership, determined in accordance with the beneficial
ownership rules promulgated under Section 13(d) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), of no more than 9.8% in number or
value of the outstanding Shares (the "Ownership Limit"). While direct or
indirect ownership will be determined in accordance with the beneficial
ownership rules promulgated under Section 13(d) of the Exchange Act, beneficial
ownership for REIT qualification purposes also will be determined in accordance
with the constructive ownership rules of Sections 318 and 544 of the Code.
Under certain conditions, the Company's Board, upon receipt of a ruling from
the IRS, an opinion of counsel or other evidence satisfactory to the Board and
upon such other conditions as the Board may establish, may exempt a proposed
transferee from the Ownership Limit; provided that such exemption would not
result in the termination of the Company's status as a REIT. The Declaration of
Trust contains a waiver
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of the Ownership Limit with respect to the Underwriters to permit ownership of
the Common Shares provided such Common Shares are timely distributed and that
such ownership will not result in the Company being "closely held" under the
Code. The Company's Declaration of Trust and the Operating Partnership's
Partnership Agreement contain provisions that require the approval of a
majority of the Trustees of the Company not otherwise interested in the
transaction for waiver of the Ownership Limit with respect to any Trustee or
his Affiliates. See "Description of Shares of Beneficial Interest--Restrictions
on Transfer; Excess Shares." The foregoing restrictions on transferability and
ownership will continue to apply until the Board determines that it is no
longer in the best interests of the Company to continue to qualify as a REIT.
The Ownership Limit may have the effect of delaying, deferring or
preventing a transaction or a change in control of the Company that might
involve a premium price for the Common Shares or otherwise be in the best
interest of the shareholders. See "Description of Shares of Beneficial
Interest--Restrictions on Transfer; Excess Shares."
The Company must also satisfy certain gross income tests to maintain its
status as a REIT. See "Federal Income Tax Consequences--Taxation of
Company--Gross Income Tests." In general, for rents to qualify as qualifying
income for purposes of such gross income tests, among other things, the Company
must not own, directly or constructively, 10% or more of any Initial Lessee or
any other Lessee of the Properties. See "Federal Income Tax
Consequences--Taxation of the Company--Gross Income Tests--Rents from Real
Property." If the Company were to own, actually or constructively, 10% or more
of an Initial Lessee or other Lessee, the Lessee would be a "related party
tenant" of the Company. Rents received from "related party tenants" do not
constitute qualifying income for purposes of the gross income tests. In
addition, the Company's Declaration of Trust prohibits transfers of Shares that
would violate the "Related Tenant Limit." See "Description of Shares of
Beneficial Interest--Restrictions on Transfer; Excess Shares." To reduce the
risk that any Lessee will be treated as a related party tenant, (i) each Sonic
Lease places restrictions on the number of Shares such Lessee may own, directly
or constructively and (ii) with respect to the Advance Leases, the Company will
obtain certain documentation from Advance Auto, which will provide for similar
restrictions.
Certain Tax and Anti-takeover Provisions May Inhibit a Change in Control of the
Company
Certain provisions contained in the Declaration of Trust and Bylaws and
the Maryland General Corporation Law (the "MGCL"), as applicable to Maryland
REITs, and the lockout provisions described above, may have the effect of
discouraging a third party from making an acquisition proposal for the Company
and may thereby delay, deter or prevent a change in control of the Company or
the removal of existing management and, as a result, could prevent shareholders
from being paid a premium for their Common Shares over then-prevailing market
prices. See "Description of Shares of Beneficial Interest--Restrictions on
Transfer; Excess Shares" and "Certain Provisions of Maryland Law and of the
Company's Declaration of Trust and Bylaws." These provisions are described
below:
Ownership Limit. The Ownership Limit provides that no person or entity may
own, or be deemed to own, as determined in accordance with the beneficial
ownership rules promulgated under Section 13(d) of the Exchange Act, more than
9.8% in number or value of the Shares of the Company unless waived by the
Board. While direct or indirect ownership will be determined in accordance with
the beneficial ownership rules promulgated under Section 13(d) of the Exchange
Act, beneficial ownership for REIT qualification purposes also will be
determined in accordance with the constructive ownership rules of Sections 318
and 544 of the Code. See "--The Ownership Limit and Restrictions on Transfer."
The foregoing ownership limitations may have the effect of precluding
acquisition of control of the Company without the consent of the Board and,
consequently, shareholders may be unable to realize a premium for their Shares
over the then-prevailing market price (a premium is customarily associated with
such acquisitions). See "Description of Shares of Beneficial
Interest--Restrictions on Transfer; Excess Shares."
Removal of Trustees; Vacancies. The Company's Declaration of Trust
provides that a Trustee may only be removed upon the affirmative vote of
two-thirds of all of the votes entitled to be cast by the shareholders in the
election of Trustees. Vacancies may be filled by the Board or at a special or
annual meeting of the shareholders. This requirement makes it more difficult to
change the management of the Company by removing and replacing Trustees.
Classified Board. The Board has been divided into three classes of
trustees. The terms of the classes will expire in 1999, 2000 and 2001,
respectively. As the term of a class expires, Trustees for that class will be
elected for a three-year term and the Trustees in the other classes will
continue in office. As a result, the classified Board could have the effect of
discouraging a takeover or other transaction in which holders of some or a
majority of the Common Shares might receive a premium over the then-prevailing
market price of such Common Shares. See "Certain Provisions of Maryland Law and
of the Declaration of Trust and Bylaws--Classification of the Board."
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Preferred Shares. The Declaration of Trust authorizes the Board to
classify or reclassify any unissued Shares from time to time by setting or
changing the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or distributions, qualifications or
terms or conditions of redemption, without the approval of shareholders. See
"Description of Shares of Beneficial Interest--Classification or
Reclassification of Preferred Shares." Thus, the Board could authorize the
issuance of preferred shares ("Preferred Shares") with terms and conditions
that could have the effect of discouraging a takeover or other transaction in
which holders of some or a majority of the Common Shares might receive a
premium for their Common Shares over the then-prevailing market price of such
Common Shares. See "Description of Shares of Beneficial
Interest--Classification or Reclassification of Preferred Shares."
Number of Authorized Shares. The Declaration of Trust authorizes the Board
to amend the Declaration of Trust, without the approval of shareholders, to
increase or decrease the aggregate number of Shares that the Trust has the
authority to issue. As a result, this ability to increase the number of
authorized Shares could have the effect of discouraging a takeover or other
transaction in which holders of some or a majority of the Common Shares might
receive a premium over the then-prevailing market price of such Common Shares.
See "Description of Shares of Beneficial Interest--General."
Advance Notice Provisions. For nominations of persons for election to the
Board or other business to be properly brought before an annual meeting of
shareholders, the Bylaws require a shareholder proposing such action to deliver
a notice to the secretary, absent specified circumstances, not less than 60
days nor more than 90 days prior to the first anniversary of the preceding
year's annual meeting setting forth: (i) as to each person whom the shareholder
proposes to nominate for election or reelection as a Trustee, all information
relating to such person that is required to be disclosed in solicitations of
proxies for the election of Trustees pursuant to Regulation 14A of the Exchange
Act; (ii) as to any other business that the shareholder proposes to bring
before the meeting, a brief description of the business proposed to be brought
before the meeting, the reasons for conducting such business at the meeting and
any material interest in such business of such shareholder and of the
beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to
the shareholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made, (x) the name and address of such
shareholder as it appears on the Company's books and of such beneficial owner
and (y) the number of Shares that are owned beneficially and of record by such
shareholder and such beneficial owner, if any. As a result, the advance notice
provisions could have the effect of discouraging a takeover or other
transaction in which holders of some or a majority of the Common Shares might
receive a premium over the then-prevailing market price of such Common Shares.
Maryland Business Combination Statute. Under the MGCL, as applicable to
Maryland REITs, certain "Business Combinations" (including certain issuances of
equity securities) between a Maryland REIT, such as the Company, and any person
who owns 10% or more of the voting power of the Company's Common Shares or an
affiliate or associate of the Company which, 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 Common Shares of the Company (an "Interested
Shareholder"), or an affiliate of the Interested Shareholder, are prohibited
for five years after the most recent date on which the Interested Shareholder
became an Interested Shareholder. Thereafter, any such "Business Combination"
must be approved by a super-majority shareholder vote unless, among other
things, the holders of Shares receive a minimum price (as defined in the MGCL)
for their Shares and the consideration is received in cash or in the same form
as previously paid by the Interested Shareholder for its Shares. As permitted
by the MGCL, the Declaration of Trust exempts any "Business Combinations"
involving the Company and Mr. Smith or any of his Affiliates. In addition, the
Board has adopted a resolution exempting Mr. Smith and any of his affiliates
from the application of the Business Combination Statute. Accordingly, the
five-year prohibition and the super-majority vote requirement will not apply to
any "Business Combinations" between Mr. Smith and his affiliates and the
Company. As a result, Mr. Smith and his affiliates may be able to enter into
"Business Combinations" with the Company, which may or may not be in the best
interests of the shareholders, without the super-majority shareholder approval.
See "Certain Provisions of Maryland Law and of the Company's Declaration of
Trust and Bylaws--Business Combinations."
Voting Rights of Class B Common Shares Held by Mr. Smith May Enable Mr. Smith
to Influence Control of the Company
Immediately following the Offering, Mr. Smith will own all of the
Company's outstanding Class B Shares. Such Shares will represent 6.6% of the
voting power of all outstanding Shares at that time.Through ownership of Class
B Common Shares, Mr. Smith will have a significant portion of shareholder
control over the Company. See " -- Certain Tax and Anti-Takeover Provisions May
Inhibit a Change in Control of the Company."
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Company Policies May Be Changed Without Shareholder Approval
The major policies of the Company, including its policies with respect to
investments, financing, growth, debt capitalization, REIT qualification and
distributions, are determined by the Board. Although it has no present
intention to do so, the Board may amend or revise these and other policies from
time to time without a vote of the shareholders. Accordingly, shareholders will
have limited control over changes in policies of the Company.
An Active Trading Market for Common Shares May Not Develop
Prior to this Offering, there has been no public market for the Common
Shares. Although the Company intends to apply for listing of the Common Shares
on the NYSE, there can be no assurance that an active trading market will
develop, that the Common Shares will be so listed or that the Common Shares
will not trade below the Offering Price. The initial public offering price will
be determined through negotiations between the Company and the Underwriters and
may not be indicative of the market price of the Common Shares after the
Offering. See "Underwriting."
An Increase in Market Interest Rates May Cause Share Prices to Decline
One of the factors that may influence the price of the Common Shares in
public markets will be the annual yield on the price paid for Common Shares
from distributions by the Company. Thus, an increase in market interest rates
may lead purchasers of Common Shares to demand a higher annual yield, which
could reduce the market price of the Common Shares.
Common Shares Eligible for Future Sale May Cause Share Prices to Decline
No prediction can be made as to the effect, if any, of future sales of
Common Shares, or the availability of Common Shares for future sales, on the
market price of the Common Shares. Sales of substantial amounts of Common
Shares (including up to approximately 2,554,558 Common Shares issuable upon the
exchange of Units issued in the Formation Transactions and up to 465,000 Common
Shares issuable upon exercise of options under the Plan), or the perception
that such sales could occur, may adversely affect prevailing market prices for
the Common Shares. Such Common Shares and Units issued in the Formation
Transactions will be deemed to be "restricted securities" within the meaning of
Rule 144 under the Securities Act and may not be transferred unless such Common
Shares or Units have been registered under the Securities Act or an exemption
from registration is available, including any exemption from registration
provided under Rule 144. In general, upon satisfaction of certain conditions,
Rule 144 permits the sale of certain amounts of restricted securities one year
following the date of acquisition of the restricted securities from the Company
and, after two years, permits unlimited sales by persons unaffiliated with the
Company.
Upon the completion of the Offering and the consummation of the Formation
Transactions, the Company will have 10,007,020 Shares outstanding (11,507,020
Shares if the Underwriters' over-allotment option is exercised in full), of
which 10,000,000 Common Shares (11,500,000 Common Shares if the Underwriters'
over-allotment option is exercised in full) will be freely tradeable in the
public market by persons other than "affiliates" of the Company without
restriction or registration under the Securities Act of 1933, as amended (the
"Securities Act"). The Company's officers and Trustees have agreed not to
offer, sell, offer to sell, contract to sell, grant any option to purchase or
otherwise sell or dispose of (or announce any offer, sale, offer of sale,
contract of sale, grant of any option to purchase or other sale or disposition
of) any Common Shares or other capital shares of the Company, or any securities
convertible or exercisable or exchangeable for any Units or Common Shares or
other shares of beneficial interest of the Company (other than pursuant to the
Plan and the Formula Plan, including the exercise of options granted
thereunder), for a period of two years from the date of this Prospectus without
the prior written consent of the Underwriters, subject to certain limited
exceptions. The Underwriters, at any time and without notice, may consent to
the sale or disposition of all or any portion of the Common Shares or Units
subject to the foregoing lock-up agreements.
If the Company exercises its option to deliver Common Shares upon the
redemption of Units, the Partnership Agreement provides that the Company will
deliver registered Common Shares to the holder. See "Common Shares Eligible for
Future Shares."
The Company may issue from time to time additional Common Shares or Units
in connection with the acquisition of Properties. See "Business of the Company
and Its Properties--Business Strategies and Objectives." The Company
anticipates that it will file a registration statement with respect to the
Common Shares issuable upon exercise of options under the Plan and the Formula
Plan following or concurrent with the completion of this Offering. Such
registration statement generally will allow Common Shares covered thereby to be
transferred or resold with fewer or no restrictions under the Securities Act.
See "Common Shares Eligible for Future Sale."
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<PAGE>
Purchasers of Shares in the Offering Will Experience Dilution
Purchasers of Common Shares in the Offering will experience immediate
dilution in the amount of $1.81 per share in net tangible book value per share
from the Offering Price. See "Dilution."
24
<PAGE>
USE OF PROCEEDS
The proceeds to the Company from the sale of the Common Shares offered
hereby, net of the estimated underwriting discounts and expenses of the
Offering, are expected to be approximately $139.6 million ($160.7 million if
the Underwriters' over-allotment option is exercised in full), assuming an
Offering Price per share of $15.00. The Company intends to apply the net
proceeds of the Offering as follows:
<TABLE>
<CAPTION>
Proceeds from
the Offering
---------------
(in Thousands)
<S> <C>
Cash consideration for Initial Properties ..................... $ 600
Payment of mortgage debt and other unsecured debt (1) ......... 109,512
Future acquisitions and working capital ....................... 29,513
--------
Total ......................................................... $139,625
========
</TABLE>
- ---------
(1) The mortgage debt and other unsecured debt being repaid with proceeds from
the Offering accrued interest at the weighted average rate of
approximately 8.2% per annum at December 1, 1998.
The balance of the purchase price for the Initial Properties will be paid
with the assumption of approximately $3.3 million of mortgage debt, and the
issuance of 870,387 Class A Units and 982,634 Class C Units. Assuming the Class
A Units are valued at the Offering Price and the Class C Units are valued
approximately at $13.0 million, the aggregate purchase price for the Initial
Properties, including closing costs, is approximately $139.4 million. If the
Underwriters' over-allotment option is exercised, the Company intends to use
the additional net proceeds for the acquisition of additional Properties and
for working capital.
Pending the uses described above, the net proceeds will be invested in
interest-bearing accounts and short-term, interest-bearing securities, that are
consistent with the Company's intention to qualify for taxation as a REIT. Such
investments may include, for example, government and government agency
securities, certificates of deposit and interest bearing bank deposits.
CAPITALIZATION
The following table sets forth the capitalization of the Company on a
historical basis and on a pro forma basis as of August 31, 1998 assuming
consummation of the Formation Transactions. The information set forth in the
following table should be read in conjunction with the Company's Audited
Balance Sheet and Notes thereto, and Unaudited Pro Forma Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus and the
discussion under "Management's Discussion and Analysis of Financial Condition
and Results of Operation."
<TABLE>
<CAPTION>
August 31, 1998
-------------------------
Historical Pro Forma
------------ ------------
(In Thousands)
<S> <C> <C>
DEBT:
Mortgages payable ...................................................................... $ -- $ 3,259
MINORITY INTEREST (1) ................................................................... -- 33,629
SHAREHOLDERS' EQUITY:
Common Shares, $1.00 par value; 100,000,000 authorized; 1,000,000 issued and outstanding
historical; 10,006,557 issued and outstanding pro forma (2) ........................... 1,000 10,007
Class B Common Shares, $1.00 par value; 5,000,000 authorized; 0 issued and outstanding
historical; 463 issued and outstanding pro forma (2) .................................. -- --
Additional paid-in capital ............................................................. -- 122,032
Less: subscription receivable .......................................................... (1,000) (10)
Total shareholders' equity ............................................................ -- 132,029
-------- --------
Total capitalization ................................................................ $ -- $168,917
======== ========
</TABLE>
- ---------
(1) Minority interest represents pro forma book value at August 31, 1998
attributable to the Units to be issued in the Formation Transactions.
(2) Excludes Shares reserved for issuance upon redemption of the Units to be
issued in the Formation Transactions, 1,100,000 Common Shares reserved for
issuance pursuant to the Company's Plan, of which options to acquire
465,000 Common
25
<PAGE>
Shares will be granted upon completion of the Offering, and 200,000 Common
Shares reserved for issuance pursuant to the Company's Formula Plan. See
"The Formation Transactions" and "Management--1999 Shares Option Plan."
DILUTION
At August 31, 1998, the Company had no net tangible book value. After
giving effect to the Formation Transactions, the pro forma net tangible book
value of the Company at August 31, 1998 would have been $132.0 million or
$13.19 per Share. This represents an immediate decrease in the net tangible
book value per Share from the Offering Price to purchasers of Common Shares in
the Offering. Net tangible book value per Share represents the amount of total
tangible assets of the Company less total liabilities and minority interest,
divided by the number of Shares outstanding. The following table illustrates
the foregoing dilution:
<TABLE>
<S> <C> <C>
Offering Price per share(1) ........................................................... $ 15.00
Pro forma net tangible book value per share prior to the Offering attributable to
Shares issued to Messrs. Smith and Bracy ............................................ $ 1.42
Increase in net tangible book value per share attributable to Common Shares issued in
the Offering ........................................................................ 11.77
-------
Pro forma net tangible book value per share after the Offering ........................ 13.19
Dilution per share purchased in the Offering .......................................... 1.81
</TABLE>
- ---------
(1) Before deduction of underwriting discounts and commissions and estimated
expenses of the Offering.
The following table summarizes, as of August 31, 1998, the difference
between contributions to be made to the Company by purchasers of Common Shares
in the Offering (before deducting expenses of the Offering) and the Shares and
Units to be issued by the Company and the Operating Partnership, respectively,
in the Formation Transactions:
<TABLE>
<CAPTION>
Shares issued
by the Company and
Units
issued by the Total Contributions to the
Operating Partnership Company
Average
Price per
Number Percent Amount Percent Share/Unit
------------ --------- --------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Common Shares sold by the Company in the
Offering ....................................... 10,000,000 79.6% $150,000,000 84.7% $ 15.00(1)
Units issued in the Formation Transactions:
Class A ........................................ 870,387 6.9% 13,055,805 7.4% $ 15.00(2)
Class B ........................................ 701,537 5.6% 999,340 *% $ 1.42
Class C ........................................ 982,634 7.8% 12,976,912 7.3% $ 13.21(2)
Shares issued to Messrs. Smith and Bracy in the
Formation Transactions ......................... 7,020 *% 10,000 *% $ 1.42
---------- ----- ------------ -----
Total ........................................... 12,561,578 100% $177,042,057 100%
========== ==== ============ ====
</TABLE>
- ---------
* Less than 1%.
(1) Based on the Offering Price before deducting underwriting discount and
estimated expenses of the Offering.
(2) Based on the value of assets to be contributed to the Operating Partnership
in the Formation Transactions.
SELECTED FINANCIAL INFORMATION
The following table sets forth selected historical and pro forma financial
information for the Company. The unaudited pro forma operating information is
presented as if the Formation Transactions had occurred as of the beginning of
the periods indicated and therefore incorporates certain assumptions that are
included in the Company's Unaudited Pro Forma Consolidated Financial
Statements. The unaudited pro forma balance sheet information is presented as
if the Formation Transactions had occurred on August 31, 1998. The unaudited
pro forma financial information does not purport to represent what the
Company's financial position or results of operations actually would have been
had the Formation Transactions, in fact, occurred on such date or at the
beginning of the periods indicated, or to project the Company's financial
position or results
26
<PAGE>
of operations at any future date or for any future period. The historical and
unaudited pro forma financial information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Mar Mar Realty Trust
Selected Historical and Pro Forma Consolidated Financial Information
(in thousands, except per share and footnote data)
<TABLE>
<CAPTION>
Pro Forma
--------------------------------
Year ended Eight Months
December 31, ended August 31,
1997 1998
-------------- -----------------
<S> <C> <C>
Operating Data:
Lease revenue (1) ............................................... $ 14,978 $ 9,986
Depreciation (2) ................................................ 3,546 2,364
General and administrative expense (3) .......................... 2,000 1,333
Interest expense (4) ............................................ 280 187
Minority interest (5) ........................................... 1,352 901
Net income ...................................................... 7,800 5,201
Earnings per share -- basic and diluted ......................... $ .99 $ .66
Weighted average Shares outstanding -- basic and diluted (6) .... 7,893 7,893
</TABLE>
<TABLE>
<CAPTION>
Historical
---------------------------------- Pro Forma
April 14, 1998 August 31, August 31,
(Date of formation) 1998 1998
--------------------- ------------ -----------
<S> <C> <C> <C>
Balance Sheet Data:
Cash ............................... $ -- $ -- $ 29,513
Property ........................... -- -- 139,404
Total assets ....................... -- 840 168,917
Mortgages payable .................. -- -- 3,259
Total liabilities .................. -- 840 3,259
Minority interest .................. -- -- 33,629
Total shareholders' equity ......... -- -- 132,029
</TABLE>
- ---------
(1) Represents rental income, computed on a straight-line basis, from the
Initial Lessees based on the terms of the Initial Leases as if all Initial
Properties had been subject to the Initial Leases for the entire period.
The Company and the applicable Sonic Lessees have entered into a new
lease, effective January 1, 2000, which provides that the annual lease
payments on the Town & Country Ford and Lone Star Ford properties will
each be increased to $1,140,000 as compared to their current levels of
$409,200 and $360,000, respectively.
(2) Represents depreciation of the building and improvements as allocated from
the purchase prices of the Initial Properties over an assumed estimated
useful life of 20 years.
(3) Represents management's estimates of general and administrative expenses.
(4) Represents interest on mortgage debt.
(5) Represents approximately 14.8% of the Operating Partnership's pro forma net
income. The minority interest in pro forma net income reflects the
requirements under GAAP that pro forma lease revenue be computed on a
straight-line basis and a portion of such revenue be allocated to holders
of Class C Units along with Class A and Class B Units. The initial
minority interest of Class A and B Units alone in contractual rents is
13.6%, reflecting that the holders of Class C Units will have no voting,
allocation or distribution rights until the effectiveness of the new
Leases described in (1) above.
(6) Represents the number of Common Shares issued to Mr. Bracy and the Class B
Common Shares issued to Mr. Smith in connection with the organization of
the Company and the number of Common Shares issued in the Offering, the
proceeds from the sale of which will be used to acquire the Initial
Properties. If the total number of Common Shares issued in the Offering
had been used, pro forma weighted average Shares outstanding would be
10,007,020 for both the year ended December 31, 1997 and the eight months
ended August 31, 1998, resulting in pro forma earnings per share of $0.78
for the year ended December 31, 1997 and $0.52 for the eight months ended
August 31, 1998. The potential redemption of Units and the potential
exercise of options granted under the Plan are not dilutive to pro forma
earnings per share.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company was organized as a Maryland REIT on April 14, 1998, and
intends to make an election to qualify under the Code as a REIT commencing with
its taxable year ending December 31, 1999. Substantially all of the Company's
initial revenues are expected to be derived from rents received under long-term
triple-net and modified triple-net leases of the Initial Dealership Properties,
the Advance Properties and the Collision Repair Property. The Leases generally
provide for fixed Base Rent with either periodic rent increases based on
changes in the Consumer Price Index ("CPI") or for fair market adjustments to
rent upon lease renewal. Although the Company is entitled to receive percentage
rent based on sales at the stores located on the Advance Properties, it does
not anticipate that it will receive significant percentage rent payments for
the foreseeable future.
The Company will incur operating and administrative expenses including,
principally, compensation expense for its executive officers and other
employees, office rental and related occupancy costs and various expenses
incurred in the process of acquiring additional Properties. The Company will be
self-administered and managed by its executive officers and staff, and will not
engage a separate advisor or pay an advisory fee for administrative or
investment services, although the Company will engage legal, accounting, tax
and financial advisors from time to time.
The primary non-cash expense of the Company will be the depreciation of
its Properties. The Company does not expect to own or lease a material amount
of personal property, furniture or equipment at any Property.
The Company expects to employ moderate leverage to fund additional
investments and will incur long and short-term indebtedness, and related
interest expense, from time to time.
The Company expects to make distributions to its shareholders in amounts
not less than the amounts required to maintain REIT status under the Code and,
in general, in amounts equal to or exceeding taxable income. The Company's
ability to make distributions will depend upon its cash available for
distribution.
Results of Operations
The Company has had no operations prior to April 14, 1998 (date of
formation), or through the date of this Prospectus. The Company's future
results of operations will depend upon the acquisition of the Initial
Properties and other Properties and the terms of any subsequent investments the
Company may make.
Pro Forma Results of Operations
The Company estimates that after giving effect to the Offering and the
acquisition of the Initial Properties, lease revenue would have been $15.0
million for the year ended December 31, 1997, and $10.0 million for the eight
months ended August 31, 1998. Net income would have been $7.8 million or $0.99
per share for the year ended December 31, 1997, and $5.2 million or $.66 per
share for the eight months ended August 31, 1998. General and administrative
expenses would have been $2.0 million for the year ended December 31, 1997, and
$1.3 million for the eight months ended August 31, 1998, including salaries and
benefits, professional services, travel and office expenses. Interest expense
would have been $280,000 for the year ended December 31, 1997, and $187,000 for
the eight months ended August 31, 1998 based upon total debt of $3.3 million at
an average interest rate of approximately 8.6%. Depreciation would have been
$3.5 million for the year ended December 31, 1997, and $2.4 million for the
eight months ended August 31, 1998 based upon purchase price allocations to
buildings of 45% for the Initial Dealership Properties and 70% for the Advance
Properties and the Collision Repair Property, and assumed estimated useful
lives of 20 years. Pro forma lease revenue is recorded on a straight-line basis
based on the terms of the Leases as if all Initial Properties had been leased
for the entire period. See "Selected Historical and Pro Forma Consolidated
Financial Information."
Liquidity and Capital Resources
Following the completion of the Offering, the Company anticipates that its
initial working capital and cash from operations, together with a credit
facility currently being negotiated by the Company with several potential
lenders, will provide adequate liquidity to conduct its operations, fund
administrative and operating costs, interest payments and acquisitions and to
allow distributions to the Company's shareholders in accordance with the Code's
requirements for qualification as a REIT and to avoid any corporate level
federal income or excise tax. The Company currently has no credit facility
available to it after the closing of the Offering and no assurance can be given
that a lending or credit arrangement will be consummated
28
<PAGE>
before the completion of the Offering. The Company's failure to obtain such a
credit arrangement may cause the Company to curtail its acquisition of
additional Properties.
In order to qualify as a REIT for federal income tax purposes, the Company
will be required to make substantial distributions to its shareholders.
Although the Company will receive most of its rental payments on a monthly
basis, it intends to make distributions quarterly. Amounts accumulated for
distributions will be invested by the Company in short-term investments.
Under the terms of the Leases relating to the Initial Dealership
Properties and the Collision Repair Property, the Lessees are responsible for
substantially all expenses associated with the operation of the Properties,
such as taxes and other governmental charges, insurance, utilities, service,
maintenance and any ground lease payments. Under the Advance Leases, the
Company is responsible for maintaining structural walls and foundations, roofs,
parking lots, sidewalks and 50% of the repair costs in excess of $500 for any
major heating or cooling system breakdown at the Advance Properties. As part of
the acquisition, Primax has guaranteed all maintenance costs incurred at the
Advance Properties for one year. The Company does not believe that it will be
responsible for significant expenses in connection with the Initial Properties
during the terms of the respective Initial Leases. The Company anticipates
entering into triple net leases with respect to additional Properties. After
the expiration of the Leases, or in the event a Lessee is unable to meet its
maintenance obligations, the Company anticipates that any expenditures it might
become responsible for in maintaining the Properties will be funded by cash
from operations and, in the case of major expenditures, possibly by borrowings.
To the extent that unanticipated expenditures or significant borrowings are
required, the Company's cash available for distribution and liquidity may be
adversely affected.
Due to the nature of single tenant triple-net leases, information on the
historical results of operations of the individual Initial Properties is not
considered to be meaningful. Instead, financial information of significant
Lessees is provided with the accompanying historical and pro forma financial
statements.
Before the consummation of the Offering, the Company intends to obtain a
line of credit. The Company is currently negotiating with several credit
sources for the terms of this credit arrangement. This credit facility will be
used principally for Property acquisitions and to a lesser extent for working
capital.
Assuming the Class A Units are valued at the Offering Price and the Class
C Units are valued at approximately $13.0 million, the aggregate purchase price
for the Initial Properties, including closing costs, is approximately $139.4
million. The purchase prices of such properties were determined by the fair
values of the properties acquired. The Company has no other commitments with
respect to capital expenditures. The Company may raise additional long-term
capital by issuing, in public or private transactions, equity or debt
securities, but the availability and terms of any such issuance will depend upon
market and other conditions. The Company anticipates that as a result of its
initially low debt to total market capitalization ratio and its intention to
maintain a debt to total market capitalization ratio of not more than 50%, it
will be able to obtain financing for its long-term capital needs. There can be
no assurance, however, that such additional financing or capital will be
available on terms acceptable to the Company.
The Company will acquire additional Properties subject to the Company's
investment objectives and policies described elsewhere in this Prospectus. The
Company's liquidity requirements with respect to future acquisitions may be
reduced to the extent the Company or the Operating Partnership uses Common
Shares or Units, respectively, as consideration for such purchases.
Inflation
All of the Initial Leases will be triple-net or modified triple-net
leases, which require the Lessees to pay all or a substantial majority of the
expenses associated with the operation of the Initial Properties, thereby
minimizing the Company's exposure to increases in costs and operating expenses
resulting from inflation. Any line of credit obtained by the Company in the
future may provide for a variable interest rate, inflation could have a
material adverse effect on the Company's net income if interest rates increase
substantially during any year such line of credit is outstanding.
Year 2000 Compliance
The Company is in the process of assessing its Year 2000 exposures and
determining the consequences that any Year 2000 problems might have on the
Company's business, results of operations or financial condition, or cause the
Company to incur potential liability to third parties if its systems are not
Year 2000 compliant. As part of its assessment, the Company will canvass its
future tenants and review the Year 2000 disclosures of certain publicly-traded
entities that provide the Company with computer and financial services,
including computer equipment and software, to determine whether Year 2000
issues will have a material effect on the Company or such third parties. Once
its assessment is complete, the Company will
29
<PAGE>
develop a contingency plan in the event its expectations regarding the Year
2000 problem are incorrect. Because of the uncertainty surrounding the Year
2000 problem, however, the Company can give no assurances that its assessment
or its contingency plan will avoid all potential, material effects of the Year
2000 problem.
The Company does not anticipate that any incremental expenditures it may
incur as a result of Year 2000 issues will be material. The Company uses
certain accounting, word processing and time management software as part of its
day-to-day operations. Because of the nature of its business, however, the
Company's operations do not depend on the use of computer equipment. Although a
shutdown of all of its computer systems could cause minor inconveniences and
minor delays in payments made by and to the Company, the Company does not
expect such interruption to materially interfere with its operations or cause
it to incur any potential liability to third parties if its systems are not
Year 2000 compliant. In a worse case scenario, Year 2000 problems affecting the
Company, the Company's bank accounts or the business operations of the
Company's Lessees' could materially, adversely affect the Company's ability to
process rent payments, meet obligations to third parties or make distributions
to shareholders.
Nevertheless, in the event that Year 2000 problems have a material effect
on the Company, its tenants or service providers, the Company expects to have
sufficient cash reserves available to meet its payroll and various other
obligations pending resolution of any significant Year 2000 issues.
30
<PAGE>
BUSINESS OF THE COMPANY AND ITS PROPERTIES
Overview
The Company is a self-administered and self-managed REIT that was
organized in April 1998 to capitalize on consolidation opportunities in the
ownership of real estate used by automobile dealerships, automotive parts and
service retailers and other businesses related to the automobile industry. The
Company's principal business strategy is to maximize cash available for
distribution by acquiring Dealership Properties and, to a lesser extent,
Related Business Properties located throughout North America. The Company
believes that the automotive dealer industry and the automotive retail
aftermarket industry, are undergoing significant consolidation due to
increasing capital needs and the pursuit of economies of scale, which will
create attractive real estate acquisition opportunities for well-capitalized
and experienced real estate investors such as the Company.
The Company believes that its ability to identify and acquire Properties
will be enhanced by its strategic alliance with Sonic Automotive, one of the
fastest growing automobile dealership consolidators in the United States, and
the extensive real estate and automotive industry experience of the Company's
senior management and its Board. Mr. Smith, the Company's Board Chairman, who
is also the chairman, chief executive officer and controlling stockholder of
Sonic Automotive and of Speedway Motorsports, a NYSE-listed owner of motor
speedways and promoter, marketer and sponsor of motorsports activities.
The Company's initial portfolio will be comprised of 30 Initial Dealership
Properties, 36 Advance Properties and one Collision Repair Property located in
11 states. The Initial Dealership Properties and the Collision Repair Property
are currently owned, or under contract to be acquired, by MMR Holdings, which
will become a wholly-owned subsidiary of the Operating Partnership upon
consummation of the Offering. As of December 15, 1998, MMR Holdings had
completed the acquisition of 17 Initial Dealership Properties and the Collision
Repair Property.
Twenty-eight of the Initial Dealership Properties are or will be leased
to, and are currently operated by, the Sonic Lessees. The dealerships located
on the Initial Dealership Properties sell 22 different brands of new
automobiles, including Acura, BMW, Chevrolet, Chrysler, Dodge, Ford, Honda,
Hyundai, Infiniti, Isuzu, Jeep, KIA, Lincoln, Mercedes, Mercury, Oldsmobile,
Plymouth, Saturn, Subaru, Toyota, Volkswagen and Volvo. Sonic Automotive, whose
stock is traded on the NYSE under the symbol "SAH," is the eighth largest
automobile dealership group in the United States based on 1997 revenues and
currently owns 44 dealerships and 15 collision repair centers. Since the
beginning of 1997, Sonic Automotive has been one of the leading consolidators
in the automobile industry, having purchased 33 dealerships in that time. After
giving pro forma effect to such acquisitions, Sonic Automotive's 1997 revenues
were $1.8 billion, 1997 operating income was $54.1 million and 1997 retail unit
sales were 48,079 new and 34,278 used vehicles. As of September 30, 1998, Sonic
Automotive reported shareholders' equity of $131.7 million and total long-term
debt of $131.2 million.
All of the Advance Properties are being acquired from Primax, an
unaffiliated third party, which is a primary consultant to Advance Auto in
connection with the selection, financing and construction of new stores
throughout the United States and owns additional properties leased to Advance
Auto. Primax also has similar relationships with operators of chain restaurant
properties, national and regional supermarket and drug store chains, muffler
and brake repair chain stores and preschool and elementary educational
facilities. Primax has advised the Company that Advance Auto constitutes
approximately 25% of its total business operations. The Company believes that
Primax will provide the Company with opportunities to acquire additional
Properties used by Advance, although the Company has no formal agreement with
Primax with respect to future acquisitions.
The Company believes that its relationship with Sonic Automotive will
provide it with unique competitive advantages in acquiring Dealership
Properties by providing the Company the opportunity to acquire Dealership
Properties on which dealerships acquired by Sonic Automotive are operated. The
Company has entered into the Strategic Alliance Agreement with Sonic Automotive
the primary provisions of which are as follows: (i) Sonic Automotive will refer
to the Company real estate acquisition opportunities that arise in connection
with Sonic Automotive's dealership acquisitions, and (ii) the Company will
refer to Sonic Automotive dealership acquisition opportunities that arise in
connection with Property acquisitions (providing sellers the option to sell
both the real estate and the operations associated with their dealerships), for
which neither party will receive separate compensation for their respective
referrals. The Company has also agreed to provide services within its areas of
expertise to Sonic Automotive, such as (i) identifying sites for additional
dealership locations, replacement locations and body shop locations, (ii)
obtaining zoning changes that may be necessary for the appropriate use of the
property, (iii) identifying, designing and constructing facilities on the
property, (iv) advising Sonic Automotive with respect to maintenance items
relating to properties Sonic Automotive is leasing from the Company, and (v)
arranging property inspections and environmental reports. As consideration,
Sonic Automotive will offer the Company and its lessees an
31
<PAGE>
opportunity to jointly purchase certain services from non-affiliated third
parties to allow the Company and its lessees to benefit from any volume
discounts or other similar savings such third party may offer due to the
aggregate amount or quantity of services purchased by Sonic, Speedway
Motorsports, the Company and the Company's lessees. Such services will include
insurance, office equipment and supplies, telecommunications services and
certain other business operations and related products and services. Neither
the Company nor its lessees will be required to compensate Sonic Automotive for
the opportunity to jointly purchase such services. The Strategic Alliance
Agreement will expire on July 8, 2001, but will automatically renew for
successive one year terms. The Strategic Alliance Agreement may be terminated
upon 60 days notice prior to the expiration of the then existing term.
All of the Company's Advance Properties will be leased to Advance Auto, an
unaffiliated third party. Advance Auto is the second largest specialty retailer
of automotive parts and accessories in the United States based on number of
stores. On November 2, 1998, Advance Auto acquired all 652 Parts America and
Western Auto stores from Sears. As a result of this transaction, Advance Auto
operates over 1,500 stores in 37 states, Puerto Rico and the U.S. Virgin
Islands. Sears currently owns approximately 40.6% of Advance Auto's parent
holding company. For fiscal 1997, Advance Auto's net sales, net income and
EBITDA were $848.1 million, $20.4 million and $65.4 million, respectively. Pro
forma for the acquisition of the Parts America and Western Auto stores, Advance
Auto, as of July 18, 1998, reported shareholders' equity of $222.4 million and
long-term debt of $425.0 million.
The Company will seek to maximize cash available for distribution to
shareholders by investing in a diverse portfolio of Dealership and Related
Business Properties, including Properties used by new and used motor vehicle
dealerships, automobile parts retailers, automobile repair services, automobile
rental outlets, fuel service stations and automobile auction businesses, among
others. While substantially all of the Initial Properties will be leased to
either Sonic Automotive's affiliates or Advance Auto, the Company intends to
pursue acquisition opportunities from a diverse group of sellers.
The Initial Dealership Properties and the Collision Repair Property will
be leased to the Sonic Lessees pursuant to "triple-net" Leases, which require
the Initial Lessees to pay all costs of operating the Initial Dealership
Properties, as well as all taxes, utilities, insurance, repairs and maintenance
and other property-related expenses. The Sonic Leases have initial terms of ten
years and generally require the Sonic Lessees to maintain a minimum Net Worth.
In addition, each of the Sonic Leases is guaranteed by Sonic Automotive. The
Advance Properties are subject to existing modified triple-net Leases that
require the Company to maintain certain portions of the facilities and systems
at the Advance Properties.
Mr. Smith, the Company's Chairman, Benjamin F. Bracy, the Company's
President, Mark J. Iuppenlatz, the Company's Executive Vice President --
Acquisitions and Chief Operating Officer, and Virginia R. Dunn, the Company's
Vice President and Chief Financial Officer, have significant collective
business and professional experience that will enhance the Company's
performance. Mr. Bracy has over 25 years of experience in the securities and
finance industries; Mr. Iuppenlatz has over 15 years of experience in the
acquisition, development, leasing and management of commercial real estate
development and management industry; and Ms. Dunn has over 15 years of
experience in the public accounting profession with a focus in the real estate
industry. The Company believes that Mr. Smith's approximately 35 years of
experience and informal business relationships with automobile dealers,
manufacturers and parts retailers, which he has developed through his
leadership of Sonic Automotive and Speedway Motorsports, will benefit the
Company by providing it with access to acquisition opportunities and the
expertise to evaluate such opportunities. None of the Company's Trustees or
officers has experience operating a REIT.
Business Strategies and Objectives
The Company's objectives are to maximize cash available for distribution
to shareholders, to enhance shareholder value by investing in additional
Properties that meet its investment criteria and to become one of the nation's
leading owners and lessors of Dealership Properties and Related Business
Properties.
Acquisition Strategy
The Company will seek to capitalize on consolidation trends in the
automotive retailing and aftermarket industries by acquiring the Properties
associated with well-located, geographically diverse automobile dealerships,
automotive parts stores and related automotive businesses and leasing it to the
operators of such businesses or other qualified automobile dealers and business
operators under long-term leases. While the Company's primary investment focus
will be on Dealership Properties, the Company intends to seek portfolio
diversification by investing in Related Business Properties whose operators are
focused on the broader automobile industry, such as automobile parts retailers,
automobile repair services, automobile rental businesses, fuel service
stations, and automobile auction businesses, among others.
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The Company intends to acquire attractively priced Properties that meet
one or more of the following investment criteria:
o Properties that are associated with well managed and financially sound
automobile dealerships, automotive parts stores and other automotive
related businesses with demonstrated operating histories;
o Properties that, because of their location and other characteristics,
are suitable for alternative uses;
o Well built Properties that have limited deferred maintenance;
o Properties that are located in diverse geographic regions in order to
minimize the potential adverse impacts of regional economic downturns; and
o Dealership Properties that are part of large affiliated dealer groups.
Development Strategy
The Company may pursue attractive real estate development opportunities
from time to time. The Company currently anticipates that substantially all of
its development activities will be associated with Lessees that are either (i)
seeking to expand their operations in order to maximize performance and/or meet
certain manufacturer requirements or (ii) constructing additional automobile
dealership or related automotive business locations. The Company currently
intends to limit its development risk exposure by undertaking development
projects on behalf of a Lessee and leasing the project back to such Lessee upon
completion based on its cost (including capitalized financing costs). The lease
payment associated with such development projects will be calculated based on
the rate associated with the existing lease payment on the original facility
(in the case of an expansion) or a specified payment negotiated with the Lessee
prior to the commencement of development.
Financing Strategy
The Company intends to fund its growth strategy utilizing a selective
blend of financing sources, including internally generated funds, secured and
unsecured debt, and a variety of equity or equity-linked securities.
Additionally, the Company will have the ability to offer sellers of Properties
Units as acquisition currency. Units will provide holders with distributions
that are identical to those paid on the Common Shares and will be redeemable
for cash or Common Shares, on a one for one basis, at the option of the
Company. The utilization of Units as acquisition currency will provide sellers
with the ability to defer taxes, improve liquidity, facilitate estate planning
and diversify their investment in Dealership and Related Business Properties by
participating as an equity owner in the Company.
MMR Holdings has utilized the proceeds of a $150.0 million secured line of
credit from Ford Motor Credit to acquire certain Initial Properties. In
connection with the Company's acquisition of MMR Holdings, the Compay will use
a portion of the net proceeds of the Offering to repay all amounts outstanding
under this line of credit and the line of credit will terminate. The Company
intends to obtain a new bank line of credit, which will be used to finance the
acquisition of additional Properties and for working capital following the
completion of the Offering. The Company intends to maintain a conservative
capital structure with a debt to total market capitalization ratio of not more
than 50%. Following the completion of the Offering, the Company's ratio of debt
to total market capitalization will be approximately 2%.
The Initial Properties
Upon completion of the Formation Transactions the Company will own 67
Initial Properites located in 11 states. The Company will use the proceeds from
the Offering, assume mortgage debt and issue Units to acquire interests in the
Initial Properties. With limited exceptions, the Company will acquire all of
the Initial Properties free of any material mortgages, liens or other
encumbrances. The Company intends to acquire additional Properties with the
balance of the net proceeds of the Offering after the Company acquires the
Initial Properties. The Company will acquire Properties primarily for income
purposes, but may sell Properties from time to time to take advantage of
possible capital gains or losses.
The valuation of the Initial Properties was based primarily upon a
capitalization of pro forma cash flow from the Initial Leases, considering the
credit worthiness of the Initial Lessees, purchase prices for similarly
situated properties, the characteristics of the Initial Properties, the cost of
capital used to acquire the Initial Properties and the return the Company could
realize from alternative investments. Pro forma cash flow was based upon the
rental revenue that the Initial Leases are anticipated to generate in the first
year. The following table presents certain information regarding the Initial
Properties.
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<PAGE>
<TABLE>
<CAPTION>
Land
Initial Initial Lease Area
Property Location Base Rent Term Expiration in Acres
- ----------------------------------- ---------------------- ------------------- ----------------- ---------
<S> <C> <C> <C> <C>
Higginbotham Acura-Mercedes Daytona Beach, FL $ 221,288 2008 4.4
Halifax Ford-Mercury New Smyrna Beach, FL 536,675(1) 2008 4.8
Halifax Ford Used Cars Edgewater, FL 72,875 2008 1.8
Higginbotham Chevy-Olds New Smyrna Beach, FL 650,000(2) 2009 4.9
Infiniti of Charlotte Charlotte, NC 432,000 2008 3.3
Town & Country Ford (Parcel #1) Charlotte, NC 409,200(3) 2009(3) 12.5
Town & Country Ford (Parcel #2) Charlotte, NC 108,513 2008 1.7
Town & Country Toyota Charlotte, NC 600,000 2008 5.7
Lake Norman Chrysler-Plymouth Cornelius, NC 590,250(1) 2007 8.4
Lake Norman Dodge Cornelius, NC 480,000(1) 2007 6.0
Westside Dodge Columbus, OH 600,000 2009 4.1
Toyota West Columbus, OH 480,000 2009 7.6
Hatfield Hyundai Columbus, OH 480,000 2009 1.5
Hatfield Lincoln-Mercury Columbus, OH 300,000 2009 4.9
VW & Jeep-Eagle West Columbus, OH 300,000 2009 3.0
Westside Chrysler-Plymouth Columbus, OH 300,000 2009 7.8
Fort Mill Ford Fort Mill, SC 480,000 2008 10.0
Century BMW Greenville, SC 420,000 2008 4.1
Heritage Lincoln-Mercury Greenville, SC 313,898 2008 5.5
Century BMW Spartanburg, SC 112,805 2008 1.7
Saturn of Chattanooga Chattanooga, TN 324,648 2007 5.0
Infiniti of Chattanooga Chattanooga, TN 344,224(1) 2007 3.8
BMW/Volvo of Chattanooga Chattanooga, TN 279,840(1) 2007 12.6
KIA/Volkswagen of Chattanooga Chattanooga, TN 132,840 2007 3.8
Toyota of Cleveland Cleveland, TN 252,000 2007 3.4
Town & Country Ford Cleveland, TN 304,424(1) 2007 13.0
Cleveland Honda Cleveland, TN 154,296 2007 2.1
Volkswagen of Nashville Nashville, TN 147,000 2008 5.2
Ron Craft Chrysler-Plymouth-Jeep Baytown, TX 262,500 2008 6.2
Lone Star Ford Houston, TX 360,000(3) 2009(3) 24.8
------------ -----
INITIAL DEALERSHIP PROPERTIES SUBTOTAL 10,449,276 183.6
------------ -----
Advance Auto Anniston, AL 69,856 2004 1.0
Advance Auto Bessemer, AL 72,500 2006 .6
Advance Auto Birmingham, AL 77,621 2007 1.0
Advance Auto Boaz, AL 59,500 2003 .7
Advance Auto Leeds, AL 60,200 2004 1.2
Advance Auto Montgomery, AL 76,440 2005 .7
Advance Auto Selma, AL 58,619(4) 2004 1.0
Advance Auto Tarrant City, AL 72,000 2007 .7
Advance Auto Troy, AL 62,016 2004 1.0
Advance Auto LaGrange, GA 56,000 2003 1.3
Advance Auto Monticello, KY 63,000 2006 .7
Advance Auto High Point, NC 54,993(4) 2008 1.0
Advance Auto Greenville, OH 74,900 2007 1.0
Advance Auto Lima, OH 85,058 2007 .7
Advance Auto Lima, OH 85,000 2007 .8
Advance Auto Piqua, OH 66,862 2007 1.7
Advance Auto Springfield, OH 95,240 2007 .9
Advance Auto Springfield, OH 82,500 2007 .5
Advance Auto Troy, OH 70,445 2008 .7
Advance Auto Belle Vernon, PA 95,775 2006 .8
Advance Auto Brownsville, PA 73,000 2007 .5
Advance Auto Chambersburg, PA 102,250 2007 .8
Advance Auto Ebensburg, PA 72,750 2007 1.0
Advance Auto Greensburg, PA 73,540(4) 2007 1.0
Advance Auto Huntingdon, PA 61,335(4) 2008 .9
Advance Auto Indiana, PA 84,000 2007 .8
Advance Auto Jeanette, PA 88,000 2007 1.0
Advance Auto Leechburg, PA 81,720 2006 1.0
Advance Auto Murrysville, PA 95,428 2006 1.4
Advance Auto New Kensington, PA 99,950 2006 1.4
Advance Auto North Huntingdon, PA 84,595(5) 2006 1.0
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Land
Initial Initial Lease Area
Property Location Base Rent Term Expiration in Acres
- ------------------------------- ----------------- ----------------- ----------------- ---------
<S> <C> <C> <C> <C>
Advance Auto Uniontown, PA $ 90,650 2006 .9
Advance Auto Washington, PA 73,500 2006 .7
Advance Auto Waynesburg, PA 84,510 2006 1.3
Advance Auto Dickson, TN 61,700 2005 .9
Advance Auto Lynchburg, VA 51,950(4) 2007 .9
------------ -----
ADVANCE PROPERTIES SUBTOTAL 2,717,403 33.5
------------ -----
ABRA Auto Body & Glass Chattanooga, TN 198,000 2007 2.2
------------ -----
INITIAL PROPERTIES TOTAL $13,364,679 219.3
============ =====
</TABLE>
- ---------
(1) Initial Base Rent indicated is the aggregate Base Rent payable on more than
one property parcel utilized by the dealership.
(2) The Higginbotham Chevy-Olds dealership is presently under construction and
is expected to be completed and available for leasing in January 1999. The
Company will acquire this Property after the completion of construction,
and the initial Base Rent indicated is an estimate.
(3) The existing Leases on these Properties will terminate by December 31,
1999. The Company and the Sonic Lessees have entered into new Leases that
will take effect on January 1, 2000, which provide for initial Base Rent
of $1,140,000 for each Property, and expire on December 31, 2009.
(4) These Advance Properties or portions of the interests therein are presently
subject to ground leases, which will be assigned to the Company. The
initial Base Rent figures shown are net of aggregate annual ground lease
payments of $96,899.
(5) The Company will be assigned certain rights under an easement agreement
pursuant to which the Company will receive all rents on the Property from
Advance Auto and will make an annual payment of $5,400 to the easement
grantor. The initial Base Rent figure shown is net of the required
easement payment.
Ground Leases and Other Interests in Certain Advance Properties
The Selma, Alabama Advance Property is subject to a ground lease with an
unrelated third-party that expires on December 31, 2034, and is renewable at
the Company's option for four successive five year terms. The rental rate is
$8,000 per year, with ten percent increases every five years during the term of
the lease. The lease also requires the Company to pay to the ground lessor 25%
of any percentage rent paid by Advance Auto. The Company is not currently
entitled to percentage rent on any of its Initial Properties.
The High Point, North Carolina Advance Property is subject to a ground
lease with an unrelated third-party that expires on December 31, 2004, with six
renewal options of five years each. The rental rate payable under the ground
lease is $26,484 per year. The rental rate increases by five percent during
each of the first two renewal terms and by ten percent during the final four
renewal terms.
The Greensburg, Pennsylvania Advance Property is subject to a ground lease
dated June 24, 1996 with an unrelated third-party that expires on December 31,
2016, with four renewal options of five years each. The present rental rate
payable under the ground lease is $30,000 per year, which will be the rental
rate through the end of 2000. Thereafter, rent increases by $5,000 every five
years of the initial term. The ground lease provides for additional rental
increases for each successive five-year term equal to the previous term's rent
multiplied by 50% of the increase in the Consumer Price Index ("CPI") for the
previous five-year period, and will, in no event, be less than a ten percent
overall increase in the rent for the previous five-year period.
The Huntingdon, Pennsylvania Advance Property is subject to an access
easement agreement with an unrelated third party dated as of February 3, 1997.
The easement agreement gives each party the right to use the property of the
other to access its own property in perpetuity. No other compensation is
required under the agreement, although the Company will be required to maintain
the property subject to the easement.
The North Huntingdon, Pennsylvania Advance Property is subject to an
access easement agreement with an unrelated third-party dated March 20, 1984.
The easement agreement provides for an initial term that expired on March 26,
1994, but contains provisions for three additional renewal terms of ten years
each. The easement agreement provides for payments to the easement grantor
during the first renewal terms of $5,400 per year. The payment increases to
$8,100 per year during the second renewal term and $12,000 per year during the
third renewal term.
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<PAGE>
The Lynchburg, Virginia Advance Property is subject to a ground lease with
an unrelated third party that expires on April 9, 2016. The lease also provides
for four additional renewal terms of five years each. The base rental rate is
$25,000 per year, and the tenant is obligated to pay the ground lessor one-half
of any percentage rent paid by Advance Auto. The base rental rate is increased
for the renewal terms as follows: $27,500 for the first renewal term; $28,875
for the second renewal term; $30,319 for the third renewal term; and $31,835
for the fourth renewal term.
The Company does not believe the lack of a fee interest in Properties
subject to the ground leases will be material to the Company because of the
long term nature of the ground leases and the remaining useful life of the
facilities located thereon.
Initial Lessees
Twenty-eight of the Initial Dealership Properties will be Leased to the
Sonic Lessees. All of the Sonic Lessees are subsidiaries of Sonic Automotive.
Sonic Automotive is one of the leading automotive retailers in the United
States, operating 44 dealerships and 15 collision repair centers in eight
states of the southeastern and southwestern United States. Its business is
geographically diverse, with dealership operations in the Charlotte, North
Carolina, Chattanooga, Tennessee, Nashville, Tennessee, Tampa/Clearwater,
Florida, Houston, Texas, Atlanta, Georgia, Columbus, Ohio and Montgomery,
Alabama markets. In recent years, many of Sonic Automotive's dealerships have
won awards measuring quality and customer satisfaction from various
Manufacturers. These awards include the Five Star Award from Chrysler, the
Chairman's Award from Ford and the President's Award from BMW. In addition,
Sonic Automotive was named to Ford's Top 100 Club, which consists of Ford's top
100 retailers based on retail volume and customer satisfaction. Sonic
Automotive had revenues of $1.8 billion, operating income of $54.1 and retail
unit sales of 48,079 new and 34,278 used vehicles in 1997 (after giving pro
forma effect to Sonic Automotive's acquisitions in 1997 and 1998).
The Sonic Lessees and their affiliates operating on the Initial Dealership
Properties (the "Sonic Dealers") sell domestic and imported luxury, family,
economy and sport utility vehicles, trucks and vans, including Acura, BMW,
Chevrolet, Chrysler, Dodge, Ford, Honda, Hyundai, Infiniti, Isuzu, Jeep, KIA,
Lincoln, Mercedes, Mercury, Oldsmobile, Plymouth, Saturn, Subaru, Toyota,
Volkswagen and Volvo. In addition to selling new vehicles, many of the Sonic
Dealers lease new vehicles and sell used vehicles. They also provide service
and parts primarily for the vehicle makes and models that they sell or lease,
and perform both warranty and non-warranty service work. In general, parts
departments support the sales and service divisions. The Sonic Dealers also
sell factory-approved parts at retail to their customers or at wholesale to
independent repair shops and arrange third-party financing for their customers,
sell vehicle service contracts and arrange selected types of credit insurance
for which they receive financing fees, subject to a charge-back against a
portion of the finance fees if contracts are terminated prior to their
scheduled maturity.
The Company's Chairman of the Board, Mr. Smith, is the chief executive
officer and chairman and a controlling shareholder of Sonic Automotive. In
addition to Mr. Smith's automotive experience, each of Sonic Automotive's other
executive officers, regional vice presidents and executive managers have an
average of 18 years of automotive retailing experience.
The Advance Properties will be acquired from Primax subject to existing
leases with Advance Auto. Advance Auto is the second largest specialty retailer
of automotive parts and accessories in the United States based on the number of
stores. On November 2, 1998, Advance Auto acquired all 652 Parts America and
Western Auto stores from Sears. As a result of this transaction, Advance Auto
operates over 1,500 stores in 37 states, Puerto Rico and the U.S. Virgin
Islands. Sears currently owns approximately 40.6% of Advance Auto's parent
holding company. Since accelerating its store expansion plan in 1992, Advance
Auto has grown from the eighth largest to the second largest U.S. specialty
retailer of automotive parts, increasing its store count by 735%. From fiscal
1992 through fiscal 1997, Advance Auto, as disclosed in reports filed with the
Commission by Advance Auto, increased sales, net income and pro forma EBITDA by
a compounded annual growth rate of 29.3%, 15.5% and 28.4%, respectively. For
fiscal 1997, Advance Auto's net sales, net income and EBITDA were $848.1
million, $20.4 million and $65.4 million, respectively. Pro forma for the
acquisition of the Parts America and Western Auto stores, Advance Auto, as of
July 18, 1998, reported shareholders' equity of $222.4 million and long-term
debt of $425.0 million.
Dealership, Sonic and Bowers Leases
General
As the Company acquires Dealership Properties in the future, the Company
intends to lease these Dealership Properties to the Lessees thereof (other than
Sonic Automotive) pursuant to standardized dealer leases (the "Dealership
Leases"). The Company may alter the substantive terms of the Dealership Leases
from time to time from those discussed below in
36
<PAGE>
order to account for market conditions and varying circumstances concerning the
subject Property. As discussed below, the terms of the Dealership Leases are
expected to differ in certain respects from the Sonic Leases on 15 of the
Initial Dealership Properties, the existing Leases on the Lake Norman Dodge and
Lake Norman Chrysler-Plymouth Dealership Properties (the "Lake Norman Leases")
and the Leases on the Bowers Properties, including the Collision Repair
Property (the "Bowers Leases"), which are being assumed in connection with the
acquisition of such Properties. The Dealership Leases are expected to have
initial terms of ten years (each an "Initial Term") with two additional five
year terms (each a "Renewal Term") at the option of the Lessee. All Dealership
Leases and Sonic Leases will be triple-net leases requiring the Lessees to
undertake and pay for any maintenance and repairs and will permit the Lessees
to undertake additions, renovations and improvements to the Dealership
Properties after receiving the consent of the Company.
The Base Rent under each Dealership Lease and Sonic Lease will be
negotiated by the Company to produce an appropriate yield to the Company based
on the Company's determination of the appropriate return on the Company's
investment considering (i) the purchase price for the Property, (ii) the credit
worthiness of the Lessee, (iii) the rental rates for similarly situated
properties in the geographic location in which the Property is situated, (iv)
the characteristics of the Property, (v) the cost to the Company of the funds
used to acquire the Property, and (vi) the return that the Company could
realize from alternative investments on that Property's purchase price
(including acquisition fees and expenses). The Base Rent thereafter will be
adjusted upward either (i) annually or periodically based on a factor of the
CPI, or (ii) periodically, based on a fair market evaluation. Such fair market
evaluation is to be agreed upon by the Company and the relevant Lessee;
otherwise, the determination of this amount will be made by independent
arbitrators pursuant to the terms of the Dealership Lease. The CPI-based
adjustments range from a minimum of 1% to a maximum of 3% of Base Rent.
Typical Dealership Lease Terms
In general, the Dealership Leases and, except as otherwise noted, the
Sonic Leases (including the Lake Norman Leases) and the Bowers Leases will
include the following lease terms. Certain of the Bowers Leases, namely the
leases on the Collision Repair Property (the "CRP Lease"), a Saturn dealership
(the "Saturn Lease") and a Toyota dealership (the "Toyota Lease"), differ from
the remaining Bowers Leases on particular terms as noted below. With future
Lessees other than Sonic Automotive, the Company will attempt to negotiate
lease terms similar to those contained in the Dealership Leases, while future
Leases with affiliates of Sonic Automotive are expected to contain terms
similar to those contained in the Sonic Leases. No assurance can be given that
the Company will be successful in instituting all the terms of the Dealership
Leases as new Dealership Properties are acquired. Moreover, the Company may be
required to assume existing leases on Properties it acquires in the future,
which may have terms substantially different from those of the Dealership
Lease.
Use of the Properties. The Dealership Leases will require (a) the
Dealership Property to be operated as an automobile dealership, and (b) that
the Lessee or any permitted assignee operate the Dealership Properties in an
efficient and professional manner in compliance with all laws and regulations.
The Bowers Leases generally provide that the property may be used for any
lawful purpose.
Amounts Payable Under the Leases; Net Provisions. During the Initial Term
and any Renewal Terms, each Lessee or any permitted assignee will pay the Base
Rent, in monthly installments. The Base Rent will be adjusted upward on a
periodic basis based on a factor of the CPI. At the beginning of each Renewal
Term, Base Rent will be adjusted for such year on the basis of a fair market
evaluation. Such evaluation will be agreed to by the Company and the applicable
Lessee; otherwise, the evaluation will be made by independent arbitrators
pursuant to the Lease terms. The Sonic Leases provide for CPI adjustments every
five years based on the cumulative increase in CPI during the preceding five
years. The Lake Norman Leases provide for annual CPI adjustments. The Bowers
Leases only provide for a Base Rent adjustment upon the beginning of each
Renewal Term on the basis of fair market value.
Each Dealership Lease will be a triple-net lease, under which each Lessee
will be required to pay rent and substantially all expenses associated with the
operation of a particular Dealership Property. Such expenses include all taxes,
assessments and levies, excises, fees and all other governmental charges with
respect to such Dealership Property, all charges for insurance, utilities,
service, repair and maintenance, including, without limitation, electricity,
telephone, trash disposal, gas, oil, water, sewer, communication and all other
utilities used in each Dealership Property. Each Lessee will be obligated to
comply with all laws, contracts, covenants and restrictions affecting a
Dealership Property.
Maintenance, Alterations, Capital Additions or Improvements. The Lessee or
any permitted assignee shall be obligated, at its sole cost and expense, to
maintain its Dealership Property in good order, repair and appearance and to
make structural and non-structural, interior and exterior, and ordinary and
extraordinary repairs and replacements, which may be necessary and appropriate
to keep such Dealership Property in good order, repair and appearance or which
may be required by any
37
<PAGE>
governmental authority. The Company will not be required to build or rebuild
any improvements to any Dealership Property, or to make any repairs,
replacements, alterations, restorations or renewals to any Dealership Property.
The Lessee or any permitted assignee, at its sole cost and expense, may
make alterations, additions, changes and/or improvements to each Dealership
Property only with the prior written consent of the Company, in the Company's
reasonable discretion. Typically, all improvements, additions, alterations and
replacements constructed upon each Dealership Property by the Lessee during the
Initial Term or a Renewal Term of a Dealership Lease will be the sole property
of the Lessee until the expiration or early termination of such Dealership
Lease, at which time all improvements, additions, alterations and replacements
will become the property of the Company. All machinery, equipment, furniture,
furnishings and other personal property installed at the expense of a Lessee on
any Dealership Property will remain the property of such Lessee and may be
removed by such Lessee at the expiration or earlier termination of the
Dealership Lease. The Bowers Leases provide that any alteration, addition or
improvement made by the Lessee and any fixtures installed as a part thereof,
may at the Lessee's sole option remain the property of the Lessee. The Bowers
Leases require the Lessee to pay for any legally mandated alterations,
additions and improvements but the Lessee is liable for any such changes in the
nature of a capital expenditure only up to $5,000 for any one item and $25,000
for all items during the Initial Term. Expenses in excess of these limitations
are subject to mutual agreement of the parties. If the parties are unable to
agree on the excess expenses, either party may terminate the lease upon 90 days
notice.
Insurance. Each Dealership Lease will provide that the Lessee will
maintain insurance on its Dealership Property with coverages in such amounts as
are customarily insured against with respect to properties similar to the
Dealership Properties, including: (i) fire, and other hazards and perils
generally included under extended coverage; (ii) sprinkler leakage; (iii)
vandalism and malicious mischief; (iv) boiler and machinery; (v) other perils
commonly covered by "All Risk" insurance, all in an amount which reasonably
assures there will be sufficient proceeds to replace the improvements and
personalty in the event of a loss against which such insurance is issued but in
no event less than 100% of the full replacement value thereof (exclusive of
foundations); (vi) broad form comprehensive general public liability and
property damage insurance providing coverage against liability for personal
injury, death and property damage; (vii) builder's risk insurance (prior to and
during any construction); (viii) business interruption insurance (not required
of the Sonic Lessees); (ix) flood (when the Dealership Property is located in
whole or in material part in a designated flood plain area), (x) worker's
compensation; and (xi) other insurance which at the time is commonly obtained
in connection with business operations similar to those of the Initial Lessee.
The Company believes that the amount of insurance required under the Leases is
sufficient to protect each Property. The foregoing insurance policies are to
name the Company and any holder of a mortgage deed of trust or other security
agreement on such Dealership Property ("Company Mortgagee") as additional
insureds. Each Dealership Lease shall specify the deductibles for insurance
covering each class of risk. In addition, such insurance shall carry not less
than "A-" or "VIII" ratings. Notwithstanding, there will be risks for which
insurance will not be obtainable or will be prohibitively expensive. In such
event, a Lessee's ability to restore the Dealership Property may be dependent
on its internally generated funds or borrowing capacity. The Bowers Leases
provide for comprehensive public liability coverage in the amount of not less
than $5,000,000, and fire, casualty and extended coverage insurance naming the
Lessee as the sole payee (but not naming the Company as additional insured).
Damage to, or Condemnation of, a Property. In the event of any damage to
any Dealership Property, the Lessee is required to submit complete and detailed
plans and specifications to the Company, and will have the obligation to
promptly repair or restore the damage at the Lessee's expense so as to make
such Dealership Property at least equal in value and character to such
Dealership Property immediately prior to such occurrence. Typically, the rent,
real estate taxes and other impositions on the particular Dealership Property
will not be abated during the time of restoration. If any Dealership Property
is damaged during the Initial Term to an extent greater than 80% of the value
of the improvements and personalty, or during a Renewal Term to an extent
greater than 60% of the value of the improvements and personalty, then the
Company may elect to terminate the relevant Dealership Lease upon notice to the
Lessee. Upon such a termination of the Dealership Lease, the Lessee will have
no obligation to repair such Dealership Property, and the entire insurance
proceeds will belong to the Company. The Bowers Leases provide for abatement or
a porportional reduction of rent for any fees or charges during the period of
restoration. The Bowers Leases provide that if the Lessee determines, in its
sole discretion, that such casualty or the repair and restoration of the
premises substantially and materially affects the Lessee's business, then the
Lessee may elect to terminate the lease. The Bowers Leases do not provide for
termination of the lease by the Company in the event of damage.
If at any time during the Initial Term or any Renewal Term, the Dealership
Property is totally and permanently taken by right of eminent domain or by
conveyance made in response to the threat of the exercise of such right
("Condemnation"),
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<PAGE>
then the Dealership Lease will terminate as of the date the condemning
authority takes possession of the Dealership Property being condemned. The
Lessee will be required to pay all outstanding applicable rent and other
charges through the date of termination.
If a portion of a Dealership Property is taken by Condemnation, the
Dealership Lease will remain in effect as to such Dealership Property if such
Dealership Property is not thereby rendered unsuitable for use as the business
contemplated by the Dealership Lease, in the Company's and the Lessee's mutual
reasonable judgment. If the Dealership Lease is not terminated, then the Lessee
will restore the Dealership Property. Any award made by the condemning
authority will belong to the Company, except to the extent required by Lessee
to restore the remaining portion of the Dealership Property. If the award is
insufficient to pay for the restoration, the Lessee is responsible for the
remaining cost and expense of such restoration. The Bowers Leases provide that
if any substantial, material portion of a Dealership Property is taken by
Condemnation, then the Company shall repair and restore the property to the
best possible tenantable condition and the rent shall be equitably reduced or
the Lessee may elect to terminate the lease in its good faith discretion.
Financial Covenants. Each Lessee, will be required to maintain a ratio of
net income before income taxes plus depreciation, amortization and rent expense
to rent of at least 1.5 to 1.0 (the "Cash Flow Coverage Ratio"), computed as
the aggregate of net income before taxes plus mortgage interest, plus rent
expense, depreciation, plus the annual LIFO adjustment and other non-cash
expenses, less recurring capital expenditures and gain (loss) on sale of real
estate, dividends and/or profits taken out of the Lessees, divided by the
aggregate of the Lessee's obligations under the Dealership Leases. The Company
will monitor the Lessee's compliance with the Cash Flow Coverage Ratio and if
the Lessee defaults in such obligation, the Lessee can cure such default by
providing the Company with additional security, in the form of guaranties,
letters of credit, security deposits or the cross collateralization of the
subject Dealership Lease with other properties of the Lessee or an affiliate.
The Sonic Leases and the Bowers Leases to affiliates of Sonic Automotive do not
provide for any Cash Flow Coverage Ratio covenant and instead provide that all
obligations of the Lessees under such Leases will be guaranteed by Sonic
Automotive. Saturn Corporation guarantees the Saturn Lease. The CRP Lease and
the Toyota Lease are not guaranteed.
Net Worth Covenant. Each Lessee will be required to maintain a Net Worth
equal to six months of the following year's Base Rent; however, during the
first year of the term such measurement shall be based on the entire first
years Base Rent divided by two. The Lake Norman Leases and the Bowers Leases
contain no Net Worth covenant. The Bowers Leases that contain a guaranty
provision provide that the guarantor shall be irrevocably released from the
guaranty when the Lessee has a net worth of $20,000,000.
Assignment and Subletting. The Dealership Leases provide that each Lessee
may not, without the prior written consent of the Company, assign, or otherwise
transfer any Dealership Lease or sublease any Initial Property or grant or
permit any lien or encumbrance on or security interest in the Lessee's interest
in the Dealership Lease, in whole or in part. An assignment of the Dealership
Lease includes any change of control of the Lessee. The Bowers Leases provide
that the Lessee may assign the lease without the Company's consent.
If the Company consents to any assignment, transfer, subletting or
encumbrance, the Lessee will continue to be primarily liable under the
Dealership Lease. Any assignment or other transfer of all or any portion of the
Lessee's interest in an Dealership Lease in violation of the restrictions on
assignment or subletting will be voidable at the Company's option.
The Lessee is not permitted to sublease the Dealership Property, assign
the Dealership Lease or enter into another arrangement which would have the
effect of causing any portion of the amount received by the Company under the
Dealership Leases to fail to qualify as "rents from real property" within the
meaning of Section 856(d) of the Code.
Indemnification. A Lessee will be required to defend, indemnify and save
and hold the Company harmless from and against liabilities, obligations,
losses, injunctions, suits, fines, actions, penalties, claims, demands, costs
and expenses (including reasonable attorneys' fees and expenses) and actual or
consequential damages incurred by, imposed upon or asserted against, indirectly
or directly, the Company, its officers, trustees, employees, shareholders,
agents or affiliates on account of, among other things: (a) any breach,
violation, or nonperformance by the Lessee or any person claiming under the
Lessee or the employees, agents, contractors, invitees, or visitors of the
Lessee of any term, representation, warranty, covenant, or provision of the
Dealership Lease or business of the Initial Lessee, its employees, agents,
contractors, invitees, visitors or any other person or any law, ordinance, or
governmental requirement of any kind; (b) any use, condition, operation or
occupancy of the Dealership Properties; (c) any acts, omissions, or negligence
of the Lessee; (d) any accident, injury, death or damage to the person or
property on the Lessee's part to be performed occurring at any Dealership
Property; (e) any matter or thing growing out of the condition, occupation,
maintenance, alteration, repair, use or operation by any person of the Property
or the operation of the business contemplated by the Dealership Lease to be
conducted thereon; (f) any failure of the Lessee
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to comply with any laws, ordinances, requirements, orders, directions, rules or
regulations of any governmental authority; (g) any contamination of the
Dealership Property, or the ground waters thereof, arising on or after the date
that the Lessee takes possession of the Dealership Property and occasioned by
the use, transportation, storage, spillage or discharge thereon of any toxic or
hazardous chemicals, compounds, materials or substances (the Bowers Leases,
however, require indemnification for an acts or omissions by the Lessee that
cause the release of hazardous materials); (h) any discharge of toxic or
hazardous sewage or waste materials from the Dealership Property into any
septic facility or sanitary sewer system serving the Dealership Property
arising on or after the date the Lessee takes possession of the Property; (i)
any brokers or agents fees and commissions; or (j) any other act or omission of
the Lessee, its employees, agents, invitees, customers, licensees or
contractors (the Bowers Leases do not provide indemnification for these types
of acts or omissions).
Pre-Existing Conditions. The Sonic Leases (other than the Lake Norman
Leases and the Bowers Leases) contain a pre-existing condition clause, which
provides with respect to any condition that existed prior to the Sonic Lessee's
possession, the Sonic Lessee will have the option of either (i) remediating
such condition at its own cost and expense, or (ii) requesting that the Company
remediate at its cost and expense in which event the Base Rent will be
increased by an amount equal to the cost of remediation multiplied by the
capitalization rate of the applicable Sonic Lease. Pre-existing conditions
covered by this clause include environmental conditions.
Events of Default. The following events, among others, will constitute
"Events of Default" under the Dealership Leases: (a) the Lessee fails to pay in
full any installment of Base Rent, or any other monetary obligation payable by
the Lessee to the Company under the Dealership Lease; (b) the Lessee fails to
observe and perform any covenant in the Dealership Lease and such failure
continues for a period of 30 days after receipt of written notice of such
failure; or if, by reason of the nature of such default, the same cannot with
due diligence be reasonably remedied within the 30-day period, the Lessee does
not commence to remedy the failure and diligently completes the remedy thereof
within a reasonable time; provided, however, such cure period will generally
not extend beyond 90 days; (c) if the Lessee (i) becomes bankrupt or insolvent
or admits in writing its inability to pay its debts generally as they become
due, (ii) files a petition in bankruptcy or a petition to take advantage of any
insolvency act, (iii) files a petition or answer seeking reorganization or
arrangement under the bankruptcy laws or any other applicable law or statute of
the United States of America or any state, or (iv) makes an assignment for the
benefit of its creditors; (d) if the Lessee files a petition for the
appointment of a receiver or trustee for all or substantially all of its assets
and such petition or appointment shall not have been set aside within 60 days
from the date of such petition or appointment; (e) if the estate or interest of
the Lessee in a Dealership Property or any part thereof is levied upon or
attached in any proceeding and the same is not vacated or discharged within 60
days after commencement; (f) termination or relinquishment of the franchise or
license pursuant to which an Lessee conducts business on the Dealership
Property, provided that such event does not constitute an Event of Default if
(i) no other Event of Default has occurred and is continuing, and (ii) at a
date no later than 30 days following such date of the default, termination or
relinquishment, the Lessee or an affiliate has cured such default or entered
into written new or amended franchises or licenses for operation of the
dealership at the Dealership Property satisfactory to the Company in its
discretion applying commercially reasonable standards; provided that if Lessee
is, in good faith, disputing an assertion of default by the franchisor or
licensor or is proceeding diligently to cure such default, the 30-day period
shall be extended so long as Lessee continues to dispute or cure such default
in good faith and the Dealership Property is operated pursuant to a Franchise
Agreement approved by the Company; (g) the Lessee shall fail to provide
insurance coverage if the Lessee vacates, abandons or fails to continuously
operate the business on the Dealership Property; (h) if, except as a result of
damage, destruction or a partial or complete condemnation, the Lessee ceases
operations on the Dealership Property for a period in excess of 30 days; (i) if
a change of control occurs or the estate or interest of the Lessee in the
Dealership Property is or any part thereof is voluntarily or involuntarily
transferred, assigned, conveyed, levied upon or attached in any proceeding,
unless Lessee is contesting such lien or attachment in good faith; (j) Lessee's
failure to provide the Company immediate notice of Lessee's receipt of notice
of a default or potential default by Lessee under the Franchise Agreement or
the Manufacturer's intent to terminate, suspend or not renew the Franchise
Agreement; and (k) if Lessee or any of its affiliates defaults under any
Dealership Lease with the Company or another landlord. The Bowers Leases do not
provide a default for items (f), (g), (i), (j) or (k) above.
The Company may exercise any one or more of the following rights and
remedies upon the occurrence of an event of default: (i) the Company may, by
written notice thereof to the Lessee, terminate the Dealership Lease and,
peaceably or pursuant to appropriate legal proceedings, resume possession of
the Dealership Property for the Company's own account and, for the Lessee's
breach of and default under the Dealership Lease, recover immediately from the
Lessee any and all rent and other sums and damages, including costs and
expenses, due or in existence at the time of such termination; (ii) the Company
may, by written notice thereof to the Lessee, terminate the Lessee's option to
renew the Dealership Lease for any or all of the Renewal Terms; (iii) the
Company may, pursuant to any prior notice required by law, and without
terminating the Dealership Lease, peaceably or pursuant to appropriate legal
proceedings, resume possession of the Dealership Property for
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the account of the Lessee, make such alterations of and repairs to the
Dealership Property as may be reasonably necessary in order to relet the same
or any part or parts thereof and relet or attempt to relet the Dealership
Property or any part or parts thereof for such term or terms (which may be for
a term or terms extending beyond the Term), at such rent and upon such other
terms and provisions as the Company, in its reasonable discretion may deem
advisable; (iv) the Company may, without resuming possession of the Dealership
Property, sue for all rent and all other sums, charges, payments, costs and
expenses due from the Lessee to the Company hereunder and incurred in
connection with the Company's recovery of possession of the premises; (v) the
Company may require the Lessee to immediately transfer to the Company all
amounts held by the Lessee in the trust account established pursuant to the
Dealership Lease and, thereafter, to deposit on the first day of each month
together with and in addition to the regular installment of Base Rent, an
amount equal to one-twelfth of the yearly taxes and assessments as estimated by
the Company to be sufficient to enable the Company to pay, at least 30 days
before they become delinquent, all taxes, assessments, and other similar
charges and insurance premiums against the Dealership Property or any part
thereof. In addition to the remedies hereinabove specified and enumerated, the
Company shall have and may exercise the right to invoke any other remedies
allowed at law or in equity as if the remedies of re-entry, unlawful detainer
proceedings and other remedies were not herein provided. The Bowers Leases
provide that the Lessee may terminate the Lease if the Company fails to perform
its obligations under the Lease.
Governing Law. Each Dealership Lease and each Sonic Lease will be governed
by and construed in accordance with the law of the state of where the
Dealership Property is located.
Advance Leases
General
Concurrently with the Company's acquisition of the Advance Properties, the
Company will assume the existing Advance Leases on the Advance Properties. The
Advance Leases all have Initial Terms of ten years or more and may be extended
for at least two additional five year Renewal Terms at the option of Advance
Auto. The Advance Leases require Advance Auto to undertake and pay for most
maintenance and repair obligations (excluding structural walls and foundations,
roof, parking lot, sidewalks and certain major break downs in heating/air
conditioning systems), and all insurance and tax obligations which relate to
the Advance Properties. The Dealership Leases provide similiar terms except
that Lessees under the Dealership Leases must bear all maintenance and repair
obligations.
The purchase price for the Advance Properties was negotiated by the
Company based upon the yield to the Company considering (i) the leases on the
Advance Properties, (ii) the creditworthiness of Advance Auto, (iii) the rental
rates for similarly situated properties in the geographic location in which the
Advance Properties are situated, (iv) the characteristics of the Advance
Properties, (v) the cost to the Company of the funds used to acquire the
Advance Properties, and (vi) the return that the Company could realize from
alternative investments on that Advance Property's purchase price (including
acquisition fees and expenses).
The Base Rent at the inception of any Renewal Term, if exercised by
Advance Auto, will be adjusted upward by pre-determined amounts averaging
approximately 4.5% of the Base Rent paid during the previous term. Similar
increases in Base Rent occur during subsequent Renewal Terms, if exercised by
Advance Auto. In all cases, if 2.5% of Advance Auto's gross sales for the
particular location in any year exceed its Base Rent, Advance Auto is required
to pay additional percentage rent such that total rent received by the Company
equals at least 2.5% of Advance Auto's gross sales for the particular location
in any year.
Typical Advance Lease Terms
The Advance Leases include the lease terms described below. The Company
expects future Leases with Advance Auto will contain substantially similar
terms as result of the Company's relationship with Primax.
Use of the Properties. The Advance Leases require that the Advance
Properties (a) be used only for the purpose of operating and conducting the
sale of automobile parts and accessories and (b) that such use complies with
all ordinances, laws, rules and regulations promulgated by any governmental
body having jurisdiction over the Advance Properties.
Amounts Payable Under the Leases; Net Provisions. During the Initial Term
and any Renewal Terms, Advance Auto or any permitted assignee will pay the Base
Rent, in monthly installments. The Base Rent will be adjusted upward during
each of the Renewal Terms as set forth above. In addition, Advance Auto shall
pay additional percentage rental, as set forth above, no later than 90 days
following the end of each rental year. Advance Auto must provide the Company
with an audit of its gross sales if requested by the Company, and the Company
may inspect Advance Auto's sales records to determine the accurancy of the
percentage rental calculation.
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Each Advance Lease is generally a "triple-net" lease, except that the
Company will incur certain maintenance and repair obligations pursuant to the
Advance Leases, as set forth below. Advance Auto is responsible for all real
estate taxes, assessments or other governmental charges which may be levied or
assessed by any lawful authority against the Advance Properties as well as all
charges for utilities.
Maintenance, Alterations, Capital Additions or Improvements. Advance Auto
will also be responsible for all maintenance and repair costs related to each
of the Advance Properties and will keep the Advance Properties in good order
and repair, except that the Company is responsible for maintenance and repair
of structural walls and foundations, roof, parking lot, sidewalks and in the
event of a major breakdown in the heating/air conditioning system which results
in generally a cost of more than $500, one half of the maintenance or repair
costs related to such major breakdown. Primax has guaranteed all maintenance
costs for a period of one year. Historically, such costs have not been
material.
Advance Auto may make alterations, improvements or may re-arrange interior
partition walls as it deems necessary for the conduct of its business. Advance
Auto may not alter, improve or re-arrange structural walls without first
obtaining the Company's written consent, which the Company may not unreasonably
withhold. All furnishings, fixtures, and equipment supplied and installed on
the Advance shall remain the property of Advance Auto unless permanently
attached to the Property. Any damage to the Property occasioned by the removal
of any furnishings, fixtures and equipment must be repaired by Advance Auto at
its sole cost and expense.
Noncompetition Covenant. In each Advance Lease, the Company has covenanted
not to lease to any third person any land or building within two miles of the
applicable Advance Property for the purpose of conducting thereon a business
similar to that being conducted by Advance Auto. Advance Auto's remedies for a
breach of this covenant include termination of its lease or the payment of only
percentage rents annually at the applicable Property.
Insurance. The Advance Leases, with one exception, require Advance Auto to
maintain hazard insurance in the amount of the full replacement value of each
of the Advance Properties. In addition, Advance Auto must maintain public
liability insurance in pre-determined amounts which were customary at the time
of lease execution for properties similar to the Advance Properties.
Notwithstanding the foregoing, there will be risks for which insurance is not
required of Advance Auto. In such event, Advance Auto's or the Company's
ability to restore the Advance Properties may be dependent on its internally
generated funds or borrowing capacity.
Damage to, or Condemnation of, a Property. In the event of any damage to
any of the Advance Properties, the Company shall be obligated to rebuild or
restore such property to a condition comparable to that existing prior to the
occurrence of said destruction or damage. If, in Advance Auto's reasonable
discretion, the damage or destruction prevents the operation of Advance Auto's
business or makes it impractical to do so, rent shall abate during rebuilding
or restoration to the extent that an Advance Property is unusable.
Notwithstanding the foregoing, the Company shall not be obligated to rebuild or
restore an Advance Property in the event that one year or less remains in the
term of the applicable Advance Lease.
If at any time during the Initial Term or any Renewal Term, any Advance
Property is totally and permanently taken by Condemnation then the Advance
Lease shall terminate automatically as of the date the condemning authority
takes title to such Advance Property. Advance Auto will be required to pay all
outstanding applicable rent and other charges through the date of termination.
If a portion of an Advance Property is taken by Condemnation such that the
portion not so taken is unsuitable for an automotive parts store, either the
Company or Advance Auto may terminate the applicable Advance Lease. If a
portion of an Advance Property is taken by Condemnation and the Advance Lease
is not terminated, the Base Rent shall be reduced by the proportion of such
taking. Upon receipt of any such Condemnation award, the Company shall restore
the building to a complete architectural unit, and Advance Auto shall make all
necessary repairs and alterations to its furnishings, fixtures, equipment and
signs. All damages or compensation paid for any such Condemnation will belong
to the Company. If the award is insufficient to pay for the restoration, the
Company may be dependent on its internally generated funds or borrowing
capacity to complete such restoration.
Assignment and Subletting. The Advance Leases provide that Advance Auto
may not, without the written prior consent of the Company, assign or sublet an
Advance Property, which consent the Company may not unreasonably withhold. If
the Company consents to any assignment or subletting, Advance Auto will remain
liable for all of its obligations pursuant to the Advance Lease.
Indemnification. Advance Auto will indemnify and save the Company harmless
from and against any and all claims, actions, damage, liability and expense in
connection with loss of life, personal injury and/or damage to property arising
from or out of any occurrence in, upon or at the Advance Properties, or the
occupancy or use by Advance Auto of the Advance
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Properties, or occasioned wholly or in part by any act or omission of Advance
Auto, its agents, contractors, employees, servants, lessees or concessionaires.
Advance Auto will also indemnify and save and hold the Company harmless for
certain environmental matters at set forth below.
Environmental Matters. The Advance Leases provide for covenants by Advance
Auto relating to environmental matters with respect to each Advance Property.
Each Advance Lease also requires Advance Auto to indemnify and hold the Company
harmless from any and all claims, damages, fines, judgments, penalties, costs,
liabilities or losses (including, without limitation, any and all sums paid for
settlement of claims, attorneys' fees, consultant and expert fees) arising
during or after the term of the Advance Leases and which arises as a result of
Advance Auto's failure to comply with all environmental laws. See "Governmental
Regulations Affecting the Properties--Environmental Laws."
Events of Default. The following events constitute "Events of Default"
under the Advance Leases: (a) Advance Auto fails to pay rent when due which
remains unpaid for more than ten days after written notice from the Company;
(b) Advance Auto fails to perform any of the other terms, conditions or
covenants contained in an Advance Lease for more than 30 days after written
notice from the Company, provided that, the nature of the default is such that
it cannot be reasonably be cured within 30 days and work thereon has commenced
within said period and diligently prosecuted, no Event of Default shall have
occurred; (c) Advance Auto shall become bankrupt or insolvent or file any
debtor proceedings or take or have taken against it in any court pursuant to
any statute, a petition in bankruptcy or insolvency or for reorganization or
for the appointment of a receiver or trustee of all or a portion of its
property; (d) Advance Auto makes an assignment for the benefit of creditors or
petitions for or enters into such an arrangement; and (e) Advance Auto abandons
an Advance Property or suffers an Advance Property to be taken under any writ
of execution.
If any Event of Default had occurred, then the Company, without excluding
other rights or remedies it may have, shall have the immediate right of
re-entry and may remove all persons and property from the Advance Property and
such property may be removed and stored in a public warehouse or elsewhere at
the cost of and for the account of Advance Auto, all without resort to legal
process and without being deemed guilty of trespass, or becoming liable for any
loss or damage which may be occasioned thereby (to the extent permitted by the
law of the state in which the Advance Property is located). If the Company
should elect to re-enter as herein provided, or should it take possession
pursuant to legal proceedings, it may either terminate the Advance Lease or it
may from time to time, without terminating the Advance Lease, make such
alterations and repairs as may be necessary to relet the Advance Property, and
relet said Property for such term and at such rentals and upon such other terms
and conditions as the Company may deem advisable. In the event of such
reletting, all rents received by the Company will be applied, first, to the
payment of any indebtedness other than rent due from Advance Auto to the
Company; second, to the payment of any costs and expenses of such reletting,
including the expense of alterations and repairs; and, third, to the payment of
rent due and unpaid, and the residue, if any, will be held by the Company and
applied in payment of any future rent due and unpaid. If such reletting yields
rentals insufficient for any month to pay the rent due by Advance Auto
hereunder for that month, Advance Auto will be liable to the Company for the
deficiency and same will be paid monthly. No such re-entry or taking possession
of the leased premises by the Company will be construed as an election to
terminate the Advance Lease unless a written notice of such intention be given
by the Company to Advance Auto at the time of such re-entry. Notwithstanding
any such re-entry and reletting without termination, the Company may at any
time thereafter elect to terminate the Advance Lease for such previous breach,
in which event it may recover from Advance Auto damages incurred by reason of
such breach, including the cost of recovering the Advance Property and the
difference in value between the rent due pursuant to the Advance Lease for the
remainder of the term and its fair market rental value for the remainder of the
term. In determining the rent payable by Advance Auto, subsequent to default,
the Base Rent for each year of the unexpired term will be equal to the average
Base Rent paid by Advance Auto from the commencement of the Term to the date of
default.
Governing Law. Each Advance Lease will be governed by and construed in
accordance with the law of the state where the applicable Advance Property is
located. In addition, each Advance Lessee will provide a certificate relating
to certain federal income tax standards.
Governmental Regulations Affecting the Properties
Environmental Laws. Under various federal, state and local laws,
ordinances and regulations, a current or previous owner, developer or operator
of real estate may be liable for the costs of removal or remediation of certain
hazardous or toxic substances at, on, under or in its property. The costs of
such removal or remediation could be substantial. Such laws often impose such
liability without regard to whether the owner or operator knew of, or was
responsible for, the release or presence of such hazardous or toxic substances.
The presence of such substances may adversely affect the owner's ability
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to sell or rent such real estate or to borrow using such real estate as
collateral. Persons who arrange for the disposal or treatment of hazardous or
toxic substances also may be liable for the costs of investigation, removal
and/or remediation of such substances at the disposal or treatment facility,
whether or not such facility is owned or operated by such person.
Limited environmental assessments have been conducted or will be completed
prior to the consummation of the Offering at the Initial Properties, with the
results set out in the Reports prepared by consultants retained by or on behalf
of the Company, Sonic Automotive, Primax and/or their respective affiliates.
The Reports describe environmental conditions of concern at certain of the
Initial Properties, including actual and potential releases of petroleum
products from underground storage tanks and the presence of asbestos-containing
materials. Based on the Reports, the Company estimates that the aggregate cost
expected to remedy identified environmental conditions of concern will not be
material to the Company. Although the Company is unaware of any environmental
condition at any of the Initial Properties that the Company believes would have
a material adverse effect on the Company's financial condition or results of
operations, no assurance can be given that such an environmental condition does
not exist. If such a condition exists or arises in the future, the Company may
incur substantial costs for the investigation, removal and/or remediation of
the condition.
With the exception of the sellers of the Bowers Properties, the sellers of
the Initial Properties have agreed to indemnify the Company for third party
claims based on environmental conditions at least until such time as the
relevant statutes of limitations have expired. The Company has agreed to
purchase the Bowers Properties "as is," and has further agreed to release,
discharge and indemnify the sellers of the Bowers Properties with respect to
any liabilities that those sellers might have to the Company in any way related
to the Bowers Properties and for third party claims based on environmental
conditions. In addition, the Initial Lessees and their affiliates are obligated
to comply with environmental laws and remediation requirements and hold
harmless the Company and its officers, Trustees, employees, shareholders,
agents and Affiliates from any failure to comply with those requirements. In
the Bowers Leases, the Company has agreed to remediate and be responsible for,
and indemnify the Lessees against, environmental costs associated with
conditions not caused by the Lessees' acts or omissions. No assurance can be
given, however, that all potential environmental liabilities have been
identified, that no prior owner or operator or other person created any
material environmental condition not known to the Company or that future uses,
conditions or legal requirements (including, without limitation, those that may
result from future acts or omissions or changes in applicable environmental
laws and regulations) will not result in the imposition of environmental
liabilities. The Initial Lessees have covenanted and the sellers of the Initial
Properties have made certain representations in the Initial Leases and the
contribution agreements (the "Contribution Agreements") and the purchase
agreements (the "Purchase Agreements") for the Initial Properties,
respectively, regarding environmental matters and, with the exception of the
sellers of the Bowers Properties, will indemnify the Company for third party
claims arising from breaches of such representations. There can be no assurance
that such indemnification will be available or uncontested, however, or that
any environmental conditions that are not remediated by the sellers of the
Initial Properties or Initial Lessees and their affiliates will not impede the
ability of the Company to sell, re-lease or finance the Initial Properties in
the future or negatively impact future sales or rental proceeds.
Americans With Disabilities Act of 1990. The Initial Properties and any
subsequently acquired Properties must comply with Title III of the ADA to the
extent that such properties are "public accommodations" and/or "commercial
facilities" as defined by the ADA. Compliance with the ADA requires that public
accommodations "reasonably accommodate" individuals with disabilities and that
new construction or alterations made to "commercial facilities" conform to
accessibility guidelines unless "structurally impracticable" for new
construction, or technically infeasible for alterations. Under the Leases, the
Lessee is responsible for all costs associated with compliance with the ADA.
However, noncompliance with the ADA could result in the imposition of
injunctive relief, fines, an award of damages to private litigants or
additional capital expenditures to remedy such noncompliance.
Dealership Franchise Agreements
Each automobile dealer located on the Initial Dealership Properties
operates its dealership pursuant to a written Franchise Agreement with a
Manufacturer. The typical automotive Franchise Agreement specifies the
locations at which the dealer has the right and the obligation to sell motor
vehicles and related parts and products and to perform certain approved
services in order to serve a specified market area. The designation of such
areas and the allocation of new vehicles among dealerships are subject to the
discretion of the Manufacturer, which generally does not guarantee exclusivity
within a specified territory. A Franchise Agreement may impose requirements on
the dealer concerning such matters as the showrooms, the facilities and
equipment for servicing vehicles, the maintenance of inventories of vehicles
and parts, the maintenance of minimum net working capital and the training of
personnel. Compliance with these requirements is closely monitored by the
Manufacturer. In addition, Manufacturers require the dealers to submit a
financial statement of operations on a monthly
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basis. The Franchise Agreement also grants the dealers the non-exclusive right
to use and display the Manufacturer's trademarks, service marks and designs in
the form and manner approved by the Manufacturer.
Each Franchise Agreement sets forth the name of the person approved by the
Manufacturer to exercise full managerial authority over the operations of a
dealership and the names and ownership percentages of the approved owners of
the dealership and contains provisions requiring the Manufacturer's prior
approval of changes in management or transfers of ownership of the dealership.
Several Manufacturers include provisions in their Franchise Agreements that
prohibit transfers of assets or real property considered necessary for the
conduct of the dealership or similar restrictions that could prohibit or
require the prior consent of a Manufacturer before a Seller can sell and the
Company can purchase a Property.
Most Franchise Agreements expire after a specified period of time, ranging
from one to five years, and the Company is not aware of any Sonic Lessee that
would be unable to renew any expiring agreements in the ordinary course of
business. The typical Franchise Agreement provides for early termination or
non-renewal by the Manufacturer under certain circumstances, such as change of
management or ownership without Manufacturer approval, insolvency or bankruptcy
of the dealership, death or incapacity of the dealer manager, conviction of a
dealer manager or owner of certain crimes, misrepresentation of certain
information by the dealer or owner to the Manufacturer, failure to adequately
operate the dealership, failure to maintain any license, permit or
authorization required for the conduct of business, or material breach of other
provisions of the Franchise Agreement. The dealership is typically entitled to
terminate the Franchise Agreement at any time without cause.
The motor vehicle franchise relationship is also governed by various
federal and state laws. The following discussion of state court and
administrative holdings and various state laws is based on management's beliefs
and may not be an accurate description of the state court and administrative
holdings and various state laws. Under the laws of most states, despite the
terms of contracts between the Manufacturers and the dealers, Manufacturers may
not unreasonably withhold approval of a transfer of a dealership, or reject a
prospective transferee of a dealership who is of good moral character and who
otherwise meets the Manufacturer's written, reasonable and uniformly applied
standards or qualifications relating to the prospective transferee's business
experience and financial qualifications. In addition, under the laws of certain
states, franchised dealerships may challenge Manufacturers' attempts to
establish new franchises in the franchised dealers' markets, and state
regulators may deny applications to establish new dealerships for a number of
reasons, including a determination that the Manufacturer is adequately
represented in the market. The laws of certain states also limit the ability of
Manufacturers to terminate or fail to renew franchises.
Competition
Several REITs and other competitors of the Company have either begun or
announced intentions to begin acquiring properties used by automobile
dealerships, automobile parts stores and other related automotive businesses.
Other public or private entities also may target these types of properties for
acquisition, and some of those companies may have greater financial resources
or general real estate experience than the Company. Those entities will compete
with the Company in seeking Properties for acquisition and re-leasing of
Properties to automobile dealers or related automotive businesses as they
become available. The Company believes that competition for Properties will be
based primarily on the acquisition price and rental terms. Competition could
have the effect of increasing acquisition prices and decreasing rents, which
would have an adverse affect on the financial results of the Company and cash
available for distribution to shareholders. See "Risk Factors--The Company will
Compete with Other Companies with Similar Business Objectives and Strategies."
Employees
As of December 14, 1998, the Company had five employees. None of the
employees is represented by a collective bargaining unit. The Company believes
that its relationship with its employees is good.
Legal Proceedings
The Company is not a party to any legal proceedings. Pursuant to the
Initial Leases, the Initial Lessees will indemnify the Company from and against
all liabilities, costs and expenses imposed upon or asserted against the
Company as owner of the Initial Properties on account of certain matters
relating to the operation of the Initial Properties by Initial Lessee and,
where appropriate, the ownership of the Initial Properties prior to their
acquisition by the Company. See "--Dealership, Sonic and Bowers
Leases--Indemnification."
45
<PAGE>
AUTOMOTIVE RETAILING AND MOTOR VEHICLE AFTERMARKET INDUSTRIES
Automotive Retailing Industry
Automotive retailing, with approximately $625 billion in 1997 sales, is
the largest consumer retail business in the United States, representing
approximately 8% of the domestic gross product based on data published by NADA
and the U.S. Department of Commerce. From 1992 to 1997, average dealership new
vehicles sales grew at an annual compounded rate of 8.8%, while average
dealership used vehicle sales grew at a rate of 12.2%. During this period, unit
sales grew at rates of 3.3% for new vehicles and 4.8% for used vehicles.
While the automotive manufacturing industry tends to be very sensitive to
economic cycles, the automotive retailing industry has shown relatively low
volatility. The chart set forth below shows the historical relationship between
the profitability margins of the automotive retailing and automotive
manufacturing industries:
<TABLE>
<CAPTION>
RETAILING VS. MANUFACTURING HISTORICAL PRETAX MARGINS
1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Retailing
Pretax 1.48 0.94 1.52 1.77 2 2.1 2.1 2.05 2 1.71 1 1 1 1.39 1.6 1.8 1.4 1.53 1.37
Margins
Big Three
Pretax 0.65 (8.48)(2.3) (0.2) 6.06 9.38 7.96 6.98 7.34 6.44 4.32 0.08 (3.54)(0.02) 4.89 7.94 5.85 6.35 6.49
Margin*
*Ford Motor Company, General Motors Corporation and Chrysler Corporation.
Sources: Publicly available documents and NADA
</TABLE>
Auto retailers' pre-tax profit margins have remained relatively stable
from 1979 to 1997 even during recessionary periods. Conversely, average pre-tax
profit margins of the three largest U.S. automotive manufacturers have
fluctuated drastically during the comparable period. The Company believes that
the relative insensitivity to recessionary markets that the automotive
retailing industry has shown relative to the automotive manufacturing industry
is due to a number of factors including, (i) approximately 90% of the
automotive retailing sector's profits are derived from the sale of used cars,
parts and service and finance and insurance; (ii) 60%-65% of the automotive
retailing sector's costs are variable, relating to personnel, advertising and
inventory finance costs; (iii) sales and service employees are typically
compensated on production levels; (iv) manufacturers typically increase dealer
incentives when sales slow, offsetting volume declines; and (v) the diversity
in offering import and domestic brands tends to lessen the impact of a decline
in one brand.
46
<PAGE>
Significant consolidation has taken place since the automotive retailing
industry's inception. The industry today remains highly fragmented, with the
largest 100 dealer groups generating less than 10% of total sales revenues and
controlling less than 6% of all franchised dealerships. According to industry
data, the number of franchised dealerships has declined from approximately
25,000 dealerships in 1990 to approximately 22,600 in 1997. The chart set forth
below illustrates the consolidation of the automotive retail industry since
1990:
FRANCHISED DEALERSHIPS IN THE UNITED STATES
1990 1991 1992 1993 1994 1995 1996 1997
- ---- ---- ---- ---- ---- ---- ---- ----
24,825 24,200 23,500 22,950 22,850 22,800 22,750 22,600
As the consolidation of dealerships has continued, dealers have been
aggregating stores into large dealership groups. The following chart
illustrates the decline in the number of smaller dealerships and the related
increase in larger dealerships over the same period:
NUMBER OF DEALERSHIPS BY NEW UNIT SALES VOLUME
1997 1987 1977
---- ---- ----
Annual New-Car
Sales Volume 0-149: 4,540 7,294 13,100
(Units)
150-399: 6,810 8,048 8,950
400-749: 5,562 4,653 3,615
750+: 5,789 5,156 3,435
In addition to the consolidation of new car dealers, an increasing number
of used vehicles are being sold by "super-store" outlets such as Carmax and
Auto Nation.
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<PAGE>
The Company believes that further consolidation is likely in the
automotive retail industry due to economies of scale, increased capital
requirements of dealerships, the limited number of viable alternative exit
strategies for dealership owners and the desire of certain Manufacturers to
strengthen their brand identity by consolidating their franchised dealerships.
The Company believes that these factors, together with the general illiquidity
of real estate assets, will provide the Company with attractive investment
opportunities. In the past, dealers had limited options for financing the real
estate assets required to operate their businesses. The Company believes that
due to the increasing demand for efficient development of capital by
increasingly sophisticated dealers that significant demand for the Company's
program exists.
Retail Automotive Aftermarket Industry
The retail automotive aftermarket consists of products and services that
are purchased for motor vehicles after the original sale of the vehicles, such
as accessories, maintenance and repairs, replacement parts and chemicals.
According to the APAA, the retail automotive aftermarket industry had 1997
sales of approximately $151 billion, up from approximately $143 billion in
1996. Retail sales in 1997 consisted of the following:
<TABLE>
<CAPTION>
Products and Services Retail Sales
- --------------------------------- --------------
(in billions)
<S> <C>
Do-It-Yourself Products:
Parts and Accessories ......... $ 25.1
Lubricants .................... 0.9
Motor Oil ..................... 1.7
Other Chemicals ............... 2.4
Tires and Tubes ............... 18.3
Service and Repair:
Labor ......................... 44.5
Parts, Chemicals .............. 58.3
-------
Total ......................... $ 151.2
=======
</TABLE>
The automobile aftermarket industry is highly fragmented, with
approximately 520,000 outlets in the U.S. While the industry has undergone
significant consolidation over the past decade, the top ten retailers currently
control only 1% of the total number of outlets. The Company's expects that its
acquisition efforts in the automotive aftermarket industry will be focused on
auto parts outlets and specialty service centers.
The Company believes that this fragmented ownership, combined with the
increasing liquidity required by retailers to support large inventories and to
invest in technological improvements related to the increased complexity and
computerization of the vehicle fleet, create opportunities to acquire
attractive Properties that can be leased back to national retail operators.
48
<PAGE>
MANAGEMENT
Trustees, Executive Officers and Key Employees
The executive officers and Trustees of the Company, and their ages as of
September 1, 1998, are as follows:
<TABLE>
<CAPTION>
Name Age Position(s) with the Company Initial Term Expires
- ----------------------------- ----- ------------------------------------------ ---------------------
<S> <C> <C> <C>
O. Bruton Smith ............. 72 Chairman and Trustee 2001
Benjamin F. Bracy ........... 55 President --
Mark J. Iuppenlatz .......... 39 Executive Vice President -- Acquisitions --
and Chief Operating Officer
Virginia R. Dunn ............ 42 Vice President and --
Chief Financial Officer
James W. Johnston ........... 52 Trustee 2000
Donald J. Carter ............ 65 Trustee 1999
</TABLE>
O. Bruton Smith has been the Chairman and a Trustee of the Company since
its organization in 1998. Since its formation in October 1998, he has served as
the chief manager and owner of MMR Holdings. Mr. Smith has been the controlling
shareholder, the chairman, chief executive officer and a director of Sonic
Automotive since its formation in 1997. Mr. Smith is presently a director and
president of each of the dealerships affiliated with Sonic Automotive. Mr.
Smith has worked in the retail automobile industry since 1966. He is also the
chairman and chief executive officer, a director and controlling shareholder,
either directly or indirectly through Sonic Financial Corporation, of Speedway
Motorsports, a NYSE traded company. Among other things, Speedway Motorsports
owns and operates the following NASCAR racetracks: Atlanta Motor Speedway,
Bristol Motor Speedway, Charlotte Motor Speedway, Sears Point Raceway and Texas
Motor Speedway.
Benjamin F. Bracy has been the Company's President since its organization
in 1998. Since its formation in October 1998, he has served as the president of
MMR Holdings. Before joining the Company, Mr. Bracy was a senior vice president
of NationsBanc Investments Inc. ("NBII"), a wholly owned subsidiary of
NationsBank, N.A. He has held several management positions with NBII and its
predecessor companies since 1988, each generally involving managing the retail
brokerage sales efforts of NBII and promoting customer services between the
parent entity and NBII. Mr. Bracy was a founder and from 1986 to 1988, an
executive vice president of First Tryon Securities, an investment banking firm
located in Charlotte that was acquired by the predecessor of NationsBank, N.A.
in 1988, where he was responsible for the recruitment and management of a
regional retail brokerage branch distribution system. From 1982 until 1986, Mr.
Bracy was a senior vice president with Interstate Securities, now Interstate
Johnson Lane, holding positions in branch management and regional development.
Mark J. Iuppenlatz has been the Executive Vice President -- Acquisitions
and Chief Operating Officer of the Company since September 1998. Since its
formation in October 1998, he has served as the secretary of MMR Holdings. Mr.
Iuppenlatz has worked in the commercial real estate industry for the past 15
years. From 1996 until he joined the Company, he was responsible for conducting
the development operations of Brookdale Living Communities, Inc., a publicly
traded company ("Brookdale"). At Brookdale, Mr. Iuppenlatz was responsible for
the implementation of a $400.0 million development program, including
developing strategy, locating sites and negotiating purchase contracts,
awarding construction contracts and coordinating of debt financing. From 1994
to 1996, he was vice president of Schlotzsky's, Inc., a publicly traded
company, where his responsibilities included the development of over 30 new
restaurant locations in more than ten states. He also served in Spain from 1989
to 1991 as the director of marketing and assistant director of development for
Kepro S.A., an affiliate of The Prime Group, where he had responsibilities for
the marketing and development of a mixed use planned development comprised of
22 office buildings, a 2.0 million square foot shopping mall, apartments,
cultural facilities and a major urban park. Mr. Iuppenlatz was also the
director of leasing for The Prime Group from 1989 through 1991, and was
responsible for marketing, negotiating and closing lease agreements for
commercial space in a 1.0 million square foot office tower.
Virginia R. Dunn has been the Vice President and Chief Financial Officer
of the Company since September 1998. Since its formation in October 1998, she
has served as the treasurer of MMR Holdings. Ms. Dunn has over 15 years of
experience in the public accounting profession with a specialization in the
real estate and financial services industries. Before joining the Company, she
was a senior manager in the Charlotte office of Deloitte & Touche LLP where she
had been employed since 1997. From 1978 to 1993, Ms. Dunn had worked in the
Baltimore and Washington, D.C. offices of Deloitte & Touche LLP. Ms. Dunn
served both public and private clients engaged in the development, construction
and management of commercial, industrial and residential real estate as well as
in mortgage banking. She was a vice president and director
49
<PAGE>
of accounting from 1993 to 1994 for The Bank of Baltimore, which was acquired
by First Fidelity Bancorporation and subsequently by First Union Corporation.
At The Bank of Baltimore, Ms. Dunn was responsible for managing and directing
all corporate accounting operations, including financial and regulatory
reporting. From 1994 to 1996, she served as the director of finance for Roland
Park Country School, an independent school in Baltimore, Maryland. Ms. Dunn is
a certified public accountant in Maryland.
James W. Johnston has been a Trustee of the Company since July 1998. Mr.
Johnston is president and chief executive officer of Stonemarker Enterprises,
Inc., a consulting and investment company, and serves on the boards of
directors of Wrap-it, the Sealy Corporation, the North Carolina Citizens for
Business and Industry, and the Greater Winston-Salem Chamber of Commerce. He is
a member of the Board of Visitors of the Bowman Gray/Baptist Hospital Medical
Center and the North Carolina Business Council of Management and Development,
Winston-Salem, Inc. Mr. Johnston also serves on the board of trustees of Wake
Forest University and is a member of the marketing committee for the National
Multiple Sclerosis Society. From 1995 to 1996, Mr. Johnston was vice chairman
of RJR Nabisco, Inc. Mr. Johnston was chief executive officer of R.J. Reynolds
Tobacco Company from 1989 to 1995, and chaired the board of directors of that
company from 1989 to 1996. Mr. Johnston was responsible for R.J. Reynolds
Tobacco Company's worldwide tobacco operations from 1994 to 1996.
Donald J. Carter has been a Trustee of the Company since July 1998. Mr.
Carter is a former chairman of the board, CEO and treasurer of Home Interiors &
Gifts, Inc., a private Dallas, Texas corporation, and is a part owner of the
Dallas Mavericks' National Basketball Association franchise. Mr. Carter founded
Carter-Crowley Properties, Inc., a real estate firm located in Dallas, Texas
that was purchased by Crescent Real Estate in 1997. In addition, he is the
chairman of the board of Carter & Sons Freightways, Inc., a privately owned
trucking company based in Carrollton, Texas.
Committees of the Board
Audit Committee. Promptly following the closing of the Offering, the Board
of the Company will establish an Audit Committee. The Audit Committee will be
established to make recommendations concerning the engagement of independent
public accountants, to review with the independent accountants the plans and
results of the audit engagement, to approve professional services provided by
the independent public accountants, to review the independence of the
independent public accountants, to consider the range of audit and non-audit
fees and to review the adequacy of the Company's internal accounting controls.
A majority of the members of the Audit Committee will be comprised of
Independent Trustees.
Executive Committee. Promptly following the closing of the Offering, the
Board of the Company will establish an Executive Committee. Subject to the
Company's conflicts of interest policies, the Executive Committee may be
granted certain authority to acquire and dispose of real property and the power
to authorize, on behalf of the full Board, the execution of certain contracts
and agreements, including those related to the borrowing of money by the
Company, and, consistent with the Partnership Agreement, to cause the Operating
Partnership to take such actions. The Executive Committee initially will be
comprised of Mr. Smith and two Trustees to be appointed after the consummation
of the Offering.
Executive Compensation Committee. Promptly following the closing of the
Offering, the Board of the Company will establish an Executive Compensation
Committee to determine compensation for the Company's executive officers and to
implement and administer the Company's Plan. The Executive Compensation
Committee will be comprised of at least two Independent Trustees to be
appointed after the consummation of the Offering.
Compensation of Trustees
Each non-employee Trustee (other than Mr. Smith) will receive an annual
grant of options to purchase 10,000 Common Shares under the Formula Plan. See
"--1999 Formula Shares Option Plan." The Company does not intend to pay any
other compensation to its Trustees.
Executive Compensation
The Company was organized on April 14, 1998 and did not conduct any
operations prior to that time. Accordingly, the Company did not pay any
compensation to its executive officers for the year ended December 31, 1997.
The following table below sets forth the annual base salary rates and other
compensation expected to be paid in 1998 to the Company's executive officers.
Executive officers are also eligible to receive discretionary annual incentive
bonuses based upon a percentage of the base annual salary of each executive
officer and dependent upon individual and corporate contribution to the
achievement of specific Company goals as set forth annually by the Executive
Compensation Committee.
50
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
Long-Term
Compensation
Awards
Number of
Shares
Name and Underlying
Principal Position(s) Year Salary (1) Bonus (2) Options (3)
- ------------------------------------ ------ ------------ ----------- -------------
<S> <C> <C> <C> <C>
Benjamin F. Bracy
President .................. 1998 $250,000 -- 140,000
Mark J. Iuppenlatz
Executive Vice President, Chief
Operating Officer and Director of
Acquisitions ............... 1998 $250,000 --(4) 140,000
Virginia R. Dunn
Vice President and Chief Financial
Officer .................... 1998 $144,000 -- 70,000
</TABLE>
- ---------
(1) Amounts given are annualized projections for the year ending December 31,
1998.
(2) The executive officers are eligible to receive bonuses based on performance
at the discretion of the Executive Compensation Committee.
(3) All options will vest in 25% increments over a three-year period with the
first increment vesting immediately upon the date of grant and the
remaining 75% vesting in three equal installments on the first, second and
third anniversaries of the date of grant. All such options will be
exercisable at the Offering Price.
(4) Mr. Iuppenlatz may receive, in addition to discretionary bonuses that may
be awarded, incentive compensation based on the dollar value of properties
acquired by the Company annually.
1999 Shares Option Plan
In January 1999, the Board and shareholders of the Company will adopt the
Plan in order to attract and retain key personnel. The following discussion of
the material features of the Plan is qualified by reference to the text of such
Plan filed as an exhibit to the Registration Statement of which this Prospectus
is a part.
Under the Plan, options to purchase up to an aggregate of 1,100,000 Common
Shares may be granted to key employees of the Company, its subsidiaries and
other affiliated entities and to officers, Trustees, consultants and other
individuals providing services to the Company and subsidiaries and affiliated
entities. Unless designated as "incentive stock options" ("ISOs") intended to
qualify under Section 422 of the Code, options granted under the Plan are
intended to be "nonstatutory stock options ("NSOs"). The Executive Compensation
Committee of the Board will administer the Plan. Members of the Board who serve
on the Executive Compensation Committee must qualify as "non-employee
directors," as that term is defined in Rule 16b-3 promulgated under the
Exchange Act.
The Executive Compensation Committee will determine, among other things,
the persons who are to receive options, the number of shares to be subject to
each option, the exercise price of options and the vesting schedule of options;
provided, that the Board will make such determinations with respect to the
initial grants made under the Plan. The Board will determine the terms and
conditions upon which the Company may make loans to enable an optionee to pay
the exercise price of an option. In selecting individuals for options and
determining the terms thereof, the Executive Compensation Committee may
consider any factors it considers relevant, including present and potential
contributions to the success of the Company. Option grants will be evidenced by
an agreement in a form, established from time to time, by the Executive
Compensation Committee.
Options granted under the Plan must be exercised within a period fixed by
the Executive Compensation Committee, which period may not exceed ten years
from the date of grant of the option, or, in the case of ISOs granted to any
holder on the date of grant of more than 10% of the total combined voting power
of all classes of shares of the Company, five years from the date of grant of
the option. Options may expire earlier upon termination of employment or
severance of the relationship with the Company. Options may be made exercisable
in whole or in installments, as determined by the Executive Compensation
Committee. The exercise price of ISOs may not be less than the fair market
value of the Common Shares on the date of grant of the ISOs. In addition, in
the case of ISOs granted to any holder on the date of grant of more than 10% of
the total combined voting power of all classes of shares of the Company, the
exercise price of such ISOs may not
51
<PAGE>
be less than 110% of the fair market value of the Common Shares on the date of
grant of the ISOs. The exercise price of options that are not ISOs will be
determined at the discretion of the Executive Compensation Committee. The
exercise price of options may be paid in cash, in Common Shares owned by the
optionee, or in any combination of cash, shares and NSOs.
Options generally may not be transferred other than by will or the laws of
descent and distribution and, during the lifetime of an optionee, options may
be exercised only by the optionee. Notwithstanding the foregoing, the Executive
Compensation Committee, in its absolute discretion, may grant transferable
NSOs, subject to the applicable limitations provided in the option agreement.
Options granted under the Plan may include the right to acquire a "reload"
option. In such a case, if a participant pays all or part of the exercise price
of an option with Common Shares held by the optionee for at least six months,
then, upon exercise of the option, the optionee is granted a second option to
purchase, at the fair market value as of the date of exercise of the original
option, the number of Common Shares transferred to the Company by the optionee
in payment of the exercise price of the original option. A reload option is not
exercisable until one year after the grant date of such reload option or the
expiration date of the original option. If the exercise price of a reload
option is paid for with Common Shares that have been held by the optionee for
more than six months, then another reload option will be issued. Common Shares
covered by a reload option will not reduce the number of Common Shares
available under the Plan.
The Plan provides that, in the event of changes in the corporate structure
of the Company or certain events affecting the shares of the Company,
adjustments will automatically be made in the number and kind of shares
available for issuance and in the number and kind of shares covered by
outstanding options. It further provides that, in connection with any merger or
consolidation in which the Company is not the surviving entity and which
results in the holders of the outstanding voting securities of the Company
owning less than a majority of the surviving entity or any sale or transfer by
the Company of all or substantially all its assets or any tender offer or
exchange offer for or the acquisition, directly or indirectly, by any person or
group of all or a majority of the then-outstanding voting securities of the
Company, all outstanding options under the Plan will become exercisable in full
on and after (i) the 15th day prior to the effective date of such merger,
consolidation, sale, transfer or acquisition or (ii) the date of commencement
of such tender offer or exchange offer, as the case may be.
The Board at any time may amend the Plan or the term of any option
outstanding under the Plan, but no such amendment shall, without an optionee's
consent, adversely affect that optionee's rights under an outstanding option.
Shareholder approval of an amendment to the Plan will be required only to the
extent necessary to comply with applicable self-regulatory organization rules
or applicable federal or state laws or regulations.
The Board, on or before the consummation of the Offering, intends to grant
options to purchase an aggregate of 465,000 Common Shares under the Plan to Mr.
Smith and executive officers of the Company. Messrs. Smith, Bracy and
Iuppenlatz and Ms. Dunn are to be granted options to purchase 115,000 shares,
140,000 shares, 140,000 shares and 70,000 shares, respectively, at an exercise
price equal to the public offering price of the Common Shares sold in the
Offering. All of Mr. Smith's options will become exercisable upon their grant.
Options granted to Messrs. Bracy and Iuppenlatz and Ms. Dunn vest and become
exercisable as follows: 25% on the date of grant and the remaining 75% in three
equal installments on the first, second and third anniversaries of the date of
grant. All options will expire ten years after the date of grant.
The following is a summary description of the federal income tax
consequences of certain transactions that may occur under the Plan. This
summary is not intended to be exhaustive and does not attempt to describe the
federal income tax consequences of each possible transaction under the Plan.
The issuance and exercise of ISOs have no federal income tax consequences
to the Company. While the issuance and exercise of ISOs generally have no
ordinary income tax consequences to the holder, upon the exercise of an ISO,
the holder will treat the excess of the fair market value of the Common Shares
on the date of exercise over the exercise price as an item of tax adjustment
for alternative minimum tax purposes. If the holder of Common Shares acquired
upon the exercise of an ISO holds such Common Shares until a date that is more
than two years following the grant of the ISO and one year following the
exercise of the ISO, the disposition of such Common Shares will ordinarily
result in capital gain or loss to the holder for federal income tax purposes
equal to the difference between the amount realized on disposition of the
Common Stock and the option exercise price. If the holding period requirements
described above are not met, the holder will recognize ordinary income for
federal income tax purposes upon disposition of the Common Shares in an amount
equal to the lesser of (i) the excess of the fair market value of the Common
Shares on the date of exercise over the option exercise price,
52
<PAGE>
and (ii) the excess of the amount realized on disposition of the Common Shares
over the option exercise price. Any additional gain upon the disposition will
be treated as capital gain. The Company will be entitled to a federal income
tax deduction for the Company's taxable year in which the disposition of the
Common Shares occurs equal to the amount of ordinary income recognized by the
holder.
The issuance of NSOs has no federal income tax consequences to the Company
or the holder. Upon the exercise of an NSO, NSO holders generally will
recognize ordinary income for federal income tax purposes at the time of option
exercise equal to the amount by which the fair market value of the underlying
shares on the date of exercise exceeds the exercise price. The Company
generally will be allowed a federal income tax deduction in the same amount.
The holder's tax basis in the shares will be the exercise price plus the amount
of income recognized upon exercise of the NSO and the holding period will begin
on the date the NSO is exercised. In the event of the disposition of the Common
Shares acquired by exercise of a NSO, any appreciation or depreciation after
the exercise date generally will be treated as capital gain or loss.
If the option exercise price under any NSO is paid for by surrendering
Common Shares previously acquired, then the optionee will recognize ordinary
income on the exercise as described above with respect to any shares acquired
under the NSO in excess of the number of shares surrendered (such shares being
treated as having been acquired without consideration), but will not recognize
any taxable gain or loss on the difference between the optionee's basis in the
surrendered shares and their current fair market value. For federal income tax
purposes, the number of newly acquired shares equal to the number of shares
surrendered will have the same basis and holding period as the surrendered
shares. Any newly acquired shares in excess of the number of shares surrendered
will have a tax basis equal to the amount of ordinary income recognized on such
exercise (i.e., fair market value at exercise) and a holding period which
begins on the date the optionee recognizes ordinary income for tax purposes.
The Company intends to register the Common Shares underlying the Plan as
required by the federal securities laws. If such registration is not required,
such shares may be issued upon option exercise in reliance upon the private
offering exemption codified in Section 4(2) of the Securities Act. Resale of
such shares may be permitted subject to the limitations of Rule 144 under the
Securities Act.
1999 Formula Shares Option Plan
The Formula Plan will be adopted by the Board and the shareholders of the
Company in January 1999. The Formula Plan is intended to be a "formula plan"
under Note (3) to Rule 16b-3 under the Exchange Act. The Formula Plan is
intended to promote the interests of the Company and its shareholders by
providing the Trustees of the Company who are not affiliated with the Company's
management ("Independent Trustees"), who are responsible in part for the
Company's growth and financial success, with the incentives inherent in
ownership of Common Shares and encouraging them to continue as Trustees. A
committee of the Board consisting of all Trustees other than the Independent
Trustees (the "Committee") serves as the committee to administer and interpret
the terms of the Formula Plan on behalf of the Company.
Under the Formula Plan, on January 31 of each year during the term of the
Formula Plan, each person who is then an Independent Trustee shall be awarded a
nonstatutory option to purchase 10,000 shares of Common Shares up to a total of
200,000 shares reserved under the Formula Plan (subject to further adjustment
in certain events). No options to purchase Common Shares have been issued under
the Plan.
An option granted under the Formula Plan (evidenced by an agreement in a
form established, from time to time, by the Committee) entitles the participant
to purchase Common Shares at an option exercise price equal to the closing
sales price of a Common Share on the last business day immediately preceding
the date of such award for which a closing price is available from the
principal trading market for the Common Shares (the "Fair Market Value").
In the event the optionee's status as an Independent Trustee terminates
incidental to conduct that, in the judgment of the Committee, involves a breach
of fiduciary duty by such Independent Trustee or other conduct detrimental to
the Company, then his or her options shall terminate immediately and thereafter
be of no force or effect. Options granted under the Formula Plan are
non-transferable and non-assignable by the optionee other than by will or by
the laws of descent and distribution or pursuant to a qualified domestic
relations order as defined by the Code or Title I of the Employment Retirement
Income Security Act and the rules thereunder. No option may be exercised after
the expiration of its term. The option exercise price is payable in full upon
exercise of an option in cash or in Common Shares owned by the optionee or a
combination of cash and Common Shares. No exercise of options shall be for less
than 100 Common Shares unless the number purchased is the total number of
shares in respect of which the option is then exercisable.
53
<PAGE>
Upon the occurrence of certain events involving the recapitalization or
reorganization of the Company, the Committee will make proportionate
adjustments to the number of shares covered by each outstanding option and the
per share exercise price thereof for any increase or decrease in the number of
issued Common Shares resulting from a subdivision or consolidation of shares or
the payment of a share dividend on the Common Shares.
The Committee may from time to time amend, suspend or discontinue the
Formula Plan or revise it in any respect whatsoever. Shareholder approval of an
amendment will be required only to the extent necessary to comply with
applicable self-regulatory organization rules or applicable federal or state
laws or regulations. No amendment shall, without an Independent Trustee's
consent, adversely affect that Independent Trustee's rights under our
outstanding option.
The following summary description of the federal income tax consequences
of transactions that may occur under the Formula Plan is not intended to be
exhaustive. No federal taxable income is recognized by plan participants upon
the grant of an option under this Formula Plan. The Independent Trustees are
subject to liability under Section 16(b) of the Exchange Act ("16(b)
Optionees") and may not be deemed to recognize the ordinary income attributable
to exercise until the occurrence of both (i) an exercise and (ii) the earlier
of (a) the expiration of six months after the date of grant of the option and
(b) the first day on which the sale of the Common Shares at a profit will not
subject the Trustee to Section 16 liability (the "Recognition Date"). The
amount of ordinary income to be recognized by 16(b) Optionees will equal the
excess of the Fair Market Value on the Recognition Date of the Common Shares so
purchased over the option exercise price, unless (if the Recognition Date is
later than the exercise date) the 16(b) Optionee files a written election with
both the Internal Revenue Service and the Company pursuant to Section 83(b) of
the Code within thirty days after exercise to have the ordinary income
attributable to exercise realized as of the exercise date, in which case the
Independent Trustee will recognize ordinary income equal to the amount by which
the Fair Market Value of the purchased shares on the date of exercise exceeds
the option exercise price.
The option exercise price plus the amount of income recognized on the date
of exercise (or, if the Recognition Date is later than the exercise date, in
the case of 16(b) Optionees who do not make an 83(b) election, on the
Recognition Date) will constitute the tax basis thereof for computing capital
gain or loss on any subsequent sale, and the holding period for an Independent
Trustee will generally be measured from the date the option is exercised (or,
if the Recognition Date is later than the exercise date, in the case of 16(b)
Optionees who do not make an 83(b) election, from the Recognition Date). The
Company will be entitled to a federal income tax deduction for the Company's
taxable year during which the 16(b) Optionee recognizes income as the result of
the exercise of the option equal to the amount of ordinary income recognized by
the 16(b) Optionee, provided that the Company timely complies with applicable
Form W-2 or 1099 reporting requirements with respect to such income. Additional
gain or loss recognized by the optionee upon the subsequent disposition of the
Common Shares will be treated as capital gain or loss.
If the option exercise price under any option is paid for by surrendering
Common Shares previously acquired, then the optionee will recognize ordinary
income on the exercise as described above with respect to any shares acquired
under the option in excess of the number of Common Shares surrendered (such
shares being treated as having been acquired without consideration), but will
not recognize any taxable gain or loss on the difference between the optionee's
basis in the surrendered shares and their current Fair Market Value. For
federal income tax purposes, that number of newly acquired Common Shares equal
to the number of shares surrendered will have the same basis and holding period
as the surrendered shares. Any newly acquired Common Shares in excess of the
number of shares surrendered will have a basis equal to their Fair Market Value
at exercise and their holding period will begin when the optionee recognizes
ordinary income for tax purposes, as described above.
Limitation of Liability and Indemnification of Trustees and Officers
The Maryland REIT Law permits a Maryland real estate investment trust to
include in its declaration of trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages
except for liability resulting from (i) actual receipt of an improper benefit
or profit in money, property or services or (ii) active and deliberate
dishonesty material to the cause of action as established by a final judgment.
The Company's Declaration of Trust contains such a provision limiting such
liability to the maximum extent permitted by the Maryland REIT Law.
The Declaration of Trust provides that the Company, to the fullest extent
permitted by Maryland law, may indemnify each Trustee, officer, employee and
agent in connection with any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that such person was a Trustee, officer, employee or agent of the
Company or is or was serving at the request of the Company as a trustee,
director, officer, partner, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust, other enterprise or
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employee benefit plan, from all claims and liabilities to which such person may
become subject by reason of service in that capacity and to pay or reimburse
reasonable expenses, as such expenses are incurred, of each Trustee, officer,
employee or agent in connection with any such action, suit or proceeding.
The Maryland REIT Law permits a Maryland real estate investment trust to
indemnify, and to advance expenses to, its trustees, officers, employees and
agents to the same extent as permitted by the MGCL for directors and officers
of Maryland corporations. The MGCL permits a corporation to indemnify its
present and former directors and officers, among others, against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by them
in connection with any proceeding to which they may be made a party by reason
of their service in those or other capacities unless it is established that (i)
the act or omission of the director or officer was material to the matter
giving rise to the proceeding and (a) was committed in bad faith or (b) was the
result of active and deliberate dishonesty, (ii) the director or officer
actually received an improper personal benefit in money, property or services
or (iii) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. However, a
Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation or for a judgment of liability on the basis
that personal benefit was improperly received, unless in either case a court
orders indemnification and then only for expenses. In addition, the MGCL and
the Bylaws permit a corporation to advance reasonable expenses to a director or
officer upon the corporation's receipt of (a) a written affirmation by the
director or officer of such person's good faith belief that he or she has met
the standard of conduct necessary for indemnification by the corporation and
(b) a written undertaking by or on behalf of such person to repay the amount
paid or reimbursed by the corporation if it shall ultimately be determined that
the standard of conduct was not met. The Declaration of Trust permits
indemnification of the Company's Trustees, officers, employees and agents to
the fullest extent permitted by Maryland law. Insofar as indemnification for
liability arising under the Securities Act may be permitted to Trustees,
officers or persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES
Investment Policies
The Company will invest in Dealership Properties and Related Business
Properties. The Company has established no limit on the amount that may be
invested in any one Property. The Company currently does not intend to acquire
Properties used by businesses other than automobile dealerships, retail
automotive parts stores and other automotive related businesses. Pending
investment in real estate, a portion of the proceeds of this Offering will be
invested in various short-term investments. See "Use of Proceeds." The Company
currently does not intend to invest in mortgages (including participating and
convertible mortgages), the securities of other issuers, except in connection
with acquisitions of indirect interests in Properties (generally through
partnership interests in special purpose partnerships owning Properties) and
does not intend to make loans to third parties. The Company does not intend to
underwrite the securities of other issuers. The Company currently has no plans
to repurchase or otherwise reacquire its Shares. The Company may change its
policies with respect to investment activities without the approval of its
shareholders. In any event, any activities of the Company with respect to
investments in securities of other issuers will be subject to the asset and
gross income tests necessary for REIT qualification for federal income tax
purposes.
Conflicts of Interest Policies
In order to mitigate any potential conflicts of interest, the Company's
Declaration of Trust contains a requirement that any transaction involving the
Company and a Trustee or an affiliate of any Trustee requires the approval of a
majority of the Independent Trustees of the Company not otherwise interested in
such transaction. However, there can be no assurance that such policies will be
successful in all cases in eliminating the influence of interested Trustees,
and if they are not successful, decisions could be made that might fail to
reflect fully the best interests of the shareholders. See "Risk Factors--
Conflicts of Interest Between the Company and Mr. Smith."
Financing Policy
The Company intends to maintain a ratio of debt-to-total market
capitalization of not more than 50%. Following completion of the Offering and
the use of the net proceeds therefrom, the Company will have approximately $3.3
million of indebtedness, which will constitute approximately 2% of its total
market capitalization.
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The Company has no self-imposed limitation on the amount or number of
mortgages that may be placed on one piece of Property, and there is no
limitation on the percentage of the Company's assets that may be invested in
any specific piece of Property. The Company does not intend to invest in real
estate mortgages or securities of, or interests in, persons primarily engaged
in real estate other than on a short-term basis as an investment of idle funds.
To ensure that the Company has sufficient liquidity to conduct its
operations, including making investments in additional Properties, the Company
intends to obtain a lending or credit arrangement before completion of the
Offering. Either the Operating Partnership or the Company may borrow money.
Indebtedness may be in the form of purchase money obligations to sellers of
Properties, publicly or privately placed debt instruments or financing from
banks, institutional investors or other lenders, any of which indebtedness may
be unsecured or secured by mortgages or other interests in Property owned by
the Company. In addition, such indebtedness may be recourse to all or any part
of Property of the Company or may be limited to the particular Property to
which the indebtedness relates. The proceeds from any borrowings may be used to
make distributions, to refinance existing indebtedness or to finance
acquisitions, expansions, additions, renovations or development of Properties,
and for working capital.
In the event that the Board determines to raise additional equity capital,
the Board will have the authority, without shareholder approval, to issue
additional Common Shares or Preferred Shares in any manner (and on such terms
and for such consideration) it deems appropriate, including in exchange for
Property. Existing shareholders have no preemptive right to purchase shares
issued in any such offering, and any such offering might cause a dilution of a
shareholder's investment in the Company.
Distributions Policy
The Company plans to pay regular quarterly distributions to its
shareholders of at least 95% of its taxable income (as defined in Section
857(b)(2) of the Code) each year so as to qualify as a REIT under the Code. The
Board may vary the distributions to holders of the Common Shares based upon the
actual results of operations of the Company, including (i) the timing of the
investment of the net proceeds of the Offering, (ii) the rent received from the
Lessees, (iii) the ability of the Lessees to meet their obligations under the
Leases, and (iv) the operating expenses of the Company. See "Description of
Shares of Beneficial Interest" and "Partnership Agreement."
THE FORMATION TRANSACTIONS
The following Formation Transactions have been or will be undertaken in
organizing the Company and the Operating Partnership.
o Messrs. Smith and Bracy organized the Company as a REIT under Maryland
law and capitalized the Company with $10,000 in cash in exchange for 463
Class B Common Shares and 6,557 Common Shares, respectively.
o In connection with the formation of the Operating Partnership, the
Operating Partnership issued to Mr. Smith 701,537 Class B Units in
exchange for a subscription receivable in the amount of $999,340. The
Company is the Operating Partnership's sole general partner.
o MMR Holdings was formed by Mr. Smith to acquire certain of the Initial
Properties before the Offering and entered into a secured line of credit
with Ford Motor Credit to finance the acquisition of such properties.
o MMR Holdings has acquired or will acquire the following Properties:
o MMR Holdings acquired two Initial Dealership Properties from Mr. Smith
and his affiliates in exchange for an aggregate purchase price of
$20.5 million, consisting of a 100% ownership interest in MMR Holdings
(which will be exchanged for 377,802 Class A Units and 982,634 Class C
Units), $425,000 in cash and repayment of $1.4 million of mortgage
debt secured by these Properties.
o MMR Holdings acquired two Initial Dealership Properties from
subsidiaries of Sonic Automotive for $10.3 million in cash.
o MMR Holdings acquired eight Initial Dealership Properties from
Chartown for $17.9 million in cash.
o By the closing of the Offering, MMR Holdings will have acquired 19
Initial Dealership Properties and the Collision Repair Property from
unaffiliated third parties for $63.7 million in cash.
o The Company will sell 10,000,000 Common Shares in the Offering and will
contribute the net proceeds thereof and the proceeds from the initial
capitalization of the Company to the Operating Partnership in exchange for
10,007,020 Class A Units.
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o Concurrently with the closing of the Offering, the Operating Partnership
will acquire all of the ownership interests in MMR Holdings from Mr. Smith
and his affiliates in exchange for 377,802 Class A Units and 982,634 Class
C Units and the assumption and simultaneous repayment of the $109.5
million of MMR Holdings' indebtedness incurred in connection with the
acquisition of the Initial Dealership Properties and the Collision Repair
Property.
o The Company will acquire from Primax 36 Advance Properties for an
aggregate purchase price of approximately $26.3 million, consisting of
approximately $600,000 in cash, 492,585 Class A Units and the assumption
of approximately $18.3 million of mortgage debt secured by such
Properties, of which $15.0 million will be repaid with the proceeds from
the Offering.
o The Company will lease the Initial Properties to the Initial Lessees
pursuant to the Initial Leases.
Benefits to Related Parties
The Company's executive officers and Trustees and certain of their
affiliates will receive the following benefits from the Formation Transactions:
Mr. Smith and Affiliates
o In connection with the formation of the Company, the Company issued to
Mr. Smith 463 Class B Common Shares in exchange for $660 in cash. The
Class B Voting Percentage (6.6% immediately after the closing of the
Offering) will be diluted proportionately by any additional issuances of
Common Shares after the closing of the Offering. The Class B Common Shares
are entitled to receive per share distributions equal to those paid on
Common Shares and are convertible, at the option of Mr. Smith, for Common
Shares, on a one-for-one basis. Any such conversion will dilute the Class
B Voting Percentage on a proportionate basis.
o In connection with the formation of the Operating Partnership, the
Operating Partnership issued to Mr. Smith 701,537 Class B Units in
exchange for a subscription receivable of $999,340, which Units will have
a value of $10.5 million based on the Offering Price. The Class B Voting
Percentage was derived in a manner to reflect the approximate voting
percentage Mr. Smith would have had if his initial equity in the Company
had been in Common Shares rather than in Class B Units. The Class B Units
are redeemable, at the option of Mr. Smith, beginning one year after
completion of the Offering, for an equal number of Class B Common Shares
(or cash, at the Company's option), which, in turn, are convertible into
an equal number of Common Shares. Upon any such conversion into Common
Shares, the Class B Voting Percentage will be diluted proportionately.
o Mr. Smith formed MMR Holdings to acquire certain of the Initial
Properties before the Offering. Concurrent with the completion of the
Offering, MMR Holdings will become a wholly-owned subsidiary of the
Operating Partnership. Mr. Smith and his affiliates transferred two
Initial Dealership Properties to MMR Holdings in exchange for an aggregate
purchase price of $20.5 million, consisting of a 100% ownership interest
in MMR Holdings (which will be exchanged for 377,802 Class A Units and
982,634 Class C Units), $425,000 in cash and repayment of $1.4 million of
mortgage debt secured by these Properties. The number of Class A Units to
be received by Mr. Smith for these Properties was determined based upon
the rent under the existing Leases. The rents under these Leases are below
current market levels. Such existing Leases will terminate by December 31,
1999, and the Company and the relevant Sonic Lessees have entered into new
Leases at higher rent rates effective January 1, 2000. The number of Class
C Units was determined on the basis of such higher rent rates. The Class C
Units have no rights with respect to voting, allocations or distributions
until the effective date of the new Leases (at which time they will attain
rights identical to those of the Class A Units). For purposes of the
Company's pro forma financial statements, the Class C Units have a deemed
value of approximately $13.0 million. The Class A Units to be received by
Mr. Smith and his affiliates will have a value of approximately $5.7
million based on the Offering Price, are redeemable beginning one year
after the Offering, at the option of Mr. Smith and his affiliates, for an
equal number of Common Shares (or cash, at the Company's option) and will
be more liquid than such affiliates' interests in such Initial Dealership
Properties.
o In order to accomodate unaffiliated third party sellers who desired to
close the sale of their properties before consummation of the Offering,
Chartown acquired eight Initial Dealership Properties. Chartown has sold
these eight Initial Dealership Properties to MMR Holdings for
approximately $17.9 million in cash, which represents Chartown's
approximate cost of acquiring such properties from unaffiliated third
parties and maintaining such properties prior to their acquisition by MMR
Holdings.
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o Upon consummation of the Offering, the Company will repay with net
proceeds from the Offering approximately $109.5 million of indebtedness
incurred by MMR Holdings in connection with the acquisition of the Initial
Dealership Properties and the Collision Repair Property, which debt is
secured by, among other things, a pledge of certain securities owned by
Mr. Smith.
Sonic Automotive and Affiliates
o Subsidiaries of Sonic Automotive sold two Initial Dealership Properties
to MMR Holdings in exchange for approximately $10.3 million in cash. The
Company will repay debt incurred to finance these acquisitions upon its
acquisition of MMR Holdings at the closing of the Offering.
o The Sonic Lessees will lease 28 Initial Dealership Properties from the
Company and will continue to control the operations of the automobile
dealerships located on such properties.
Management
o In connection with the formation of the Company, the Company issued to
Mr. Bracy 6,557 Common Shares in exchange for $9,340 in cash, which shares
will have a value of $98,355 based on the Offering Price.
o The Company's Trustees and executive officers will receive options under
the Company's Plan to acquire an aggregate of 465,000 Common Shares at the
Offering Price.
Acquisition of the Initial Properties from the Sellers
The Company will acquire the Initial Properties pursuant to agreement
negotiated on an arms' length basis with each seller unaffiliated with the
Company or Mr. Smith. Company officials believe that the purchase prices with
sellers affiliated with Mr. Smith or Sonic Automotive represent fair values for
the Initial Dealership Properties acquired because such prices were based
primarily on a capitalization of pro forma cash flow from the Initial Leases on
such Properties. The Company also considered the creditworthiness of the
Initial Lessees of such Properties, the quality, age and condition of the
structures located on the Properties, the Properties' locations, the value of
the Properties for alternative uses, the availability of similar properties in
the same locality, recent sales prices for comparable commercial properties in
the same locality and the cost of capital used to acquire the Properties. The
obligations of Primax to transfer the Advance Properties is conditioned upon
the completion of the Offering, the closing of the other Formation
Transactions, and normal and customary conditions to the closing of real estate
transactions, including the consents of lenders. The Contribution Agreement and
Purchase Agreements also contain representations and warranties by the sellers
concerning the ownership and operation of the Initial Properties and
environmental matters and certain other covenants, representations and
warranties. Claims for indemnification for any breach under the Contribution
Agreement may be made by the Company for approximately one year from the
completion of the Offering. Moreover, the Leases will generally contain a net
worth covenant and indemnification obligations, but the Lessee of any
particular Property may not be the seller of the same Property.
In connection with the acquisition of two of the Initial Dealership
Properties and all of the Advance Properties, the Company has agreed (the
"Lock-Out Agreement") to restrictions on its ability to sell, transfer,
exchange or otherwise dispose of such Properties for a period of ten years,
subject to certain exceptions including either a like-kind exchange of such
Properties under Section 1031 of the Code or any other disposition or transfer
that does not result in a taxable gain under the Code. The prohibition against
the sale, transfer, exchange or other disposition of such Properties will
automatically terminate in the event that Mr. Smith and his affiliates or
Primax, in one or more transactions, exchange for Common Shares, sell or
otherwise dispose of 95% or more of their individual Units in a taxable
transaction.
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CERTAIN RELATIONSHIPS AND TRANSACTIONS
Formation of the Company
Mr. Smith, the Chairman of the Company's Board, and Mr. Bracy, the
Company's President, formed the Company and provided initial capital of $10,000
in exchange for 463 Class B Common Shares and 6,557 Common Shares,
respectively, pursuant to subscription agreements between Messrs. Smith and
Bracy and the Company.
In connection with the formation of the Operating Partnership, the
Operating Partnership issued to Mr. Smith 701,537 Class B Units in exchange for
a subscription receivable of $999,340, which Units will have a value of $10.5
million based on the Offering Price. The Class B Voting Percentage was derived
in a manner to reflect the approximate voting percentage of Mr. Smith would
have had if his initial equity in the Company had been in Common Shares rather
than in Class B Units. The Class B Units are redeemable, at the option of Mr.
Smith, beginning one year after completion of the Offering, for an equal number
of Class B Common Shares (or cash, at the Company's option), which, in turn,
are convertible into an equal number of Common Shares. Upon any such conversion
into Common Shares, the Class B Voting Percentage will be diluted
proportionately.
Strategic Alliance with Sonic Automotive
The Company has entered into the Strategic Alliance Agreement with Sonic
Automotive pursuant to which Sonic Automotive has agreed to refer to the
Company real estate acquisition opportunities that arise in connection with
Sonic Automotive's dealership acquisitions. The Company has agreed to provide
or make available to Sonic Automotive such real estate development,
maintenance, survey and inspection services as Sonic Automotive may reasonably
request from time to time. Sonic Automotive and the Company have also agreed to
permit an affiliate of the Company to offer future Lessees volume discounts,
through participation with Sonic Automotive and Speedway Motorsports, on
insurance, office equipment and supplies, telecommunications services and
certain other products and services. The Strategic Alliance Agreement will
expire on July 8, 2001, but will automatically renew for successive one year
terms unless terminated by either party upon 60 days notice prior to the
expiration of the then existing term. In return, the Company has agreed to
refer to Sonic Automotive dealership acquisition opportunities that arise in
connection with Property acquisitions, thereby providing sellers of dealerships
the option to sell both the real estate and the operations associated with
their dealerships. The Company believes that this alliance will provide it with
unique competitive advantages in acquiring Dealership Properties. Mr. Smith is
the chairman of the board, chief executive officer and controlling stockholder
of Sonic Automotive.
Acquisition of Certain Initial Dealership Properties
MMR Holdings acquired in November 1998 from Mr. Smith and his affiliates
all of the interests in the Town & Country Ford (Parcel #1) and Lone Star Ford
Initial Dealership Properties, in exchange for an aggregate purchase price of
$20.5 million, consisting of a 100% interest in MMR Holdings, $425,000 in cash
and repayment of $1.4 million of mortgage debt secured by these Properties.
Simultaneously with the closing of the Offering, the Company will acquire all
of Mr. Smith's and his affiliates' interests in MMR Holdings in exchange for
377,802 Class A Units, with an aggregate value of $5.7 million based on the
Offering Price, 982,634 Class C Units, and assumption and repayment of $109.5
million of indebtedness incurred by MMR Holdings to finance additional Property
acquisitions. The Class A Units are redeemable at the option of the holder for
cash or, at the option of the Company, Common Shares on a one-for-one basis,
beginning one year after the consummation of the Offering. The Class C Units
were issued to account for below market rental rates in the existing Leases on
the Town & Country Ford (Parcel #1) and Lone Star Food Properties acquired from
Mr. Smith and his affiliates, which will terminate by December 31, 1999. The
Company has entered into new Leases on such Properties, which will become
effective on January 1, 2000 and provide for higher rental rates. The Class C
Units will attain rights identical to those of the Class A Units at the time
the new Leases become effective. Until such time, the Class C Units have no
voting, allocation or distribution rights. The Class C Units have a deemed
value of $13.0 million for purposes of the Company's Pro Forma Consolidated
Financial Statements.
MMR Holdings acquired eight Initial Dealership Properties from Chartown, a
North Carolina general partnership controlled by Mr. Smith. Chartown acquired
or will acquire such Properties through arms' length negotiations with the
sellers, which are unaffiliated with the Company, in order to facilitate the
Company's acquisition of such Properties. The Company will acquire such
Properties for approximately $17.9 million in cash, which represents Chartown's
approximate cost of purchasing and maintaining such Properties prior to their
acquisition by MMR Holdings.
The Company will acquire from sellers who are unaffiliated with the
Company, Sonic Automotive or Mr. Smith six Initial Dealership Properties
pursuant to purchase options acquired from Sonic Automotive for nominal
consideration. The
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Company negotiated the $20.5 million purchase price for such Properties through
arms-length negotiations with the sellers. In addition, MMR Holdings acquired
two Initial Dealership Properties directly from Sonic Automotive for $10.3
million in cash.
Sonic Leases
Twenty-eight of the Initial Dealership Properties will be leased to the
Sonic Lessees, which are direct or indirect, wholly-owned subsidiaries of Sonic
Automotive for initial Base Rent of $9.9 million in the aggregate, representing
approximately 74% of the Company's annual rent revenue. With the exception of
the two Intial Dealership Properties acquired from Mr. Smith and his affiliates
and the Lake Norman Properties, the Sonic Lessees have agreed to enter into
Sonic Leases that provide for Initial Terms of ten years, two optional
five-year Renewal Terms and fair market rent, and, other than Sonic Leases on
certain of the Bowers Properties, are subject to upward CPI adjustments every
five years. For further discussion of the terms of the Sonic Leases, see
"Business of the Company and Its Properties -- Initial Properties," " --
Initial Lessees" and "--Dealership, Sonic and Bowers Leases." For the initial
annual Base Rent to be paid under each of the Sonic Leases, see the table
appearing under "Business of the Company and Its Properties -- Initial
Properties."
The Company will assume the existing Leases on the two Initial Dealership
Properties to be purchased from Mr. Smith and affiliates of Mr. Smith. The
existing Leases currently provide for rent of $409,200 and $360,000,
respectively, and provide for their termination by December 31, 1999. The
Company and the Lessees of such Properties have entered into new Leases that
are scheduled to take effect on January 1, 2000. The new Leases have terms
substantially similar to those of the Sonic Leases, provide for initial Base
Rent of $1,140,000 for each Property, and expire on December 31, 2009.
Lock-Out Agreement
Pursuant to a Lock-Out Agreement among Sonic Financial Corporation and
Town and Country Ford, Inc., each an affiliate of Mr. Smith, Mr. Smith and the
Operating Partnership, the Company has agreed to certain restrictions on its
ability to sell, transfer, exchange or otherwise dispose of the two Initial
Dealership Properties acquired by the Company from Mr. Smith and affiliates of
Mr. Smith for a period of ten years.
The restriction on the Company's ability to sell or otherwise dispose of
such Properties is subject to certain exceptions including either a like-kind
exchange of any Property under Section 1031 of the Code or any other
disposition or transfer that does not result in a taxable gain under the Code.
The prohibition against the sale, transfer, exchange or other disposition of
such Properties shall automatically terminate in the event that Mr. Smith and
his affiliates, in one or more transactions, exchange for Common Shares, sell
or otherwise dispose of 95% or more of their Units in a taxable transaction.
The restrictions on the Company's ability to prepay or refinance certain
mortgage debt do not limit the Company's ability to change the amount or
characteristic of its liabilities so long as the changes do not result in
taxable gains to Mr. Smith and his affiliates.
Registration Rights
The Company has entered into a Registration Rights and Lock-Up Agreement
(the "Registration Rights Agreement") with, among others, Mr. Smith and his
affiliates, the holders of 2,061,973 Units. Mr. Smith and his affiliates have
agreed that their Units are not redeemable by the Company until one year after
the date of the consummation of the Offering. Subject to certain limitations,
the Company has agreed to use its best efforts to file a registration statement
under the Securities Act one year after the date of the consummation of the
Offering, at its expense, that would allow the sale of any and all Common
Shares issued in connection with the redemption of Units held by Mr. Smith and
his affiliates. For further discussion of the Registration Rights Agreement,
see "Common Shares Eligible for Future Sale--Registration Rights and Lock-Up
Agreement."
PARTNERSHIP AGREEMENT
The Initial Properties will be owned by the Operating Partnership. The
sellers of Initial Properties that are contributing such Initial Properties to
the Operating Partnership in exchange for Units, including Mr. Smith and his
affiliates, will, among other things, be permitted to defer until a later date
a portion of the tax liabilities that they otherwise would incur if they
received cash or Common Shares. Because the Operating Partnership will receive
below market rents from the Initial Properties being contributed by Mr. Smith
until January 1, 2000, Mr. Smith will receive 377,802 Class A Units and 982,634
Class C Units. In connection with the formation of the Operating Partnership,
the Company issued to Mr. Smith 701,537 Class B Units in exchange for a
subscription receivable in the amount of $999,340. Prior to the effectiveness
of the new
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Leases entered into with respect to such Properties, the Class C Units will
have no rights with respect to voting, allocations or distributions. Upon the
effectiveness of such new Leases, a Class C Unit will attain the same rights as
a Class A Unit. In addition, through the Operating Partnership the Company may
acquire interests in additional properties in transactions that may defer such
tax consequences for the contributors.
Following the closing of the Offering, substantially all of the Company's
assets (including the Company's interest in the Initial Properties) will be
held by, and its operations will be conducted through, the Operating
Partnership. The Company will initially hold 10,007,020 Class A Units and will
control the Operating Partnership in its capacity as the sole general partner.
The Company's interest in the Operating Partnership will entitle it to share in
cash distributions from, and in the profits and losses of, the Operating
Partnership in proportion to the Company's percentage ownership of the
Operating Partnership (apart from tax allocations of profits and losses to take
into account pre-contribution property appreciation). Other holders of Units
(the "Limited Partners") will own 870,387 Class A Units, 701,537 Class B Units
and 982,634 Class C Units. For a period of one year following the closing of
the Offering, the holders of Units will not be permitted to offer, pledge,
sell, contract to sell, grant any options for the sale of or otherwise dispose
of any such Units without the permission of the Company except (i) in the case
of a holder that is a natural person, to certain family members of such holder
or upon the death of such holder, to such holder's estate, personal
representative or beneficiaries, (ii) in the case of a business entity, to
another entity wholly owned thereby or as a distribution to the equity owners
thereof, (iii) as a bona fide gift, or (iv) pursuant to a pledge, grant of a
security interest or other encumbrance effected in a bona fide transaction with
an unrelated and unaffiliated pledgee. After the first anniversary of the
closing of the Offering, Units may be transferred by a Limited Partner without
restriction, unless such transfer would (i) violate any securities laws, (ii)
result in the Operating Partnership being treated as an association taxable as
a corporation, (iii) be effectuated through an "established securities market"
or a "secondary market (or the substantial equivalent thereof)" within the
meaning of Section 7704 of the Code, or (iv) be to a lender to the Operating
Partnership or related person holding nonrecourse liability, the transferee
will only be admitted as a Limited Partner subject to furnishing certain
specified or requested instruments or documents to the Company in its capacity
as general partner. Also, after the first anniversary after the closing of the
Offering (or earlier with the consent of the Company in its capacity as general
partner), each Limited Partner may tender to the Operating Partnership for
redemption its Units. The Class A Units and Class C Units may be redeemed by
the Company or the Operating Partnership for Common Shares on a one-for-one
basis, subject to the Company's right to pay cash in lieu of issuing Common
Shares. The Class B Units may be redeemed by the Company or the Operating
Partnership for Class B Common Shares on a one-for-one basis, subject to the
Company's right to pay cash in lieu of issuing Class B Common Shares. With each
redemption of Units, the Company's interest in the Operating Partnership will
increase.
The Company will hold one Class A Unit in the Operating Partnership for
each Share that it has issued. The net proceeds of any future issuance of
Shares of the Company will be contributed to the Operating Partnership in
exchange for an equivalent number of Units.
As general partner of the Operating Partnership, the Company will have the
exclusive power under the Partnership Agreement to manage and conduct the
business of the Operating Partnership. The Board will manage the affairs of the
Company by directing the affairs of the Operating Partnership. The Operating
Partnership will be responsible for, and pay when due, its share of all
administrative and operating expenses of the Properties.
The following summary of the Partnership Agreement, including the
descriptions of certain provisions set forth elsewhere in this Prospectus, is
qualified in its entirety by reference to the Partnership Agreement, which is
filed as an exhibit to the Registration Statement of which the Prospectus is a
part.
Management
The Operating Partnership has been organized as a Delaware limited
partnership pursuant to the terms of the Partnership Agreement. The Company, as
the sole general partner of the Operating Partnership, generally will have
full, exclusive and complete discretion in managing and controlling the
Operating Partnership. The Limited Partners will have no authority to transact
business for, or to participate in the management activities or decisions of,
the Operating Partnership, except as provided in the Partnership Agreement and
as provided by applicable law. However, the consent of all the Limited Partners
will be required to (i) take any action that would make it impossible to carry
on the ordinary business of the Operating Partnership, except as otherwise
provided in the Partnership Agreement; (ii) possess Operating Partnership
property, or assign any rights to specific Operating Partnership property for
other than an Operating Partnership purpose, except as otherwise provided in
the Partnership Agreement; (iii) admit a person as a partner, except as
otherwise provided in the Partnership Agreement and (iv) perform any act that
would subject a Limited Partner to liability as a general partner in any
jurisdiction or any other liability except as provided in the Partnership
Agreement or under the laws of the State of Delaware.
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In addition, the Company has agreed pursuant to the Partnership Agreement that
it will not take any of the following actions prior to the first anniversary of
the Closing Date without the consent of Limited Partners holding a majority of
the outstanding Units: (i) a merger, consolidation or share exchange of the
Company requiring the approval of the Company's shareholders or any merger,
consolidation or partnership interest exchange of the Operating Partnership,
(ii) a sale, lease, transfer or other disposition of all or substantially all
of the Company's assets requiring the approval of the Company's shareholders, a
sale, lease, transfer or other disposition of all or substantially all of the
operating assets, or any election to dissolve the Company requiring the
approval of the Company's shareholders, or (iii) an amendment to the
Declaration of Trust requiring the approval of the Company's shareholders.
Indemnification
The Partnership Agreement provides that each individual made a party to a
proceeding by reason of his status as a general partner or an officer of the
Operating Partnership or a trustee or officer of the Company or any other
person as the Company may designate from time to time in its sole and absolute
discretion (each, an "Indemnitee") will be indemnified and held harmless by the
Operating Partnership for any act relating to the operation of the Operating
Partnership unless it is established that (i) the act or omission of the
Indemnitee was material to the matter giving rise to the proceeding and either
was committed in bad faith or was the result of material active and deliberate
dishonesty; (ii) the Indemnitee actually received an improper personal benefit
of money, property or services; or (iii) in the case of any criminal
proceeding, the Indemnitee had reasonable cause to believe that the act or
omission was unlawful. The Partnership Agreement provides that the termination
of any proceeding by judgment, order or settlement does not create a
presumption that the Indemnitee did not meet the requisite standard of conduct
set forth above. The termination of any proceeding by conviction or upon a plea
of nolo contendre or its equivalent, or an entry of an order of probation prior
to judgment, would, under the Partnership Agreement, create a rebuttable
presumption that the individual acted in a manner contrary to that specified
above. Any indemnification so made shall be made only out of the assets of the
Operating Partnership.
Capital Contributions
When the Company contributes additional capital to the Operating
Partnership from the proceeds of issuance of Common Shares (or preferred shares
of beneficial interest) of the Company, the Company's interest in the Operating
Partnership will be increased on a proportionate basis based upon the number of
Common Shares (or preferred shares of beneficial interest) issued.
Tax Matters
Pursuant to the Partnership Agreement, the Company will be the tax matters
partner of the Operating Partnership and, as such, will have the authority to
make certain tax related decisions and tax elections under the Code on behalf
of the Operating Partnership.
Operations
The Partnership Agreement allows the Company to operate the Operating
Partnership in a manner that will enable the Company to satisfy the
requirements for being classified as a REIT. The Partnership Agreement also
requires the distribution of cash available for distribution by the Operating
Partnership quarterly in accordance with the Partnership Agreement.
Duties and Conflicts
The Partnership Agreement provides that the Company shall not enter into
or conduct any business other than in connection with the ownership,
acquisition and disposition of partnership interests in the Operating
Partnership and the management of the business and incidental activities of the
Operating Partnership. Therefore, all activities pertaining to the acquisition,
development, management and operation of any properties, must be conducted
through the Operating Partnership.
Term
The Operating Partnership will continue in full force and effect until
December 31, 2099 or until sooner dissolved upon (i) the withdrawal of the
Company as a general partner (unless all of the Limited Partners elect to
continue the Operating Partnership), or (ii) by the election of the Company,
with the consent of a majority in interest of Limited Partners, (iii) in
connection with a merger or other combination of the Operating Partnership, or
(iv) by the sale or other disposition of all or substantially all of the assets
of the Operating Partnership, or (v) entry of a decree of judicial dissolution
of the Operating Partnership, or (vi) bankruptcy or insolvency of the Company.
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PRINCIPAL SHAREHOLDERS OF THE COMPANY
The following table sets forth certain information regarding the
beneficial ownership of the Shares by (a) each person known by the Company to
be the beneficial owner of more than 5% of the Shares immediately following the
completion of the Offering, (b) each Trustee of the Company, (c) each executive
officer of the Company and (d) all Trustees and executive officers of the
Company as a group (excluding exercise of the Underwriters' over-allotment
option). Unless otherwise indicated in the footnotes, all of such interests are
owned directly, and the indicated person or entity has sole voting and
investment power. The number of shares represents the number of Shares the
person holds or the number of Common Shares issuable upon exercise of vested
options to acquire Common Shares. The executive officers and Trustees of the
Company have agreed not to sell Shares (including Shares issued on redemption
of Units) without the consent of the Underwriter, for a period of two years
following completion of the Offering.
<TABLE>
<CAPTION>
Number Percentage of All
of Shares Outstanding
Owned (1) Shares
--------------------- -----------------------
Before After Before After
Name Offering Offering Offering Offering(2)
- -------------------------------------------------------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
O. Bruton Smith (3) ....................................... 463 115,463 6.6% 1.1%
Benjamin F. Bracy (4) ..................................... 6,557 41,557 93.4 *
Mark J. Iuppenlatz (4) .................................... -- 35,000 -- *
Virginia R. Dunn (4) ...................................... -- 17,500 -- *
All Trustees and executive officers as a group (6 persons) 7,020 209,520 100.0% 2.1%
</TABLE>
- ---------
* Less than one percent.
(1) Numbers and percentages set forth in this table exclude all outstanding
Units since the Units are not redeemable for Shares before the first
anniversary of the Offering.
(2) The stated percentage represents Mr. Smith's ownership interest in Common
Shares with both voting and economic participation rights, including
allocations and distributions. The percentages of total voting power,
based on Mr. Smith's ownership of all Class B Common Shares, would be as
follows: Mr. Smith, 7.7%; Messrs. Bracy and Iuppenlatz and Ms. Dunn, less
than 1%; and all Trustees and executive officers as a group, 8.5%.
(3) Mr. Smith owns directly 463 Class B Common Shares and, upon completion of
the Offering, will own options issued under the Plan to purchase 115,000
Common Shares. Such options will be exercisable immediately upon grant at
the Offering Price. In addition, Mr. Smith has sole voting and investment
control over Class A Units, Class B Units and Class C Units that are held
by him directly or through his affiliates, although none of such Units
will be redeemable, directly or indirectly for Common Shares until the
first anniversary of the Offering.
(4) Common Shares shown underlie options that will be issued under the Plan
upon completion of the Offering, which options will be immediately
exercisable at the Offering Price. Messrs. Bracy and Iuppenlatz and Ms.
Dunn will also hold unvested options for 105,000, 105,000 and 52,500
Common Shares, respectively, after the Offering.
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
The following summary of the terms of the shares of beneficial interest of
the Company does not purport to be complete and is subject to and qualified in
its entirety by reference to Maryland law and to the Declaration of Trust and
Bylaws of the Company, copies of which are exhibits to the Registration
Statement of which this Prospectus is a part. See "Additional Information."
General
The Declaration of Trust of the Company provides that the Company may
issue up to 100,000,000 Common Shares, which may be designated as any class or
series of Shares as the Board may determine. See "--Classification or
Reclassification of Preferred Shares." Upon the closing of the Offering and the
consummation of the Formation Transactions, 10,006,557 Common Shares will be
issued and outstanding (11,507,020 shares if the Underwriters' over allotment
option is exercised in full) and 463 Class B Common Shares will be issued and
outstanding and no other Shares will be issued and outstanding. As permitted by
Title 8 of the Corporations and Associations Article of the Annotated Code of
Maryland, as amended (the "Maryland REIT Law"), the Declaration of Trust
contains a provision permitting the Board, without any action by the
shareholders of the Company, to amend the Declaration of Trust to increase or
decrease the aggregate number of Shares or the number of Shares of any class of
shares of beneficial interest that the Trust has authority to issue. The
Company believes
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that the power of the Board to issue additional shares of beneficial interest
will provide the Company with increased flexibility in structuring possible
future financings and acquisitions and in meeting other needs that might arise.
The additional shares of beneficial interest, including possibly Common Shares,
will be available for issuance without further action by the Company's
shareholders, unless action by the shareholders is required by applicable law
or the rules of any stock exchange or automated quotation system on which the
Company's securities may be listed or traded. Although the Board currently has
no intention of doing so, it could authorize the Company to issue a class or
series that could, depending on the terms of such class or series, delay, defer
or prevent a transaction or a change in control of the Company that might
involve a premium price for the Common Shares and might otherwise be in the
best interests of the shareholders.
Both the Maryland REIT Law and the Company's Declaration of Trust provide
that no shareholder of the Company will be personally liable for any obligation
of the Company solely as a result of such shareholder's status as a shareholder
of the Company. The Company's Declaration of Trust further provides that, with
certain limited exceptions, the Company will indemnify and hold each
shareholder harmless against any claim or liability to which the shareholder
may become subject by reason of such shareholder's being or having been a
shareholder or former shareholder, subject to such shareholder providing prompt
notice to the Company and provided that no indemnification will be provided if
the claim or liability is finally adjudged to have arisen out of the
shareholder's bad faith, willful misconduct or gross negligence. The Company
must also pay or reimburse each shareholder for all legal and other expenses
reasonably incurred by such shareholder in connection with any claim or
liability unless it is established by a court that such claim or liability
arose out of such shareholder's bad faith, willful misconduct or gross
negligence.
The Common Shares
Subject to the preferential rights of any other shares or series of
beneficial interest and to the provisions of the Company's Declaration of Trust
regarding the restriction on transfer of Common Shares, holders of Common
Shares and Class B Common Shares are entitled to receive dividends on an equal
basis on such shares if, as and when authorized and declared by the Board of
the Company out of assets legally available therefor and to share ratably in
the assets of the Company legally available for distribution to its
shareholders in the event of its liquidation, dissolution or winding-up after
payment of, or adequate provision for, all known debts and liabilities of the
Company.
The holders of outstanding Common Shares are entitled to one vote, for
each share held of record on all matters submitted to a vote of shareholders,
including the election of Trustees and, except as provided with respect to any
other class or series of the Shares, the holders of such Common Shares possess
the exclusive voting power. Initially, the holder of the outstanding Class B
Common Shares is entitled, in the aggregate, to the Class B Voting Percentage,
which is the right to cast 6.6% of the total votes entitled to be cast on any
matter submitted to a vote of shareholders. Based on the 463 Class B Common
Shares initially outstanding, each Class B Common Share is entitled to cast
1,527 votes on each such matter based on the number of Class A Common Shares
and Class B Common Shares to be outstanding immediately following the Offering.
As an additional Class B Common Share is issued upon conversion of a Class B
Unit or as a Class B Unit is redeemed for cash, the number of votes to which a
Class B Common Share is entitled to cast is proportionately reduced so that, in
the aggregate, the holder of the Class B Common Shares remains entitled to the
Class B Voting Percentage. This means that if all of the Class B Units are
converted into Class B Common Shares (an aggregate of 702,000 Class B Common
Shares outstanding), each Class B Common Share would be entitled to cast one
vote on each matter submitted to a vote of shareholders. Each Class B Common
Share can be converted, at the option of the holder, into a Class A Common
Share on a one-for-one basis. As a Class A Common Share is issued upon the
conversion of a Class B Common Share, the Class B Voting Percentage will be
proportionately reduced based on a fraction the numerator of which is the
number of Class B Common Shares converted and the denominator of which is
702,000, the total number of Class B Common Shares and Class B Units initially
issued. In addition, as the Company issues additional Class A Common Shares in
the future, the Class B Voting Percentage will be proportionately reduced based
on a fraction the numerator of which is the number of additional Class A Common
Shares issued and the denominator of which is the total number of Class A
Common Shares outstanding immediately after the issuance. The holders of Class
A Common Shares and Class B Common Shares will vote together as a single class
on all matters submitted to a vote of shareholders. The Class B Common Shares
automatically convert, except in certain limited circumstances, into Common
Shares upon transfer by Mr. Smith. There is no cumulative voting in the
election of Trustees, which means that the holders of a majority of the
outstanding Common Shares can elect all of the Trustees then standing for
election and the holders of the remaining shares will not be able to elect any
Trustees.
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Holders of Common Shares have no preference, conversion, sinking fund,
redemption or appraisal rights and have no preemptive rights to subscribe for
any securities of the Company. Subject to the provisions of the Declaration of
Trust regarding the restriction on transfer of Common Shares, Common Shares
have equal dividend, distribution, liquidation and other rights.
Under the Maryland REIT Law, a Maryland real estate investment trust
generally cannot amend its declaration of trust or merge unless approved by the
affirmative vote of shareholders holding at least two-thirds of the shares
entitled to vote on the matter unless a lesser percentage (but not less than a
majority of all the votes entitled to be cast on the matter) is set forth in
the real estate investment trust's declaration of trust. The Company's
Declaration of Trust or Bylaws provide for approval by a majority of the votes
cast by holders of Shares voting as a single class entitled to vote on the
matter in all situations permitting or requiring action by the shareholders,
except with respect to: (i) the election of Trustees (which requires a
plurality of all the votes cast at a meeting of shareholders of the Company at
which a quorum is present), (ii) the removal of Trustees (which requires the
affirmative vote of two-thirds of the votes entitled to be cast in the election
of Trustees or the affirmative vote of two-thirds of the Trustees, which action
can only be taken by vote at a shareholder or Trustees' meeting), (iii) the
merger of the Company into a new entity, consolidation or sale (or other
disposition) of all or substantially all of the assets of the Company (which
requires the affirmative vote of the holders of two-thirds of the outstanding
votes entitled to be cast on the matter, which action can only be taken by vote
at a shareholder meeting), (iv) the amendment of the Declaration of Trust by
shareholders, including the amendment or repeal of the Independent Trustee
provision (which requires the affirmative vote of a majority of votes entitled
to be cast on the matter, except under certain circumstances specified in the
Declaration of Trust which require the affirmative vote of two-thirds of all
the votes entitled to be cast on the matter), and (v) the termination of the
Company (which requires the affirmative vote of two-thirds of the outstanding
votes entitled to be cast on the matter). The Company has agreed pursuant to
the Partnership Agreement that Limited Partners also have voting rights with
respect to certain of the foregoing actions for a limited period. See
"Partnership Agreement of Operating Partnership--Management." As allowed under
the Maryland REIT Law, the Company's Declaration of Trust permits the Trustees
by a two-thirds vote to amend the declaration of trust from time to time to
qualify as a real estate investment trust under the Code or the Maryland REIT
Law without the approval of the shareholders. As permitted by the Maryland REIT
Law, the Declaration of Trust contains a provision permitting the Board,
without any action by the shareholders of the Company, to amend the Declaration
of Trust to increase or decrease the aggregate number of Shares or the number
of Shares of any class that the Company has authority to issue.
Classification or Reclassification of Preferred Shares
The Declaration of Trust authorizes the Board to classify any unissued
Shares and to reclassify any previously classified but unissued Shares of any
class or series from time to time in one or more classes or series, as
authorized by the Board. Prior to issuance of shares of each class or series,
the Board is required by the Maryland REIT Law and the Company's Declaration of
Trust to set for each such class or series, subject to the provisions of the
Company's Declaration of Trust regarding the restriction on transfer of shares
of beneficial interest, the terms, preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of redemption for each
such class or series. Thus, the Board could authorize the issuance of Preferred
Shares with terms and conditions which could have the effect of delaying,
deferring or preventing a transaction or a change in control of the Company
that might involve a premium price for holders of Common Shares or otherwise
might be in their best interest. As of the date hereof, no Preferred Shares are
outstanding and the Company has no present plans to issue any Preferred Shares.
Restrictions on Transfer; Excess Shares
For the Company to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding shares of beneficial
interest. Specifically, not more than 50% in value of the Company's outstanding
shares of beneficial interest may be owned, directly or indirectly, by five or
fewer individuals (as defined in the Code to include certain entities) at any
time during the last half of a taxable year (other than the first year the
election to be a REIT has been made), and the Company must be beneficially
owned by 100 or more persons during at least 335 days of a taxable year of
twelve months or during a proportionate part of a shorter taxable year (other
than the first year the election to be a REIT has been made). See "Federal
Income Tax Consequences--Taxation of the Company."
For this reason, among others, the Declaration of Trust, subject to
certain exceptions described below and to possible limited exceptions regarding
certain contributing investors, provides that no person may own, or be deemed
to own by virtue of the ownership provisions of Section 13(d) of the Exchange
Act, more than (i) 9.8% of the Company's issued and outstanding Shares or (ii)
9.8% of the total value of such Shares (the "Ownership Limit"). While direct or
indirect ownership
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will be determined in accordance with the beneficial ownership rules
promulgated under Section 13(d) of the Exchange Act, beneficial ownership for
REIT qualification purposes also will be determined in accordance with the
constructive ownership rules of Sections 318 and 544 of the Code. Any transfer
of Common or Preferred Shares that would (i) result in any person owning,
directly or indirectly, Common or Preferred Shares in excess of the Ownership
Limit, (ii) result in the Common and Preferred Shares being owned by fewer than
100 persons (determined without reference to any rules of attribution), (iii)
result in the Company being "closely held" within the meaning of Section 856(h)
of the Code, or (iv) cause the Company to own, actually or constructively, 9.8%
or more of the ownership interests in a tenant of its real property, within the
meaning of Section 856(d)(2)(B) of the Code, shall be null and void, and the
intended transferee will acquire no rights in such Shares.
Subject to certain exceptions described below, if any purported transfer
of Shares is not null and void and would (i) result in any person owning,
directly or indirectly, Shares in excess of the Ownership Limit, (ii) result in
the Shares being owned by fewer than 100 persons (determined without reference
to corporate attribution), (iii) result in the Company being "closely held"
within the meaning of 856(h) of the Code or (iv) cause the Company to own,
actually or constructively, 9.8% or more of the ownership interests in a tenant
of its real property, within the meaning of Section 856(d)(2)(B) of the Code,
the Shares will be designated as excess shares (the "Excess Shares") and
transferred automatically to a trust (the "Excess Share Trust") effective as of
the close of business on the business day before the purported transfer of such
Shares. The record holder of the Shares that are designated as Excess Shares
(the "Purported Transferee") will have no rights in such shares except as
described below. The trustee of the Excess Share Trust (the "Share Trustee")
will be designated by the Company, but will not be affiliated with the Company.
The beneficiary of the Excess Share Trust (the "Beneficiary") will be one or
more charitable organizations that are named by the Board.
Excess Shares will remain issued and outstanding Common or Preferred
Shares and will be entitled to the same rights and privileges as all other
shares of the same class or series. The Excess Share Trust will receive all
dividends and distributions on the Excess Shares and will hold such dividends
and distributions in trust for the benefit of the Beneficiary. The Share
Trustee will vote all Excess Shares. The Purported Transferee may designate a
beneficiary of an interest in such Excess Shares held in the Excess Share
Trust, if such Excess Shares would not be Excess Shares in the hands of such
beneficiary, and the Purported Transferee does not receive a price for
designating such beneficiary in excess of the price paid by the Purported
Transferee for the Shares which were transferred to the Excess Share Trust.
Upon such a designation, the Excess Shares Trust shall terminate as to such
Shares, such Shares shall no longer be designated Excess Shares, and such
Shares shall be transferred of record to such beneficiary.
The Excess Shares will be deemed to have been offered for sale to the
Company, or its designee, at a price per share equal to the lesser of (i) the
price per share in the transaction that created such Excess Shares (or, in the
case of a gift or devise, the Market Price per share on the date of such
transfer) or (ii) the Market Price per share on the date that the Company, or
its designee, accepts such offer. The Company will have the right to accept
such offer for a period of ninety days after the later of (i) the date of the
purported transfer which resulted in such Excess Shares and (ii) the date the
Company determines in good faith that a transfer resulting in such Excess
Shares occurred.
"Market Price" means the last reported sales price, regular way, reported
on the NYSE for a particular class of Shares on the trading day immediately
preceding the relevant date, or if not then traded on the NYSE, the last
reported sales price for such class of Shares on the trading day immediately
preceding the relevant date as reported on any exchange or quotation system
over or through which such class of Shares may be traded, or if not then traded
over or through any exchange or quotation system, then the market price of such
class of Shares on the relevant date as determined in good faith by the Board.
Any person who acquires or attempts to acquire Shares in violation of the
foregoing restrictions, or any person who owned Shares that were transferred to
a Share Trust, will be required (i) to give immediately written notice to the
Company of such event or, in the event of a proposed or attempted transfer, to
give at least 30 days prior written notice to the Company of such event, and
(ii) to provide to the Company such other information as the Company may
request in order to determine the effect, if any, of such transfer on the
Company's status as a REIT.
The Declaration of Trust requires all persons who own, directly or
indirectly, more than 5% (or such lower percentages as required pursuant to
regulations under the Code) of the number or value of the outstanding Shares,
within 30 days after January 1 of each year, to provide to the Company a
written statement stating the name and address of such direct or indirect
owner, the number of Shares owned directly or indirectly, and a description of
how such shares are held. In addition, each such direct or indirect shareholder
shall provide to the Company such additional information as the Company may
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request in order to determine the effect, if any, of such ownership on the
Company's status as a REIT and to ensure compliance with the Ownership Limit.
The Ownership Limit generally will not apply to the acquisition of Shares
by an underwriter that participates in a public offering of such shares in the
event that such shares are timely distributed by the underwriter. In addition,
the Board, upon receipt of a ruling from the Service or an opinion of counsel
and upon such other conditions as the Board may direct, may exempt a person
from the Ownership Limit under certain circumstances. Mr. Bracy has been
granted a waiver from the Ownership Limit through the closing of the Offering.
However, the Board may not grant an exemption from the Ownership Limit to any
proposed transferee whose ownership, direct or indirect, of shares of
beneficial interest of the Company in excess of the Ownership Limit would
result in the termination of the Company's status as a REIT. The foregoing
restrictions will continue to apply until the Board determines that it is no
longer in the best interests of the Company to attempt to qualify, or to
continue to qualify, as a REIT.
The Company must also satisfy certain gross income tests to maintain its
status as a REIT. See "Federal Income Tax Consequences--Taxation of
Company--Gross Income Tests." Rents received from "related party tenants" do
not constitute qualifying income. In general, for rents to qualify as
qualifying income for purposes of such gross income tests, among other things,
the Company must not own, directly or constructively, 10% or more of any
Initial Lessee or any other Lessee of the Properties. See "Federal Income Tax
Consequences--Taxation of the Company--Gross Income Tests--Rents from Real
Property." To reduce the risk that any Lessee will be treated as a related
party tenant, the Declaration of Trust generally provides that if there is a
purported sale or transfer of Shares which would cause any Related Tenant Owner
to constructively own shares in excess of 9.8% of the value of the outstanding
Shares of the Company (the "Related Tenant Limit"), any Shares purportedly
owned by the Related Tenant Owner which would cause such Related Tenant Owner
to constructively own shares in excess of the Related Tenant Limit shall be
automatically designated as Excess Shares and transferred to the Excess Share
Trust. For purposes of the preceding sentence, attribution rules under Section
318 of the Code (modified for purposes of the REIT rules) are applicable in
determining whether any Related Tenant Owner constructively owns Shares in
excess of the "Related Tenant Limit." Under Section 318(a)(3)(C) of the Code
(modified for purposes of the REIT rules), if 10% or more in value of the
shares of beneficial interest in a REIT is owned, directly or indirectly, by or
for any person, such REIT shall be considered as owning the stock owned,
directly or indirectly, by or for such person. Under Section 318(a)(4) of the
Code, if any person has an option to acquire stock (such as the Shares in the
Company), such stock shall be considered as owned by such person. After the
first anniversary after the closing of the Offering (or earlier with the
consent of the Company in its capacity as general partner), any holder of Units
may exchange one Unit for one Common Share subject to the Company's right to
pay cash in lieu of issuing Common Shares. Separately, the Declaration of Trust
provides, subject to certain exceptions, that no person may own, or be deemed
to own by virtue of ownership provisions of Section 13(d) of the Exchange Act,
more than 9.8% of the number or value of the Company's issued and outstanding
Shares. See "Description of Shares of Beneficial Interest--Restriction on
Transfer; Excess Shares." Further, the Partnership Agreement provides that no
conversion of Units into Shares is permitted, and no Company right to pay cash
in lieu of conversion applies, if the Declaration of Trust would thereby be
violated. To the extent the Company's right (i) to pay cash in lieu of issuing
Common Shares to a holder of Units and (ii) to restrict ownership of Shares,
prevents a holder of Units from converting its Units into Shares, such Units
should not be counted as options for purposes of Section 318(a)(4) of the Code.
Accordingly, a person's ownership of Units that would be redeemable (absent
such restrictions) for Shares should not be taken into account in determining
what stock is constructively owned by the Company. The Declaration of Trust
defines a Related Tenant Owner to mean any person who owns, directly or
constructively, within the meaning of Section 318 of the Code, an interest in a
tenant, which interest is equal to or greater than (i) 9.8% of the combined
voting power of all classes of stock of such tenant, (ii) 9.8% of the total
number of shares of all classes of stock of such tenant, or (iii) if such
tenant is not a corporation, 9.8% of the assets or net profits of such tenant,
in each case only if such ownership would cause the Company to fail the 95%
gross income test set forth in Section 856(c)(2) of the Code or the 75% gross
income test set forth in Section 856(c)(3) of the Code.
Section 318 of the Code (modified for purposes of the REIT rules) provides
that partnerships are deemed to own any stock owned, directly or indirectly, by
or for a 25% or more partner in a partnership. To reduce the risk that any
Lessee will be treated as a related party tenant because of such rule, (i) the
Declaration of Trust provides that no direct or indirect partner or member of
an Excluded Holder (as defined in the Declaration of Trust) may beneficially or
constructively own Shares and (ii) the Partnership Agreement provides that no
partner (other than the General Partner) shall be permitted to own (actually or
constructively, through the application of Section 318 of the Code, modified
for purposes of the REIT rules) a 25% or greater percentage interest in the
Partnership. No assurance can be given that these restrictions will be complied
with.
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The Ownership Limit and restrictions on transfer could have the effect of
delaying, deferring or preventing a transaction or a change in control of the
Company that might involve a premium price for the Common Shares or otherwise
be in the best interest of the shareholders of the Company.
All certificates representing Common or Preferred Shares will bear a legend
referring to the restrictions described above.
CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S DECLARATION OF TRUST AND BYLAWS
The following summary of certain provisions of Maryland law and of the
Declaration of Trust and Bylaws of the Company does not purport to be complete,
although the Company believes all material provisions thereof are described,
and is qualified in its entirety by reference to Maryland law and to the
Declaration of Trust and Bylaws of the Company, copies of which are exhibits to
the Registration Statement of which this Prospectus is a part. See "Additional
Information."
Classification of the Board
The Company's Declaration of Trust provides that the number of Trustees of
the Company cannot be less than three nor more than 15. At the closing of the
Offering, there will be five Trustees. The Trustees are divided into three
classes, with terms of three years each and with one class to be elected at
each annual meeting of shareholders. The classified Board could have the effect
of making the removal of incumbent Trustees time-consuming and difficult, which
could discourage a third party from making a tender offer or otherwise
attempting to effect a change in control of the Company that a majority of
shareholders may believe to be beneficial to the Company and its shareholders.
Vacancies
Any vacancy on the Board arising for any cause may be filled (i) by the
Trustees then in office, (ii) at the next annual meeting of shareholders or
(iii) at a special meeting of shareholders called for such purpose. Any Trustee
elected by the Trustees to fill a vacancy will hold office until the next
annual meeting of shareholders.
Removal of Trustees
The Declaration of Trust provides that, subject to the rights of holders
of one or more classes or series of Shares to elect or remove Trustees, a
Trustee may be removed with or without cause by the shareholders upon the
affirmative vote of at least two-thirds of the votes entitled to be cast in the
election of Trustees. This provision has the effect of limiting shareholders'
power to remove incumbent Trustees.
Business Combinations
Under the MGCL, as applicable to Maryland real estate investment trusts,
certain "business combinations" (including mergers, consolidations, share
exchanges and asset transfers and certain issuances or reclassifications of
equity securities) between a Maryland real estate investment trust and any
person who beneficially owns ten percent or more of the voting power of the
trust's shares or an affiliate or associate of the trust who, at any time
within the two-year period prior to the date in question, was the beneficial
owner of ten percent or more of the voting power of the then outstanding voting
shares of the trust (an "Interested Shareholder"), or an affiliate of such an
Interested Shareholder, are prohibited for five years after the most recent
date on which the Interested Shareholder becomes an Interested Shareholder.
Thereafter, any such business combination must be recommended by the Board of
such trust and approved by the affirmative vote of at least (i) 80% of the
votes entitled to be cast by holders of outstanding voting shares of beneficial
interest of the trust, voting together as a single voting group, and (ii)
two-thirds of the votes entitled to be cast by holders of voting shares of the
trust other than shares held by the Interested Shareholder with whom (or with
whose affiliate) the business combination is to be effected or by an affiliate
or associate of the Interested Shareholder, voting together as a single group,
unless, among other conditions, the trust's common shareholders receive a
minimum price (as defined in the MGCL) for their shares and the consideration
is received in cash or in the same form as previously paid by the Interested
Shareholder for its shares. These provisions of Maryland law do not apply,
however, to business combinations that are approved or exempted by the Board of
the trust prior to the time that the Interested Shareholder becomes an
Interested Shareholder. As permitted by the MGCL, the Declaration of Trust
exempts any "Business Combinations" involving the Company and Mr. Smith or any
of his affiliates. In addition, the Board has adopted a resolution exempting a
business combination with Mr. Smith or any of his affiliates from the
applicable provisions of the MGCL.
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Control Share Acquisitions
The MGCL, as applicable to Maryland real estate investment trusts,
provides that "control shares" (as defined below) of a Maryland real estate
investment trust acquired in a "control share acquisition" (as defined below)
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 of beneficial
interest owned by the acquiror, by officers or by trustees who are employees of
the trust. "Control Shares" are voting shares of beneficial interest which, if
aggregated with all other such shares of beneficial interest 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 trustees 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 then entitled to vote as a result of
having previously obtained shareholder approval. A "control share acquisition"
means the acquisition of Control Shares, subject to certain exceptions.
A person who has made or proposes to make a Control Share Acquisition,
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the Board of the trust to call a special meeting of
shareholders to be held within 50 days of the Company's receipt of the demand
and undertaking to consider the voting rights of the shares. If no request for
a meeting is made, the trust may itself present the question at any
shareholders meeting.
If an acquiring person statement has been delivered within ten days after
the control shares acquisition, and voting rights are not approved at the
meeting or if the acquiring person does not deliver an acquiring person
statement as required by the statute, then, subject to certain conditions and
limitations, the trust may redeem any or all of the Control Shares (except
those for which voting rights have previously been approved) at their fair
value, determined without regard to the absence of voting rights for the
Control Shares, as of the date of the last Control Share Acquisition by the
acquiror or of any meeting of shareholders at which the voting rights of such
shares are considered and not approved. If voting rights for Control Shares are
approved at a shareholders meeting and the acquiror becomes entitled to vote a
majority of the shares entitled to vote, all other shareholders may exercise
appraisal rights. The fair value of the shares as determined for purposes of
such appraisal rights may not be less than the highest price per share paid by
the acquiror in the control share acquisition.
The Control Share Acquisition statute does not apply (a) to shares
acquired in a merger, consolidation or share exchange if the trust is a party
to the transaction or (b) to acquisitions approved or exempted by the
declaration of trust or bylaws of the trust prior to such acquisition. The
Declaration of Trust provides that the Control Shares Acquisition statute does
not apply to Shares owned or acquired by Mr. Smith or any affiliate of Mr.
Smith (but the statute shall apply to Shares acquired by such person after Mr.
Smith or any of his affiliates no longer directly holds any equity interest in
such person).
Shareholders' Meetings
The Declaration of Trust and Bylaws provide for an annual meeting of
Shareholders to be held upon proper notice and within a reasonable period
following delivery of the Company's annual report. Special meetings of
Shareholders may be called by a majority of the Trustees or by the Chairman of
the Board or the President of the Company and must be called upon the written
request of Shareholders holding in the aggregate not less than 25% of the
voting power of the outstanding Shares of the Company entitled to vote. Written
notice stating the place, date and time of the Shareholders' meeting and, in
the case of a special meeting, the purpose or purposes for which the meeting is
called, is required to be delivered not less than 10 nor more than 60 days
before the day of the meeting to each holder of record entitled to vote at such
meeting.
Annual Report
Under the Maryland REIT Law, the Company is required to deliver to
shareholders an annual report concerning its operations for the preceding
fiscal year containing financial statements which are certified by independent
certified public accountants. The report must include a balance sheet, an
income statement and a surplus statement. Annual reports must be submitted to
the shareholders at or before the annual meeting and must be placed on file at
the principal office of the Company within the time prescribed by the Maryland
REIT Law.
Amendment
The Trustees, by a two-thirds vote, may amend the provisions of the
Company's Declaration of Trust, without shareholder approval, to qualify the
Company as a REIT under the Code or under the Maryland REIT Law. The Board may
also amend the Declaration of Trust, without shareholder approval, to increase
or decrease the aggregate number of Shares that
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the Company has the authority to issue. Otherwise, the Company's Declaration of
Trust may be amended only by the affirmative vote or written consent of the
holders of not less than a majority of the votes entitled to be cast thereon.
The Company's Bylaws may be amended by the Board or by the Shareholders at any
annual or special meeting of the Shareholders.
Limitation of Liability and Indemnification
The Maryland REIT Law permits a Maryland real estate investment trust to
include in its declaration of trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages
except for liability resulting from (i) actual receipt of an improper benefit
or profit in money, property or services or (ii) active and deliberate
dishonesty material to the cause of action as established by a final judgment.
The Company's Declaration of Trust contains such a provision limiting such
liability to the maximum extent permitted by the Maryland REIT Law.
The Declaration of Trust provides that the Company, to the fullest extent
permitted by Maryland law, may indemnify each Trustee, officer, employee and
agent in connection with any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that such person was a Trustee, officer, employee or agent of the
Company or is or was serving at the request of the Company as a trustee,
director, officer, partner, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust, other enterprise or employee
benefit plan, from all claims and liabilities to which such person may become
subject by reason of service in that capacity and to pay or reimburse
reasonable expenses, as such expenses are incurred, of each Trustee, officer,
employee or agent in connection with any such action, suit or proceeding.
The Maryland REIT Law permits a Maryland real estate investment trust to
indemnify, and to advance expenses to, its trustees, officers, employees and
agents to the same extent as permitted by the MGCL for directors and officers
of Maryland corporations. The MGCL permits a corporation to indemnify its
present and former directors and officers, among others, against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by them
in connection with any proceeding to which they may be made a party by reason
of their service in those or other capacities unless it is established that (i)
the act or omission of the director or officer was material to the matter
giving rise to the proceeding and (a) was committed in bad faith or (b) was the
result of active and deliberate dishonesty, (ii) the director or officer
actually received an improper personal benefit in money, property or services
or (iii) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. However, a
Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation or for a judgment of liability on the basis
that personal benefit was improperly received, unless in either case a court
orders indemnification and then only for expenses. In addition, the MGCL
permits a corporation to advance reasonable expenses to a director or officer
upon the corporation's receipt of (a) a written affirmation by the director or
officer of such person's good faith belief that he or she has met the standard
of conduct necessary for indemnification by the corporation and (b) a written
undertaking by or on behalf of such person to repay the amount paid or
reimbursed by the corporation if it shall ultimately be determined that the
standard of conduct was not met. The Declaration of Trust permits
indemnification of the Company's Trustees, officers, employees and agents to
the fullest extent permitted by Maryland law. Insofar as indemnification for
liability arising under the Securities Act may be permitted to Trustees,
officers or persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
Operations; Maryland Asset Requirements
The Company is generally prohibited from acquiring or holding property or
engaging in any activity that would cause the Company to fail to qualify as a
real estate investment trust. To maintain its qualification as a Maryland real
estate investment trust, the Maryland REIT Law requires that the Company hold,
either directly or indirectly, at least 75% of the value of its assets in real
estate assets, mortgages or mortgage related securities, government securities,
cash and cash equivalent items, including high-grade short-term securities and
receivables. The Maryland REIT Law also prohibits using or applying land for
farming, agriculture, horticulture or similar purposes.
Terminations of the Trust and REIT Status
The Company's Declaration of Trust permits (i) the termination of the
Company and the discontinuation of the operations of the Company at any meeting
of the Shareholders by the affirmative vote of the holders of two-thirds of the
votes entitled to be cast thereon after approval by a majority of the entire
Board, and (ii) the termination of the Company's qualification as a REIT by the
Board.
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Advance Notice of Trustee Nominations and New Business
For nominations of persons for election to the Board or other business to
be properly brought before an annual meeting of shareholders, the Company's
Bylaws require such shareholder to deliver a notice to the secretary, absent
specified circumstances, not less than 60 days nor more than 90 days prior to
the first anniversary of the preceding year's annual meeting setting forth: (i)
as to each person whom the shareholder proposes to nominate for election or
reelection as a trustee, all information relating to such person that is
required to be disclosed in solicitations of proxies for the election of
trustees pursuant to Regulation 14A of the Exchange Act; (ii) as to any other
business that the shareholder proposes to bring before the meeting, a brief
description of the business proposed to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest
in such business of such shareholder and of the beneficial owner, if any, on
whose behalf the proposal is made; and (iii) as to the shareholder giving the
notice and the beneficial owner, if any, on whose behalf the nomination or
proposal is made, (x) the name and address of such shareholder as it appears on
the Company's books and of such beneficial owner and (y) the number of Shares
which are owned beneficially and of record by such shareholder and such
beneficial owner, if any. For nominations of persons for election to the Board
at special meetings of shareholders (provided the Board has determined that
Trustees shall be elected at such meeting), the information described above
must also be delivered to the secretary of the Company not less than 60 days
nor more than 90 days before the date of any special meeting of shareholders or
not later than the tenth day following the day on which public announcement is
first made of the date of such meeting and of the nominees for election of
Trustees. In the event of an advancement of 30 days or more or in a
postponement of 60 days or more of an annual meeting of shareholders, the
notice requirements are similar to those for a special meeting. As a result,
the advance notice provisions could have the effect of discouraging a takeover
or other transaction in which holders of some or a majority of the Common
Shares might receive a premium over the then-prevailing market price for such
Common Shares.
Possible Antitakeover Effect of Certain Provisions of the Declaration of Trust
and Bylaws
The provisions of the Declaration of Trust on classification of the Board,
the removal of Trustees and the restrictions on the transfer of shares of
beneficial interest and the advance notice provisions of the Bylaws, among
others, could have the affect of delaying, deferring or preventing a
transaction or change in control of the Company that might involve a premium
price for holders of Common Shares or otherwise be considered by shareholders
to be in their best interest.
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COMMON SHARES ELIGIBLE FOR FUTURE SALE
Prior to the date of this Prospectus, there has been no public market for
the Common Shares. The Company has applied for trading of the Common Shares on
the NYSE. No prediction can be made as to the effect, if any, that future sales
of Common Shares (including sales pursuant to Rule 144) or the availability of
Common Shares for future sale will have on the market price prevailing from
time to time. Sales of substantial amounts of Common Shares (including Common
Shares issued upon the exercise of options or the exchange of Units), or the
perception that such sales could occur, could adversely affect prevailing
market prices of the Common Shares and impair the Company's ability to obtain
additional capital through the sale of equity securities. See "Risk
Factors--Common Shares Eligible for Future Sale May Cause Share Prices to
Decline." For a description of certain restrictions on transfers of Common
Shares held by certain shareholders of the Company, see "Underwriting" and
"Description of Shares of Beneficial Interest."
The executive officers and Trustees of the Company have agreed not,
directly or indirectly, to offer, sell, offer to sell, contract to sell, grant
any option to purchase or otherwise sell or dispose (or announce any offer,
sale, offer of sale, contract of sale, grant of any option to purchase or other
sale or disposition) of any Units or Common Shares or other shares of
beneficial interest of the Company, or any securities convertible into, or
exercisable or exchangeable for, any Units or Common Shares or other shares of
beneficial interest of the Company (other than pursuant to the Plan and the
Formula Plan, including the exercise of options granted thereunder, and
pursuant to the redemption of Units) for a period of two years from the
completion of the Offering without the prior written consent of the
Underwriters. The Underwriters, at any time and without notice, may release all
or any portion of the Common Shares subject to the foregoing lock-up
agreements.
The Common Shares owned by Mr. Smith and the Common Shares issuable upon
redemption of Units will be "restricted securities" under Rule 144 promulgated
under the Securities Act and may not be sold in the absence of registration
under the Securities Act unless an exemption from registration is available,
including exemptions contained in Rule 144. In general, under Rule 144 as
currently in effect, a person (or persons whose shares are aggregated with them
in accordance with Rule 144) who has beneficially owned "restricted securities"
(defined generally as securities acquired from the issuer or an affiliate of
the issuer in a transaction not involving a public offering) for at least one
year, including the holding period of any seller of such securities, unless
such seller is an affiliate, in which case the affiliate must have held the
restricted securities for at least two years, would be entitled to sell within
any three-month period a number of Common Shares that does not exceed the
greater of 1% of the then-outstanding number of Common Shares or 1% of the
average weekly trading volume of the Common Shares on the NYSE during the four
calendar weeks preceding each such sale. Sales under Rule 144 are also subject
to certain manner of sale provisions, notice requirements and the availability
of current public information about the Company. Any person (or persons whose
shares are aggregated with them in accordance with Rule 144) who is not deemed
to have been an affiliate of the Company at any time during the three months
preceding a sale, and who has beneficially owned shares for at least two years
(including any period of ownership of preceding non-affiliated holders), would
be entitled to sell such shares under Rule 144(k) without regard to the volume
limitations, manner of sale provisions, notice requirements or public
information requirements. An "affiliate" of the Company is a person that
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or under common control with, the Company. Mr. Smith would be
deemed to be an affiliate of the Company.
The Company has established the Plan and the Formula Plan for the purpose
of attracting and retaining executive officers, Trustees and other key
employees. See "Management--1998 Shares Option Plan." Contemporaneously with
the completion of the Offering, the Company will issue options to purchase an
aggregate of 465,000 Common Shares to Mr. Smith and the Company's executive
officers and will reserve an additional 635,000 and 200,000 Common Shares on a
fully diluted basis for future issuance under the Plan and the Formula Plan,
respectively. The Company intends to file a registration statement under the
Securities Act registering the Common Shares reserved for issuance upon the
exercise of options granted under the Plan and the Formula Plan. See
"Management--1998 Shares Option Plan." This registration statement is expected
to be filed shortly after the completion of the Offering.
Pursuant to the Contribution Agreement, the Company has entered into the
Registration Rights Agreement with the holders of 2,554,558 Units. Under the
terms of the Registration Rights Agreement, holders of such Units have agreed
that such Units are not redeemable by the Company for Common Shares or cash
until one year after the date of the consummation of the Offering. The
Registration Rights Agreement also prohibits Unit holders from offering,
pledging, selling or otherwise disposing of any Units or Shares for a period of
one year. Certain exceptions include certain transactions among related
parties, bona fide gifts and customary estate planning transactions. Subject to
certain limitations, the Company has agreed to use its best efforts to file a
registration statement under the Securities Act one year after the consummation
of the
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Offering, at its expense, which would allow the sale of any and all Common
Shares issued in connection with the redemption of Units held by such holders.
These registration rights are limited or restricted to the extent an
underwriter of the offering determines that the amount of Common Shares to be
registered by such holders exceeds the number of Common Shares that can be sold
without adversely affecting the market for the Common Shares.
FEDERAL INCOME TAX CONSEQUENCES
The Company intends to operate in a manner that permits it to satisfy the
requirements for taxation as a REIT under the applicable provisions of the
Code. No assurance can be given, however, that such requirements will be met.
The following is a summary of the federal income tax consequences for the
Company and its shareholders with respect to the treatment of the Company as a
REIT. The information set forth below, to the extent that it constitutes
matters of law or legal conclusions, is based on the opinion of Mayer, Brown &
Platt, special tax counsel to the Company.
Based upon the matters described below, in the opinion of Mayer, Brown &
Platt, counsel to the Company, the Company has been organized in conformity
with the requirements for qualification as a REIT beginning with its taxable
year ending December 31, 1999, and its proposed method of operation as
represented by the Company to Mayer, Brown & Platt and as described in this
Prospectus will enable it to satisfy the requirements for such qualification.
This opinion is based on certain assumptions relating to the organization and
operation of the Company and the Operating Partnership, including that the
Formation Transactions have been and will be consummated in accordance with the
operative documents and such documents accurately reflect the material facts of
such transactions, and that the Company and the Operating Partnership will each
be operated in the manner described in their applicable organizational
documents and in this Prospectus, and that all terms and provisions of such
documents and other documents to which the Company or Operating Partnership is
a party, will be complied with by all parties thereto. This opinion is also
conditioned upon certain representations made by the Company as to certain
factual matters relating to the Company's organization and intended or expected
manner of operation. In addition, this opinion is based on the law existing and
in effect on the date hereof, and the Company's qualification and taxation as a
REIT will depend on compliance with such law existing and in effect on the date
hereof and as the same may hereafter be amended. The Company's qualification
and taxation as a REIT will further depend upon the Company's ability to meet,
on a continuing basis through actual operating results, asset composition,
distribution levels and diversity of share ownership, the various qualification
tests imposed under the Code discussed below. Counsel will not review
compliance with these tests on a continuing basis, and thus no assurance can be
given that the Company will satisfy such tests on a continuing basis.
In brief, a corporation that invests primarily in real estate can, if it
meets the REIT provisions of the Code described below, claim a tax deduction
for the dividends it pays to its shareholders. Such a corporation generally is
not taxed on its "REIT taxable income" to the extent such income is currently
distributed to shareholders, thereby substantially eliminating the "double
taxation" (i.e., at both the corporate and shareholder levels) that generally
results from an investment in a corporation. However, as discussed in greater
detail below, such an entity remains subject to tax in certain circumstances
even if it qualifies as a REIT. Further, if the entity were to fail to qualify
as a REIT in any year, it would not be able to deduct any portion of the
dividends it paid to its shareholders and would be subject to full federal
income taxation on its earnings, thereby significantly reducing or eliminating
the cash available for distribution to its shareholders. See "--Taxation of the
Company--General" and "--Taxation of the Company--Failure to Qualify."
The Board of the Company currently expects that the Company will operate
in a manner that permits it to elect, and that it will timely and effectively
elect, REIT status for its taxable year ending December 31, 1999, and in each
taxable year thereafter. There can be no assurance, however, that this
expectation will be fulfilled since qualification as a REIT depends on the
Company continuing to satisfy the numerous asset, income and distribution tests
described below, which in turn will be dependent on the Company's operating
results.
The following summary is based on existing law, is not exhaustive of all
possible tax considerations and does not give a detailed discussion of any
state, local or foreign tax considerations, nor does it discuss all of the
aspects of federal income taxation that may be relevant to a prospective
shareholder in light of his or her particular circumstances or to certain types
of shareholders (including insurance companies, financial institutions and
broker-dealers, and, except as discussed below, foreign corporations and
persons who are not the citizens or residents of the United States) subject to
special treatment under the federal income taxation laws.
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Taxation of the Company
General
In any year in which the Company qualifies as a REIT, in general it will
not be subject to federal income tax on that portion of its REIT taxable income
or capital gain which is distributed to shareholders. The Company may, however,
be subject to tax at normal corporate rates upon any taxable income or capital
gain not distributed. Under recently enacted legislation, to the extent that
the Company elects to retain and pay income tax on its net long-term capital
gain, shareholders are required to include their proportionate share of the
Company's undistributed long-term capital gain in income but receive a credit
for their share of any taxes paid on such gain by the Company.
Notwithstanding its qualification as a REIT, the Company also may be
subject to taxation in certain other circumstances. If the Company should fail
to satisfy either the 75% or the 95% gross income test (each as discussed
below), and nonetheless maintain its qualification as a REIT because certain
other requirements are met, it will be subject to a 100% tax on the greater of
the amount by which the Company fails either the 75% or the 95% test,
multiplied by a fraction intended to reflect the Company's profitability. The
Company will also be subject to a tax of 100% on net income from any
"prohibited transaction" (as described below), and if the Company has (i) net
income from the sale or other disposition of "foreclosure property" which is
held primarily for sale to customers in the ordinary course of business or (ii)
other non-qualifying income from foreclosure property, it will be subject to
tax on such income from foreclosure property at the highest corporate rate. In
addition, if the Company should fail to distribute during each calendar year at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of
its REIT capital gain net income for such year, and (iii) any undistributed
taxable income from prior years, the Company would be subject to a 4% excise
tax on the excess of such required distribution over the amounts actually
distributed. To the extent that the Company elects to retain and pay income tax
on its long-term capital gain, such retained amounts will be treated as having
been distributed for purposes of the 4% excise tax. The Company also may be
subject to the corporate alternative minimum tax, as well as to tax in certain
situations not presently contemplated. The Company will use the calendar year
both for federal income tax purposes, as is required of a newly organized REIT,
and for financial reporting purposes.
In order to qualify as a REIT, the Company must meet, among others, the
following requirements:
Share Ownership Tests
The Company's shares of beneficial interest (which term, in the case of
the Company, currently means the Common Shares) must be held by a minimum of
100 persons for at least 335 days in each taxable year (or a proportional
number of days in any short taxable year). In addition, at all times during the
second half of each taxable year, no more than 50% in value of the outstanding
shares of beneficial interest of the Company may be owned, directly or
indirectly and including the effects of certain constructive ownership rules,
by five or fewer individuals, which for this purpose includes certain tax-exempt
entities. However, for purposes of this test, any shares of beneficial interest
held by a qualified domestic pension or other retirement trust will be treated
as held directly by its beneficiaries in proportion to their actuarial interest
in such trust rather than by such trust. These share ownership requirements
need not be met until the second taxable year of the Company for which a REIT
election is made.
In order to attempt to ensure compliance with the foregoing share
ownership tests, the Company has placed certain restrictions on the ownership
and transfer of its shares of beneficial interest to prevent additional
concentration of stock ownership. Moreover, to evidence compliance with these
requirements, Treasury regulations require the Company to maintain records
which disclose the actual ownership of its outstanding shares of beneficial
interest. In fulfilling its obligations to maintain records, the Company must
and will demand written statements each year from the record holders of
designated percentages of its shares of beneficial interest disclosing the
actual owners of such shares of beneficial interest (as prescribed by Treasury
regulations). A list of those persons failing or refusing to comply with such
demand must be maintained as part of the Company's records. A shareholder
failing or refusing to comply with the Company's written demand must submit
with his tax return a similar statement disclosing the actual ownership of the
Company's shares of beneficial interest and certain other information. In
addition, the Company's Declaration of Trust provides restrictions regarding
the ownership and transfer of its shares of beneficial interest that are
intended to assist the Company in continuing to satisfy the share ownership
requirements. See "Description of Shares of Beneficial Interest--Restrictions
on Ownership and Transfer; Excess Shares."
Asset Tests
At the close of each quarter of the Company's taxable year, the Company
must satisfy two tests relating to the nature of its assets (determined in
accordance with generally accepted accounting principles). First, at least 75%
of the value of the Company's total assets must be represented by interests in
real property, interests in mortgages on real property, shares in
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other REITs, cash, cash items, government securities and qualified temporary
investments. Second, although the remaining 25% of the Company's assets
generally may be invested without restriction, securities in this class may not
exceed (i) in the case of securities of any one non-government issuer, 5% of
the value of the Company's total assets (the "Value Test") or (ii) 10% of the
outstanding voting securities of any one such issuer (the "Voting Stock Test").
Where the Company invests in a partnership (such as the Operating Partnership),
it will be deemed to own a proportionate share of the partnership's assets and
the partnership interest does not constitute a security for purposes of these
tests. See "--Tax Aspects of the Company's Investments in
Partnerships--General." Accordingly, the Company's investment in the Properties
through its interest in the Operating Partnership is intended to constitute an
investment in qualified assets for purposes of the 75% asset test.
Gross Income Tests
There are two separate percentage tests relating to the sources of the
Company's gross income which must be satisfied for each taxable year. For
purposes of these tests, where the Company invests in a partnership, the
Company will be treated as receiving its share of the income and loss of the
partnership, and the gross income of the partnership will retain the same
character in the hands of the Company as it has in the hands of the
partnership. See "--Tax Aspects of the Company's Investments in
Partnerships--General" below. The two tests are separately described below:
The 75% Test. At least 75% of the Company's gross income for the taxable
year must be "qualifying income." Qualifying income generally includes: (i)
rents from real property (except as modified below); (ii) interest on
obligations secured by mortgages on, or interests in, real property; (iii)
gains from the sales or other disposition of interests in real property and
real estate mortgages, other than gain from property bought primarily for sale
to customers in the ordinary course of the Company's trade or business ("dealer
property"); (iv) dividends or other distributions on shares in other REITs, as
well as gain from the sale of such shares; (v) abatements and refunds of real
property taxes; (vi) income from the operation, and gain from the sale, of
property acquired at or in lieu of a foreclosure of the mortgage secured by
such property ("foreclosure property"); and (vii) commitment fees received for
agreeing to make loans secured by mortgages on real property or to purchase or
lease real property.
The 95% Test. In addition to deriving 75% of its gross income from the
sources listed above, at least 95% of the Company's gross income for the
taxable year must be derived from the above-described qualifying income or from
dividends, interest, or gains from the sale or other disposition of stock or
other securities that are not dealer property. Dividends and interest on any
obligations not collateralized by an interest in real property are included for
purposes of the 95% test, but not for purposes of the 75% gross income test.
The Company intends to closely monitor its non-qualifying income and
anticipates that non-qualifying income from its other activities will not
result in the Company failing to satisfy either the 75% or 95% gross income
test.
Characterization of Rent
Rents under the Leases (the "Rent") will not constitute "rents from real
property" if the Leases are characterized as service contracts, joint ventures,
financing arrangements or some other type of arrangement other than true leases
for federal income tax purposes. The determination of whether the Leases are
true leases depends on an analysis of all surrounding facts and circumstances.
In making such a determination, courts have considered a variety of factors,
including the following: (i) the intent of the parties; (ii) the form of the
agreement; (iii) the degree of control over the property that is retained by
the property owner (e.g., whether the lessee has substantial control over the
operation of the business conducted on the property); (iv) the extent to which
the property owner retains the risk of loss with respect to the operation of
the business conducted on the property (e.g., whether the lessee bears the risk
of increases in operating expenses and decreases in operating revenues); and
(v) the extent to which the property owner retains the burdens and benefits of
ownership of the property.
Mayer, Brown & Platt is of the opinion that, subject to the receipt of
certain documentation with respect to the Advance Leases, each Initial Lease
will be treated as a true lease for federal income tax purposes. Such opinion
is not binding on the IRS and is based, in part, on the following facts: (i)
the Operating Partnership and each Lessee intend for their relationship to be
that of a lessor and lessee and such relationship will be documented by lease
agreements; (ii) each Lessee will have the right to exclusive possession and
use and quiet enjoyment of the Properties during the term of the Lease; (iii)
each Lessee will bear the costs of, and be responsible for, day-to-day
maintenance and repair of the Property, and will control how the business
conducted on the Property is operated; (iv) each Lessee will bear all of the
costs and expenses of operating the Property during the term of the Lease; (v)
each Lessee will benefit from any savings in expenses and costs of operating
the Property during the term of the Lease; (vi) the Lessee will generally
indemnify the Operating Partnership against all liabilities imposed on the
Operating Partnership during the term of the Lease by reason of (a) injury to
persons or damage to property occurring at the Property, or (b) the Lessee's
use, management, maintenance or repair of the Property; (vii) the
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Lessee is obligated to pay material fixed rent for the period of use of the
Properties; (viii) the Lessee stands to incur substantial losses (or reap
substantial gains) depending on how successfully it operates the business
conducted on the Property; (ix) the useful life of each Property is
significantly longer than the term of the Lease to which it relates; and (x)
the Operating Partnership will receive the benefit of any increase in value,
and will bear the risk of any decrease in value, of the Property during the
term of each Lease.
If the IRS were to challenge successfully the characterization of the
Initial Leases as true leases, the Operating Partnership would not be treated
as the owner of the Property for federal income tax purposes, would lose tax
depreciation deductions with respect to such Property and could have
non-qualified interest income, which in turn could cause the Company to fail to
qualify as a REIT.
Prospective investors should be aware that there are no controlling
Treasury regulations, published rulings, or judicial decisions involving leases
with terms substantially similar to those contained in the Leases that address
whether such leases constitute true leases for federal income tax purposes. If
the Leases are recharacterized as financing or partnership arrangements, rather
than true leases, part or all of the payments that the Operating Partnership
receives from the Lessees may not be considered rent or may not otherwise
satisfy the various requirements for qualification as "rents from real
property." In that case, the Company likely would not be able to satisfy either
the 75% of 95% gross income tests and, as a result, would lose its REIT status.
Although the Operating Partnership intends to structure any leasing
transaction for Properties acquired in the future such that the Lease will be
characterized as a "true lease" and the Operating Partnership will be treated
as the owner of the Property in question for federal income tax purposes, the
Operating Partnership will not seek an advance ruling from the IRS and may not
seek an opinion of counsel (except with respect to the Initial Leases) that the
Operating Partnership will be treated as the owner of any leased Properties for
federal income tax purposes, and thus there can be no assurances that future
leases will be treated as true leases for federal income tax purposes.
Rents from Real Property
Rents received by the Company will qualify as "rents from real property"
for purposes of the gross income tests only if several requirements are
satisfied. First, the amount of rent must not be based in whole or in part on
the income or profits derived by any person from the property being leased.
However, an amount received or accrued generally will not be excluded from the
terms "rents from real property" solely by reason of being based on a fixed
percentage or percentages of receipts or sales. The Company will structure the
Leases so that Rent paid by the Lessees for the Properties will be a fixed
amount, and will not be based in whole or in part on the net income of any
person with respect to the Properties.
Second, for Rents to qualify as "rents from real property," the Company
must not own, actually or constructively, 10% of more of any Initial Lessee or
any other Lessee of the Properties (a "Related Party Tenant"). The constructive
ownership rules generally provide that if 10% or more in value of the Shares of
the Company are owned, directly or indirectly, by or for any person, the
Company is considered as owning the shares owned, directly or indirectly, by or
for such person. The applicable attribution rules, however, are complex and
difficult to apply on account of factual uncertainty and other reasons, and the
Company may enter into leases with Lessees who, through application of such
rules, constitute Related Party Tenants. In such event, rent paid by the
Related Party Tenant will not qualify as "rents from real property," which may
jeopardize the Company's status as a REIT. To reduce the risk that any Lessee
will be treated as a related party tenant, the Company's Declaration of Trust
prohibits transfers of Shares that could cause a Lessee to be a related party
tenant of the Company. In addition, the Sonic Leases prohibit Lessees from
owning, directly or indirectly, 10% or more in value of the Shares of the
Company and the Company will obtain certain documentation from Advance Auto
which will provide for similar restrictions. In addition, to reduce the risk
that any Lessee will be treated as a related party tenant (i) the Declaration
of Trust provides that no direct or indirect partner or member of an Excluded
Holder (as defined in the Declaration of Trust) may beneficially or
constructively own Shares and (ii) the Partnership Agreement provides that no
partner (other than the General Partner) shall be permitted to own (actually or
constructively, through the application of Section 318 of the Code, modified
for purposes of the REIT rules) a 25% or greater percentage interest in the
Partnership. No assurance can be given that these restrictions will be complied
with. See "Description of Shares of Beneficial Interest--Restrictions on
Transfer--Excess Shares."
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." The Rent attributable to the
personal property associated with a property is the amount that bears the same
ratio to total rent for the taxable year as the average of the adjusted bases
of the personal property in the property at
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the beginning and at the end of the taxable year bears to the average of the
aggregate adjusted bases of both the real and personal property comprising the
property at the beginning and at the end of such taxable year.
Finally, for rents received to qualify as rents from real property for
purposes of the 75% and 95% gross income tests, the Company generally must not
operate or manage the property or furnish or render services to customers,
other than through an "independent contractor" from whom the Company derives no
income, except that the "independent contractor" requirement does not apply to
the extent that the services provided by the Company are "usually or
customarily rendered" in connection with the rental of space for occupancy
only, or are not otherwise considered "rendered to the occupant for his
convenience" or the amounts received with respect to such services do not
exceed 1% of all amounts received or accrued, directly or indirectly, by the
Company during the taxable year with respect to such property. The Operating
Partnership will provide certain services at the Properties that it owns and
possibly at any newly acquired Properties of the Operating Partnership. The
Company believes that any services provided at such Properties and any other
services and amenities provided by the Operating Partnership or its agents with
respect to such Properties will be of the type usually or customarily rendered
in connection with the rental of space for occupancy only and not rendered to
the occupant for his convenience. The Company intends that services that cannot
be provided directly by the Operating Partnership or other agents will be
performed by independent contractors.
Foreclosure Property Rules and Certain Other Rules
REITs generally are subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would generally be
qualifying income for purposes of the 75% gross income test), less expenses
directly connected with the production of such income. "Foreclosure property"
is defined as any real property (including interests in real property) and any
personal property incident to such real property (i) that is acquired by a REIT
as the result of such REIT having bid in such property at foreclosure, or
having otherwise reduced such property to ownership or possession by agreement
or process of law, after there was a default (or default was imminent) on a
lease of such property or on an indebtedness owed to the REIT that such
property secured, (ii) as to which the related lease or loan was made or
acquired by the REIT at a time when default was not imminent or anticipated,
and (iii) for which such REIT makes a proper election to treat such property as
foreclosure property. Except as provided in the following paragraph, property
shall cease to be foreclosure property with respect to the Company as of the
close of the third taxable year following the taxable year in which the Company
acquired such property in foreclosure. If property is not eligible for the
election to be treated as foreclosure property ("ineligible property") because,
for example, the related lease was acquired by the REIT at a time when default
was imminent or anticipated, income received with respect to such ineligible
property may not be qualifying income for purposes of the 75% or 95% gross
income tests.
Any foreclosure property shall cease to be foreclosure property on the
first day (occurring on or after the day on which the Company acquired the
property in foreclosure) on which: (x) a lease is entered into with respect to
such property which, by its terms, will not give rise to qualifying income for
purposes of the 75% gross income test or any amount is received or accrued,
directly or indirectly, pursuant to a lease entered into on or after such day
which does not generate qualifying income for purposes of the 75% gross income
test; (y) any construction takes place on such property (other than completion
of a building, or completion of any other improvement, where more than 10
percent of the construction of such building or other improvement was completed
before default became imminent); or (z) if such day is more than 90 days after
the day on which such property was acquired by the Company and the property is
used in a trade or business which is conducted by the Company (other than
through an independent contractor (within the meaning of Section 856(d)(3) of
the Code) from whom the Company itself does not derive or receive any income).
For example, if the Company were to acquire a Dealership as foreclosure
property and operate the Dealership for more than 90 days, the Company would be
required to operate the Dealership through an independent contractor (within
the meaning of the Code) from whom the Company itself did not derive or receive
any income (which might include income from the Dealership). Otherwise, after
such 90th day, the property would cease to be foreclosure property.
In the event that a foreclosure with respect to any of the Company's
investments were to occur (or were anticipated to occur), the Company intends
to manage the actual or anticipated foreclosure with the intent of assuring
qualification under the REIT asset and gross income tests including, if
appropriate, the election to treat a foreclosed upon property as foreclosure
property and to pursue the continued treatment of such property under the
foreclosure property rules.
For purposes of determining whether the Company complies with the 75% and
the 95% gross income tests, gross income does not include income from
prohibited transactions. A "prohibited transaction" is a sale of dealer
property (excluding foreclosure property); however, a sale of property will not
be a prohibited transaction if such property is held by the Company for at
least four years and certain other requirements (relating to the number of
properties sold in a year, their tax
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bases, and the cost of improvements made thereto) are satisfied. See
"--Taxation of the Company--General" and "Tax Aspects of the Company's
Investments in Partnerships--Sale of the Properties."
The Company believes that, for purposes of both the 75% and the 95% gross
income tests, its investment in the Properties through the Operating
Partnership will in major part give rise to qualifying income in the form of
rents, and that gains on sales of the Properties, or of the Company's interest
in the Operating Partnership, generally will also constitute qualifying income.
Even if the Company fails to satisfy one or both of the 75% and 95% gross
income tests for any taxable year, it may still qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions will generally be available if: (i) the Company's failure to comply
is due to reasonable cause and not to willful neglect; (ii) the Company reports
the nature and amount of each item of its income included in the tests on a
schedule attached to its tax return; and (iii) any incorrect information on
this schedule is not due to fraud with intent to evade tax. If these relief
provisions apply, however, the Company will nonetheless be subject to a 100%
tax on the greater of the amount by which it fails either the 75% or 95% gross
income test, multiplied by a fraction intended to reflect the Company's
profitability.
Annual Distribution Requirements
In order to quality as a REIT, the Company is required to distribute
dividends to its shareholders each year in an amount at least equal to (A) the
sum of (i) 95% of the Company's REIT taxable income (computed without regard to
the dividends paid deduction and the Company's net capital gain) and (ii) 95%
of the net income (after tax), if any, for foreclosure property, minus (B) the
sum of certain items of non-cash income. Such distributions must be paid in the
taxable year to which they relate, or in the following taxable year if declared
before the Company timely files its tax return for such year and if paid on or
before the first regular dividend payment after the declaration. To the extent
that the Company does not distribute all of its net capital gain or distributes
at least 95%, but less than 100%, of its REIT taxable income, as adjusted, it
will be subject to tax on the undistributed amount at regular capital gain or
ordinary corporate tax rates, as the case may be.
The Company intends to make timely distributions sufficient to satisfy the
annual distribution requirements described in the first sentence of the
preceding paragraph. In this regard, the Partnership Agreement authorizes the
Company in its capacity as general partner to take such steps as may be
necessary to cause the Operating Partnership to distribute to its partners an
amount sufficient to permit the Company to meet the distribution requirements.
It is possible that the Company may not have sufficient cash or other liquid
assets to meet the 95% distribution requirement, due to timing differences
between the actual receipt of income and actual payment of expenses on the one
hand, and the inclusion of such income and deduction of such expense in
computing the Company's REIT taxable income on the other hand; due to the
Operating Partnership's inability to control cash distributions with respect to
any properties as to which its does not have decision making control; or for
other reasons. The Company will closely monitor the relationship between its
REIT taxable income and cash flow and, if necessary, intends to borrow funds
(or cause the Operating Partnership or other affiliates to borrow funds) in
order to satisfy the distribution requirement. However, there can be no
assurance that such borrowing would be available at such time.
If the Company fails to meet the 95% distribution requirement as a result
of an adjustment to the Company's tax return by the Service, the Company may
retroactively cure the failure by paying a "deficiency dividend" (plus
applicable penalties and interest) within a specified period.
Failure to Qualify
If the Company fails to qualify for taxation as a REIT in any taxable year
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to shareholders in any year which the
Company fails to qualify as a REIT will not be deductible by the Company, nor
generally will they be required to be made under the Code. In such event, to
the extent of current and accumulated earnings and profits, all distributions
to shareholders will be taxable as ordinary income, and subject to certain
limitations in the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific
statutory provisions, the Company also will be disqualified from re-electing
taxation as a REIT for the four taxable years following the year during which
qualification was lost.
Tax Aspects of the Company's Investments in Partnerships
General
The Company will hold a partnership interest in the Operating Partnership.
In general, a partnership is a "pass-through" entity which is not subject to
federal income tax. Rather, partners are allocated their proportionate shares
of the items of
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income, gain, loss, deduction and credit of a partnership, and are potentially
subject to tax thereon, without regard to whether the partnership received a
distribution from the partnership. The Company will include its proportionate
share of the foregoing partnership items for purposes of the various REIT gross
income tests and in the computation of its REIT taxable income. See "--Taxation
of the Company--General" and "--Gross Income Tests."
Each partner's share of a partnership's tax attributes is determined in
accordance with the partnership agreement, although the allocations will be
adjusted for tax purposes if they do not comply with the technical provisions
of Code Section 704(b) and the regulations thereunder. The Operating
Partnership's allocations of tax attributes are intended to comply with these
provisions. Notwithstanding these allocation provisions, for purposes of
complying with the gross income and asset tests discussed above, the Company
will be deemed to own its proportionate share of each of the assets of the
partnership and will be deemed to have received a share of the income of the
Partnership based on its capital interest in the Operating Partnership.
Accordingly, any resultant increase in the Company's REIT taxable income
from its interest in the Operating Partnership (whether or not a corresponding
cash distribution is also received from the Operating Partnership) will
increase its distribution requirements (see "--Taxation of the Company--Annual
Distribution Requirements"), but will not be subject to federal income tax in
the hands of the Company provided that an amount equal to such income is
distributed by the Company to its shareholders. Moreover, for purposes of the
REIT asset tests (see "--Taxation of the Company--Asset Tests"), the Company
will include its proportionate share of assets held by the Operating
Partnership.
Entity Classification
Based on the representations of the Company that the Operating Partnership
will be operated in accordance with its organizational documents and satisfies
certain conditions relating to "publicly traded partnership" status under the
Code, in the opinion of Mayer, Brown & Platt, under existing federal income tax
law and regulations, the Operating Partnership will be treated for federal
income tax purposes as a partnership, and not as an association taxable as a
corporation. Such opinion, however, is not binding on the Service.
Tax Allocations with Respect to the Properties
Pursuant to Section 704(c) of the Code, income, gain, loss and deductions
attributable to appreciated or depreciated property that is contributed to a
partnership in exchange for an interest in the partnership (such as certain of
the Properties or interests therein) must be allocated in a manner such that
the contributing partner is charged with, or benefits from, respectively, the
unrealized gain or unrealized loss associated with the property at the time of
the contribution. The amount of such unrealized gain or unrealized loss is
generally equal to the difference between the fair market value of the
contributed property at the time of contribution, and the adjusted tax basis of
such property at the time of contribution (a "Book-Tax Difference"). Such
allocations are solely for federal income tax purposes and do not affect the
book capital amounts or other economic arrangements among the partners. The
formation of the Operating Partnership included contributions of appreciated
property (including certain of the Properties or interests therein).
Consequently, the Partnership Agreement requires certain allocations to be made
in a manner consistent with Section 704(c) of the Code.
In general, certain of the sellers of the Initial Properties as
contributors of certain of the Properties or interests therein will be
allocated lower amounts of depreciation deductions for tax purposes and
increased taxable income and gain on sale by the Operating Partnership on the
contributed assets (including certain of such Properties). This will tend to
eliminate the Book-Tax Difference over the life of the Operating Partnership.
However, the special allocation rules of Section 704(c) do not always entirely
rectify the Book-Tax Difference on an annual basis or with respect to a
specific taxable transaction such as a sale, and accordingly variations from
normal Section 704(c) principles may arise, which could result in the
allocation of additional taxable income to the Company in excess of
corresponding cash proceeds in certain circumstances.
Treasury regulations under Section 704(c) provide partnerships with a
choice of several methods of accounting for Book-Tax Differences. The Operating
Partnership and the Company have not yet determined which of the alternative
methods of accounting for Book-Tax Differences will be elected, and
accordingly, such determination could have differing timing and other effects
on the Company.
Certain of the Properties acquired in taxable transactions will in general
have a tax basis equal to their fair market value. Section 704(c) of the Code
will not apply in such cases.
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Sale of the Properties
The Company's share of any gain realized by the Operating Partnership on
the sale of any "dealer property" generally will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax. See "--Taxation
of the Company--General" and "Gross Income Tests--The 95% Test." Under existing
law, whether property is dealer property is a question of fact that depends on
all the facts and circumstances with respect to the particular transaction. The
Operating Partnership intends to hold (and, to the extent within its control,
to have any joint venture to which the Operating Partnership is a partner so
hold) the Properties for investment with a view to long-term appreciation, to
engage in the business of acquiring, owning, operating and developing the
Properties and other industrial properties, and to make such occasional sales
of the Properties and other properties acquired subsequent to the date hereof
as are consistent with the Company's investment objectives. Based upon the
Company's investment objectives, the Company believes that overall, the
Properties should not be considered dealer property and that the amount of
income from prohibited transactions, if any, will not be material.
Taxation of Domestic Shareholders
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable domestic shareholders out of current or accumulated earnings
and profits (and not designated as capital gain dividends or retained capital
gains) generally will be taxed to such shareholders as ordinary dividend income
and will not be eligible for the dividends received deduction for corporations.
Distributions of net capital gain designated by the Company as capital gain
dividends will be taxed to such shareholders as long-term capital gain (to the
extent they do not exceed the Company's actual net capital gain for the fiscal
year) without regard to the period for which the shareholder has held its
shares of beneficial interest of the Company. However, corporate shareholders
may be required to treat up to 20% of capital gain dividends as ordinary
income. To the extent that the Company makes distributions in excess of current
and accumulated earnings and profits, such distributions will be treated first
as a tax-free return of capital to the shareholder, reducing the tax basis of a
shareholder's Common Shares by the amount of such excess distribution (but not
below zero), with distributions in excess of the shareholder's tax basis being
taxed as capital gains (if the Common Shares are held by the shareholder as a
capital asset). See "Distribution Policy." In addition, any dividend declared
by the Company in October, November or December of any year that is payable to
a shareholder of record on a specific date in any such month shall be treated
as both paid by the Company and received by the shareholder on December 31 of
such year, provided that the dividend is actually paid by the Company during
January of the following calendar year. Shareholders may not include in their
individual income tax returns any net operating losses of the Company. Federal
income tax rules may also require that certain minimum tax adjustments and
preferences be apportioned to Company shareholders.
The Company is permitted under the Code to elect to retain and pay income
tax on its net capital gain for any taxable year. Under the Taxpayer Relief Act
of 1997 (the "1997 Act"), however, if the Company so elects, a shareholder must
include in income such shareholder's proportionate share of the Company's
undistributed capital gain for the taxable year, and will be deemed to have
paid such shareholder's proportionate share of the income tax paid by the
Company with respect to such undistributed capital gain. Such tax would be
credited against the shareholder's tax liability and subject to normal refund
procedures. In addition, each shareholder's basis in such shareholder's shares
of Common Shares would be increased by the amount of undistributed capital gain
(less the tax paid by the Company) included in the shareholder's income.
The Internal Revenue Service Restructuring and Reform Act of 1998 (the
"1998 Act") alters the holding period for capital gain income for individuals
(and for certain trusts and estates). Pursuant to the 1997 Act, gain from the
sale or exchange of Common Shares held for more than 18 months was taxed at a
maximum capital gain rate of 20%. Gain from the sale or exchange of Common
Shares held for more than one year, but not more than 18 months was taxed at a
maximum capital gain rate of 28%. The 1997 Act also provided a maximum rate of
25% for "unrecaptured section 1250 gain" recognized on the sale or exchange of
certain real estate assets held for more than 18 months. Pursuant to the 1998
Act, property held for more than one year (rather than for more than 18 months)
will be eligible for the 20% and 25% capital gains rates discussed above. The
1998 Act applies to amounts taken into account on or after January 1, 1998. On
November 10, 1997, the Service issued Notice 97-64, which provides generally
that the Company may classify portions of its designated capital gain dividends
and deemed distributions of retained capital gains as (i) a 20% rate gain
distribution (which would be taxed as capital gain in the 20% group), (ii) an
unrecaptured Section 1250 gain distribution (which would be taxed as capital
gain in the 25% group), or (iii) a 28% rate gain distribution (which would be
taxed as capital gain in the 28% group). If no designation is made, the entire
designated capital gain dividend will be treated as a 28% rate capital gain
distribution. Notice 97-64 provides that the Company must determine the maximum
amounts that it may designate as 20% and 25% rate capital gain dividends by
performing the computation required by the Code as if the Company were an
individual
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whose ordinary income was subject to a marginal tax rate of at least 28%.
Notice 97-64 has not yet been modified to incorporate the changes made to
holding period requirements under the 1998 Act.
In general, any loss upon a sale or exchange of Common Shares by a
shareholder who has held such Common Shares for six months or less (after
applying certain holding period rules) will be treated as a long-term capital
loss, to the extent of distributions from the Company required to be treated by
such shareholders as long-term capital gains.
Backup Withholding
The Company will report to its domestic shareholders and to the IRS the
amount of dividends paid for each calendar year, and the amount of tax
withheld, if any, with respect thereto. Under the backup withholding rules, a
shareholder may be subject to backup withholding at a rate of 31% with respect
to dividends paid unless such shareholder (i) is a corporation or comes with
certain other exempt categories and, when required, demonstrates this fact or
(ii) provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with applicable
requirements of the backup withholding rules. A shareholder that does not
provide the Company with its correct taxpayer identification number may also be
subject to penalties imposed by the Service. Any amount paid as backup
withholding is available as a credit against the shareholder's income tax
liability. In addition, the Company may be required to withhold a portion of
capital gain distributions made to any shareholders who fail to certify their
non-foreign status to the Company. See "--Certain United States Tax
Considerations for Non-U.S. Shareholders" below.
Taxation of Tax-Exempt Shareholders
The IRS has issued a revenue ruling in which it held that amounts
distributed by a REIT to a tax-exempt employees' pension trust do not
constitute unrelated business taxable income ("UBTI"). Subject to the
discussion below regarding a "pension-held REIT," based upon such ruling and
the statutory framework of the Code, distributions by the Company to a
shareholder that is a tax-exempt entity should not constitute UBTI, provided
that the tax-exempt entity has not financed the acquisition of its shares with
"acquisition indebtedness" within the meaning of the Code, that the shares are
not otherwise used in an unrelated trade or business of the tax-exempt entity,
and that the Company, consistent with its present intent, does not hold a
residual interest in a real estate mortgage investment conduit ("REMIC") that
is an entity or arrangement that satisfies the standards set forth in Section
860D of the Code.
If any pension or other retirement trust that qualifies under Section
401(a) of the Code (a "qualified pension trust") holds more than 10% by value
of the interests in a "pension-held REIT" at any time during a taxable year, a
portion of the dividends paid to the qualified pension trust by such REIT may
constitute UBTI. For these purposes, a "pension-held REIT" is defined as a REIT
(i) which would not have qualified as a REIT but for the provisions of the Code
which look through such a qualified pension trust in determining ownership of
shares of the REIT and (ii) as to which at least one qualified pension trust
holds more than 25% by value of the interests of such REIT or one or more
qualified pension trusts (each owning more than a 10% interest by value in the
REIT) hold in the aggregate more than 50% by value of the interests in such
REIT.
The Company does not expect to constitute a "pension-held REIT"
immediately after the closing of the Offering and Formation Transaction.
However, no assurance can be given that the Company will not become a
"pension-held REIT" in the future.
Other Tax Considerations
Tax Legislation and Other Law Changes
The 1997 Act modifies many of the provisions relating to the requirements
for qualification as, and the taxation of, a REIT. Among other things, the 1997
Act (i) replaces the rule that disqualifies a REIT for any year in which the
REIT fails to comply with United States Treasury regulations that are intended
to enable a REIT to ascertain its ownership, with an intermediate penalty for
failing to do so; (ii) permits a REIT to render a de minimis amount of
impermissible services to tenants, or in connection with the management of
property, and still treat amounts received with respect to that property as
rents from real property; (iii) permits a REIT to elect to retain and pay
income tax on net long term capital gains; (iv) repeals a rule that required
that less than 30% of a REIT's gross income be derived from gain from the sale
or other disposition of stock or securities held for less than one year,
certain real property held for less than four years, and property that is sold
or disposed of in a prohibited transaction; (v) lengthens the original grace
period for foreclosure property from two years after the REIT acquired the
property to a period ending on the last day of the third full taxable year
following the taxable year in which the property was acquired; (vi) treats
income from all hedges that reduce the interest rate risk
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of REIT liabilities, not just interest rate swaps and caps, as qualifying
income under the 95% gross income test; and (vii) permits any corporation
wholly owned by a REIT to be treated as a qualified subsidiary, regardless of
whether the corporation has always been owned by a REIT.
Prospective shareholders should recognize that the present federal income
tax treatment of an investment in the Company may be modified by legislative,
judicial or administrative action at any time and that any such action may
affect investments and commitments previously made. The rules dealing with
federal income taxation are constantly in review by persons involved in the
legislative process and by the Service and the Treasury Department resulting in
revisions of regulations and revised interpretations of established concepts as
well as statutory changes. No assurance can be given as to the form or content
(including with respect to effective dates) of any tax legislation which may be
enacted. Revisions in federal tax laws and interpretations thereof can
adversely affect the tax consequences of an investment in the Company.
State and Local Taxes
The Company and its shareholders may be subject to state or local taxation
and the Company and the Operating Partnership may be subject to state or local
tax withholding requirements in various jurisdictions, including those in which
it or they transact business or reside. The state and local tax treatment of
the Company and its shareholders may not conform to the federal income tax
consequences discussed above. Consequently, prospective shareholders should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in Common Shares.
CERTAIN UNITED STATES TAX CONSIDERATIONS FOR NON-U.S. SHAREHOLDERS
The following is a discussion of certain anticipated U.S. federal income
and U. S. federal estate tax consequences of the ownership and disposition of
shares by a beneficial owner of shares of beneficial interest who is not a U.S.
person (a "Non-U.S. Shareholder"). For purposes of this discussion, a "U.S.
person" means a citizen or resident of the United States, a corporation or
partnership created or organized in the United States or under the law of the
United States or of any State or political subdivision of the foregoing (except
that the 1997 Act provides the IRS with the authority to issue regulations to
classify a foreign partnership as a domestic or foreign partnership where such
treatment is more appropriate without regard to where the partnership is
created or organized), any estate whose income is includible in gross income
for U.S. federal income tax purposes regardless of its source, or a "United
States Trust". A United States Trust is any trust if (i) a court within the
United States is able to exercise primary supervision over the administration
of the trust and (ii) one or more U.S. persons have the authority to control
all substantial decisions of the trust. The discussion is based on current law
and is for general information only. The discussion does not address other
aspects of U.S. Federal taxation other than income and estate taxation or all
aspects of U.S. Federal income and estate taxation. The discussion does not
consider any specific facts or circumstances that may apply to a particular
Non-U.S. Shareholder.
PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING
THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S. INCOME, ESTATE AND OTHER TAX
CONSEQUENCES OF HOLDING AND DISPOSING OF SHARES OF BENEFICIAL INTEREST.
Distributions From The Company
Ordinary Dividends
The portion of dividends received by Non-U.S. Shareholders payable out of
the Company's earnings and profits that are not attributable to capital gains
of the Company will be subject to U.S. withholding tax at the rate of 30%
unless reduced by treaty or the Non-U.S. Shareholder files an Internal Revenue
Service Form 4224 with the Company certifying that the investment to which the
distribution relates is effectively connected to a United States trade or
business of such Non-U.S. Shareholder (and, if certain tax treaties apply, is
attributable to a United States permanent establishment maintained by such
Non-U.S. shareholder). Under certain limited circumstances, the amount of tax
withheld may be refundable, in whole or in part, because of the tax status of
certain partners or beneficiaries of Non-U.S. Shareholders that are either
foreign partnerships or foreign estates or trusts. In general, Non-U.S.
Shareholders will not be considered engaged in a U.S. trade or business solely
as a result of their ownership of shares of beneficial interest. In cases where
the dividend income from a Non-U.S. shareholder's investment in shares of
beneficial interest is (or is treated as) effectively connected with the
Non-U.S. Shareholder's conduct of a U.S. trade or business (and, if certain tax
treaties apply, is attributable to a United States permanent establishment
maintained by such Non-U.S. shareholder), the Non-U.S. Shareholder generally
will be subject to U.S. tax at graduated rates, in the same manner as U.S.
shareholders are taxed with respect to such dividends (and may also be
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subject to the 30% branch profits tax (unless reduced or eliminated by treaty)
in the case of a Non-U.S. Shareholder that is a foreign corporation).
Under current Treasury Regulations, dividends paid to an address in a
foreign country are presumed to be paid to a resident of that country (unless
the payor has knowledge to the contrary) for purposes of the withholding
discussed above and, under the current interpretation of the Treasury
Regulations, for purposes of determining the applicability of a tax treaty
rate. However, under recently finalized Treasury Regulations effective for
dividends paid after December 31, 1999 (the "New Regulations"), a Non-U.S.
Shareholder who wishes to claim the benefit of an applicable treaty rate will
be required to satisfy applicable certification requirements on Internal
Revenue Service Form W-8. The New Regulations will also permit a reduced rate
of withholding on payments of dividends to foreign partnerships whose partners
are entitled to a reduced rate of withholding if the partners and the foreign
partnership supply the appropriate Internal Revenue Service certifications or
if the foreign partnership elects to be treated as a "qualified intermediary"
for withholding tax purposes. Under the New Regulations, Non-U.S. Shareholders
who claim that the dividends are effectively connected with the conduct of a
U.S. trade or business will have to supply Form W-8A in lieu of Form 4224 (Form
W-8A to date has only been issued in proposed form and is subject to change).
Capital Gain Dividends
Under the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"),
any distribution made by the Company to a Non-U.S. Shareholder, to the extent
attributable to gains from dispositions of United States Real Property
Interests ("USRPIs") by the Company ("USRPI Capital Gains"), will be considered
effectively connected with a U.S. trade or business of the Non-U.S. Shareholder
and subject to U.S. income tax at the rates applicable to U.S. individuals or
corporations, without regard to whether such distribution is designated as a
capital gain dividend. In addition, the Company will be required to withhold
tax equal to 35% of the amount of such distribution to the extent it
constitutes USRPI Capital Gains. Such distribution may also be subject to the
30% branch profits tax (unless reduced or eliminated by treaty) in the case of
a Non-U.S. shareholder that is a foreign corporation.
Non-Dividend Distributions
Any distributions by the Company that exceed both current and accumulated
earnings and profits of the Company will not be taxed as either ordinary
dividends or capital gain dividends. However, under current law, if it cannot
be determined at the time a distribution is made whether or not such
distribution will be in excess of current and accumulated earnings and profits,
the distribution will be subject to withholding. Should this occur, the
Non-U.S. Shareholder may seek a refund of over-withholding from the Internal
Revenue Service once it is subsequently determined that such distribution was,
in fact, in excess of current and accumulated earnings and profits of the
Company. Under the New Regulations, the Company will be entitled to make a
reasonable estimate of the portion of the distribution that is not a dividend.
Dispositions of Shares of Beneficial Interest
Unless the shares of beneficial interest constitute USRPIs, a sale or
exchange of shares of beneficial interest by a Non-U.S. shareholder generally
will not be subject to U.S. taxation under FIRPTA. The shares of beneficial
interest will not constitute USRPIs if the Company is a "domestically
controlled REIT." A domestically controlled REIT is a REIT in which, at all
times during a specified testing period, less than 50% in value of its shares
of beneficial interest is held directly or indirectly by Non-U.S. shareholders.
Because the Common Shares will be publicly traded, no assurance can be given
that the Company will continue to be a domestically controlled REIT.
If the Company does not constitute a domestically controlled REIT, a
Non-U.S. Shareholder's sale or exchange of shares of beneficial interest
generally will still not be subject to tax under FIRPTA as a sale of USRPIs
provided that (i) the Company's shares of beneficial interest are "regularly
traded" (as defined by applicable Treasury regulations) on an established
securities market (e.g., the NYSE, on which the Shares are listed) and (ii) the
selling Non-U.S. Shareholder held 5% or less of the Company's outstanding
shares of beneficial interest at all times during a specified testing period.
If gain on the sale or exchange of shares of beneficial interest were
subject to taxation under FIRPTA, the Non-U.S. Shareholder would be subject to
U.S. income tax at the rates applicable to U.S. individuals or corporations
(subject to alternative minimum tax and a special alternative minimum tax in
the case of nonresident alien individuals), and the purchaser of shares of
beneficial interest could be required to withhold 10% of the purchase price and
remit such amount to the Internal Revenue Service. The branch profits tax would
not apply to such sales or exchanges.
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Capital gains not subject to FIRPTA will nonetheless be taxable in the
United States to a Non-U.S. shareholder in two cases: (i) if the Non-U.S.
Shareholder's investment in shares of beneficial interest is effectively
connected with a U.S. trade or business conducted by such Non-U.S. Shareholder,
the Non-U.S. Shareholder will be subject to the same treatment as U.S.
shareholders with respect to such gain or (ii) if the Non-U.S. Shareholder is a
nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and has a "tax home" in the United States or an
office or other fixed place of business in the United States to which such gain
is attributable, the nonresident alien individual will be subject to 30% tax on
the individual's capital gain (unless reduced or eliminated by treaty).
Federal Estate Tax
Shares of beneficial interest owned or treated as owned by an individual
who is not a citizen or "resident" (as specifically defined for U.S. federal
estate tax purposes) of the United States at the time of death will be
includable in the individual's gross estate for U.S. federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise. Such
individual's estate may be subject to U.S. federal estate tax on the property
includable in the estate for U.S. federal estate tax purposes.
Information Reporting and Backup Withholding
The Company must report annually to the IRS and to each Non-U.S.
Shareholder the amount of dividends (including any capital gain dividends) paid
to, and the tax withheld with respect to, each Non-U.S. Shareholder. These
reporting requirements apply regardless of whether withholding was reduced or
eliminated by an applicable tax treaty. Copies of these returns may also be
made available under the provisions of a specific treaty or agreement with the
tax authorities in the country in which the Non-U.S. Shareholder resides.
U.S. backup withholding (which generally is imposed at the rate of 31% on
certain payments to persons that fail to furnish the information required under
the U.S. information reporting requirements) and information reporting will
generally not apply to dividends (including any capital gain dividends) paid on
shares of beneficial interest to a Non-U.S. Shareholder at an address outside
the United States. However, under the New Regulations, a Non-U.S. Shareholder
may be required to provide a certification on Form W-8 to be exempt from backup
withholding.
The payment of the proceeds from the disposition of shares of beneficial
interest to or through a U.S. office of a broker will be subject to information
reporting and backup withholding unless the owner, under penalties of perjury,
certifies, among other things, its status as a Non-U.S. Shareholder, or
otherwise establishes an exemption. The payment of the proceeds from the
disposition of shares of beneficial interest to or through a non-U.S. office of
a non-U.S. broker generally will not be subject to backup withholding and
information reporting, except as noted below. In the case of a payment of
proceeds from the disposition of shares of beneficial interest to or though a
non-U.S. office of a broker which is (i) a U.S. person, (ii) a "controlled
foreign corporation" for U.S. Federal income tax purposes or (iii) a foreign
person 50% or more of whose gross income for certain periods is derived from a
U.S. trade or business, information reporting (but not backup withholding) will
apply unless the broker has documentary evidence in its files that the holder
is a Non-U.S. Shareholder (and the broker has no actual knowledge to the
contrary) and certain other conditions are met, or the holder otherwise
establishes an exemption. A payment of the proceeds from the disposition of
shares of beneficial interest to or through such broker will be subject to
backup withholding if such broker has actual knowledge that the holder is a
U.S. person.
Backup withholding is not an additional tax. Any amounts withheld under
the backup withholding rules will be refunded or credited against the Non-U.S.
Shareholder's U.S. federal income tax liability, provided that required
information is furnished to the Internal Revenue Service.
These backup withholding and information reporting rules are currently
under review by the Treasury Department, and their application to shares of
beneficial interest is subject to change.
IT IS STRONGLY ADVISED THAT EACH PROSPECTIVE PURCHASER CONSULT WITH SUCH
PURCHASER'S TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO SUCH
PURCHASER OF THE PURCHASE, OWNERSHIP AND SALE OF COMMON SHARES IN AN ENTITY
ELECTING TO BE TAXED AS A REAL ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL,
STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP,
SALE AND ELECTION AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for which Wheat First Union, a
division of Wheat First Securities, Inc., and NationsBanc Montgomery Securities
LLC, are acting as representatives (the "Representatives"), have severally
agreed to purchase from the Company, and the Company has agreed to sell to the
Underwriters, the respective number of Common Shares set forth opposite each
Underwriter's name below:
<TABLE>
<CAPTION>
Underwriter Number of Shares
- ------------------------------------------------- -----------------
<S> <C>
Wheat First Securities, Inc. ...................
NationsBanc Montgomery Securities LLC ..........
----------
Total .......................................... 10,000,000
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase the Common Shares are subject to approval of certain
legal matters by counsel and to certain other conditions. The nature of the
Underwriters' obligation is such that they are committed to purchase and pay
for all of the Common Shares if any Common Shares are purchased.
The Underwriters propose to offer the Common Shares directly to the public
at the Offering Price set forth on the cover page of the Prospectus and to
certain securities dealers at such price less a concession not in excess of $
per share. The Underwriters may allow, and such selected dealers may reallow,
a concession not in excess of $ per share to certain brokers and dealers.
After the Offering, the Offering Price, concession, allowance and reallowance
may be changed by the Representatives. The Representatives have informed the
Company that the Underwriters do not intend to confirm sales to accounts over
which they exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to
1,500,000 additional Common Shares at the Offering Price. To the extent that
the Underwriters exercise this option, each of the Underwriters will be
committed, subject to certain conditions, to purchase such additional Common
Shares in approximately the same proportion as set forth in the table above.
The Underwriters may purchase such Common Shares only to cover over-allotments,
if any, made in connection with this Offering. If purchased, the Underwriter
will offer such additional Common Shares on the same terms as those on which
the initial 10,000,000 Common Shares are being offered.
The Company and its Trustees and executive officers have agreed not to
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise dispose (or announce any offer, sale, offer of sale,
contract of sale, grant of any option to purchase or other sale or
disposition), directly or indirectly, any Units or Common Shares or other
shares of beneficial interest of the Company, or any securities convertible
into, or exercisable or exchangeable for, any Units or Common Shares or other
shares of beneficial interest of the Company, for a period of two years from
completion of the Offering without the prior written consent of the
Underwriters, other than, in the case of the Company, in connection with the
acquisition of Properties, pursuant to the Plan and the Formula Plan or
pursuant to the redemption of Units. The Underwriters, at any time and without
notice, may release all or any portion of the Units, Common Shares or other
shares of beneficial interest subject to the foregoing lock-up agreements. See
"Shares Eligible for Future Sale."
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make in respect thereof.
In order to facilitate the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Shares, which might be higher than the price that otherwise might
prevail in the open market. The Underwriters may over allot in connection with
the Offering, creating a short position in the Common Shares for their own
account. In addition, to cover over allotments, syndicate short positions or to
stabilize the price of the Common Shares, the Underwriters may bid for, and
purchase, Common Shares in the open market. The underwriting syndicate also may
reclaim selling concessions allowed to an Underwriter or a dealer for
distributing the Common Shares in the Offering, if the syndicate repurchases
previously distributed Common Shares in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Common Shares
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above independent market levels. The Underwriters are not required to engage in
these activities, and may end any of these activities at any time.
Prior to the Offering, there has been no public market for the Common
Shares. The Offering Price, therefore, will be determined through negotiations
between the Company and the Representative. Among the factors to be considered
in such negotiations will be the prevailing market conditions, the expected
results of operations of the Company, evaluation of the Initial Properties,
estimates of the business potential and earnings prospects of the Company, the
current state of the Company's industry and the economy as a whole.
The Company intends to apply to list the Common Shares on the NYSE. In
order to meet one of the requirements for listing the Common Shares on the
NYSE, the Underwriters have undertaken to sell lots of 100 or more Common
Shares to a minimum of 2,000 beneficial holders.
LEGAL MATTERS
Certain legal matters in connection with the Offering will be passed upon
for the Company by Parker, Poe, Adams & Bernstein L.L.P., Charlotte, North
Carolina, and Ballard Spahr Andrews & Ingersoll, LLP, Baltimore, Maryland, with
regard to certain matters of Maryland law, and for the Underwriters by Hunton &
Williams, Richmond, Virginia. In addition, the description of federal income
tax consequences contained in this Prospectus under "Federal Income Tax
Consequences" is based on, to the extent that it constitutes matters of law or
legal conclusions, the opinion of Mayer, Brown & Platt, special tax counsel for
the Company.
EXPERTS
The balance sheet of Mar Mar Realty Trust as of April 14, 1998 (date of
formation) included in this Prospectus has been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing herein, and has
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-11 under the Securities Act,
with respect to the Common Shares offered hereby (the "Registration
Statement"). This Prospectus, which is part of the Registration Statement, does
not contain all the information set forth in the Registration Statement and the
exhibits thereto. For further information with respect to the Company and the
Common Shares, reference is made to the Registration Statement and such
exhibits filed therewith. Any statements contained herein concerning the
provisions of any document are not necessarily complete, and, in each instance,
reference is made to the copy of such document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference.
For further information with respect to the Company and the Common Shares,
reference is made to the Registration Statement and such exhibits, and
financial schedules, copies of which may be examined without charge at, or
copies obtained upon payment of prescribed fees from, the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and
will also be available for inspection and copying at the regional offices of
the Commission located at 7 World Trade Center, Suite 1300, New York, New York
10048. The Commission also maintains a web site that contains reports, proxy
and information statements and other information regarding registrants that
file documents with the Commission, including the Company, and the address is
http://www.sec.gov. Moreover, the Company intends to apply to have its Common
Shares approved for listing on the New York Stock Exchange ("NYSE").
Accordingly, upon issuance and such approval by the NYSE, periodic reports,
proxy statements, and other information concerning the Company when filed, may
be inspected at the offices of the NYSE, Operations, 20 Broad Street, New York,
New York 10005.
Following the closing of the Offering, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and will, therefore, be required to file reports, proxy
and information statements and other information with the Commission pursuant
to the reporting requirements of Section 13(a) thereof, in addition to any
other legal or NYSE requirements. Such reports, statements and information can
also be inspected and copied at the Commission's offices and web site listed
above.
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Sonic Automotive is subject to the informational requirements of the
Exchange Act and in accordance therewith files reports, proxy statements and
other information with the Commission that can be obtained from the Commission
as described above.
The Company intends to furnish its shareholders with annual reports
containing consolidated financial statements audited by its independent
certified public accountants and with quarterly reports containing unaudited
condensed consolidated financial statements for each of the first three
quarters of each fiscal year.
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GLOSSARY
Unless the context otherwise requires, the following capitalized terms
shall have the meanings set forth below for the purposes of this Prospectus:
"ADA" means the Americans with Disabilities Act of 1990, as amended, and
the regulations promulgated under the authority conferred thereby.
"Advance Auto" means Advance Stores Company, Incorporated.
"Advance Lease" means a lease agreement between an Advance Lessee and the
Company.
"Advance Lessee" means Advance Auto in its capacity as Lessee of the
Advance Properties.
"Advance Properties" means the Properties acquired from Advance Auto Parts
Stores.
"APAA" means the Automotive Parts and Accessories Association.
"Automotive Aftermarket" means the market for products and services
purchased for motor vehicles after the original sale of the vehicles.
"Bankruptcy Code" means the Bankruptcy Code of 1978.
"Base Rent" means the annual base rent each Lessee or its assigns is
obligated to the Lessor each Lease year.
"Board" means the Board of Trustees of the Company.
"Business Combination" means a merger, consolidation or other combination
with or into another person or sale of all or substantially all of its assets,
or any reclassification, recapitalization or change of outstanding Common
Shares.
"Bylaws" means the bylaws of the Company, as amended.
"Cash Available for Distribution" means net earnings plus depreciation and
amortization and minus capital expenditures and principal payments on
indebtedness.
"Cash Flow Coverage Ratio" means the ratio of net income of a Lessee
before income taxes plus depreciation, amortization and rent expense to rent of
at least 1.5 to 1.0, computed as the aggregate of net income before taxes plus
mortgage interest, plus rent expense and depreciation, plus the annual LIFO
adjustment and other non-cash expenses, less recurring capital expenditures and
gain (loss) on the sale of real estate, dividends and/or profit taken out of
the Initial Lessees, divided by the aggregate of the Initial Lessee's
obligations under the Initial Leases.
"Class A Unit" means a limited partnership interest in the Operating
Partnership redeemable on a one-for-one basis for Common Shares or cash at the
Company's option.
"Class B Common Shares" means the Class B common shares of beneficial
interest, par value $1.00 per share, of the Company that are convertible into
Common Shares on a one-for-one basis.
"Class B Units" means a limited partnership interest in the Operating
Partnership redeemable on a one-for-one basis for Class B Common Shares or cash
at the Company's option.
"Class C Unit" means a limited partnership interest in the Operating
Partnership initially having no rights regarding voting, allocations or
distributions and subsequently attaining rights identical to the Class A Units
at the effective time of the new Leases for the two Properties acquired from
Mr. Smith and his affiliates.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collision Repair Property" means the real estate occupied by ABRA Auto
Body & Class, an operator of a collision repair facility.
"Commission" or "SEC" means the United States Securities and Exchange
Commission.
"Common Shares" means the Class A common shares of beneficial interest,
par value $1.00 per share, of the Company.
"Company" means Mar Mar Realty Trust, a Maryland REIT, and its
subsidiaries, including the Operating Partnership.
"Condemnation" means the acquisition of property by the government or a
subdivision thereof whether through the exercise of its power of eminent domain
or otherwise.
88
<PAGE>
"Contribution Agreement" means the contribution agreement pursuant to
which the Company will acquire certain of the Initial Properties or interests
therein owned by the sellers thereof, including the ownership interests in MMR
Holdings.
"Control Shares" means voting shares of beneficial interest of a Maryland
REIT, which, if aggregated with all other such shares of beneficial interest
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
revocable proxy) would entitle the acquiror to exercise voting power in
electing Trustees 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 of all voting power. Control Shares do not
include shares the acquiror is then entitled to vote as a result of having
previously obtained shareholder approval.
"Control Share Acquisition" means the acquisition of Control Shares,
subject to certain exceptions.
"CPI" means the Consumer Price Index, the economic index issued by the
U.S. Department of Labor indicating price increases or decreases for the U.S.
economy.
"Dealership Leases" means the agreements pursuant to which the Company
will lease Dealership Properties in the future.
"Dealership Properties" means real estate occupied by a motor vehicle
retail dealer.
"Declaration of Trust" means the Company's Amended and Restated
Declaration of Trust.
"EBITDA" means earnings before interest, taxes, depreciation and
amortization.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Excess Shares" means Shares that upon their sale or other disposition
would (i) result in any person owning, directly or indirectly, Shares in excess
of the Ownership Limit, (ii) result in the Shares being owned by fewer than 100
persons (determined without reference to corporate attribution), (iii) result
in the Company being "closely held" within the meaning of 856(h) of the Code or
(iv) cause the Company to own, actually or constructively, 10% or more of the
ownership interests in a tenant of its real property, within the meaning of
Section 856(d)(2)(B) of the Code, and that are transferred automatically to the
Excess Shares Trust effective as of the close of business on the business day
before the purported transfer of such Shares.
"Excess Share Trust" means a trust that holds Common Shares or Preferred
Shares that have been designated as Excess Shares.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Executive Committee" means the executive committee of the Board.
"Executive Compensation Committee" means the executive compensation
committee of the Board.
"Formation Transactions" means those transactions described in "The
Formation Transactions" in this Prospectus.
"Formula Plan" means the Company's 1998 Formula Shares Option Plan.
"Franchise Agreements" means dealer sales and service agreements and
related agreements, and the standard terms and conditions incorporated by
reference in such agreements, entered into between Manufacturers and automobile
dealers.
"GAAP" means generally accepted accounting principles in the United
States.
"Improvement" means all improvements, additions, alterations and
replacements constructed upon Dealership Properties.
"Independent Trustee" means Trustees who are not affiliated with the
Company, any seller of Properties, any Lessee or the Underwriters.
"Initial Dealership Properties" means the Dealership Properties acquired
in the Formation Transactions.
"Initial Leases" means the Leases pursuant to which the Company will lease
the Initial Properties to the Initial Lessees.
"Initial Lessees" means the Lessees of the Initial Properties.
"Initial Term" means the initial term of the Initial Leases.
"Initial Properties" means the 67 Properties that the Company will acquire
in the Formation Transactions.
89
<PAGE>
"Interested Shareholder" means any person who beneficially owns 10% or
more of the voting power of a Maryland corporation's voting shares or an
affiliate of the REIT which, 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 common shares of beneficial interest.
"IRS" means the United States Internal Revenue Service.
"Lake Norman Properties" means the Properties associated with Lake Norman
Dodge and Lake Norman Chrysler-Plymouth.
"Lake Norman Leases" means the Sonic Leases relating to the Lake Norman
Properties.
"Lease" means any Lease pursuant to which the Company will lease
Properties to a Lessee.
"Lessee" means any owner or operator of a business to whom the Company
leases a Property.
"Manufacturers" means motor vehicle manufacturers (or authorized
distributors thereof).
"Maryland REIT Law" means Title 8 of the Corporations and Associations
Article of the Annotated Code of Maryland, as amended.
"MGCL" means the Maryland General Corporation Law, as amended.
"MMR Holdings" means MMR Holdings, L.L.C., a North Carolina limited
liability company, which will become a wholly-owned subsidiary of the Operating
Partnership upon completion of the Offering.
"NADA" means the National Automobile Dealers Association.
"Net Worth" means the excess of a Lessee's tangible assets over its
liabilities.
"Non-U.S. Shareholder" means a holder of Common Shares who is a
nonresident alien individual, foreign corporation, foreign partnership, foreign
trust or estate or other foreign shareholder.
"NYSE" means The New York Stock Exchange, Inc.
"Offering" means the offering of Common Shares of the Company pursuant to
and as described in this Prospectus.
"Offering Price" means the price at which shares are offered for sale in
the Offering.
"Operating Partnership" means Mar Mar Realty, L. P., a Delaware limited
partnership having its principal offices at the same location as the Company,
and its subsidiaries.
"Ownership Limit" means the prohibition in the Declaration of Trust
limiting any person to direct or indirect ownership of no more than (i) 9.8% of
the number or value of outstanding Common Shares, or (ii) 9.8% of the number or
value of outstanding Preferred Shares or any series of Preferred Shares.
"Partnership Agreement" means the Amended and Restated Limited Partnership
Agreement of the Operating Partnership.
"Primax" means Primax Properties, L.L.C.
"Plan" means the Company's 1998 Shares Option Plan.
"Preferred Shares" means the preferred shares of beneficial interest of
the Company.
"Prohibited Owner" means any purported owner of Common Shares who would
otherwise violate the Ownership Limit or such other limit as provided in the
Declaration of Trust.
"Prohibited Transferee" means any purported transferee of Common Shares
who would otherwise violate the Ownership Limit or such other limit as provided
in the Declaration of Trust.
"Properties" means any real property and improvements acquired, or to be
acquired, from time to time, by the Company.
"Prospectus" means the prospectus used in connection with the Offering.
"Purchase Agreements" means the respective purchase agreements between the
Company and the sellers of certain Initial Properties pursuant to which the
Company is acquiring certain Initial Dealership Properties.
Qualified REIT Subsidiary means MMR QRS, Inc., a North Carolina
Corporation and wholly-owned subsidiary of the Company.
90
<PAGE>
"REIT" means a real estate investment trust as defined by the Code and the
applicable Treasury Regulations.
"Related Business Properties" means Properties associated with motor
vehicle related businesses.
"Related Party Tenant" means any Initial Lessee or any other Lessee of the
Properties in which the Company owns a 10% or greater interest.
"Related Tenant Limit" means 9.8% of the value of the outstanding Shares
of the Company.
"Renewal Term" means the term by which an initial term may be extended.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means a common share of beneficial interest or other beneficial
interest in the Company.
"Share Trustee" means a trustee of the Excess Share Trust.
"Sonic Automotive" means Sonic Automotive, Inc.
"Sonic Dealers" means the Sonic Lessees and their affilates operating on
the Initial Dealership Properties.
"Sonic Leases" means Leases relating to Initial Dealership Properties
leased to the Sonic Lessees.
"Sonic Lessees" means affiliates of Sonic Automotive that will lease the
Initial Dealership Properties under the Sonic Leases.
"Special Tax Counsel" means the law firm of Mayer, Brown & Platt, which
has acted as a special tax counsel to the Company in connection with the
Offering and the preparation of the Prospectus.
"Speedway Motorsports" means Speedway Motorsports, Inc.
"Treasury Regulations" means the rules and regulations promulgated by the
United States Department of the Treasury under the Code, as such rules and
regulations are amended from time to time.
"Trustees" means the members of the Company's Board.
"Units" means units of limited partnership interest in the Operating
Partnership.
91
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
INTRODUCTION TO FINANCIAL STATEMENTS ..................................................... F-2
MAR MAR REALTY TRUST:
Independent Auditors' Report ........................................................... F-3
Consolidated Balance Sheets as of April 14, 1998 (Date of Formation) and unaudited as
of August 31, 1998.................................................................... F-4
Notes to Balance Sheets ................................................................ F-5
Introduction to Pro Forma Consolidated Financial Statements ............................ F-10
Pro Forma Consolidated Balance Sheet as of August 31, 1998 (Unaudited) ................. F-11
Pro Forma Consolidated Statement of Operations for the Year ended December 31, 1997
(Unaudited)........................................................................... F-12
Pro Forma Consolidated Statement of Operations for the Eight Months ended August 31,
1998 (Unaudited)...................................................................... F-13
Notes to Pro Forma Consolidated Financial Statements (Unaudited) ....................... F-14
SONIC AUTOMOTIVE, INC:
Summary Historical and Pro Forma Financial Information ................................. F-16
</TABLE>
F-1
<PAGE>
MAR MAR REALTY TRUST
INTRODUCTION TO FINANCIAL STATEMENTS
The following pages present the historical balance sheets of the Company
as well as summary historical and pro forma financial information for Sonic
Automotive. Sonic Automotive is the parent company of the Sonic Lessees and
guarantor of the Sonic Leases. The Sonic Lessees will lease Properties with
purchase prices representing more than 20% of the expected proceeds of the
Offering, or more than 20% of the total assets of the Company upon consummation
of the Offering and, therefore, are considered significant. Sonic Automotive
files periodic reports with the Securities and Exchange Commission and only
summary historical financial information with respect to Sonic Automotive has
been provided herein. See "Additional Information" for a description of
publicly available information with respect to Sonic Automotive.
Financial statements of the Operating Partnership have not been presented,
as it has not had any significant activity since its inception in July 1998.
The Operating Partnership will commence activity concurrent with the closing of
the Offering. However, Unaudited Pro Forma Consolidated Financial Statements
are presented which give effect to the completion of the Offering and the
acquisition of the Initial Properties.
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Trustees
Mar Mar Realty Trust
Charlotte, North Carolina
We have audited the accompanying balance sheet of Mar Mar Realty Trust
(the "Company") as of April 14, 1998 (date of formation). This financial
statement is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of the Company as of April 14, 1998 (date of
formation), in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
December 18, 1998
F-3
<PAGE>
MAR MAR REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
APRIL 14, 1998 AUGUST 31,
(DATE OF FORMATION) 1998
--------------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Deferred offering costs ............................................................. $ -- $ 684
Property acquisition costs .......................................................... -- 156
-------- --------
Total assets ....................................................................... $ -- $ 840
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Accounts payable ................................................................... $ -- $ 683
Due to affiliate ................................................................... -- 157
-------- --------
Total liabilities .................................................................. -- 840
-------- --------
Shareholder's equity:
Common shares, par value $1; 2,000,000 shares authorized; 1,000,000 shares issued
and outstanding ................................................................... 1,000 1,000
Less: share subscription receivable ................................................ (1,000) (1,000)
-------- --------
Total shareholder's equity ......................................................... -- --
-------- --------
Total liabilities and shareholder's equity .......................................... $ -- $ 840
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
MAR MAR REALTY TRUST
NOTES TO CONSOLIDATED BALANCE SHEETS
1. THE COMPANY
Mar Mar Realty Trust (the "Company") was formed as a self-managed Maryland
real estate investment trust on April 14, 1998 and was initially capitalized on
such date through the sale of up to 1,000,000 common shares of beneficial
interest for a $1,000,000 share subscription receivable from the Company's
Chairman ("Mr. Smith"). Such share subscription was subsequently amended (See
Note 3). Through its ownership interest in Mar Mar Realty L.P. (the "Operating
Partnership"), which was formed on July 8, 1998, the Company intends to focus
primarily on investing in real estate associated with high quality, franchised
motor vehicle dealerships and, to a lesser extent, properties associated with
other motor vehicle related businesses, including stand alone auto parts and
services stores, auto rental facilities and fuel service stations located
throughout North America. The Company consolidates the Operating Partnership
due to its control as sole general partner and majority owner. The accompanying
consolidated balance sheets include all accounts of the Company and the
Operating Partnership.
The Company has filed a registration statement for 10,000,000 common
shares of beneficial interest, par value $1.00 per share (the "Common Shares"),
at an estimated price per share between $14.00 and $16.00, (the "Offering").
The Company will contribute the proceeds from the Offering to the Operating
Partnership in exchange for 10,000,000 Class A units of limited partnership
interest in the Operating Partnership (the "Class A Units" and together with
the Operating Partnership's Class B and C units of limited partnership
interest, (the "Class B Units" and the "Class C Units", respectively), the
"Units"). See Note 3.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PROPERTY -- Subsequent to completion of its pending acquisitions (see Note
4), the Company will capitalize land, buildings and improvements at cost based
upon the purchase prices paid in cash, debt assumed and the value of Units
issued to certain sellers. Building and improvements will be depreciated over
their estimated useful lives using the straight-line method, while maintenance
and repairs will be charged to operating expenses when incurred.
INCOME TAXES -- The Company has elected to be taxed as an S Corporation.
As such, the Company is not subject to federal income taxes. Upon completion of
the Offering, the Company intends to make an election to be taxed as a real
estate investment trust under the provisions of the Internal Revenue Code of
1986, as amended (the "Code"). As a real estate investment trust, the Company
generally will not be subject to federal and state income taxation to the
extent it distributes annually at least 95% of its taxable income, as defined
in the Code, to its shareholders and satisfies certain other requirements.
FOUNDERS SHARES -- The number of founders shares and units issued is
subject to adjustment based on the number of shares sold by the Company in the
Offering. No compensation expense has been recorded as the issuances were made
during the period that the Company was still in formation and earliest stages
of development, prior to the commencement of operations.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CONCENTRATION OF RISK -- As a newly formed entity, the Company is subject
to certain risk factors, including the following:
o The lack of operating history of the Company and management's lack of
experience in operating a REIT;
o Dependence on the ability of the initial lessees for substantially all of
the Company's income;
o Taxation of the Company as a regular corporation if it fails to qualify
as a real estate investment trust;
o The Company's dependence on key officers and trustees of the Company;
o Ownership of the properties is subject to risks inherent in operating
automobile dealerships, retail automotive parts stores and other related
automotive businesses;
o The general risks related to commercial real estate ownership and
investment; and
F-5
<PAGE>
o Conflicts of interest between the Company and Mr. Smith who is an
affiliate of certain lessees.
3. RELATED PARTY TRANSACTIONS -- FORMATION
In addition to the initial capitalization transactions described in Note
1, the following formation transactions have occurred or will occur:
o In connection with the formation of the Company, and effective October
10, 1998, the Company issued 6,557 Common Shares to the Company's
President in exchange for $9,340 in cash. In addition, the Company issued
to Mr. Smith 463 Class B common shares of beneficial interest, par value
$1.00 per share ("Class B Common Shares" and together with the Common
Shares, the "Shares"), in exchange for $600 in cash. The Class B Common
Shares are entitled to voting rights representing 6.6% of the combined
voting power of the Shares outstanding immediately after the closing of
the Offering (the "Class B Voting Percentage"). The Class B Voting
Percentage will be diluted proportionately by any additional issuances of
Common Shares after the closing of the Offering. The Class B Common
Shares are entitled to receive per share distributions equal to those
paid on Common Shares and are convertible, at the option of Mr. Smith,
for Common Shares, on a one-for-one basis. Any such conversion will
dilute the Class B Voting Percentage on a proportionate basis.
o In connection with the formation of the Operating Partnership, and
effective October 10, 1998, the Operating Partnership issued to Mr. Smith
701,537 Class B Units in exchange for a subscription receivable of
$999,340, which Units will have a value of $10.5 million based on an
assumed initial offering price per Common Share of $15.00. The Class B
Units along with the 6,557 Common Shares and 463 Class B Commmon Shares
replace the 1,000,000 Common Shares originally issued to Mr. Smith on
April 14, 1998. The Class B Voting Percentage was derived in a manner to
reflect the approximate voting percentage Mr. Smith would have had if his
initial equity in the Company had been in Common Shares rather than in
Class B Units. The Class B Units are redeemable, at the option of Mr.
Smith, beginning one year after completion of the Offering, for an equal
number of Class B Common Shares (or cash, at the Company's option),
which, in turn, are convertible into an equal number of Common Shares.
Upon any such conversion into Common Shares, the Class B Voting
Percentage will be diluted proportionately.
o Mr. Smith formed MMR Holdings, L.L.C. ("MMR Holdings") to acquire certain
properties before the Offering. Concurrent with the completion of the
Offering, MMR Holdings will become a wholly-owned subsidiary of the
Operating Partnership. Mr. Smith and his affiliates transferred two
automobile dealership properties to MMR Holdings in exchange for an
aggregate purchase price of $20.5 million, consisting of a 100% ownership
interest in MMR Holdings, $425,000 in cash and repayment of $1.4 million
of mortgage debt secured by these properties. Concurrent with the
Offering, Mr. Smith and his affiliates will exchange their interests in
MMR Holdings for 377,802 Class A Units (valued at $15.00 per unit) and
982,634 Class C Units (valued at $13.21 per unit) assuming an initial
offering price of $15.00 per share. The number of Class A Units to be
received by Mr. Smith for these properties was determined based upon the
rent under the existing leases. The rents under these leases are below
current market levels. Such existing leases will terminate by December
31, 1999, and the Company and the relevant lessees have entered into new
leases at higher rent rates effective January 1, 2000. The number of
Class C Units was determined on the basis of such higher rent rates. The
Class C Units have no rights with respect to voting, allocations or
distributions until the effective date of the new leases (at which time
they will attain rights identical to those of the Class A Units). The
Class A Units to be received by Mr. Smith and his affiliates are
redeemable beginning one year after the Offering, at the option of Mr.
Smith and his affiliates, for an equal number of Common Shares (or cash,
at the Company's option).
o Upon consummation of the Offering, the Company will repay with net
proceeds from the Offering the then outstanding indebtedness incurred by
MMR Holdings in connection with the acquisition of properties.
4. ACQUISITIONS AND RENTAL INCOME
ACQUISITIONS -- In November 1998, MMR Holdings acquired, in addition to
the two automobile dealership properties contributed by Mr. Smith and his
affiliates for an aggregate purchase price of $20.5 million (see Note 3), 15
auto dealership properties and one collision repair facility for an aggregate
purchase price of approximately $46.4 million (excluding closing costs of
$600,000) which was financed from borrowings on MMR Holdings' secured line of
credit. In addition to the properties described above, MMR Holdings has
committed to acquire an additional 13 auto dealership properties for an
aggregate purchase price of approximately $45.4 million (excluding closing
costs of approximately $200,000). Two of such properties will be acquired from
Sonic Automotive, Inc. ("Sonic Automotive") for $10.3 million in cash. Mr.
Smith is the Chairman of the Board and Chief Executive Officer of Sonic
Automotive. Concurrent with the Offering, the Company,
F-6
<PAGE>
through the Operating Partnership, will acquire 36 auto parts stores for an
aggregate purchase price of approximately $25.9 million (excluding closing
costs of approximately $400,000) consisting of approximately $600,000 in cash,
492,585 Class A Units and the assumption of approximately $18.3 million of
mortgage debt secured by such Properties, of which $15.0 million will be repaid
with the proceeds from the Offering.
RENTAL INCOME -- As part of the acquisitions described above, the Company
will enter into new leases or assume existing lease agreements on the acquired
properties primarily with certain wholly owned subsidiaries of Sonic Automotive
and with Advance Stores Company, Incorporated ("Advance Auto"). The leases with
the Sonic Automotive subsidiaries generally will have initial terms of ten
years and generally may be extended for up to two additional five- or ten-year
terms, at the option of the lessee. The leases will be triple-net leases and
require the lessees to pay substantially all expenses associated with
operations, including taxes, insurance, utilities, service, maintenance and
ground lease payments. Under certain of such leases, base rent will be
increased at certain points during the term of the lease (generally at
five-year intervals) by a factor based on the consumer price index, from 1% to
3%, compounded annually. The leases with Advance Auto will have initial terms
of ten years with two additional five-year extension terms, at the option of
the lessee. The Advance Auto leases will be net leases as discussed above,
except that the Company will be responsible for the repair of structural walls
and foundations, parking lot and roof maintenance and one-half of HVAC repairs
or replacements that exceed $500. As part of the purchase agreement between the
Company and the seller of the Advance Auto properties, the seller will be
responsible for the above repair and maintenance costs for a period of one year
subsequent to the purchase date. Base rent on the leases with Advance Auto will
be fixed during the initial term and will increase by approximately 4 1/2
percent at the start of each extension term.
Future minimum rental payments will be received by the Company as follows
(in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDING DECEMBER 31,
<S> <C>
1999 (A) .................. $ 12,251
2000 ...................... 14,875
2001 ...................... 14,875
2002 ...................... 14,875
2003 ...................... 14,896
Thereafter ................ 70,682
--------
$142,454
========
</TABLE>
- ---------
(A) Assumes the date of the Offering is February 1, 1999.
The increase in minimum rents from 1999 to 2000 relates to two automobile
dealership leases. On January 1, 2000, the annual lease payments on these
properties are scheduled to increase to an aggregate rental of $2,280,000 as
compared to their initial aggregate rental of $769,200 (see Note 3).
The Company's properties to be leased to Sonic Automotive and Advance Auto
are summarized as follows (in thousands, except number of properties):
<TABLE>
<CAPTION>
SONIC AUTOMOTIVE ADVANCE AUTO
------------------ -------------
<S> <C> <C>
Number of properties .......... 28 36
Purchase price ................ $104,608 $25,880
Initial base rent ............. $ 9,873 $ 2,717
</TABLE>
The Company has agreed with the sellers to restrictions on its ability to
sell all 36 of the Advance Auto properties for a period of ten years following
their purchase. There are separate loan agreement restrictions on repayment of
$3.3 million of the debt to be assumed in connection with seven of the Advance
Auto properties.
Sonic Automotive represents a significant lessee based upon the combined
cost of the related properties representing more than 20% of the Company's
initial assets (or amounts expected to be raised in the Offering) and, as such,
the financial statements of Sonic Automotive are considered to be more
meaningful than the financial statements of the properties given the net lease
arrangement. Sonic Automotive files periodic reports with the Securities and
Exchange Commission. Summarized financial information for Sonic Automotive, for
each of the three years ended December 31, 1997 and as of December 31, 1996 and
1997 (derived from audited consolidated financial statements) and for the nine
months ended September 30, 1997 and 1998 and as of September 30, 1998 (derived
from unaudited consolidated financial statements), is as follows (in
thousands):
F-7
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------- --------------
1996 1997 1998
---------- ----------- --------------
<S> <C> <C> <C>
BALANCE SHEETS
Current assets .................................... $ 91,388 $197,372 $295,988
Property and equipment, net ....................... 12,467 19,081 24,444
Other assets ...................................... 7,121 74,997 169,906
-------- -------- --------
Total assets ..................................... $110,976 $291,450 $490,338
======== ======== ========
Current liabilities ............................... $ 71,608 $152,696 $208,936
Long-term debt .................................... 5,286 38,640 131,213
Other liabilities ................................. 7,787 15,749 18,520
Stockholders' equity .............................. 26,295 84,365 131,669
-------- -------- --------
Total liabilities and stockholders' equity ....... $110,976 $291,450 $490,338
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, PRO FORMA SEPTEMBER 30,
----------------------------------- 1997 -------------------------
1995 1996 1997 (UNAUDITED) 1997 1998
----------- ----------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
Revenues ..................................... $311,323 $376,604 $536,001 $1,806,453 $340,241 $1,158,505
Cost of sales ................................ 272,130 331,047 471,253 1,584,691 301,855 1,012,432
-------- -------- -------- ---------- -------- ----------
Gross profit ................................. 39,193 45,557 64,748 221,762 38,386 146,073
Selling, general and administrative expense .. 28,091 33,678 48,520 161,038 28,442 105,511
Other expense, net ........................... 5,666 6,858 10,230 39,727 5,915 20,782
-------- -------- -------- ---------- -------- ----------
Income before income taxes and minority
interest .................................... 5,436 5,021 5,998 20,997 4,029 19,780
Provision for income taxes ................... 2,176 1,924 2,249 8,319 1,531 7,550
-------- -------- -------- ---------- -------- ----------
Income before minority interest .............. 3,260 3,097 3,749 12,678 2,498 12,230
Minority interest ............................ (22) (114) (47) -- 47 --
-------- -------- -------- ---------- -------- ----------
Net income ................................... $ 3,238 $ 2,983 $ 3,702 $ 12,678 $ 2,451 $ 12,230
======== ======== ======== ========== ======== ==========
</TABLE>
The unaudited pro forma statement of operations for the year ended
December 31, 1997, includes adjustments to reflect certain acquisitions, an IPO
and a reorganization and prior offering as if such transactions had occurred as
of January 1, 1997.
1999 SHARES OPTION PLAN -- Prior to the consummation of the Offering, the
Board and the shareholders of the Company are expected to adopt the Company's
1999 Shares Option Plan (the "Plan") in order to attract and retain key
personnel. Under the Plan, options to purchase up to 1,100,000 of Common Shares
may be granted to key employees of the Company and its subsidiaries and to
officers, trustees, consultants and other individuals providing services to the
Company.
The Compensation Committee of the Board will administer the Plan and will
determine, among other things, the persons who are to receive options, the
number of shares to be subject to each option and the vesting schedule of
options. Options granted under the Plan must be exercised within a period fixed
by the Compensation Committee, which period may not exceed ten years from the
date of grant of the option. Options may be made exercisable in whole or in
installments, as determined by the Compensation Committee.
The Board, on or before the consummation of the Offering, intends to grant
nonstatutory share options to purchase an aggregate of 465,000 Common Shares
under the Plan at an offering price equal to the public offering price of the
Common Shares sold in the offering to trustees and executive officers of the
Company. Options for 115,000 shares to be issued to the Company's Chairman will
become exercisable upon their grant. The remaining options to be granted will
vest and become exercisable as follows: 25% on the date of grant and the
remaining 75% in three equal installments on the first, second and third
anniversaries of the date of grant. All options will expire ten years after the
date of grant.
1999 FORMULA SHARES OPTION PLAN -- Prior to the consummation of the
Offering, the Company's 1999 Formula Shares Option Plan (the "Formula Plan") is
expected to be adopted by the Board and the shareholders of the Company. The
Formula Plan is intended to be a "formula plan" under Note (3) to Rule 16b-3 of
the Securities and Exchange Commission. The Formula Plan is intended to promote
the interest of the Company and its shareholders by providing the trustees of
the Company who are not affiliated with the Company's management ("the
Independent Trustees"), but who are responsible in part
F-8
<PAGE>
for the Company's growth and financial success, with the incentives inherent in
Common Share ownership and encouraging them to continue as trustees.
Under the Formula Plan, on January 31 of each year during the term of the
Formula Plan, each person who is then an Independent Trustee shall be awarded
an option to purchase 10,000 shares of Common Shares up to 200,000 shares to be
reserved under the Formula Plan (subject to further adjustment in certain
events). No options to purchase Common Shares have been issued under the
Formula Plan. An option granted under the Formula Plan entitles the participant
to purchase Common Shares at an option exercise price equal to the closing
sales price per Common Share on the last business day immediately preceding the
date of such award for which a closing price is available from the principal
trading market for the Common Shares.
F-9
<PAGE>
MAR MAR REALTY TRUST
PRO FORMA CONSOLIDATED BALANCE SHEET AS OF AUGUST 31, 1998
AND
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
AND THE EIGHT MONTHS ENDED AUGUST 31, 1998
The following unaudited pro forma consolidated balance sheet gives effect
to: (i) the completion of the Offering, (ii) the acquisition of the Initial
Properties, (iii) the commencement of the Initial Leases, and (iv) certain
other transactions described in the notes hereto as though such transactions
occurred on August 31, 1998.
The following unaudited pro forma consolidated statements of operations
give effect to (i) the completion of the Offering, (ii) the acquisition of the
Initial Properties, (iii) the commencement of the Initial Leases, and (iv)
certain other transactions described in the notes hereto as though such
transactions occurred at the beginning of the presented period.
The following unaudited pro forma data is not necessarily indicative of
what the actual financial position or results of operations of the Company
would have been as of the date or for the period indicated, nor does it purport
to represent the financial position or results of operations for the Company
for future periods.
F-10
<PAGE>
MAR MAR REALTY TRUST
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF AUGUST 31, 1998
(Unaudited, In Thousands)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA (A)
------------ --------------------- --------------
<S> <C> <C> <C>
ASSETS
Cash ............................................. $ -- $ 139,625(b) $ 29,513
(600)(c)
(109,512)(c)
Property:
Land ........................................... -- 68,491(c) 68,491
Buildings and improvements ..................... -- 70,913(c) 70,913
-------- --------
Total property ................................ -- 139,404
Deferred offering costs and other assets ......... 840 (840)(e) --
-------- --------
Total assets ................................... $ 840 $168,917
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable ................................. $ 683 (683)(e) $ --
Due to affiliate ................................. 157 (157)(e) --
Mortgages and other notes payable ................ -- 112,771(c) 3,259
(109,512)(c)
Total liabilities .............................. 840 3,259
Minority interest ................................ -- 26,033(c)(d) 33,629
7,596(d)
Shareholders' equity:
Common shares .................................. 1,000 10,000(b) 10,007
(993)(f)
Additional paid-in capital ..................... -- 129,625(b) 122,032
(7,596)(d)
3(f)
Less: share subscription receivable ............ (1,000) 990(f) (10)
-------- --------
Total shareholders' equity .................... -- 132,029
-------- --------
Total liabilities and shareholders' equity ..... $ 840 $168,917
======== ========
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma
consolidated financial statement.
F-11
<PAGE>
MAR MAR REALTY TRUST
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(Unaudited, In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA (A)
------------ ------------------ --------------
<S> <C> <C> <C>
Lease revenue ...................................................... $-- $ 14,978(g) $ 14,978
Expenses:
Depreciation ..................................................... -- 3,546(c) 3,546
General and administrative ....................................... -- 2,000(h) 2,000
Interest ......................................................... -- 280(c) 280
--- --------
Total expenses ................................................... -- 5,826
--- --------
Income before minority interest .................................... -- 9,152
Minority interest .................................................. -- (1,352)(d) (1,352)
--- --------
Net income ......................................................... $-- $ 7,800
=== ========
Earnings per share -- basic and diluted ............................ $-- $ .99
=== ========
Weighted average common shares outstanding -- basic and diluted .... -- 7,893(i)
=== ========
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma
consolidated financial statement.
F-12
<PAGE>
MAR MAR REALTY TRUST
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE EIGHT MONTHS ENDED AUGUST 31, 1998
(Unaudited, In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA (A)
------------ --------------- --------------
<S> <C> <C> <C>
Lease revenue ..................................................... $-- $ 9,986(g) $ 9,986
Expenses:
Depreciation ..................................................... -- 2,364(c) 2,364
General and administrative ....................................... -- 1,333(h) 1,333
Interest ......................................................... -- 187(c) 187
--- --------
Total expenses ................................................... -- 3,884
--- --------
Income before minority interest ................................... -- 6,102
Minority interest ................................................. -- (901)(d) (901)
--- --------
Net income ........................................................ $-- $ 5,201
=== ========
Earnings per share -- basic and diluted ........................... $-- $ .66
=== ========
Weighted average common shares outstanding -- basic and diluted ... -- 7,893(i)
=== ========
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma
consolidated financial statement.
F-13
<PAGE>
MAR MAR REALTY TRUST
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(a) The Company, as sole general partner and majority owner of the Operating
Partnership, will have, subject to certain rights of the Limited Partners,
full, exclusive and complete responsibility and discretion in the
management and control of the Operating Partnership. Such responsibilities
permit the Company to enter into certain major transactions including
acquisitions, dispositions, and refinancings, and to cause changes in the
Operating Partnership's line of business and distribution policies.
Further, the Company may not be replaced as general partner by the Limited
Partners, except in certain limited circumstances. Accordingly, for
accounting purposes, the Company is considered to control the Operating
Partnership and the accompanying unaudited pro forma financial statements
consolidate the accounts of the Company and the Operating Partnership.
(b) Represents 10,000,000 Common Shares assumed to be issued in the Offering,
at an assumed offering price of $15.00 per share with a par value of $1.00
per share. Adjustments consist of the following (in thousands):
<TABLE>
<S> <C>
Proceeds of the Offering ........... $ 150,000
Underwriters' discount ............. (9,375)
Offering expenses .................. (1,000)
---------
Net proceeds ....................... $ 139,625
=========
Common shares ...................... $ 10,000
Additional paid-in capital ......... 129,625
---------
Net proceeds ....................... $ 139,625
=========
</TABLE>
(c) Represents the acquisition of the Initial Properties in exchange for Units,
the assumption of mortgage debt and cash. In the opinion of management,
the purchase price of the real property acquired is equal to the estimated
fair value of such property as of the date of commitment to acquire. For
purposes of the unaudited pro forma consolidated financial statements, the
purchase price of the Initial Dealership Properties has been preliminarily
allocated 55 percent / 45 percent between land and buildings,
respectively, and 30 percent / 70 percent, respectively, for the Advance
Properties and the Collision Repair Property. Final allocations will be
calculated and recorded by the Operating Partnership upon closing.
Depreciation is computed using the straight-line method assuming estimated
useful lives of 20 years for the building and improvements. Adjustments
are comprised of the following (in thousands):
<TABLE>
<CAPTION>
TOTAL LAND BUILDING
----------- ---------- ---------
<S> <C> <C> <C>
Initial Dealership Properties .............. $111,149 $61,132 $50,017
Advance Properties ......................... 26,240 6,754 19,486
Collision Repair Property .................. 2,015 605 1,410
-------- ------- -------
$139,404 $68,491 $70,913
======== ======= =======
Units issued -- minority interest .......... $ 26,033
Cash paid .................................. 600
Debt assumed ............................... 112,771
--------
$139,404
========
</TABLE>
Of the total mortgage debt of $112.8 million, $109.5 million is assumed to
be repaid with proceeds of the Offering. The remaining $3.3 million in
assumed debt bears interest at approximately 8.6 percent per annum and is
payable in monthly installments through 2006.
F-14
<PAGE>
(d) Represents the calculation of minority interest based on the ownership of
the Operating Partnership as follows (in thousands):
<TABLE>
<CAPTION>
CLASS C
TOTAL CLASS A AND B UNITS UNITS TOTAL UNITS
INITIAL ADJUSTED ------------------- -------- -------------------
AMOUNT AMOUNT NUMBER % NUMBER NUMBER %
----------- ----------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Partners' capital:
The Company ................ $139,625 $132,029 10,007 86.4% 10,007 79.7%
Minority interest:
Initial Sellers ........... 26,033 33,629 870 7.5 983 1,853 14.8
Founder ................... 999 999 702 6.1 702 5.5
Subscription receivable ... (999) (999)
-------- -------- ------ ---- --- -------- -----
Total .................... $165,658 $165,658 11,579 100% 983 12,562 100%
======== ======== ====== ==== === ====== ====
</TABLE>
Minority interest includes 870,387 Class A Units issued to initial sellers
valued at $15.00 per unit and 701,537 Class B Units issued to the Company's
founder in exchange for a subscription receivable of $999,340. Sellers of
two Initial Properties will be issued 982,684 Class C Units. Each Class C
Unit initially will have no distribution, allocation or voting rights.
Concurrent with an increase in rents with respect to two properties
expected to occur on January 1, 2000, each Class C Unit will automatically
attain rights identical to those of the Class A Units. Class A Units are
valued at $15.00 per unit and Class C Units are valued at $13.21 per unit
based upon the absence of distributions until the scheduled rent increase
on January 1, 2000. The Class B Units are valued at the price paid of $1.42
per unit. The adjusted amounts shown in the table above reflect a transfer
from shareholders' equity to minority interest necessary to adjust the
initial contributed values in the balance sheet to amounts based upon the
percentage of total Units held by the minority interest (20.3%).
Until January 1, 2000, the pro forma minority interest share of Operating
Partnership net income is attributable only to holders of Class A and Class
B Units (13.6%) except for the portion of net income attributable to the
straight-line rent adjustment which is allocated to the holders of Class A,
B and C Units (20.3%), resulting in an initial combined minority interest
in pro forma net income of 14.8%.
(e) Represents deferred offering costs and other assets and related liabilities
incurred as of August 31, 1998, that are included in the total costs
reflected in notes (b) and (c) to be paid from the Offering proceeds.
(f) Represents amendment to original share subscription reducing the number of
Shares initially subscribed from 1,000,000 to 7,020.
(g) Represents rental income (based upon signed leases), computed on a
straight-line basis, from the Initial Lessees based on the terms of the
Initial Leases as if all Initial Properties had been subject to the
Initial Leases for the entire period. On January 1, 2000, the annual lease
payments on the Town & Country Ford and Lone Star Ford properties are each
scheduled to increase to $1,140,000 as compared to their current levels of
$409,200 and $360,000, respectively. Straight-line adjustments also include
the minimum level of CPI adjustment to the Sonic Automotive leases. The
approximate $1.6 million excess of straight-line rents over the initial
annual contractual rents of $13.4 million is primarily attributable to the
Town & Country and Lone Star Ford leases scheduled rent increases.
(h) Represents management's estimate for salaries, legal, audit, office costs,
and other general and administrative expenses to be incurred by the
Company, based on its expected level of operations and related
administrative requirements giving effect to the proposed acquisitions, as
follows (in thousands):
<TABLE>
<CAPTION>
EIGHT MONTHS
YEAR ENDED ENDED
DECEMBER 31, AUGUST 31,
1997 1998
-------------- -------------
<S> <C> <C>
Salaries and benefits -- executive officers ................... $ 960 $ 640
Other salaries and benefits ................................... 171 114
Directors and officers insurance .............................. 175 117
Legal and accounting .......................................... 250 167
Travel and entertainment ...................................... 172 115
Office rent, telephone, supplies and other administrative ..... 190 125
Other ......................................................... 82 55
------- ------
Total ......................................................... $ 2,000 $1,333
======= ======
</TABLE>
The above amounts may increase based on additional acquisition activity.
F-15
<PAGE>
(i) Represent the number of Common Shares, the proceeds of which will be used
to acquire the Initial Properties, along with the Shares issued to the
Company's Chairman and President. If the total number of shares expected
to be issued in the Offering had been used, pro forma weighted average
common shares outstanding would be approximately 10,007,020 for both the
year ended December 31, 1997 and the eight months ended August 31, 1998,
resulting in pro forma earnings per share outstanding of $0.78 and $0.52
for the year ended December 31, 1997 and the eight months ended August 31,
1998, respectively. The potential redemption of the Operating Partnership
Units and the potential exercise of options granted to acquire 465,000
Common Shares under the Plan are not dilutive to pro forma earnings per
share.
SONIC AUTOMOTIVE, INC.
SUMMARY HISTORICAL FINANCIAL INFORMATION
Summarized historical financial information for Sonic Automotive, Inc. for
each of the three years ended December 31, 1997 and as of December 31, 1996 and
1997 (derived from audited consolidated financial statements) and for the nine
months ended September 30, 1997 and 1998 and as of September 30, 1998 (derived
from unaudited consolidated financial statements) is as follows (in thousands):
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------- --------------
1996 1997 1998
---------- ----------- --------------
<S> <C> <C> <C>
Current assets .................................... $ 91,388 $197,372 $295,988
Property and equipment, net ....................... 12,467 19,081 24,444
Other assets ...................................... 7,121 74,997 169,906
-------- -------- --------
Total assets ..................................... $110,976 $291,450 $490,338
======== ======== ========
Current liabilities ............................... $ 71,608 $152,696 $208,936
Long-term debt .................................... 5,286 38,640 131,213
Other liabilities ................................. 7,787 15,749 18,520
Stockholders' equity .............................. 26,295 84,365 131,669
-------- -------- --------
Total liabilities and stockholders' equity ....... $110,976 $291,450 $490,338
======== ======== ========
</TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED FOR THE NINE
DECEMBER 31, PRO FORMA MONTHS ENDED SEPTEMBER 30,
----------------------------------- 1997 --------------------------
1995 1996 1997 (UNAUDITED) 1997 1998
----------- ----------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues ................................. $311,323 $376,604 $536,001 $1,806,453 $340,241 $1,158,505
Cost of sales ............................ 272,130 331,047 471,253 1,584,691 301,855 1,012,432
-------- -------- -------- ---------- -------- ----------
Gross profit ............................. 39,193 45,557 64,748 221,762 38,386 146,073
Selling, general and administrative
expense .................................. 28,091 33,678 48,520 161,038 28,442 105,511
Other expense, net ....................... 5,666 6,858 10,230 39,727 5,915 20,782
-------- -------- -------- ---------- -------- ----------
Income before income taxes and minority
interest ............................... 5,436 5,021 5,998 20,997 4,029 19,780
Provision for income taxes ............... 2,176 1,924 2,249 8,319 1,531 7,550
-------- -------- -------- ---------- -------- ----------
Income before minority interest .......... 3,260 3,097 3,749 12,678 2,498 12,230
Minority interest ........................ (22) (114) (47) -- (47) --
-------- -------- -------- ---------- -------- ----------
Net income ............................... $ 3,238 $ 2,983 $ 3,702 $ 12,678 $ 2,451 $ 12,230
======== ======== ======== ========== ======== ==========
</TABLE>
The unaudited pro forma statement of operations for the year ended
December 31, 1997, includes adjustments to reflect certain acquisitions, an IPO
and a reorganization and prior offering as if such transactions had occurred as
of January 1, 1997.
F-16
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus in connection with the offer made by this prospectus and, if given
or made, such information or representations must not be relied upon as having
been authorized by the Company or any of the Underwriters. This prospectus does
not constitute an offer to sell or the solicitation of any offer to buy any
security other than the Common Shares offered by this prospectus, nor does it
constitute an offer to sell or a solicitation of any offer to buy the Common
Shares by anyone in any jurisdiction in which such offer or solicitation is not
authorized, or in which the person making such offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful to make such offer
or solicitation. Neither the delivery of this prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that any
information contained herein is correct as of any time subsequent to the date
hereof.
--------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Prospectus Summary .................................... 1
Risk Factors .......................................... 12
Use of Proceeds ....................................... 25
Capitalization ........................................ 25
Dilution .............................................. 26
Selected Financial Information ........................ 26
Management's Discussion and Analysis of Financial
Condition and Results of Operations ................ 28
Business of the Company and its Properties ............ 31
Automotive Retailing and Motor Vehicle Aftermarket
Industries ......................................... 46
Management ............................................ 49
Policies and Objectives with Respect to Certain
Activities ......................................... 55
The Formation Transactions ............................ 56
Certain Relationships and Transactions ................ 59
Partnership Agreement ................................. 60
Principal Shareholders of the Company ................. 63
Description of Shares of Beneficial Interest .......... 63
Certain Provisions of Maryland Law and of the
Company's Declaration of Trust and Bylaws .......... 68
Common Shares Eligible for Future Sale ................ 72
Federal Income Tax Consequences ....................... 73
Certain United States Tax Considerations for Non-U.S.
Shareholders ....................................... 82
Underwriting .......................................... 85
Legal Matters ......................................... 86
Experts ............................................... 86
Additional Information ................................ 86
Glossary .............................................. 88
Index to Financial Statements ......................... F-1
</TABLE>
--------------------------------
Until , 1999 (25 days after commencement of this offering), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
10,000,000 Shares
[MAR MAR REALTY TRUST LOGO]
Class A Common Shares of
Beneficial Interest
--------------------------
PROSPECTUS
--------------------------
Wheat First Union
NationsBanc Montgomery Securities LLC
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 30. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 31. Other Expenses of Issuance and Distribution.
The following table itemizes the expenses incurred by the Company in
connection with the offering of the Common Shares being registered. All of the
amounts shown are estimates except the SEC registration fee, the NASD fee and
the NYSE Listing fee.
<TABLE>
<S> <C>
SEC registration fee ........................................... $54,280
NASD fee ....................................................... 18,900
NYSE Listing fee ...............................................
Blue Sky fees and expenses (including fees of counsel) .........
Printing and engraving expenses ................................
Legal fees and expenses (other than Blue Sky) ..................
Accounting fees and expenses ...................................
Underwriter's Reimbursement of Expenses ........................
Miscellaneous ..................................................
-------
Total ......................................................... $
=======
</TABLE>
Item 32. Sales To Special Parties.
See response to Item 33.
Item 33. Recent Sales Of Unregistered Securities.
The following sets forth certain information as to all securities sold by
the Company within the last three years that were not registered under the
Securities Act of 1933, as amended (the "Securities Act"). As to all such
transactions, an exemption is claimed under Section 4(2) of the Securities Act
as transactions not involving a public offering or such transactions did not
constitute an offer or sale of securities within the meaning of Section 5 of
the Securities Act since no consideration was received by the Company. In the
private placement transactions, neither the Shares nor the Units were required
to be registered under the Securities Act due to the sophistication of the
purchasers, the relationship of the purchasers to the Company, the purchaser's
access to material information, the disclosure actually made to them by the
Company and the absence of any general solicitation or advertising.
(1) On April 14, 1998, the Company entered into a subscription agreement
with O. Bruton Smith for the issuance of up to 1,000,000 Common Shares in
connection with the formation of the Company. On October 10, 1998, Mr.
Smith's Common Shares were exchanged for a subscription receivable
previously tendered by Mr. Smith and 463 Class B Common Shares were issued
to Mr. Smith for $660 in cash.
(2) On July 9, 1998, the Operating Partnership agreed to issue in exchange
for certain of the Initial Properties and interests in entities that own
certain of the Initial Properties, subject to the completion of the
Offering and certain other conditions, (i) an aggregate of 377,802 Class A
Units and 982,634 Class C Units to Mr. Smith and affiliates of Mr. Smith
and Sonic Automotive, Inc., and (ii) an aggregate of 492,585 Class A Units
to Primax Properties, L.L.C. and affiliates thereof.
(3) On October 10, 1998 the Company sold an aggregate of 6,557 Common
Shares to Benjamin F. Bracy, the Company's President, for $9,340 in cash.
(4) On October 10, 1998, in connection with the formation of the Operating
Partnership, the Operating Partnership issued to Mr. Smith 701,537 Class B
Units in exchange for a subscription receivable from Mr. Smith in the
amount of $999,340.
(5) On October 23, 1998, the Operating Partnership amended its agreement of
July 9, 1998 with Mr. Smith and his affiliates and agreed to issue in
exchange for all the membership interests in MMR Holdings, subject to the
completion of the Offering and certain other conditions, an aggregate of
377,802 Class A Units and 982,634 Class C Units to Mr. Smith and his
affiliates.
II-1
<PAGE>
Item 34. Indemnification Of Trustees And Officers.
The Declaration of Trust and By-laws authorize the Company to indemnify
its present and former trustees and officers and to pay or reimburse expenses
for such individuals in advance of the final disposition of a proceeding to the
maximum extent permitted from time to time under Maryland law. The MGCL, as
applicable to Maryland REITs, currently provides that indemnification of a
person who is a party, or threatened to be made a party, to legal proceedings
by reason of the fact that such a person is or was a trustee, officer, employee
or agent of a corporation, or is or was serving as a trustee, officer, employee
or agent of a corporation or other firm at the request of a corporation,
against judgments, fines, penalties, amounts paid in settlement and reasonable
expenses, is mandatory in certain circumstances and permissive in others,
subject to authorization by the Board by a quorum consisting of trustees not
partial to the proceeding, a committee of the Board consisting of two or more
trustees not parties to the proceeding (if there does not exist a majority vote
quorum of the Board consisting of trustees not parties to the proceeding),
special legal counsel appointed by the Board or such committee of the Board, or
by the shareholders, so long as it is not established that the act or omission
of such person was material to the matter giving rise to the proceedings and
was committed in bad faith, was the result of active and deliberate dishonesty,
involved such person receiving an improper personal benefit in money, property
or services, or, in the case of criminal proceedings, such person had reason to
believe that his or her act or omission was unlawful.
It is the position of the Securities and Exchange Commission that
indemnification of directors and officers for liabilities arising under the
Securities Act is against public policy and is unenforceable pursuant to
Section 14 of the Securities Act.
The Company's officers and trustees are also indemnified pursuant to the
Partnership Agreement and their respective employment agreements, which
agreements are filed as exhibits hereto.
The Company intends to purchase an insurance policy that purports to
insure the officers and trustees of the Company against certain liabilities
incurred by them in the discharge of their functions as such officers and
trustees, except for liabilities resulting from their own malfeasance.
The form of Underwriting Agreement, filed as Exhibit 1.1 hereto, provides
for the reciprocal indemnification by the Underwriters of the Company and its
directors, officers and controlling persons, and by the Company of the
Underwriters and their directors, officers and controlling persons, against
certain liabilities under the Securities Act.
Item 35. Treatment Of Proceeds From Common Shares Being Registered.
Not Applicable.
Item 36. Financial Statements And Exhibits.
(a) Index to Financial Statements
<TABLE>
<S> <C>
INTRODUCTION TO FINANCIAL STATEMENTS ..................................................... F-2
MAR MAR REALTY TRUST:
Independent Auditors' Report ........................................................... F-3
Balance Sheets as of April 14, 1998 (Date of Formation) and unaudited as of August 31,
1998 ................................................................................... F-4
Notes to Balance Sheets ................................................................ F-5
Introduction to Pro Forma Consolidated Financial Statements ............................ F-9
Pro Forma Consolidated Balance Sheet as of August 31, 1998 (Unaudited) ................. F-10
Pro Forma Consolidated Statement of Operations for the Year ended December 31, 1997
(Unaudited) ............................................................................ F-11
Pro Forma Consolidated Statement of Operations for the Eight Months Ended August 31,
1998 (Unaudited) ....................................................................... F-12
Notes to Pro Forma Consolidated Financial Statements (Unaudited) ....................... F-13
SONIC AUTOMOTIVE, INC:
Summary Historical and Pro Forma Financial Information ................................. F-15
</TABLE>
(b) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Description
- ---------------- -------------------------------------------------------------------
<S> <C>
1.1** Underwriting Agreement
3.1* Form of Mar Mar Realty Trust Articles of Amendment and Restatement
3.1 a** Mar Mar Realty Trust Articles of Amendment and Restatement
3.2* Bylaws of Mar Mar Realty Trust
4.1** Specimen Class A Common Share certificate
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description
- ---------------- ------------------------------------------------------------------------
<S> <C>
4.2* * Specimen Class B Common Share certificate
4.3* Form of Registration Rights and Lock-Up Agreement dated as of
, 1998 between Mar Mar Realty Trust and certain other parties
5.1 Form of Opinion of Ballard Spahr Andrews & Ingersoll, LLP regarding
the validity of the Common Shares being registered
8.1 Form of Opinion of Mayer, Brown & Platt regarding tax matters
10.1** Amended and Restated Limited Partnership Agreement of Mar
Mar Realty L.P.
10.2* * Form of Mar Mar Realty Trust 1999 Shares Option Plan
10.3* * Form of Mar Mar Realty Trust 1999 Formula Shares Option Plan
10.4* Strategic Alliance Agreement and Agreement for the Mutual Referral of
Acquisition Opportunities dated as of July 9, 1998 between Mar Mar
Realty, L.P. and Sonic Automotive, Inc.
10.4a Amendment to Strategic Alliance Agreement for the Mutual Referral of
Acquisition Opportunities dated as of October 21, 1998 between Mar
Mar Realty, L.P. and Sonic Automotive, Inc.
10.5* Form of Sonic Lease Agreement
10.6* Form of Dealership Lease
10.7* Form of Advance Auto Lease
10.8* Contribution Agreement dated July 9, 1998 among Mar Mar Realty,
L.P., O. Bruton Smith, Town & Country Ford, Inc., Sonic Financial
Corporation, Primax Properties, L.L.C. and William and Emma
Seymour
10.8a Form of First Amendment to Contribution Agreement dated October
23, 1998 among Mar Mar Realty, L.P., O. Bruton Smith and Sonic
Financial Corporation
10.9* Contract to Purchase and Sell real property underlying Town &
Country Toyota dated as of June 26, 1998 between Mar Mar Realty
Limited Partnership and Sonic Automotive, Inc.
10.10* Contract to Purchase and Sell real property underlying Fort Mill Ford
dated as of June 26, 1998 between Mar Mar Realty Limited
Partnership and Sonic Automotive, Inc.
10.11* Agreement Regarding the Sale of Real Property dated as of June ,
1998 between Mar Mar Realty Limited Partnership and Chartown
10.12* Letter dated as of August 14, 1998 from the Company to Mark J.
Iuppenlatz
10.13 Form of Amended Subscription Agreement dated October 10, 1998
between O. Bruton Smith and Mar Mar Realty Trust
10.14 Form of Subscription Agreement dated October 10, 1998 between Benjamin F.
Bracy and Mar Mar Realty Trust
10.15 Form of Subscription Agreement dated October 10, 1998 between O.
Bruton Smith and Mar Mar Realty, L.P.
21.1 Subsidiaries of the Company
23.1 Consent of Ballard Spahr Andrews & Ingersoll, LLP (included in
Exhibit 5.1)
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Mayer, Brown & Platt (included in Exhibit 8.1)
24.1* Power of Attorney (included on signature page in Part II of the initial
filing)
27.1* Financial Data Schedule
</TABLE>
- ---------
* Previously filed.
** To be filed by amendment.
Item 37. Undertakings.
(a) The undersigned registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
II-3
<PAGE>
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to Trustees, officers and controlling
persons of the registrant pursuant to the provisions described under Item 34
above, or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a trustee, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-11 and has duly caused this
Amendment No. 2 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Charlotte, State of
North Carolina, on December 22, 1998.
MAR MAR REALTY TRUST
By: /s/ BENJAMIN F. BRACY
------------------------------------
Benjamin F. Bracy
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to the Registration Statement has been signed by the
following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ---------------------------------------------------------- ----------------------------------------- ------------------
<S> <C> <C>
* Chairman December 22, 1998
----------------------------------
O. Bruton Smith
/s/ Benjamin F. Bracy President (principal executive officer) December 22, 1998
----------------------------------
Benjamin F. Bracy
* Executive Vice President, Chief December 22, 1998
---------------------------------- Operating Officer and Director of
Mark J. Iuppenlatz Acquisitions
* Vice President and Chief Financial December 22, 1998
---------------------------------- Officer (principal financial and
Virginia R. Dunn accounting officer)
* Trustee December 22, 1998
----------------------------------
James W. Johnston
* Trustee December 22, 1998
----------------------------------
Donald J. Carter
*By: /s/ BENJAMIN F. BRACY
------------------------------
Benjamin F. Bracy
(Attorney-in-fact for each of
the persons indicated)
</TABLE>
II-5
EXHIBIT 5.1
[FORM OF OPINION OF BALLARD SPAHR ANDREWS & INGERSOLL, LLP]
December , 1998
Mar Mar Realty Trust
Independence Office Park
6407 Idlewild Road, Bldg. 2, Ste. 111
Charlotte, NC 28212
RE: Registration Statement on Form S-11
Registration No. 333-58895
Ladies and Gentlemen:
We have served as Maryland counsel to Mar Mar Realty Trust, a Maryland
real estate investment trust (the "Company"), in connection with certain
matters of Maryland law arising out of the registration of up to 11,500,000
common shares of beneficial interest, par value $1.00 per share (the "Shares")
covered by the above-referenced registration statement, and all amendments
thereto (the "Registration Statement"), under the Securities Act of 1933, as
amended (the "1933 Act"). Capitalized terms used but not defined herein shall
have the meanings given to them in the Registration Statement.
In connection with our representation of the Company, and as a basis for
the opinion hereinafter set forth, we have examined originals, or copies
certified or otherwise identified to our satisfaction, of the following
documents (collectively, the "Documents"):
1. The Registration Statement, including the related form of prospectus
included therein, in the form in which it was transmitted to the Securities and
Exchange Commission (the "Commission") under the 1933 Act;
2. The Declaration of Trust of the Company (the "Declaration of Trust"),
certified as of a recent date by the State Department of Assessments and
Taxation of Maryland (the "SDAT");
3. The Bylaws of the Company, certified as of the date hereof by an officer
of the Company;
4. Resolutions adopted by the Board of Trustees of the Company relating to
the sale, issuance and registration of the Shares, certified as of the date
hereof by an officer of the Company;
5. The form of certificate representing a common share of beneficial
interest, certified as of the date hereof by an officer of the Company;
6. A certificate of the SDAT, as of the date hereof, as to the good
standing of the Company;
7. A certificate executed by an officer of the Company, dated the date
hereof; and
8. Such other documents and matters as we have deemed necessary or
appropriate to express the opinion set forth in this letter, subject to the
assumptions, limitations and qualifications stated herein.
In expressing the opinion set forth below, we have assumed, and so far as
is known to us there are no facts inconsistent with, the following:
1. Each individual executing any of the Documents, whether on behalf of
such individual or another person, is legally competent to do so.
2. Each individual executing any of the Documents on behalf of a party
(other than the Company) is duly authorized to do so.
3. Each of the parties (other than the Company) executing any of the
Documents has duly and validly executed and delivered each of the Documents to
which such party is a signatory, and such party's obligations set forth therein
are legal, valid and binding and are enforceable in accordance with all stated
terms.
4. All Documents submitted to us as originals are authentic. The form and
content of the Documents submitted to us as unexecuted drafts do not differ in
any respect relevant to this opinion from the form and content of such
Documents as executed and delivered. All Documents submitted to us as certified
or photostatic copies conform to the original documents. All signatures on all
such Documents are genuine. All public records reviewed or relied upon by us or
on our behalf are true
<PAGE>
and complete. All statements and information contained in the Documents are
true and complete. There has been no oral or written modification or amendment
to any of the Documents, and there has been no waiver of any provision of any
of the Documents, by action or omission of the parties or otherwise.
The phrase "known to us" is limited to the actual knowledge, without
independent inquiry, of the lawyers at our firm who have performed legal
services in connection with the issuance of this opinion.
Based upon the foregoing, and subject to the assumptions, limitations and
qualifications stated herein, it is our opinion that:
1. The Company is a real estate investment trust duly formed and existing
under and by virtue of the laws of the State of Maryland and is in good
standing with the SDAT.
2. The Shares are duly authorized and, when and if delivered against
payment therefor in accordance with the Resolutions, will be validly issued,
fully paid and nonassessable.
The foregoing opinion is limited to the substantive laws of the State of
Maryland and we do not express any opinion herein concerning any other law. We
express no opinion as to the applicability or effect of any federal or state
securities laws, including the securities laws of the State of Maryland, or as
to federal or state laws regarding fraudulent transfers. To the extent that any
matter as to which our opinion is expressed herein would be governed by any
jurisdiction other than the State of Maryland, we do not express any opinion on
such matter.
We assume no obligation to supplement this opinion if any applicable law
changes after the date hereof or if we become aware of any fact that might
change the opinion expressed herein after the date hereof.
This opinion is being furnished to you for submission to the Commission as
an exhibit to the Registration Statement. We hereby consent to the filing of
this opinion as an exhibit to the Registration Statement and to the use of the
name of our firm therein. In giving this consent, we do not admit that we are
within the category of persons whose consent is required by Section 7 of the
1933 Act.
Very truly yours,
EXHIBIT 8.1
[Form of Opinion of Mayer, Brown & Platt]
____________, 1999
Mar Mar Realty Trust
Independence Office Park
6407 Idlewild Road
Building 2, Suite 111
Charlotte, North Carolina 28212
RE: Partnership Classification; Status as a Real Estate Investment Trust
("REIT"); Information in the Prospectus under "FEDERAL INCOME
TAX CONSEQUENCES"
Ladies and Gentlemen:
In connection with the Offering of Common Shares1 in Mar Mar Realty Trust,
a Maryland real estate investment trust (the "Company"), pursuant to the
Registration Statement on Form S-11 (File No. 333-58895) filed with the
Securities and Exchange Commission on July 10, 1998, as amended (the
"Registration Statement"), you have requested our opinions concerning (i) the
treatment of the Operating Partnership as a partnership for Federal income tax
purposes, and not as an association taxable as a corporation; (ii) the
qualification and taxation for Federal income tax purposes of the Company as a
REIT; and (iii) the information in the Prospectus under the heading "FEDERAL
INCOME TAX CONSEQUENCES."
In formulating our opinions, we have reviewed and relied upon (i) the
Amended and Restated Limited Partnership Agreement of Mar Mar Realty, L.P., a
Delaware limited partnership (the "Operating Partnership"), the Declaration of
Trust and Bylaws of the Company, and each of the Initial Leases (collectively,
the "Organizational Documents"), (ii) the Prospectus and (iii) such other
documents and information provided by you, and such applicable provisions of
law, as we have considered necessary for purposes of the opinions expressed
herein.
In addition, we have relied upon the Company's certificate (the "Officer's
Certificate"), executed by a duly appointed officer of the Company, setting
forth certain factual representations relating to the organization and the
proposed method of operation of the Company and the Operating Partnership and
certain other factual certificates (together with the Officer's Certificate, the
"Certificates"). For purposes of our opinions, we have not made an independent
- --------
1 Unless otherwise specifically defined herein, all capitalized terms
have the respective meanings assigned to them in the prospectus (the
"Prospectus") as contained in the Registration Statement.
<PAGE>
Mar Mar Realty Trust
_____________, 1999
Page 2
investigation of the facts and representations set forth in the Certificates or
in the Organizational Documents or any of the information set forth in the
Registration Statement. We have, consequently, relied upon your representations
that the information presented in such documents accurately and completely
describes all material facts. No facts have come to our attention, however, that
would cause us to question the accuracy or completeness of such facts or
documents in any material respect.
In rendering these opinions, we have assumed the Company and the Operating
Partnership will each be operated in the manner described in the applicable
Organizational Documents and in the Prospectus, and that all terms and
provisions of such agreements and documents will be complied with by all parties
thereto.
The opinions expressed herein are based on the Code, the Treasury
regulations promulgated thereunder, and interpretations of the Code and such
regulations by the courts and the Internal Revenue Service, all as they are in
effect and exist at the date of this letter. It should be noted that statutes,
regulations, judicial decisions, and administrative interpretations are subject
to change at any time and, in some circumstances, with retroactive effect. A
material change that is made after the date hereof in any of the foregoing bases
for our opinions could adversely affect our conclusions. Other than as expressly
stated below, we express no opinion on any issue relating to the Operating
Partnership, the Company or any investment therein.
Based upon and subject to the foregoing, it is our opinion that:
1. The Operating Partnership will be treated, for Federal income tax
purposes, as a partnership, and not as an association taxable as a corporation.
2. Beginning with the Company's taxable year ending December 31, 1999, and
assuming that the actions contemplated in the Prospectus are completed in a
timely fashion, the Company has been organized in conformity with the
requirements for qualification as a REIT under the Code, and the Company's
proposed method of operation, as described in the Prospectus and as represented
in the Officer's Certificate, will enable it to satisfy the requirements for
qualification as a REIT.
3. The information in the Prospectus under the heading "FEDERAL INCOME TAX
CONSEQUENCES," to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by us and is correct in all material respects.
<PAGE>
Mar Mar Realty Trust
_____________, 1999
Page 3
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of the name of our firm therein.
Very truly yours,
MAYER, BROWN & PLATT
Exhibit 10.4a
AMENDMENT TO STRATEGIC ALLIANCE AGREEMENT
FOR THE MUTUAL REFERRAL OF ACQUISITION OPPORTUNITIES
THIS AMENDMENT (this "Amendment") is made and entered into as of this 21st
day of October, 1998, by and between MAR MAR REALTY L.P., a Delaware limited
partnership ("MMR") and SONIC AUTOMOTIVE, INC., a Delaware corporation ("SAI").
RECITALS
A. MMR and SAI are parties to a certain Strategic Alliance Agreement and
Agreement for the Mutual Referral of Acquisition Opportunities dated as of July
9, 1998 (the "Original Agreement").
B. MMR and SAI desire to amend the Original Agreement on the terms and
conditions contained in this Amendment.
NOW, THEREFORE, in consideration of the mutual provisions contained herein
and other good and valuable considerations, cash to the other in hand paid, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. Definitions. Capitalized terms used herein and not defined in this
Amendment shall have the meanings assigned to such terms in the Original
Agreement. The term "Agreement" when used herein shall mean the Original
Agreement as amended hereby.
2. Term. Section 15 of the Original Agreement is hereby deleted in
its entirety and the following substituted in lieu thereof.
"Section 15. Term. The term of this Agreement shall be for three (3)
years, commencing on the date hereof and expiring on July 8, 2001. The
term shall be automatically extended for additional one (1) year periods
until terminated by MMR or SAI by written notice to the other given at
least sixty (60) days prior to the expiration of the then current term."
3. Consulting Services. In the event MMR is not required under the
Agreement to refer, or SAI determines not to act on the referral of, a
Dealership acquisition opportunity, then, at the request of MMR, SAI shall
provide the following services to MMR in connection with the acquisition
of the Real Property associated with such Dealership.
(i) financial, management and operational analysis, including the
review of financial books and records of such associated Dealership;
(ii) analysis of the franchise relationship and agreement which such
associated Dealership has with its manufacturers;
(iii) market analysis of the associated Dealership, and
(iv) such other services as SAI and MMR shall reasonably agree are
to be provided in connection therewith.
4. Referrals. Nothing in this Agreement shall preclude MMR or SAI from
referring Dealership or Real Property acquisition opportunities, as the
case may be, to others in the event MMR and SAI, as the case may be, does
not have the financial ability to consummate the acquisition of a
Dealership or Real Property, as the case may be. No later than ten (10)
days after receipt of a referral from the other party, the receiving party
shall notify the sending party whether it is interested in such
acquisition opportunity and provide assurance of its financial ability to
consummate the referred acquisition opportunity. If the receiving party
fails to so notify the referring party, then the receiving party shall be
deemed to have elected to decline such acquisition opportunity.
5. Headings. The paragraph heading are inserted for convenience only
and are in no way intended to describe, interpret, define or limit the
scope or content of this Amendment or any provision hereof.
6. Construction. Words of any gender used in this Amendment shall be
held and construed to include any other gender, and words in the singular
number shall be held to include the plural, and vice versa, unless the
context requires otherwise. Any disputes regarding the interpretation of
any portion of this Amendment shall not be presumptively construed against
the drafting party.
7. Applicable law. This Amendment shall be governed by the laws of
the State of North Carolina, notwithstanding conflicts of laws or choice
of laws principles to the contrary.
8. Invalidity. If any provision of this Amendment shall be declared
invalid or unenforceable, the remainder of this Amendment shall continue
in full force and effect.
9. Successors and Assigns. This Amendment shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs,
successors and assigns.
10. Counterparts. This Amendment may be executed in two (2) or more
counterparts.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their duly authorized and empowered officers, partners or members,
as of the day and year first above written.
SAI: MMR:
SONIC AUTOMOTIVE, INC. MAR MAR REALTY L.P.
By: Mar Mar Realty Trust
Its: General Partner
By: /s/ O. BRUTON SMITH By: /s/ MARK IUPPENLATZ
---------------------- ----------------------
Name: Name: Mark Iuppenlatz
Title: Title: EVP-COO
EXHIBIT 10.8a
FIRST AMENDMENT
TO
CONTRIBUTION AGREEMENT
This First Amendment (the "First Amendment") to that certain Contribution
Agreement relating to the capitalization of Mar Mar Realty Trust by and among
Mar Mar Realty Trust, Mar Mar Realty L.P. and various contributors identified
therein dated as of July 9, 1998 (the "Contribution Agreement") is made and
entered into as of October 23, 1998 by and among Mar Mar Realty Trust (the
"Company"), Mar Mar Realty L.P. (the "Partnership"), O. Bruton Smith and Sonic
Financial Corporation ("Sonic"). Capitalized terms not defined in this First
Amendment are used as defined in the Contribution Agreement.
WHEREAS, Mr. Smith and Sonic are in the process of restructuring ownership
of the Title Holding Partnerships which hold the Real Property being contributed
by each of them pursuant to the Contribution Agreement;
WHEREAS, Town and Country Ford, Inc. no longer holds any interests in the
Title Holding Partnership previously being contributed by it pursuant to the
Contribution Agreement;
WHEREAS, pursuant to the authority contained in Section 14.5 of the
Contribution Agreement, the Company, the Partnership, Mr. Smith and Sonic desire
to amend the Contribution Agreement as set forth in this First Amendment as it
relates to them;
WHEREAS, the Company is in the process of reorganizing its capital
structure;
NOW, THEREFORE, in consideration of the foregoing, the parties hereto
agree that the Contribution Agreement is hereby amended as follows:
1. The definition of Permitted Exceptions contained in Section 1.1 of the
Contribution Agreement is amended and restated as follows:
"Permitted Exceptions" means (a) those exceptions contained on
Schedule "B" of the title policy currently held by the applicable
Contributor or Title Holding Partnership, a list of which title policies
is set forth on Schedule 1.3 (excluding Liens securing or evidencing
indebtedness other than Assumed Mortgage Debt), (b) such additional
encumbrances as do not adversely affect the use, value or marketability of
the Property affected thereby, (c) those additional matters that may be
specifically approved in writing by the Company (which approval shall not
be unreasonably withheld), (d) the Leases, (e) Liens for taxes which are
not yet due and payable and (f) Liens evidencing or securing Assumed
Mortgage Debt to the extent and in the manner such Liens are in existence
on the date hereof or for which consent is given by the Company and the
Partnership pursuant to Section 3.6 of this Agreement and which, upon such
consent, is added to Schedule 1.2.
1
<PAGE>
2. The definition of Title Holding Partnership contained in Section 1.1 of
the Contribution Agreement is amended and restated as follows:
"Title Holding Partnership" means an entity holding title to a
property which is organized under state law as a general or limited
partnership or limited liability company and is treated as a partnership
for U.S. federal income tax purposes and not as an association taxable as
a corporation.
3. Paragraphs (a) and (b) of Section 4.11 of the Contribution Agreement
are amended and restated as follows:
(a) The outstanding partnership, or other ownership, interests in each
Title Holding Partnership listed on Schedule 2.4 are owned by the Contributors
thereof as shown on Schedule 2.4, free and clear of all Liens. Each Partnership
Interest Contributor owns the partnership, or other ownership, interest in the
Title Holding Partnership shown as owned by it on Schedule 2.4, free and clear
of all Liens. Each Contributor and Title Holding Partnership has good and
marketable or indefeasible title to each Real Property shown as owned by it on
Exhibit A, free and clear of all Liens other than Permitted Exceptions.
(b) The partnership, or other ownership, interest owned by each
Partnership Interest Contributor in each Title Holding Partnership shown as
owned by it on Schedule 2.4 were validly issued, fully paid and non-assessable,
and, together with the partnership, or other ownership, interest of any other
Partnership Interest Contributor shown on Schedule 2.4 as owning a partnership,
or other ownership, interest in such Title Holding Partnership, constitutes all
of the issued and outstanding partnership, or other ownership, interests of such
Title Holding Partnership; all such partnership, or other ownership, interests
were not issued in violation of any preemptive rights. The partnership, or other
ownership, interests owned by each Partnership Interest Contributor in such
Title Holding Partnership were issued in compliance with applicable law and the
relevant organizational documents (as then in effect). There are no enforceable
rights, subscriptions, warrants, options, conversion rights, preemptive rights
or agreements of any kind outstanding to purchase or to otherwise acquire any of
the interests in any Title Holding Partnership or any securities or obligations
of any kind convertible into any interests in any Title Holding Partnership or
other equity interests or profit participations of any kind.
4. Paragraph (a)(vi) of Section 4.16 of the Contribution Agreement is
amended and restated as follows:
(vi) The general partner, or other manager, of each Title Holding
Partnership shall be responsible for filing the final Tax Return for 1998
for each of the respective Title Holding Partnerships;
5. Town and Country Ford, Inc. is hereby deleted as a party to the
Contribution Agreement since it is no longer holds any interests in a Title
Holding Partnership and thereby is
2
<PAGE>
deleted from the definition of Contributor contained in the preamble to the
Contribution Agreement.
6. Attached hereto are the following amended and restated exhibits and
schedules to the Contribution Agreement:
EXHIBITS
N - Title Holding Partnerships Tax Returns
SCHEDULES
A - Properties, Descriptions and Contribution Amounts per
Contributor
1.2 - Assumed Mortgage Debt
1.3 - Current Title Policies
2.4 - Partnership Interest Contributors and Title Holding
Partnerships
4.5 - Service Contracts, TI Contracts and Repair Contracts
4.9 - Environmental Reports
10.1 - Contributor Maintenance Obligations
11.3 - Leasing Commissions
X - Disclosures
7. References in the form of Amended and Restated Agreement of Limited
Partnership of Mar Mar Realty L.P. to Class B Units shall be amended to refer to
Class C Units.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Contribution
Agreement to be duly executed on their behalf as of the date first above
written.
MAR MAR REALTY TRUST
By:
------------------------------------------
Name: Benjamin F. Bracy
Title: President
MAR MAR REALTY L.P.
By: MAR MAR REALTY TRUST, its general partner
By:
--------------------------------------
Name: Benjamin F. Bracy
Title: President
4
<PAGE>
CONTRIBUTORS:
SONIC FINANCIAL CORPORATION
address:
Attention:
Facsimile No.:
By:
------------------------------------------
Name:
Title:
O. BRUTON SMITH
address:
Facsimile No.:
------------------------------------------
5
EXHIBIT 10.13
AMENDED SUBSCRIPTION AGREEMENT
WHEREAS, there has been organized under the laws of the State of Maryland
a real estate investment trust known as Mar Mar Realty Trust (the "Trust");
WHEREAS, the Trust is authorized to issue 5,000,000 Class B Common Shares
of Beneficial Interest, $1.00 par value ("Class B Common Shares").
WHEREAS, the Trust and the undersigned have previously entered into a
subscription agreement dated April 14, 1998 and the parties have determined it
to be in each of their respective best interests to amend and supersede such
subscription agreement with (i) this amended subscription agreement and (ii) a
subscription agreement between Mar Mar Realty L.P. and the undersigned.
NOW, THEREFORE, in consideration of the covenants contained herein, the
undersigned hereby subscribes for and agrees to purchase up to four hundred
sixty three (463) Class B Common Shares of the Trust and agrees to give as
consideration therefor six hundred sixty dollars ($660.00).
The subscription hereunder shall be payable upon execution and the Shares
subscribed for hereunder shall be issued at the time payment is received
therefor.
Dated as of the 10th day of October, 1998.
By:
---------------------------------
O. Bruton Smith
Accepted as of
October 10, 1998
MAR MAR REALTY TRUST
By:
-------------------------------------------
Virginia R. Dunn
Vice President and Chief Financial Officer
EXHIBIT 10.14
SUBSCRIPTION AGREEMENT
WHEREAS, there has been organized under the laws of the State of Maryland
a real estate investment trust known as Mar Mar Realty Trust (the "Trust");
WHEREAS, the Trust is authorized to issue up to 100,000,000 Class A Common
Shares of Beneficial Interest, $1.00 par value ("Class A Common Shares").
NOW, THEREFORE, in consideration of the covenants contained herein, the
undersigned hereby subscribes for and agrees to purchase up to six thousand five
hundred fifty seven (6,557) Class A Common Shares of the Trust and agrees to
give as consideration therefor nine thousand three hundred forty dollars
($9,340.00).
The subscription hereunder shall be payable upon execution and the Shares
subscribed for hereunder shall be issued at the time payment is received
therefor.
Dated as of the 10th day of October, 1998.
By:
---------------------------------
Benjamin F. Bracy
Accepted as of
October 10, 1998
MAR MAR REALTY TRUST
By:
---------------------------------------
Virginia R. Dunn
Vice President and Chief Financial Officer
EXHIBIT 10.15
SUBSCRIPTION AGREEMENT
WHEREAS, there has been organized under the laws of the State of Delaware
a limited partnership known as Mar Mar Realty L.P. (the "Partnership");
WHEREAS, the Partnership is authorized to issue units of limited
partnership interest ("Units") of one or more series from time to time.
NOW, THEREFORE, in consideration of the covenants contained herein, the
undersigned hereby subscribes for and agrees to purchase up to seven hundred one
thousand five hundred thirty seven (701,537) Class B Units and agrees to give as
consideration therefor a promissory note (in the form attached hereto) in the
amount of nine hundred ninety nine thousand three hundred forty dollars
($999,340.00).
The subscription hereunder shall be payable at such time or times as the
general partner of the Partnership may determine upon at least three days'
written notice to the subscriber, and the Class B Units subscribed for hereunder
shall be issued at the time payment is received therefor.
Dated as of the 10th day of October, 1998.
By:
--------------------------------------
O. Bruton Smith
Accepted as of
October 10, 1998
MAR MAR REALTY L.P.
By: MAR MAR REALTY TRUST,
its general partner
By:
------------------------------------------
Virginia R. Dunn
Vice President and Chief Financial Officer
<PAGE>
Promissory Note
, 1998 US $999,340.00
For value received or to be received, the undersigned, O. Bruton Smith, an
individual, (herein the "PAYOR"), promises to pay to the order of Mar Mar Realty
L.P., a Delaware limited partnership (the "Partnership"), NINE HUNDRED AND
NINETY NINE THOUSAND THREE HUNDRED FORTY and 00/100 DOLLARS (US $999,340.00),
plus interest, if any, on the unpaid principal amount hereof outstanding from
time to time, at such times and on such terms as described below.
1. Repayment of Principal. The aggregate principal amount of this
Promissory Note shall be payable in whole or in part at such time or times as
requested by the Partnership on three days' written notice to the PAYOR with any
principal amounts remaining outstanding due and payable on the earlier to occur
of (i) the closing of the initial public offering of Class A common shares of
beneficial interest of Mar Mar Realty Trust or (ii) June 15, 1999 (the "Final
Maturity Date").
2. Interest. Unless there is a default in the payment of principal
hereunder, no interest will accrue and be payable under this promissory note.
3. Payment and Amount of Interest. In the event of any default in the
payment of principal under this promissory note, interest shall accrue and be
payable by the PAYOR on the defaulted amount at a rate of 5% per annum for the
period that the PAYOR shall be in default. All interest will be calculated for
the actual number of days elapsed on the basis of a 365-day year.
4. Optional Prepayment. The PAYOR, at its option, may prepay this
Promissory Note in whole or in part at any time prior to the Final Maturity
Date.
In addition to, and not in limitation of, the foregoing, the undersigned
further agrees, subject only to any limitation imposed by applicable law, to pay
all expenses, including reasonable attorneys' fees and expenses, incurred by the
holder of this Promissory Note in seeking to collect any amounts payable
hereunder which are not paid when due.
All parties hereto, whether as makers, endorsers, or otherwise, severally
waive presentment for payment, protest, and notice of dishonor.
This Promissory Note may not be changed or modified orally.
THIS PROMISSORY NOTE SHALL BE GOVERNED BY THE LAWS OF THE STATE OF
MARYLAND.
IN WITNESS WHEREOF, the undersigned has executed this Promissory Note as
of the date first above written.
PAYOR
-------------------------------
O. Bruton Smith
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF THE COMPANY
Mar Mar Realty Limited Partnership, a Delaware limited partnership
MMR Holdings, L.L.C., a North Carolina limited liability company
MMR Tennessee, L.L.C., a North Carolina limited liability company
MMR Viking Investment Associates, a Texas limited partnership
MMR QRS, Inc., a North Carolina corporation
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
To the Board of Trustees
Mar Mar Realty Trust
Charlotte, North Carolina
We consent to the use in this Registration Statement on Form S-11 relating
to 11,500,000 Class A Common Shares of Beneficial Interest of Mar Mar Realty
Trust of our report dated December 18, 1998, appearing in the Prospectus, which
is a part of this Registration Statement, and to the reference to us under the
heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
December 18, 1998
