As filed with the Securities and Exchange Commission on July 10, 1998
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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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CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Amount Maximum Maximum
Title of Securities Being Offering Price Aggregate Amount of
Being Registered Registered per Share Offering Price Registration Fee
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Common Shares of
Beneficial Interest (par
value $1.00 per share) .. 11,500,000 $ 16.00 $184,000,000 $54,280
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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 , 1998
PROSPECTUS
10,000,000 Common Shares
Mar Mar Realty Trust
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 aftermarket 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, auto rental facilities and fuel service related properties
("Related Business Properties") located throughout North America. Upon
completion of the Formation Transactions (as herein defined), the Company will
own 18 Dealership Properties on which 16 automobile dealerships operate (the
"Initial Dealership Properties") and 36 Advance Auto Parts Stores (the "Advance
Properties" and, together with the Initial Dealership Properties, the "Initial
Properties" and together with any future properties, the "Properties") located
in ten states. The Company will lease, pursuant to long-term leases, the
Initial Dealership Properties to Sonic Automotive, Inc., the eighth largest
automobile dealer group in the United States based on 1997 revenues, and the
Advance Properties to Advance Stores Company, Incorporated, the second largest
specialty retailer of automotive parts and accessories based on number of
stores.
All of the Company's 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."
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See "Risk Factors" beginning on page 11 for a discussion of certain
material risks to be considered by prospective investors in the Common Shares,
including, among others:
o Dependence on the ability of the lessees of the Properties to pay rent to the
Company, which ability may be affected by risks inherent in operating
automobile dealerships, retail automotive parts stores and other related
automotive businesses;
o Conflicts of interest between the Company and O. Bruton Smith, the Chairman
of the Board of Trustees of the Company, and his affiliates;
o The Company's lack of operating history and management's lack of experience
in operating a REIT;
o Approximately 63% of the net proceeds of the Offering (assuming the
Underwriters do not exercise their over-allotment option) have not been
committed to specific investments; the Company may face significant
competition in acquiring additional properties, which may inhibit the
Company's ability to achieve its investment objectives; the shareholders
will not have the opportunity to evaluate such acquisitions by the Company;
and
o Adverse tax consequences of failing to qualify as a REIT and the decrease in
funds available to pay distributions to shareholders resulting from taxation
as a regular corporation.
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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Price to Underwriting Proceeds to the
Public Discount(1) Company(2)
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Per Common Share ......... $ $ $
Total(3) ................. $ $ $
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses of this Offering, payable by the Company,
estimated at $ . See "Use of Proceeds."
(3) The Company has granted to the Underwriters an option, exercisable within
30 days of the date hereof, to purchase up to an aggregate of 1,500,000
additional Common Shares solely to cover over-allotments, if any. If such
option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to the 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. Delivery of the
Common Shares is expected to be made against payment therefor on or about ,
1998, at the offices of Wheat First Securities, Inc., Richmond, Virginia.
Wheat First Union NationsBanc Montgomery Securities LLC
The date of this Prospectus is , 1998.
<PAGE>
(continuation of cover page)
[Photographs][Artwork]
[Map Showing Location by State of Initial 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 "NADA Data 1996," "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," "1996 Market Data Book" and "1997 Market Data Book"
publications, (iii) a division of Intertec Publishing Corp. in its "Ward's
Dealer Business," or (iv) The Automotive Parts and Accessories Association
("APAA") 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
Risk Factors .................................................. 2
Business Strategies and Objectives ............................ 3
Acquisition Strategy ........................................ 3
Development Strategy ........................................ 3
Financing Strategy .......................................... 3
The Initial Properties and Initial Lessees .................... 4
The Automotive Retailing and Motor Vehicle Aftermarket
Industries .................................................. 6
Formation Transactions ........................................ 6
Benefits to Related Parties ................................... 8
Distributions ................................................. 8
Tax Status of the Company ..................................... 8
The Offering .................................................. 9
Summary Financial Information ................................. 9
RISK FACTORS ..................................................... 11
Dependence Upon the Ability of Lessees to Pay Rent and
Fulfill Other Lease Obligations ............................. 11
Dependence on Lessees and Guarantors for Payment of
Rent and Performance of Lease Terms ....................... 11
Financial Condition of Advance Auto ......................... 11
Lack of Control Over Dealer Franchise Agreements ............ 11
Rejection of Leases in Bankruptcy ........................... 11
Inability of the Company to Sell or Re-Lease
Properties ................................................ 11
Responsibility for Uninsurable Losses ....................... 12
General Risks Associated with Operating Dealerships ........... 12
Dependence on Manufacturers for Supply of Motor
Vehicles .................................................. 12
Restrictions in Franchise Agreements ........................ 13
Competition and Cyclicality ................................. 13
General Risks Associated with Operating Retail
Automotive Parts Stores ..................................... 13
Conflicts of Interest Between the Company and
Mr. Smith ................................................... 13
Purchase Prices of Properties May Exceed Their Fair
Market Values ............................................... 14
Lack of Operating History; Management's Lack of
Experience Operating a REIT ................................. 14
The Company May Not Complete Any Additional
Acquisitions of Properties .................................. 14
No Limitation on the Incurrence of Debt ....................... 15
Dependence on Key Personnel ................................... 15
General Real Estate Investment Risks .......................... 15
General Risks of Real Estate Investment ..................... 15
Risks Associated With Illiquidity of Real Estate ............ 15
Possible Adverse Effects of Acquisition, Development
and Construction Activities ............................... 15
Governmental Regulations; Environmental Matters ............... 16
Environmental Laws .......................................... 16
Americans With Disabilities Act of 1990 ..................... 17
Other Regulations ........................................... 17
Competition from Other Companies with Similar
Business Objectives and Strategies .......................... 17
Adverse Consequences of Failure to Qualify as a REIT;
Other Tax Risks ............................................. 17
Tax Liabilities as a Consequence of Failure to Qualify
as a REIT ................................................. 17
Adverse Effects of REIT Minimum Distribution
Requirements .............................................. 18
Consequences of Failure to Qualify as a Partnership ......... 18
Risks Regarding Characterization of Initial Leases .......... 18
Other Tax Liabilities ....................................... 19
The Ownership Limit and Restrictions on Transfer .............. 19
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Certain Tax and Anti-takeover Provisions May Inhibit a
Change in Control of the Company ............................ 19
Ownership Limit ............................................. 20
Removal of Trustees; Vacancies .............................. 20
Classified Board ............................................ 20
Preferred Shares ............................................ 20
Number of Authorized Shares ................................. 20
Advance Notice Provisions ................................... 20
Maryland Business Combination Statute ....................... 21
Changes in Policies ........................................... 21
No Prior Market for Common Shares ............................. 21
Effect of Market Interest Rates on Share Prices ............... 21
Possible Adverse Effects on Share Price Arising from
Common Shares Eligible for Future Sale ...................... 21
Dilution ...................................................... 22
USE OF PROCEEDS .................................................. 23
CAPITALIZATION ................................................... 23
DILUTION ......................................................... 23
SELECTED FINANCIAL INFORMATION ................................... 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS .................................................... 26
Overview ...................................................... 26
Results of Operations ......................................... 26
Pro Forma Results of Operations ............................... 26
Liquidity and Capital Resources ............................... 26
Inflation ..................................................... 27
Year 2000 Compliance .......................................... 27
BUSINESS OF THE COMPANY AND ITS PROPERTIES ....................... 28
Overview ...................................................... 28
Business Strategies and Objectives ............................ 29
Acquisition Strategy ........................................ 29
Development Strategy ........................................ 29
Financing Strategy .......................................... 29
The Initial Properties ........................................ 30
Initial Lessees ............................................... 31
Dealership Leases and Sonic Leases ............................ 32
General ..................................................... 32
Typical Dealership Lease Terms .............................. 32
Use of the Properties ....................................... 32
Amounts Payable Under the Leases; Net Provisions ............ 33
Maintenance, Alterations, Capital Additions or
Improvements .............................................. 33
Insurance ................................................... 33
Damage to, or Condemnation of, a Property ................... 33
Financial Covenants ......................................... 34
Net Worth Covenant .......................................... 34
Tax and Insurance Escrow .................................... 34
Assignment and Subletting ................................... 34
Indemnification ............................................. 34
Environmental Matters ....................................... 35
Pre-Existing Conditions ..................................... 35
Events of Default ........................................... 35
Governing Law ............................................... 36
Advance Leases ................................................ 36
General ..................................................... 36
Typical Advance Lease Terms ................................. 36
Use of the Properties ....................................... 37
Amounts Payable Under the Leases; Net Provisions ............ 37
Maintenance, Alterations, Capital Additions or
Improvements .............................................. 37
Noncompetition Covenant ..................................... 37
Insurance ................................................... 37
Damage to, or Condemnation of, a Property ................... 37
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Assignment and Subletting .................................... 38
Indemnification .............................................. 38
Environmental Matters ........................................ 38
Events of Default ............................................ 38
Governing Law ................................................ 39
Governmental Regulations Affecting the Properties .............. 39
Environmental Laws ........................................... 39
Americans With Disabilities Act of 1990 ...................... 39
Dealership Franchise Agreements ................................ 39
Competition .................................................... 40
Employees ...................................................... 40
Legal Proceedings .............................................. 40
AUTOMOTIVE RETAILING AND MOTOR VEHICLE
AFTERMARKET INDUSTRIES ......................................... 41
Automotive Retailing Industry .................................. 41
Retail Automotive Aftermarket Industry ......................... 42
MANAGEMENT ........................................................ 44
Trustees, Executive Officers and Key Employees ................. 44
Committees of the Board ........................................ 45
Audit Committee .............................................. 45
Executive Committee .......................................... 45
Executive Compensation Committee ............................. 45
Compensation of Trustees ....................................... 45
Executive Compensation ......................................... 45
1998 Shares Option Plan ........................................ 46
1998 Formula Shares Option Plan ................................ 48
Limitation of Liability and Indemnification of Trustees
and Officers ................................................. 49
POLICIES AND OBJECTIVES WITH RESPECT TO
CERTAIN ACTIVITIES ............................................. 50
Investment Policies ............................................ 50
Conflicts of Interest Policies ................................. 50
Financing Policy ............................................... 50
Distributions Policy ........................................... 51
THE FORMATION TRANSACTIONS ........................................ 51
Benefits to Related Parties .................................... 51
Acquisition of the Initial Properties from the Sellers ......... 52
CERTAIN RELATIONSHIPS AND TRANSACTIONS ............................ 52
Formation of the Company ....................................... 52
Strategic Alliance with Sonic Automotive ....................... 52
Acquisition of Certain Initial Dealership Properties ........... 53
Sonic Leases ................................................... 53
Lock-Out Agreements ............................................ 53
Registration Rights ............................................ 53
PARTNERSHIP AGREEMENT ............................................. 54
Management ..................................................... 55
Indemnification ................................................ 55
Capital Contributions .......................................... 55
Tax Matters .................................................... 55
Operations ..................................................... 55
Duties and Conflicts ........................................... 56
Term ........................................................... 56
PRINCIPAL SHAREHOLDERS OF THE COMPANY ............................. 56
DESCRIPTION OF SHARES OF BENEFICIAL
INTEREST ....................................................... 56
General ........................................................ 57
The Common Shares .............................................. 57
Classification or Reclassification of Preferred Shares ......... 58
Restrictions on Transfer; Excess Shares ........................ 58
CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S DECLARATION OF TRUST AND
BYLAWS ......................................................... 60
Classification of the Board .................................... 61
Vacancies ...................................................... 61
Removal of Trustees ............................................ 61
Business Combinations .......................................... 61
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Control Share Acquisitions ..................................... 61
Shareholders' Meetings ......................................... 62
Annual Report .................................................. 62
Amendment ...................................................... 62
Operations; Maryland Asset Requirements ........................ 63
Terminations of the Trust and REIT Status ...................... 63
Advance Notice of Trustee Nominations and New
Business ..................................................... 63
Possible Antitakeover Effect of Certain Provisions of
Maryland Law and of the Declaration of Trust and
Bylaws ....................................................... 64
COMMON SHARES ELIGIBLE FOR FUTURE SALE ............................ 65
Registration Rights and Lock-Up Agreement ...................... 65
FEDERAL INCOME TAX CONSEQUENCES ................................... 66
Taxation of the Company ........................................ 66
General ...................................................... 66
Share Ownership Tests ........................................ 67
Asset Tests .................................................. 67
Gross Income Tests ........................................... 68
The 75% Test ............................................... 68
The 95% Test ............................................... 68
Characterization of Rent ..................................... 68
Rents from Real Property ..................................... 69
Foreclosure Property Rules and Certain Other Rules ........... 70
Annual Distribution Requirements ............................. 71
Failure to Qualify ........................................... 71
Tax Aspects of the Company's Investments in
Partnerships ................................................. 71
General ...................................................... 71
Entity Classification ........................................ 72
Tax Allocations with Respect to the Properties ............... 72
Sale of the Properties ....................................... 72
Taxation of Domestic Shareholders .............................. 73
Backup Withholding ........................................... 73
Taxation of Tax-Exempt Shareholders .......................... 74
Other Tax Considerations ....................................... 74
Tax Legislation and Other Law Changes ........................ 74
State and Local Taxes ........................................ 75
CERTAIN UNITED STATES TAX CONSIDERATIONS
FOR NON-U.S. SHAREHOLDERS ...................................... 75
Distributions From The Company ................................. 75
Ordinary Dividends ........................................... 75
Capital Gain Dividends ....................................... 76
Non-Dividend Distributions ................................... 76
Dispositions of Shares of Beneficial Interest .................. 76
Federal Estate Tax ............................................. 76
Information Reporting and Backup Withholding ................... 77
UNDERWRITING ...................................................... 78
LEGAL MATTERS ..................................................... 79
EXPERTS ........................................................... 79
ADDITIONAL INFORMATION ............................................ 79
GLOSSARY .......................................................... 80
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 affiliated partnership, Mar Mar
Realty L.P., a Delaware limited partnership (the "Operating Partnership"), or
either of them. See "Glossary" beginning on page 80 for the definition of
certain capitalized terms used in this Prospectus.
The Company
The Company is a self-administered and self-managed REIT that has been
created to capitalize on consolidation opportunities in the ownership of real
estate used by automobile dealerships, automotive aftermarket retailers and
other businesses related to the automobile industry. The Company's principal
business strategy is to acquire 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 acquisition capabilities will be enhanced by
its strategic alliance with Sonic Automotive, Inc. ("Sonic Automotive"), one of
the fastest growing automobile dealership consolidators in the United States,
its relationship with Primax Properties, L.L.C. and its affiliates ("Primax"),
the sellers of the Advance Properties, and the extensive experience and
relationships of the Company's senior management and its Board of Trustees (the
"Board"). The Company also expects to benefit from the automobile industry
expertise of O. Bruton Smith, the Company's Board Chairman, who is also
president and chief executive officer of Sonic Automotive and of Speedway
Motorsports, Inc. ("Speedway Motorsports"), a NYSE-listed promoter, marketer
and sponsor of motorsports activities.
The Company's initial portfolio will be comprised of the 18 Initial
Dealership Properties and 36 Advance Properties located in ten states. All of
the Initial Dealership Properties will be leased to and are currently operated
by affiliates of Sonic Automotive (the "Sonic Lessees"). The dealerships
located on the Initial Dealership Properties sell 16 different brands of new
automobiles, including BMW, Cadillac, Chrysler, Dodge, Ford, Hyundai, Isuzu,
Jeep, KIA, Lincoln, Mercury, Oldsmobile, Plymouth, Subaru, Toyota and
Volkswagen. Sonic Automotive, whose stock is traded on the NYSE under the
symbol "SAH," is one of the top ten automobile dealership groups in the United
States based on 1997 revenues. Since the beginning of 1997, Sonic Automotive
has been one of the leading consolidators in the automobile industry, having
purchased 16 dealerships in that time. After giving pro forma effect to such
acquisitions, Sonic Automotive's 1997 revenues were $1.0 billion, 1997
operating income was $30.8 million and 1997 retail unit sales were 28,359 new,
16,068 used and 15,591 wholesale vehicles.
All of the Company's Advance Properties will be leased to Advance Stores
Company, Incorporated ("Advance Auto" and together with the Sonic Lessees, 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. As of April 25,
1998, Advance Auto had 863 stores in 16 states operating under the "Advance
Auto Parts" name. For fiscal 1997, Advance Auto's net sales and earnings before
interest, taxes, depreciation and amortization ("EBITDA") were $848.1 million
and $65.4 million, respectively.
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 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 of Properties.
The Company believes that its relationship with Sonic Automotive will
provide it with unique competitive advantages in acquiring Dealership
Properties. The Company has entered into a strategic alliance 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
1
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and the operations associated with their dealerships), (iii) the Company has
agreed to provide or make available to Sonic Automotive (at Sonic Automotive's
cost) 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. The Company also expects that its
relationship with Primax will provide it with opportunities to acquire
additional Properties used by Advance Auto.
The Initial Dealership Properties will be leased to the Sonic Lessees
pursuant to "triple-net" leases (the "Sonic Leases"), which require the Sonic
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 (the
"Advance Leases" and together with the Sonic 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, James A. Mezzanotte, the Company's Executive Vice President,
Director of Acquisitions and Treasurer, and James E. Dillon, the Company's
General Counsel and Director of Investor Relations, have significant collective
experience in the real estate, financial, legal and motor vehicle industries.
The Company believes that Mr. Smith's experience and relationships with
automobile dealers, manufacturers and parts retailers, which he has developed
through his leadership of Sonic Automotive and Speedway Motorsports, will be of
significant benefit to the Company as it executes its growth strategy.
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 Dependence on lease payments from the Initial Lessees for substantially
all of the Company's income;
o Ownership of the Properties is subject to risks inherent in operating
automobile dealerships, retail automotive parts stores and other related
automotive businesses;
o Conflicts of interest between the Company and Mr. Smith, who serves as
the Company's Chairman of the Board and who is an affiliate of certain
sellers of Properties and all of the Sonic Lessees;
o The lack of operating history of the Company and management's lack of
experience in operating a REIT;
o Approximately 63% of the net proceeds of the Offering have not been
committed to specific investments; the Company may face significant
competition in acquiring additional Properties, and such competition may
inhibit the Company's ability to achieve its investment objectives and
necessitate the investment of a portion of the proceeds of this Offering
in short-term or government securities that could produce a lower yield to
the Company than could be generated from an investment in Properties; the
Company's shareholders will not have the opportunity to evaluate future
property acquisitions by the Company;
o The taxation of the Company as a regular corporation if it fails to
qualify as a REIT and the resulting decrease in funds available to pay
distributions to shareholders;
o The lack of third party appraisals and the possibility that the
consideration paid by the Company for certain Properties may exceed the
fair market values of such Properties;
o The Company's dependence on key officers and Trustees of the Company,
including Mr. Smith, Mr. Bracy, Mr. Mezzanotte, and Mr. Dillon, the loss
of any of whom could adversely affect the management of the Company;
o General risks relating to commercial real estate ownership, development
and investment, including, but not limited to, economic and other
conditions that may affect real estate investments, the general lack of
liquidity of investments in real estate, and the potential for unknown or
future environmental or other liabilities, all of which could have a
material adverse effect on Cash Available for Distribution;
o The ability of the Board to change the policies of the Company, including
investment, financing, leverage and distribution policies, without a vote
of the shareholders;
2
<PAGE>
o Certain provisions in the Company's Declaration of Trust and Bylaws and
restrictions on ownership of Common Shares or other classes of shares of
beneficial interest (collectively, the "Shares") intended to ensure
compliance with certain requirements related to qualification of the
Company as a REIT may inhibit a change in control of the Company; and
o The absence of a prior public market for the Common Shares and the
possibility that the trading volume of the Common Shares may be limited.
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 real estate of
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.
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.
The Company believes that its acquisition capabilities will be enhanced by
its strategic alliance with Sonic Automotive, its relationship with Primax and
Mr. Smith's contacts and relationships developed over 35 years within the
automotive retailing and motorsports businesses.
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
dealerships 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 defined herein) 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
3
<PAGE>
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.
Upon the completion of the Offering, the Company expects to obtain a $100
million line of credit (the "Line of Credit"), the proceeds of which will be
used for the acquisition of additional Properties and working capital. 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 11%.
The Initial Properties and Initial Lessees
Upon completion of the Formation Transactions, the Company will own 54
Initial Properties located in ten states. All of the Initial Dealership
Properties will be leased to the Sonic Lessees. Dealerships owned by Sonic
Automotive have received numerous awards from manufacturers based on customer
satisfaction and sales volume, including 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.
The Advance Properties will be leased to Advance Auto. Advance Auto has
achieved significant growth in recent years. 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 from 223 to 863. From fiscal 1992 through fiscal 1997, Advance Auto
increased sales and pro forma EBITDA by a compounded annual growth rate of
29.3% and 28.4%, respectively. Primax, the seller of the Advance Properties, is
a primary consultant to Advance Auto in connection with the selection,
financing and construction of new stores throughout the United States. Primax
and its principals have assisted Advance Auto with the development of over 100
new stores.
The Company will acquire the Initial Dealership Properties for an
aggregate purchase price of approximately $58.7 million, consisting of $51.2
million in cash, 394,410 Class A units of limited partnership interest in the
Operating Partnership ("Class A Units") and the assumption of $1.6 million of
Mortgage Debt. The Company will acquire the Advance Properties for an aggregate
purchase price of approximately $25.9 million, consisting of approximately
$240,000 in cash, 483,267 Class A Units and the assumption of $18.4 million of
Mortgage Debt. The two Initial Dealership Properties being contributed by
affiliates of Mr. Smith are subject to existing Leases at rents below current
market levels. The number of Class A Units to be received by Mr. Smith for
these Properties was determined based upon the existing rental revenue from
these Properties. Such existing Leases on these Properties will terminate by
December 31, 1999, and the Company and the relevant Sonic Lessees have entered
into new leases at market rates effective January 1, 2000. In recognition of
the future increased rent that these Properties will generate, the Company has
issued to Mr. Smith 982,634 Class B units of limited partnership interest in
the Operating Partnership ("Class B Units" and together with the Class A Units,
"Units"), which 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 B Units have a deemed
fair value of approximately $12.6 million.
4
<PAGE>
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>
Town & Country Ford (Parcel #1) Charlotte, NC $ 409,200(1) 1999
Town & Country Ford (Parcel #2) Charlotte, NC 108,513 2008
Town & Country Toyota Charlotte, NC 600,000 2008
Frontier Oldsmobile-Cadillac Monroe, NC 187,000 2008
Lake Norman Chrysler-Plymouth Cornelius, NC 480,000 2007
Lake Norman Dodge (Parcel #1) Cornelius, NC 360,000 2007
Lake Norman Dodge (Parcel #2) Cornelius, NC 120,000 2007
Westside Dodge Columbus, OH 600,000 2008
Toyota West Columbus, OH 480,000 2008
Hatfield Hyundai Columbus, OH 480,000 2008
Hatfield Lincoln-Mercury Columbus, OH 300,000 2008
VW & Jeep-Eagle West Columbus, OH 300,000 2008
Westside Chrysler-Plymouth Columbus, OH 300,000 2008
Fort Mill Ford Fort Mill, SC 480,000 2008
Century BMW Greenville, SC 387,187 2008
Century BMW Spartanburg, SC 112,805 2008
Heritage Lincoln-Mercury Greenville, SC 349,860 2008
Lone Star Ford Houston, TX 360,000(1) 1999
------------
INITIAL DEALERSHIP PROPERTIES SUBTOTAL 6,414,565
------------
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(2) 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(2) 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(2) 2007
Advance Auto Huntingdon, PA 61,335(2) 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(3) 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(2) 2007
------------
ADVANCE PROPERTIES SUBTOTAL 2,717,403
------------
INITIAL PROPERTIES TOTAL $9,131,968
============
</TABLE>
5
<PAGE>
- ---------
(1) The existing Leases on these Properties provide for their termination by
December 31, 1999. The Company and the Sonic Lessees have entered into new
Leases that are scheduled to take effect on January 1, 2000, which provide
for initial Base Rents of $1,140,000 for each Property, and expire on
December 31, 2009.
(2) 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.
(3) 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.
The Automotive Retailing and Motor Vehicle Aftermarket Industries
Automotive retailing is the largest consumer retail market in the United
States, with approximately $640 billion in 1996 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 1996, the largest 100 dealer groups generated less than 10% of
total sales revenues and controlled less than 5% 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.
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 parts, fuel 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.
Formation Transactions
The following transactions (the "Formation Transaction") have been or will
be completed in connection with the completion of the Offering:
o Mr. Smith capitalized the Company with $1.0 million in exchange for
702,000 Common Shares.
o The Company will sell 10,000,000 Common Shares in the Offering.
o The Company will contribute the net proceeds of the Offering and the $1.0
million of proceeds from the initial capitalization of the Company to the
Operating Partnership in exchange for 10,702,000 Class A Units. The
Company is the sole general partner of the Operating Partnership.
o Concurrently with the closing of the Offering, the Company will acquire
all of the interests in two affiliates of Mr. Smith that own two Initial
Dealership Properties in exchange for 394,410 Class A Units and 982,634
Class B Units and the assumption of approximately $1.6 million of Mortgage
Debt secured by such Properties.
o In order to facilitate the Company's acquisition of four Initial
Dealership Properties, an affiliate of Mr. Smith has acquired such
Properties from unaffiliated third parties. The Company will acquire such
Properties from the affiliate in exchange for approximately $9.0 million
in cash, which represents such affiliate's cost of purchasing and
maintaining such Properties prior to their acquisition by the Company.
o The Company will acquire two Initial Dealership Properties from
subsidiaries of Sonic Automotive in exchange for approximately $10.3
million in cash.
o The Company will acquire ten Initial Dealership Properties from parties
unaffiliated with Sonic Automotive or Mr. Smith in exchange for
approximately $31.8 million in cash.
6
<PAGE>
o The Company will acquire from Primax 36 Advance Properties in exchange
for approximately $240,000 in cash, 483,267 Class A Units and the
assumption of approximately $18.4 million of Mortgage Debt secured by such
Properties.
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:
[GRAPHIC OMITTED]
* Percentages are based upon the relative shares of pro forma GAAP-based net
income, which requires rental income to be computed on a straight-line basis
and a portion of such income to be allocated to holders of Class B Units.
The initial sharing percentages based on contractual rents are 92.4% to the
Company and 7.6% to the other holders of Class A Units. The holders of Class
B Units will have no voting, allocation or distribution rights until the
effectiveness of new leases on two Initial Dealership Properties (scheduled
to be January 1, 2000).
7
<PAGE>
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:
o Mr. Smith and his affiliates will receive 394,410 Class A Units and
982,634 Class B Units in connection with the contribution of their
interests in two entities that own two Initial Dealership Properties to
the Company. The Company will assume approximately $1.6 million of
Mortgage Debt related to these Properties that is currently guaranteed by
Mr. Smith. The Class A Units will have a value of approximately $5.9
million based on the Offering Price and will be more liquid than such
affiliates' interests in such Initial Dealership Properties. The Class B
Units will automatically attain rights identical to those of the Class A
Units upon the effectiveness of the new Leases entered into with respect
to such Properties. Prior to that time, such Class B Units will have no
rights with respect to voting, allocation or distributions. For certain
tax and business reasons, the Operating Partnership has agreed to
restrictions on its ability to sell or repay Mortgage Debt secured by
these Properties for a period of ten years.
o In order to facilitate the Company's acquisition of four of the Initial
Dealership Properties, an affiliate of Mr. Smith purchased such Properties
prior to the Offering. In connection with the Company's acquisition of
such Properties, such affiliate will receive approximately $9.0 million in
cash, representing such affiliate's cost to acquire and maintain such
Properties.
o Affiliates of Sonic Automotive will sell two Initial Dealership
Properties to the Company in exchange for approximately $10.3 million in
cash.
o In connection with the formation of the Company, the Company issued Mr.
Smith 702,000 Common Shares in exchange for cash consideration of $1.0
million.
o Affiliates of Sonic Automotive will lease the 18 Initial Dealership
Properties from the Company and will continue to control the operations of
the automobile dealerships located on such Properties.
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 515,000 Common Shares at the Offering Price.
Distributions
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 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. See "Description of Shares of Beneficial Interest"
and "Partnership Agreement."
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, 1998. 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 an opinion of its 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, 1998, 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 a REIT.
8
<PAGE>
The Offering
Common Shares Offered by
the Company.................. 10,000,000 shares
Common Shares to be Outstanding After the
Offering....................... 11,579,677 shares (1)
Use of Proceeds................. Approximately $52.0 million for the
acquisition of the Initial Properties, and
the balance of $87.6 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 877,677 Common Shares issuable upon redemption of Class A Units to
be issued in the Formation Transactions, and 702,000 Common Shares issued
to Mr. Smith. Excludes 982,634 Common Shares reserved for issuance upon
redemption of Class B Units to be issued in the Formation Transaction,
1,100,000 Common Shares reserved for issuance pursuant to the Plan, of
which options to purchase 515,000 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
1998 Formula Shares Option Plan (the "Formula Plan"). See "The Formation
Transactions," "Management--1998 Shares Option Plan" and "--1998 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 April 14, 1998, the date the
Company was formed. 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."
9
<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
---------------------------------
Period from Year ended
January 1, 1998 December 31,
to April 14, 1998 1997
------------------- -------------
<S> <C> <C>
Operating Data:
Lease revenue (1) ....................................................... $ 3,083 $ 10,632
Depreciation (2) ........................................................ 750 2,585
General and administrative expense (3) .................................. 580 2,000
Interest expense (4) .................................................... 519 1,788
Minority interest (5) ................................................... 125 431
Net income .............................................................. 1,109 3,828
Earnings per share -- basic and diluted (6) ............................. $ .25 $ .88
Weighted average common shares outstanding -- basic and diluted (6) ..... 4,356 4,356
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Historical
April 14, 1998 April 14, 1998
(Date of Formation) (Date of Formation)
--------------------- --------------------
<S> <C> <C>
Balance Sheet Data:
Cash ............................... $ 88,591 $--
Property ........................... 97,818 --
Total assets ....................... 186,409 --
Mortgages payable .................. 19,979 --
Minority interest .................. 25,805 --
Total shareholders' equity ......... 140,625 --
</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 10.1% of the Operating Partnership's pro forma net
income.
(6) Represents the number of Common Shares issued to Mr. Smith 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, weighted average
common shares outstanding would be 10,702,000 for both the period ended
April 14, 1998 and the year ended December 31, 1997, resulting in earnings
per share of $0.10 for the period ended April 14, 1998 and $0.36 for the
year ended December 31, 1997. The potential redemption of the Class A
Units and Class B Units and the potential exercise of options granted
under the Plan are not dilutive to earnings per share.
10
<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.
Dependence Upon the Ability of Lessees to Pay Rent and Fulfill Other Lease
Obligations
Dependence on Lessees and Guarantors for Payment of Rent and Performance
of 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 the Lessees default 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.
Certain Initial Leases will be guaranteed by affiliates of the Initial
Lessees (the "Guarantors"), which will guaranty 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 the Company, the Company's decision whether or not to pursue
payment from certain Guarantors could be influenced by Mr. Smith in his
capacity as a Trustee. See "Risk Factors--Conflicts of Interest."
Financial Condition of Advance Auto. Advance Auto recently conducted a
series of recapitalization transactions, which resulted in Advance Auto having
consolidated long-term debt of approximately $335.0 million and a stockholders'
deficit of approximately $56.3 million at April 25, 1998. As a result, Advance
Auto's ability to pay rent and satisfy other lease obligations to the Company
is dependent upon its ability to generate sufficient cash flow in excess of its
operating expenses and debt service obligations to meet such lease obligations.
No assurance can be given that Advance Auto will be able to generate sufficient
cash flow to pay such rent and satisfy such other lease obligations. To the
extent that Advance Auto is unable to satisfy some or all of its lease
obligations to the Company, the Company's results of operations, financial
condition and ability to make distributions to shareholders may be adversely
affected.
Lack of 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.
Rejection of Leases 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.
Inability of the Company 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 $1.6 million of
Mortgage Debt that it is assuming on the two Initial Dealership Properties. The
Company may agree to similar provisions in connection with future acquisitions
of Properties.
11
<PAGE>
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.
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.
Responsibility for Uninsurable 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. In addition, there is no
assurance 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 "The Initial Properties--Initial
Leases--Insurance."
General Risks Associated with Operating Dealerships
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 employment, income growth, interest rates, credit availability, other
national and local economic conditions, automotive innovations and general
consumer sentiment.
Dependence on 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 is dependent for its inventory of new motor vehicles
and parts. A reduction in the availability of 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
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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.
Restrictions in Franchise Agreements. 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 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 "The Initial
Properties--Franchise Agreements."
Competition and Cyclicality. 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.
General Risks Associated with Operating Retail Automotive Parts Stores
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
Certain conflicts of interest could exist between the Company and Mr.
Smith in his capacity as a Trustee of the Company, on the one hand, and as a
director and chief executive officer of Sonic Automotive and as owner of
certain other Sellers of Properties and Initial Lessees, on the other hand. The
terms of the contribution agreement between the Company and
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Mr. Smith, pursuant to which the Company will acquire two Dealership
Properties, and the Initial Leases for such Properties were not negotiated on
an arm's length basis. Mr. Smith could significantly influence the 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, (ii) decisions to sell or refinance Properties
contributed by his affiliates, (iii) decisions of Initial Lessees affiliated
with Mr. Smith to extend the terms of existing Leases and the terms of any such
extensions, (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 result in adverse tax consequences to Mr. Smith or his affiliates,
and (v) the enforcement of Initial Leases and agreements with Mr. Smith or his
affiliates. 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. To the extent that Properties may be
purchased from Sellers whose affiliates hold positions with the Company,
including Mr. Smith, the use of such valuation methodologies, and the basis of
negotiation of the purchase price, for such Properties may be susceptible to
conflict of interests.
Furthermore, management believes it is appropriate to value the Company as
an operating enterprise rather than at the values that could be obtained from a
liquidation of the Company or of individual Properties. Accordingly, the
valuation of the Company has been determined based on the factors set forth in
the section captioned "Underwriting." See "Underwriting." Because the
liquidation value of the Company may be less than the value of the Company as a
going concern, 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.
Lack of Operating History; Management's Lack of 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 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 "Distributions."
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 "Distributions."
The Company May Not Complete Any Additional Acquisitions of 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.
Approximately 63% 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.
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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.
No Limitation on the Incurrence of Debt
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.
Dependence on Key Personnel
The loss of the services of Mr. Smith, the Company's Chairman, Mr. Bracy,
the Company's President, or Mr. Mezzanotte, the Company's Executive Vice
President, Director of Acquisitions and Treasurer, and Mr. Dillon, the
Company's General Counsel and Director of Investor Relations, 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 Real Estate Investment Risks
General Risks of Real Estate Investment. 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 and Lessees; and
(viii) other factors that are beyond the control of the Company.
Risks Associated With 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.
Possible Adverse Effects of 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 "The
Company--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).
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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.
Governmental Regulations; Environmental Matters
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
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, 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 future discovery of
environmental contamination may require expenditures by the Company or
additional expenditures by the Sellers 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, 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 "The Initial
Properties and Initial Lessees--Government Regulations Affecting the
Properties--Environmental Laws."
Limited environmental investigations have been conducted or will be
completed prior to the consummation of the Offering at the Initial Properties,
with the results set out in "Phase I reports" prepared by consultants retained
by the Company, Sonic Automotive, Primax and/or their respective affiliates.
The Phase I 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 Phase I 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.
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
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statute of limitations has run. 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. However, if any Seller or Lessee fails to comply with
such requirements, the Company could be forced to pay such costs, which at such
time could be significant, and then 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 Phase I 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 or re-lease 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
"The Initial 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.
Competition from 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 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; Other Tax Risks
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, 1998. 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 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.
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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 would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates and
would 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
"Certain 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 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.
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.
Risks Regarding Characterization 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 and the Operating Partnership would
lose tax depreciation deductions with respect to such Property, 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
18
<PAGE>
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 "Certain 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 and Restrictions on Transfer
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 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 Independent Trustees of the Company 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
19
<PAGE>
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."
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.
20
<PAGE>
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 the Initial Sellers of the Dealership
Properties and the Company. As a result, the Initial Sellers of the Dealership
Properties, including Mr. Smith, 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."
Changes in Policies
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.
No Prior Market for Common Shares
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 or that the Common Shares will be so listed. 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."
Effect of Market Interest Rates on Share Prices
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.
Possible Adverse Effects on Share Price Arising from Common Shares Eligible for
Future Sale
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 approximately up to 1,860,311 Common Shares issuable upon the
exchange of Units issued in the Formation Transactions; up to approximately
702,000 Common Shares issued as Common Shares in connection with the Formation
Transactions; and up to 515,000 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 10,702,000 Common Shares outstanding
(12,202,000 Common 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
21
<PAGE>
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), 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 "Shares Eligible for Future
Shares--Registration Rights."
The Company may issue from time to time additional Common Shares or Units
in connection with the acquisition of Properties. See "The Company--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 "Shares Eligible for Future Sale."
Dilution
Purchasers of Common Shares in the Offering will experience immediate
dilution in the amount of $1.86 per share in net tangible book value per share
from the Offering Price. See "Dilution."
22
<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 $52.0 million
of the net proceeds of the Offering as payment of the cash portion of the
purchase price for the Initial Properties and related closing costs. The
remainder of the net proceeds will be retained for future acquisitions and
working capital.
The balance of the purchase price for the Initial Properties will be paid
with the assumption of approximately $20.0 million of Mortgage Debt and the
issuance of 877,677 Class A Units and 982,634 Class B Units. For a discussion
of the redemption rights of holders of the Units, see "Partnership
Agreement--Redemption Rights." If the Underwriters' over-allotment option is
exercised, the Company intends to use the additional net proceeds of
approximately $21.1 million 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 April 14, 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>
April 14, 1998
(Date of Formation)
-----------------------
Historical Pro Forma
------------ ----------
(In Thousands)
<S> <C> <C>
DEBT:
Mortgages payable .................................................................... $ -- $ 19,979
MINORITY INTEREST (1) ................................................................. -- 25,805
SHAREHOLDERS' EQUITY:
Common shares, $1.00 par value; 2,000,000 authorized; 1,000,000 issued and outstanding
historical; 10,702,000 issued and outstanding pro forma as adjusted (2) (3) ......... 1,000 10,702
Additional paid-in capital ........................................................... -- 129,923
Less: share subscription receivable .................................................. (1,000) --
-------- --------
Total shareholders' equity .......................................................... -- 140,625
-------- --------
Total capitalization .............................................................. $ -- $186,409
======== ========
</TABLE>
- ---------
(1) Minority interest represents pro forma book value at April 14, 1998
attributable to the 1,860,311 Units to be issued in the Formation
Transactions.
(2) Pro forma common shares issued and outstanding reflect a reduction in
historical shares issued to Mr. Smith and outstanding at April 14, 1998
from 1,000,000 to 702,000.
(3) Excludes 1,860,311 Common 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 515,000 Common 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--1998 Shares Option Plan."
DILUTION
At April 14, 1998 (date of formation), 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 April 14, 1998 would have been $140.6
million or $13.14 per Common Share. This represents an immediate decrease in
the net tangible book value per Common Share
23
<PAGE>
from the Offering Price to purchasers of Common Shares in the Offering. Net
tangible book value per Common Share represents the amount of total tangible
assets of the Company less total liabilities and minority interest, divided by
the number of Common Shares outstanding. The following table illustrates the
foregoing dilution:
<TABLE>
<CAPTION>
<S> <C>
Offering Price per share(1) .............................................................. $ 15.00
Pro forma net tangible book value per share prior to the Offering attributable to Common
Shares issued to Mr. Smith ............................................................... 1.42
Increase in net tangible book value per share attributable to Common Shares issued in the
Offering................................................................................ 11.72
Pro forma net tangible book value per share after the Offering ........................... 13.14
Dilution per share purchased in the Offering ............................................. 1.86
</TABLE>
- ---------
(1) Before deduction of underwriting discounts and commissions and estimated
expenses of the Offering.
The following table summarizes, as of April 14, 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 Common
Shares and Units to be issued by the Company and the Operating Partnership,
respectively, in the Formation Transactions:
<TABLE>
<CAPTION>
Common 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 84.8% $ 15.00(1)
Units issued in the Formation Transactions:
Class A ..................................... 877,677 7.0% 13,165,155 7.4% $ 15.00(2)
Class B ..................................... 982,634 7.8% 12,639,512 7.2% $ 12.86(2)
Common Shares issued to Mr. Smith in the
Formation Transactions ...................... 702,000 5.6% 1,000,000 0.6% 1.00
---------- ---- ------------ ----
Total ........................................ 12,562,311 100% $176,804,667 100%
========== ==== ============ ====
</TABLE>
- ---------
(1) Based on the Offering Price before deducting underwriting discount and
estimated expenses of the Offering.
(2) Based on the fair 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 April 14, 1998, the date the
Company was formed. 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."
24
<PAGE>
Mar Mar Realty Trust
Selected Historical and Pro Forma Consolidated Financial Information
(in thousands, except per share and footnote data)
<TABLE>
<CAPTION>
Pro Forma
----------------------------------
Period from Year ended
January 1, 1998 to December 31,
April 14, 1998 1997
-------------------- -------------
<S> <C> <C>
Operating Data:
Lease revenue (1) ....................................................... $ 3,083 $ 10,632
Depreciation (2) ........................................................ 750 2,585
General and administrative expense (3) .................................. 580 2,000
Interest expense (4) .................................................... 519 1,788
Minority interest (5) ................................................... 125 431
Net income .............................................................. 1,109 3,828
Earnings per share -- basic and diluted (6) ............................. $ .25 $ .88
Weighted average common shares outstanding -- basic and diluted (6) ..... 4,356 4,356
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Historical
April 14, 1998 April 14, 1998
(Date of Formation) (Date of Formation)
--------------------- --------------------
<S> <C> <C>
Balance Sheet Data:
Cash ............................... $ 88,591 $ --
Property ........................... 97,818 --
Total assets ....................... 186,409 --
Mortgages payable .................. 19,979 --
Minority interest .................. 25,805 --
Total shareholders' equity ......... 140,625 --
</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 10.1% of the Operating Partnership's pro forma net
income.
(6) Represents the number of Common Shares issued to Mr. Smith 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, weighted average
common shares outstanding would be 10,702,000 for both the period ended
April 14, 1998 and the year ended December 31, 1997, resulting in earnings
per share of $0.10 for the period ended April 14, 1998 and $0.36 for the
year ended December 31, 1997. The potential redemption of Class A Units
and Class B Units and the potential exercise of options granted under the
Plan are not dilutive to earnings per share.
25
<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, 1998. 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
and the Advance Properties. Under the terms of the Sonic Leases, Base Rent
generally is fixed for the first five years of the Lease, and is increased at
the end of every fifth year based on the cumulative change in the Consumer
Price Index ("CPI") for the preceding five-year period. Certain of the Sonic
Leases provide for annual CPI adjustments, and the Company expects that future
Leases with Lessees other than Sonic also will include annual CPI-based rent
adjustments. The Advance Leases provide for fixed Base Rent, with increases
upon Lease renewal of 3% to 7%. 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, pursuant to its Line of
Credit or otherwise, 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 $10.6
million for the year ended December 31, 1997, and $3.1 million for the period
from January 1, 1998 to April 14, 1998. Net income would have been $3.8 million
or $0.88 per share for the year ended December 31, 1997, and $1.1 million or
$0.25 per share for the period ended April 14, 1998. Depreciation would have
been $2.6 million for the year ended December 31, 1997, and $750,000 for the
period ended April 14, 1998. 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
The Company anticipates that its initial working capital and cash from
operations, together with the Line of Credit anticipated to be available to the
Company, 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.
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.
26
<PAGE>
Under the terms of the Sonic Leases, the Sonic Lessees are responsible for
substantially all expenses associated with the operation of the Initial
Dealership 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.
The Company is negotiating to obtain a $100 million Line of Credit. It is
expected that the Line of Credit will bear interest at variable rates based on
a spread over the London Interbank Offered Rate (LIBOR). It also is expected
that the Line of Credit will contain affirmative and negative covenants
customary and standard for a REIT. The Company expects to borrow under the Line
of Credit in connection with the acquisition of additional Properties, the
renovation or expansion of Properties, or, as necessary, to meet certain
distribution requirements imposed on REITs under the Code.
Other than the $52.0 million used to fund the cash portion of the purchase
price of the Initial Properties, the Company has no commitments with respect to
other 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 less than 50%, it will be able to
obtain financing for its long-term capital needs. However, there can be no
assurance 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. Because the Line of Credit is expected to 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.
Accordingly, when deemed appropriate, based on the then current interest rates,
the Company may seek to replace the Line of Credit with a credit facility that
provides for a fixed rate.
Year 2000 Compliance
The Company recognizes the need to ensure that its operations will not be
adversely impacted by Year 2000 software failures. The Company believes that
its computer systems are currently Year 2000 compliant, although no assurances
can be given in this regard. The Company also believes that Year 2000 issues
will not materially affect the ability of the Initial Lessees to meet their
obligations under the Initial Leases, although no assurances can be given in
this regard. The Company's suppliers and future Lessees of Properties may be
impacted by Year 2000 complications. The failure of the Company's suppliers or
Lessees to ensure that their computer systems are Year 2000 compliant could
have a material adverse effect on such suppliers and Lessees, which in turn
could have a material adverse effect on the Company's business, results of
operations and financial condition.
27
<PAGE>
BUSINESS OF THE COMPANY AND ITS PROPERTIES
Overview
The Company is a self-administered and self-managed REIT that has been
created to capitalize on consolidation opportunities in the ownership of real
estate used by automobile dealerships, automotive aftermarket retailers and
other businesses related to the automobile industry. The Company's principal
business strategy is to acquire 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 acquisition capabilities will be enhanced by
its strategic alliance with Sonic Automotive, one of the fastest growing
automobile dealership consolidators in the United States, its relationship with
Primax, the sellers of the Advance Properties, and the extensive experience and
relationships of the Company's senior management and its Board. The Company
also expects to benefit from the automobile industry expertise of O. Bruton
Smith, the Company's Board Chairman, who is also president and chief executive
officer of Sonic Automotive and of Speedway Motorsports, a NYSE-listed
promoter, marketer and sponsor of motorsports activities.
The Company's initial portfolio will be comprised of the 18 Initial
Dealership Properties and 36 Advance Properties located in ten states. All of
the Initial Dealership Properties will be leased to and are currently operated
by the Sonic Lessees. The dealerships located on the Initial Dealership
Properties sell 16 different brands of new automobiles, including BMW,
Cadillac, Chrysler, Dodge, Ford, Hyundai, Isuzu, Jeep, KIA, Lincoln, Mercury,
Oldsmobile, Plymouth, Subaru, Toyota and Volkswagen. Sonic Automotive, whose
stock is traded on the NYSE under the symbol "SAH," is one of the top ten
automobile dealership groups in the United States based on 1997 revenues. Since
the beginning of 1997, Sonic Automotive has been one of the leading
consolidators in the automobile industry, having purchased 16 dealerships in
that time. After giving pro forma effect to such acquisitions, Sonic
Automotive's 1997 revenues were $1.0 billion, 1997 operating income was $30.8
million and 1997 retail unit sales were 28,359 new, 16,068 used and 15,591
wholesale vehicles.
All of the Company's Advance Properties will be leased to Advance Auto,
the second largest specialty retailer of automotive parts and accessories in
the United States based on number of stores. As of April 25, 1998, Advance Auto
had 863 stores in 16 states operating under the "Advance Auto Parts" name. For
fiscal 1997, Advance Auto's net sales and EBITDA were $848.1 million and $65.4
million, respectively.
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 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 Company believes that its relationship with Sonic Automotive will
provide it with unique competitive advantages in acquiring Dealership
Properties. The Company has entered into a strategic alliance 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 make available to Sonic Automotive
(at Sonic Automotive's cost) 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, insurance, office equipment and supplies, telecommunications
services and certain other products and services. The Company also expects that
its relationship with Primax will provide it with opportunities to acquire
additional Properties used by Advance Auto.
The Initial Dealership Properties will be leased to the Sonic Lessees
pursuant to triple-net Leases, which require the Sonic 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.
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<PAGE>
Mr. Smith, the Company's Chairman, Benjamin F. Bracy, the Company's
President, James A. Mezzanotte, the Company's Executive Vice President,
Director of Acquisitions and Treasurer, and James E. Dillon, the Company's
General Counsel and Director of Investor Relations, have significant collective
experience in the real estate, financial, legal and motor vehicle industries.
The Company believes that Mr. Smith's experience and relationships with
automobile dealers, manufacturers and parts retailers, which he has developed
through his leadership of Sonic Automotive and Speedway Motorsports, will be of
significant benefit to the Company as it executes its growth strategy.
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 real estate of
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.
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.
The Company believes that its acquisition capabilities will be enhanced by
its strategic alliance with Sonic Automotive, its relationship with Primax and
Mr. Smith's contacts and relationships developed over 35 years within the
automotive retailing and motorsports businesses.
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
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<PAGE>
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 Properties and Related Business Properties by participating as an
equity owner in the Company.
Upon the completion of the Offering, the Company expects to obtain the
Line of Credit of $100 million, the proceeds of which will be used for the
acquisition of additional Properties and working capital. 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 11%.
The Initial Properties
Upon completion of the Formation Transactions the Company will own 54
Initial Properites located in ten states. The Company will acquire the Initial
Dealership Properties for an aggregate purchase price of approximately $58.7
million, consisting of $51.2 million in cash, 394,410 Class A Units and the
assumption of $1.6 million of Mortgage Debt. The Company will acquire the
Advance Properties for an aggregate purchase price of approximately $25.9
million, consisting of approximately $240,000 in cash, 483,267 Class A Units
and the assumption of $18.4 million of Mortgage Debt. The two Initial
Dealership Properties being contributed by affiliates of Mr. Smith are subject
to existing Leases at rents below current market levels. The number of Class A
Units to be received by Mr. Smith for these Properties was determined based
upon the existing rental revenue from these Properties. Such existing Leases on
these Properties will terminate by December 31, 1999, and the Company and the
relevant Sonic Lessees have entered into new Leases at market rates effective
January 1, 2000. In recognition of the future increased rent that these
Properties will generate, the Company has issued to Mr. Smith 982,634 Class B
Units, which initially 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 B Units have a deemed
fair value of approximately $12.6 million.
The following table presents certain information regarding the Initial
Properties.
<TABLE>
<CAPTION>
Initial Land
Annual Lease Area
Property Location Base Rent Expiration in Acres
- ----------------------------------- ------------------ ----------------- ------------ ---------
<S> <C> <C> <C> <C>
Town & Country Ford (Parcel #1) Charlotte, NC $ 409,200(1) 1999 12.5
Town & Country Ford (Parcel #2) Charlotte, NC 108,513 2008 1.7
Town & Country Toyota Charlotte, NC 600,000 2008 5.7
Frontier Oldsmobile-Cadillac Monroe, NC 187,000 2008 7.1
Lake Norman Chrysler-Plymouth Cornelius, NC 480,000 2007 5.7
Lake Norman Dodge (Parcel #1) Cornelius, NC 360,000 2007 4.2
Lake Norman Dodge (Parcel #2) Cornelius, NC 120,000 2007 1.8
Westside Dodge Columbus, OH 600,000 2008 4.1
Toyota West Columbus, OH 480,000 2008 7.6
Hatfield Hyundai Columbus, OH 480,000 2008 1.5
Hatfield Lincoln-Mercury Columbus, OH 300,000 2008 4.9
VW & Jeep-Eagle West Columbus, OH 300,000 2008 3.0
Westside Chrysler-Plymouth Columbus, OH 300,000 2008 7.8
Fort Mill Ford Fort Mill, SC 480,000 2008 10.0
Century BMW Greenville, SC 387,187 2008 4.1
Century BMW Spartanburg, SC 112,805 2008 1.7
Heritage Lincoln-Mercury Greenville, SC 349,860 2008 5.5
Lone Star Ford Houston, TX 360,000(1) 1999 24.8
------------ -----
INITIAL DEALERSHIP PROPERTIES SUBTOTAL 6,414,565 113.7
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(2) 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(2) 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
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Initial Land
Annual Lease Area
Property Location Base Rent Expiration in Acres
- ---------------- ---------------------- --------------- ------------ ---------
<S> <C> <C> <C> <C>
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(2) 2007 1.0
Advance Auto Huntingdon, PA 61,335(2) 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(3) 2006 1.0
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(2) 2007 .9
----------- -----
ADVANCE PROPERTIES SUBTOTAL 2,717,403 33.5
----------- -----
INITIAL PROPERTIES TOTAL $9,131,968 147.2
=========== =====
</TABLE>
- ---------
(1) The existing Leases provide for their termination by December 31, 1999. The
Company and the Sonic Lessees have entered into new Leases that are
scheduled to take effect on January 1, 2000, which provide for initial
Base Rents of $1,140,000 for each Property, and expire on December 31,
2009.
(2) These Advance Properties or portions of 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.
(3) 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.
Initial Lessees
Concurrently with the Company's acquisition of the Initial Properties, the
Company intends to lease the Initial Properties to the Initial Lessees pursuant
to the Initial Leases.
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 BMW, Cadillac,
Chrysler, Dodge, Ford, Hyundai, Isuzu, Jeep, KIA, Lincoln, Mercury, Oldsmobile,
Plymouth, Subaru, Toyota and Volkswagen. 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.
All of the Sonic Lessees are subsidiaries of Sonic Automotive. Sonic
Automotive is one of the leading automotive retailers in the United States,
operating 22 dealerships and eight collision repair centers in six metropolitan
areas 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 and Atlanta, Georgia markets. In addition to the 16
brands sold on the Initial Dealership Properties, Sonic Automotive also sells
Honda, Infiniti, Jaguar, Mistsuibishi and Volvo brands of vehicles. 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
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<PAGE>
satisfaction. Sonic Automotive had revenues of $1.0 billion, operating income
of $30.8 and retail unit sales of 28,359 new, 16,068 used and 15,591 wholesale
vehicles in 1997 (after giving pro forma effect to Sonic Automotive's
acquisitions in 1997 and 1998).
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
retail outlets. As of April 25, 1998, Advance Auto had 863 stores in 16 states
operating under the "Advance Auto Parts" name. Advance Auto has achieved
significant growth in recent years. 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
387%. From fiscal 1992 through fiscal 1997, Advance Auto increased sales and
pro forma EBITDA by a compounded annual growth rate of 29.3% and 28.4%,
respectively. Advance Auto, which is the largest automotive retailer in a
majority of its markets based on store count, has expanded from its original
geographic base of North Carolina, South Carolina, Tennessee and Virginia to
also operate in Alabama, Arkansas, Florida, Georgia, Indiana, Kentucky,
Maryland, Michigan, Mississippi, Ohio, Pennsylvania and West Virginia. For
fiscal 1997, Advance Auto's net sales and EBITDA were $848.1 million and $65.4
million, respectively.
Dealership Leases and Sonic 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"). 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 and the existing Leases on the Lake Norman Dodge (Parcels
#1 and #2) and Lake Norman Chrysler-Plymouth Dealership Properties (the "Lake
Norman 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) will include the following
lease terms. 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.
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<PAGE>
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
yearly basis based on a factor of the CPI, except for the fifth anniversary of
the Lease and each five year anniversary thereafter, including the beginning of
each Renewal Term, when Base Rent shall 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.
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 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.
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 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.
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
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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.
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"), 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.
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 do not provide for any Cash Flow Coverage Ratio covenant and
instead provide that all obligations of the Sonic Lessees under the Sonic
Leases will be guaranteed by Sonic Automotive.
Net Worth Covenant. Each Lessee will be required to maintain an excess of
such Lessee's tangible assets over its liabilities ("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 contain no Net Worth covenant.
Tax and Insurance Escrow. Each Lessee is required to maintain a separate
trust account for the Company's benefit into which the Lessee will deposit
monthly one-twelfth of the estimated annual amount of taxes and assessments and
insurance premiums and such other amounts as the Company reasonably requires to
ensure sufficient funds to pay such taxes, assessments and insurance premiums.
In the event of a casualty, the proceeds of all insurance policies may be
required to be deposited in the Company's name in an escrow account, to be
disbursed by the Company.
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.
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 will
be obligated to 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,
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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 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; (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 Initial Lessee,
its employees, agents, invitees, customers, licensees or contractors.
Environmental Matters. The Dealership Leases provide for covenants by the
Lessee relating to environmental matters with respect to each Dealership
Property. Each Dealership Lease also requires the Lessee to indemnify, release
and hold the Company harmless from and against all liabilities, costs and
expenses imposed upon, or assessed against the Company, for the presence of
hazardous materials upon or under the Dealership Property (irrespective of
whether there has occurred any violation of any environmental law). Such Lessee
is required to comply with all environmental laws. See "Risk Factors--
Governmental Regulations; Environmental Laws." The Lake Norman Leases provide
that the Lessees will not be liable for any pre-existing environmental
conditions.
Pre-Existing Conditions. The Sonic Leases (other than the Lake Norman
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
Lesseee 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 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 federal 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
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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 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 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.
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, and all insurance and tax obligations which
relate to the Advance Properties.
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 credit worthiness 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.
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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.
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
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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 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 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
ocurred; (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 in order 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 rentals 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.
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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 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 investigations have been conducted or will be
completed prior to the consummation of the Offering at the Initial Properties,
with the results set out in "Phase I reports" prepared by consultants retained
by the Company, Sonic Automotive, Primax and/or their respective affiliates.
The Phase I 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 Phase I 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.
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, and 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. 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 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 or re-lease 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
39
<PAGE>
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 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--Competition with
Other Companies with Similar Business Objectives and Strategies."
Employees
As of July 9, 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 "--Initial Leases-- Indemnification."
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<PAGE>
AUTOMOTIVE RETAILING AND MOTOR VEHICLE AFTERMARKET INDUSTRIES
Automotive Retailing Industry
Automotive retailing, with approximately $640 billion in 1996 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 1996, new vehicles sales grew
at an annual compounded rate of 10.5%, while used vehicle sales grew at a rate
of 15.8%. During this period, unit sales grew at rates of 4.0% for new vehicles
and 6.4% for used vehicles.
New vehicles are sold through dealerships franchised by vehicle
manufacturers. According to industry data, the number of franchised dealerships
has declined from approximately 25,000 dealerships in 1990 to approximately
23,000 in 1997. Although 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 5% of all franchised
dealerships. The chart set forth below illustrates the consolidation of the
automotive retail industry since 1990:
[GRAPHIC OMITTED]
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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:
[GRAPHIC OMITTED]
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.
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.
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, fuel 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>
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<PAGE>
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.
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<PAGE>
MANAGEMENT
Trustees, Executive Officers and Key Employees
The executive officers and Trustees of the Company, and their ages as of
April 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 --
James A. Mezzanotte .......... 55 Executive Vice President, Director of --
Acquisitions and Treasurer
James E. Dillon .............. 30 General Counsel and Director of --
Investor Relations
James Johnston ............... 52 Trustee 2000
Donald Carter ................ 65 Trustee 1999
</TABLE>
O. Bruton Smith has been the Chairman and a Trustee of the Company since
its organization in 1998. 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. 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.
James A. Mezzanotte has been the Executive Vice President, Director of
Acquisitions and Treasurer of the Company since its organization in 1998. Mr.
Mezzanotte has worked in commercial and residential real estate development for
the past 12 years. Since 1986, he has been the president and controlling
stockholder of First Meridian Construction Corp., a privately-held
construction/development firm located in Charlotte, the president and
controlling shareholder of First Meridian Management, Inc., a privately-held
property management company managing low-to-moderate-income, tax credit
residential properties in North Carolina and South Carolina and the vice
president and controlling stockholder of First Meridian Properties, Inc., a
privately-held real estate brokerage licensed in North Carolina and South
Carolina. Mr. Mezzanotte is also currently the president of Residential Child
Development Centers, Inc., a privately-held child day care center, and is the
founder and a stockholder of Home Cleaning Concepts, Inc., a four-state
franchisee of Sears. From 1985 to 1986, he served as a vice president and
corporate counsel for DiGard, Inc. and Gardner Properties, Inc., both of which
were privately-held Charlotte real estate developers, where he had
responsibility for property development, contracting and acquisition
negotiation. Mr. Mezzanotte received a law degree from Yale University in 1968
and practiced tax and corporate law with emphasis in real estate development
and syndications and construction law for over 17 years. Mr. Mezzanotte also
served as a chief financial officer of a publicly traded apparel company for
two years in the 1970s.
James E. Dillon has been the Company's General Counsel and Director of
Investor Relations since May 1998. Mr. Dillon also serves on the board of
directors of the Community Housing Development Corporation, a non-profit entity
focusing on community housing needs in Charlotte, North Carolina. Prior to
joining the Company in 1998, he was associated with the law firm of Moore & Van
Allen, PLLC in Charlotte, North Carolina since 1992. Mr. Dillon's practice
focused on commercial real estate and litigation. He is a member of the North
Carolina Bar Association.
James Johnston has consented to become a Trustee of the Company upon the
completion of the Offering. 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
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<PAGE>
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 Carter has consented to become a Trustee of the Company upon the
completion of the Offering. 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 1998. 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
"--1998 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.
45
<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
James A. Mezzanotte
Executive Vice President, Director of
Acquisitions and Treasurer .... 1998 $250,000 -- 140,000
James E. Dillon
General Counsel
Director of Investor Relations 1998 $ 86,000 -- 50,000
</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.
1998 Shares Option Plan
In July 1998, 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 and its subsidiaries and
to officers, Trustees, consultants and other individuals providing services to
the Company. 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 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, in NSOs granted under the Plan (except
that the exercise price of an ISO may not be paid in NSOs) or in any
combination of cash, shares and NSOs.
46
<PAGE>
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 may at any time amend the Plan or the term of any option
outstanding under the Plan. 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 515,000 Common Shares under the Plan to Mr.
Smith and executive officers of the Company. Messrs. Smith, Bracy, Mezzanotte
and Dillon are to be granted options to purchase 115,000 shares, 140,000
shares, 140,000 shares and 50,000 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, Mezzanotte and Dillon 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, 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
47
<PAGE>
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.
1998 Formula Shares Option Plan
The Formula Plan will be adopted by the Board and the shareholders of the
Company in July 1998. The Formula Plan is intended to be a "formula plan" under
Note (3) to Rule 16b-3 of the Securities and Exchange Commission (the "SEC").
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 or before 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.
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.
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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 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)
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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
The Company is subject to various conflicts of interest arising from its
relationship with Mr. Smith, who serves as the Company's Chairman, and certain
sellers of Initial Properties and Initial Lessees that are affiliates of Mr.
Smith. 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 50% or less. Following completion of the Offering and the use
of the net proceeds therefrom, the Company will have approximately $20 million
of indebtedness, which will constitute approximately 11% of its total market
capitalization.
To ensure that the Company has sufficient liquidity to conduct its
operations, including making investments in additional Properties, the Company
intends to seek a Line of Credit for approximately $100 million. 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.
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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 completed in
connection with the completion of the Offering:
o Mr. Smith capitalized the Company with $1.0 million in exchange for 702,000
Common Shares.
o The Company will sell 10,000,000 Common Shares in the Offering.
o The Company will contribute the net proceeds of the Offering and the $1.0
million of proceeds from the initial capitalization of the Company to the
Operating Partnership in exchange for 10,702,000 Class A Units. The Company
is the sole general partner of the Operating Partnership.
o Concurrently with the closing of the Offering, the Company will acquire all
of the interests in two affiliates of Mr. Smith that own two Initial
Dealership Properties in exchange for 394,410 Class A Units and 982,634
Class B Units and the assumption of approximately $1.6 million of Mortgage
Debt secured by such Initial Dealership Properties.
o In order to facilitate the Company's acquisition of four Initial Dealership
Properties, an affiliate of Mr. Smith has acquired such Properties from
unaffiliated third parties. The Company will acquire such Properties from
the affiliate in exchange for approximately $9.0 million in cash, which
represents such affiliate's cost of purchasing and maintaining such
Properties prior to their acquisition by the Company.
o The Company will acquire two Initial Dealership Properties from Sonic
Automotive's wholly-owned subsidiaries in exchange for approximately
$10.3 million in cash.
o The Company will acquire ten Initial Dealership Properties from parties
unaffiliated with Sonic Automotive or Mr. Smith in exchange for
approximately $31.8 million in cash.
o The Company will acquire from Primax 36 Advance Properties in exchange for
approximately $240,000 in cash, 483,267 Class A Units and the assumption
of approximately $18.4 million of Mortgage Debt.
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:
o Mr. Smith and his affiliates will receive 394,410 Class A Units and 982,634
Class B Units in connection with the contribution of their interests in two
entities that own two Initial Dealership Properties to the Company. The
Company will assume approximately $1.6 million of Mortgage Debt related to
these Properties that is currently guaranteed by Mr. Smith. The Class A
Units will have a value of approximately $5.9 million based on the Offering
Price and will be more liquid than such affiliates' interests in such
Initial Dealership Properties. The Class B Units will automatically attain
rights identical to those of the Class A Units upon the effectiveness of the
new Leases entered into with respect to such Properties. Prior to that time,
such Class B Units will have no rights with respect to voting, allocations
or distributions. For certain tax and business reasons, the Operating
Partnership has agreed to restrictions on its ability to sell, or repay
Mortgage Debt secured by, these Properties for a period of ten years.
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o In order to facilitate the Company's acquisition of four of the Initial
Dealership Properties, an affiliate of Mr. Smith purchased such
Properties prior to the Offering. In connection with the Company's
acquisition of such properties, such affiliate will receive approximately
$9.0 million in cash, representing such affiliate's cost to acquire and
maintain such Properties.
o Affiliates of Sonic Automotive will sell two Initial Dealership Properties
to the Company in exchange for approximately $10.3 million in cash.
o In connection with the formation of the Company, the Company issued Mr.
Smith 702,000 Common Shares in exchange for cash consideration of $1.0
million.
o Affiliates of Sonic Automotive will lease the 18 Initial Dealership
Properties from the Company and will continue to control the operations
of the automobile dealerships located on such Properties.
o The Company's executive officers and Mr. Smith will receive options under
the Company's the Plan to acquire an aggregate of 515,000 Common Shares
at the Offering Price.
Acquisition of the Initial Properties from the Sellers
The Company will acquire the Initial Properties pursuant to Purchase
Agreements and a Contribution Agreement negotiated on an arms-length basis with
each seller unaffiliated with the Company or Mr. Smith. Company officials
believe that the purchase prices under the Contribution Agreement and Purchase
Agreements with sellers affiliated with Mr. Smith or Sonic Automotive fairly
represent the value of the Initial Dealership Properties acquired because such
prices were based primarily on an evaluation of the current and anticipated
cash flows from the Sonic Leases. The obligations of the Sellers to transfer
such Initial Properties pursuant to the Contribution Agreement or Purchase
Agreements is or will be conditioned upon the completion of the Offering, the
closing of the transactions contemplated by the Initial Leases, the Purchase
Agreements and the Contribution Agreement, and normal and customary conditions
to the closing of real estate transactions, including the consents of lenders
and Manufacturers, if required. The Contribution Agreement and Purchase
Agreements also contain representations and warranties to the Operating
Partnership 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 such Properties
for a period of ten years. In the Lock-Out Agreement, the Company has also
agreed to certain restrictions on its ability to prepay approximately $1.6
million of Mortgage Debt that it is assuming on the two Initial Dealership
Properties. In addition, loan agreements will restrict the ability of the
Company to prepay approximately $3.3 million of the Mortgage Debt being assumed
on seven of the Advance Properties.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
Formation of the Company
Mr. Smith, the Chairman of the Company's Board, formed the Company on
April 14, 1998 and provided initial capital of $1.0 million in exchange for
702,000 Common Shares pursuant to a subscription agreement between Mr. Smith
and the Company.
Strategic Alliance with Sonic Automotive
The Company has entered into a strategic alliance 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. In return, the Company has agreed to refer to Sonic Automotive
dealership acquisition opportunities that arise in connection with Property
acquisitions, thereby providing
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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
The Company will acquire from Mr. Smith and affiliates of Mr. Smith all of
the interests in two Initial Dealership Properties. The Company will acquire
such interests in exchange for 394,410 Class A Units, with an aggregate value
of $5.9 million based on the Offering Price, 982,634 Class B Units, and the
assumption by the Company of $1.6 million of Mortgage Debt secured by such
Properties. The Class A Units are redeemable for cash or Common Shares on a
one-for-one basis, at the option of the Company, one year after the
consummation of the Offering. The Class B Units were issued to account for
below market rental rates in the existing Leases on the two Properties acquired
from Mr. Smith and affiliates of Mr. Smith. The Company has entered into new
Leases on such Properties, which are scheduled to become effective on January
1, 2000 and provide for market rental rates. The Class B 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 B Units have no voting, allocation
or distribution rights. The Class B Units have a deemed fair value of $12.6
million for purposes of the Company's Pro Forma Consolidated Financial
Statements.
The Company will acquire from Sonic Automotive two Initial Dealership
Properties in exchange for an aggregate of approximately $10.3 million in cash.
The Company will acquire four 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 $9.0 million in cash, which represents Chartown's
cost of purchasing and maintaining such Properties prior to their acquisition
by the Company.
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 Company negotiated the $20.5 million purchase price for such
Properties through arms-length negotiations with the sellers.
Sonic Leases
All the Initial Dealership Properties will be leased to the Sonic Lessees,
which are direct or indirect, wholly-owned subsidiaries of Sonic Automotive.
With the exception of the two Intial Dealership Properties to be acquired from
Mr. Smith and affiliates of Mr. Smith and the Lake Norman Properties, the Sonic
Lessees have agreed to enter into Sonic Leases providing for Initial Terms of
ten years, two optional five-year Renewal Terms and fair market rent, subject
to upward CPI adjustments every five years. For further discussion of the terms
of the Sonic Leases, see "The Initial Properties and Initial
Lessees--Dealership Leases and Sonic Leases." For the initial Annual Base Rent
to be paid under each of the Sonic Leases, see the table appearing under "The
Initial Properties and Initial Lessees."
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 or otherwise dispose of, or prepay or refinance approximately
$1.6 million of Mortgage Debt secured by, the two Initial Dealership Properties
acquired by the Company from Mr. Smith and affiliates of Mr. Smith for a period
of ten years.
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 1,377,044 Units. Mr. Smith and his affiliates have
agreed
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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, 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 not be
able to charge market rents for the Initial Properties being contributed by Mr.
Smith until January 1, 2000, Mr. Smith will receive 394,410 Class A Units and
982,634 Class B Units. Prior to the effectiveness of the new Leases entered
into with respect to such Properties, the Class B Units will have no rights
with respect to voting, allocations or distributions. Upon the effectiveness of
such new Leases, a Class B 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 10,702,000 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 877,677 Class A Units and 982,634 Class B
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,
except if 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) to a lender to the Operating Partnership
or related person holding nonrecourse liability, although 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 of Units may tender to the Operating Partnership
for redemption its Units, which 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. With each exchange of
Units, the Company's interest in the Operating Partnership will increase.
The Company will hold one Unit in the Operating Partnership for each
Common Share that it has issued. The net proceeds of any future issuance of
Common 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.
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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. 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.
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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, 2098 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.
PRINCIPAL SHAREHOLDERS OF THE COMPANY
The following table sets forth certain information regarding the
beneficial ownership of the Common Shares by (a) each person known by the
Company to be the beneficial owner of more than 5% of the Common 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 Common Shares the person holds or the number of Common Shares
issuable upon redemption of Units held by such person. The executive officers
and Trustees of the Company have agreed not to sell Common Shares (including
Common 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 Common Outstanding
Shares Owned (1) Common Shares
---------------------- --------------------
Before After Before After
Name Offering Offering Offering Offering
- ------------------------------------------------------------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
O. Bruton Smith (2) ....................................... 702,000 1,211,410 100.0% 10.4%
Benjamin F. Bracy (3) ..................................... -- 35,000 -- *
James A. Mezzanotte (3) ................................... -- 35,000 -- *
James E. Dillon (3) ....................................... -- 12,500 -- *
All Trustees and executive officers as a group (6 persons) 702,000 1,293,910 100.0% 11.0%
</TABLE>
- ---------
* Less than one percent.
(1) Number and percentages set forth in this table assume that all outstanding
Class A Units (other than those owned by the Company) are redeemed for
Common Shares.
(2) If the Underwriters' over-allotment option is exercised in full, then after
the Offering Mr. Smith will own 702,000 Common Shares or approximately
6.6% of the Common Shares then outstanding. Mr. Smith owns directly
702,000 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 at the Offering Price. In addition, Mr. Smith
has sole voting and investment control over Class A Units and Class B
Units that are held by him directly or through his affiliates.
(3) 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, Mezzanotte and Dillon
will also hold unvested options for 105,000, 105,000 and 37,500 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."
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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 classes 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, 10,702,000 Common Shares will
be issued and outstanding (12,202,000 shares if the Underwriters' over
allotment option is exercised in full) 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 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 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 are entitled to receive dividends 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. 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.
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 Common Shares 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
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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 dissolution 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
series from time to time in one or more series, as authorized by the Board.
Prior to issuance of shares of each series, the Board is required by the
Maryland REIT Law and the Company's Declaration of Trust to set for each such
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 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 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
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<PAGE>
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
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. 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
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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" (as defined herein) 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 puposes 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" (as defined herein)
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 stock 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 stock 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.
Therefore, even if a person holds Units that would be convertible (absent such
restrictions) into Shares such that after such conversion such person owned 10%
or more of the Company's issued and outstanding Shares, the Company should not
be treated as constructively owning any stock owned, directly or indirectly, by
or for such person including a related party tenant and rents received from
such tenant should constitute rents from real property for purposes of the REIT
rules. 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.
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."
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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
stock 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.
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.
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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.
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 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
only be amended by the Board subject to repeal or change by action of the
shareholders entitled to vote thereon.
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.
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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.
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 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 if such qualification, in
the opinion of the Board, is no longer advantageous to the shareholders.
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
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
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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 Maryland Law and 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--Possible Adverse Effects on Share Price Arising from Common Shares
Eligible for Future Sale." 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) 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 515,000 Common Shares to Mr. Smith and the Company's executive
officers and will reserve an additional 585,000 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.
Registration Rights and Lock-Up Agreement
Pursuant to the Contribution Agreement, the Company has entered into the
Registration Rights Agreement with the holders of 1,860,311 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. Subject to
certain limitations, the Company has agreed to use its best efforts to file a
registration statement under the Securities Act that 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.
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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, 1998, 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 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, 1998, 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.
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.
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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 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.
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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 intends 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 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.
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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 and the Operating
Partnership would lose tax depreciation deductions with respect to such
Property, which in turn could cause the Company to fail 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 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"
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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 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.
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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 received 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 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."
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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 Initial Sellers 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.
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
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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 1997 Act also altered the taxation of net capital gain for individuals
(and for certain trusts and estates). Gain from the sale or exchange of Common
Shares held for more than 18 months will be 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 will be taxed at a maximum capital gain
rate of 28%. The 1997 Act also provides 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, introduces special rules for "qualified
5-year gain," and makes certain other changes to prior law. 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 whose ordinary income was subject to a marginal tax rate of at least
28%.
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
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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 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.
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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 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
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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
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.
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.
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<PAGE>
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.
77
<PAGE>
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 has agreed not to issue, and all 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, 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, for a period of
two years from 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 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 above
independent market levels. The Underwriters are not required to engage in these
activities, and may end any of these activities at any time.
78
<PAGE>
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 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.
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.
79
<PAGE>
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 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 time the new Leases for the two Properties acquired from Mr. Smith and
his affiliates.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" or "SEC" means the United States Securities and Exchange
Commission.
"Common Shares" means the 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.
"Company Mortgagee" means any holder of a mortgage deed of trust or other
security instrument on a Dealership Property.
"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.
"Contribution Agreement" means the contribution agreement pursuant to
which the Company will acquire certain of the Initial Properties or interests
therein owned by the Initial Sellers.
"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
80
<PAGE>
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 of beneficial interest of the Company that have been designated as
Shares Excess.
"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 on a triple-net and modified
triple-net basis.
"Initial Lessees" means the Lessees of the Initial Properties.
"Initial Term" means the initial term of the Initial Leases.
"Initial Properties" means the 54 Properties that the Company will acquire
in the Formation Transactions.
"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.
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<PAGE>
"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.
"Line of Credit" means a line of credit that the Company anticipates
obtaining upon completion of the Offering in an aggregate principal amount of
$100 million.
"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.
"Mortgage Debt" means the indebtedness secured by certain Initial
Properties that will be assumed by the Company pursuant to the Contribution
Agreement.
"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.
"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.
"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 greater than 10% interest.
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"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 share of common stock 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.
"Sonic Lessees" means affiliates of Sonic Automotive that currently
operate dealerships on Initial Dealership Properties.
"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.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
INTRODUCTION TO FINANCIAL STATEMENTS ..................................................... F-2
MAR MAR REALTY TRUST:
Independent Auditors' Report ........................................................... F-3
Balance Sheet as of April 14, 1998 (Date of Formation) ................................. F-4
Notes to Balance Sheet ................................................................. F-5
Introduction to Pro Forma Consolidated Financial Statements ............................ F-9
Pro Forma Consolidated Balance Sheet as of April 14, 1998 (Unaudited) .................. F-10
Pro Forma Consolidated Statement of Operations for the Year ended December 31, 1997 F-11
(Unaudited)
Pro Forma Consolidated Statement of Operations for the Period from January 1, 1998 to
April 14, 1998 (Unaudited) ............................................................... F-12
Notes to Pro Forma Consolidated Financial Statements (Unaudited) ....................... F-13
SONIC AUTOMOTIVE, INC:
Summary Historical Financial Information ............................................... F-15
</TABLE>
F-1
<PAGE>
MAR MAR REALTY TRUST
INTRODUCTION TO FINANCIAL STATEMENTS
The following pages present the audited balance sheet of the Company as
well as summary historical financial information for one of the Initial
Lessees. Sonic Automotive, Inc. (as a lessee and parent company and guarantor
to certain other lessees) represents an Initial Lessee for which the purchase
price of the related Initial Properties under lease represents greater than 20%
of the expected proceeds of the Offering, or 20% of the total assets of the
Company upon consummation of the Offering and, therefore, is considered
significant. As Sonic Automotive, Inc. is a publicly traded entity, registered
with the Securities and Exchange Commission, only summary historical financial
information has been provided; however, audited historical financial statements
and other information, as filed with the Securities and Exchange Commission, is
publicly available.
Financial statements of the Operating Partnership have not been presented,
as it has not had any significant activity since its inception in June 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, the balance sheet referred to above presents fairly, in
all material respects, the financial position of Mar Mar Realty Trust as of
April 14, 1998 (date of formation) in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
July 10, 1998
F-3
<PAGE>
MAR MAR REALTY TRUST
BALANCE SHEET
As of April 14, 1998 (Date of Formation)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Total assets ........................................................... $ --
============
LIABILITIES AND SHAREHOLDER'S EQUITY
Total liabilities ...................................................... $ --
Shareholder's equity:
Common shares, par value $1
2,000,000 shares authorized, 1,000,000 shares issued and outstanding 1,000,000
Less: share subscription receivable ................................... (1,000,000)
------------
Total shareholder's equity ............................................ --
------------
Total liabilities and shareholder's equity ............................. $ --
============
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-4
<PAGE>
MAR MAR REALTY TRUST
NOTES TO BALANCE SHEET
April 14, 1998 (Date of Formation)
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 1,000,000 common shares of beneficial interest
for a $1,000,000 share subscription receivable from the Company's Chairman.
Through its ownership interest in Mar Mar Realty L.P. (the "Operating
Partnership"), 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 related properties located throughout North
America. The Company will consolidate the Operating Partnership due to its
control as sole general partner and majority owner. The accompanying balance
sheet includes all accounts of the Company.
The Company is in the process of filing a registration statement for
approximately 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 units of limited
partnership interest (the "Class B Units"), the "Units").
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.
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
o Conflicts of interest between the Company and the Company's Chairman who
is an affiliate of certain lessees.
3. Related Party Transactions
Concurrent with the closing of the Offering, the Company will acquire six
properties from affiliates of the Company's Chairman in exchange for $9.0
million in cash, the assumption of $1.6 million of mortgage debt and the
issuance of 394,410 Class A Units (valued at $15.00 per unit) and 982,634 Class
B Units (valued at $12.86 per unit) assuming an initial public
F-5
<PAGE>
offering price of $15 per share. Class A Units will be redeemable for cash or,
at the Company's option, Common Shares on a one-for-one basis beginning one
year after the consummation of the Offering. Each Class B Unit will have no
distribution, allocation or voting rights. Concurrent with the increase in
rentals from two of the acquired properties (expected to occur on January 1,
2000), each Class B Unit will automatically attain rights identical to those of
the Class A Units. The Company will also use approximately $10.3 million of the
proceeds of the Offering to acquire two properties from Sonic Automotive, Inc.
("Sonic Automotive"). The Company's Chairman is the Chairman of the Board and
Chief Executive Officer of Sonic Automotive.
As part of the initial capitalization of the Company upon its formation,
the Company issued 1,000,000 Common Shares to the Company's Chairman in
exchange for a $1,000,000 share subscription receivable. The number of shares
is subject to reduction based upon the portion of the Company sold in the
Offering. The organizational and offering costs and other expenditures of the
Company prior to the Offering are being funded through payments of the share
subscription receivable.
Sonic Automotive and certain of its wholly owned subsidiaries will lease
18 properties from the Company and will continue to control the operations of
the automobile dealerships operated on those properties.
4. Subsequent Events
Acquisitions -- Since April 14, 1998, the Company, through the Operating
Partnership, has committed to acquire real property and improvements for a
total purchase price of approximately $97.2 million, for which approximately
$25.8 million will be paid with Units, approximately $20.0 million will consist
of mortgage debt assumed by the Company, and the remaining $51.4 million
(excluding closing costs of $630,000) will be paid from the proceeds of the
Offering. These acquisitions are contingent on the completion of the Offering.
Rental Income -- As part of the planned acquisitions described above and
contingent on the completion of the Offering, the Company will enter into or
assume existing lease agreements on the acquired properties 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. Base rent
generally will be increased at certain points during the term of the lease
(generally at five-year intervals) by a factor of 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 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 property, 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 as follows (in thousands):
<TABLE>
<CAPTION>
For the Year Ended December 31,
<S> <C>
1998 (A) ................. $ 3,044
1999 ..................... 9,132
2000 ..................... 10,643
2001 ..................... 10,643
2002 ..................... 10,643
Thereafter ............... 59,826
--------
$103,931
========
</TABLE>
- ---------
(A) Assumes leases in effect beginning September 1, 1998.
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 current aggregate rental of $769,200.
F-6
<PAGE>
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 .......... 18 36
Purchase price ................ $71,308 $25,880
Initial base rent ............. $ 6,415 $ 2,717
</TABLE>
The Company has agreed with the sellers to restrictions on its ability to
sell the properties or repay the $1.6 million of mortgage debt assumed with two
of the Sonic Automotive properties and 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 assumed in connection with seven of the Advance Auto properties.
Summarized financial information for Sonic Automotive, as a significant
lessee, for the year ended December 31, 1997 (derived from audited consolidated
financial statements) and for the three months ended March 31, 1998 (derived
from unaudited consolidated financial statements), is as follows (in
thousands):
<TABLE>
<CAPTION>
As of As of
March 31, December 31,
1998 1997
----------- -------------
<S> <C> <C>
Balance sheets
Current assets ....................................... $199,973 $197,372
Property and equipment, net .......................... 19,796 19,081
Other assets ......................................... 86,723 74,997
-------- --------
Total assets ....................................... $306,492 $291,450
======== ========
Current liabilities .................................. $151,073 $152,696
Long-term debt ....................................... 49,982 38,640
Other liabilities .................................... 15,593 15,749
Stockholders' equity ................................. 89,844 84,365
-------- --------
Total liabilities and stockholders' equity ......... $306,492 $291,450
======== ========
</TABLE>
<TABLE>
<CAPTION>
For the Three For the Year
Months Ended Ended
March 31, December 31,
1998 1997
--------------- -------------
<S> <C> <C>
Statements of operations
Revenues ................................................ $263,781 $536,001
Cost of sales ........................................... 228,600 471,253
-------- --------
Gross profit ............................................ 35,181 64,748
Selling, general and administrative expense ............. 26,640 48,520
Other expense, net ...................................... 5,067 10,230
-------- --------
Income before income taxes and minority interest ........ 3,474 5,998
Provision for income taxes .............................. 1,338 2,249
-------- --------
Income before minority interest ......................... 2,136 3,749
Minority interest ....................................... -- (47)
-------- --------
Net income .............................................. $ 2,136 $ 3,702
======== ========
</TABLE>
1998 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
1998 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.
F-7
<PAGE>
The Board, on or before the consummation of the Offering, intends to grant
nonstatutory share options to purchase an aggregate of 515,000 Common Shares
under the Plan 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.
1998 Formula Shares Option Plan -- Prior to the consummation of the
Offering, the Company's 1998 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 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 or before 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-8
<PAGE>
MAR MAR REALTY TRUST
PRO FORMA CONSOLIDATED BALANCE SHEET AS OF APRIL 14, 1998
AND
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
AND THE PERIOD FROM JANUARY 1, 1998 TO APRIL 14, 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 April 14, 1998.
The following unaudited pro forma consolidated statements of operations
give effect to (i) the completion of the Offering, (ii) the acquisition of
certain 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-9
<PAGE>
MAR MAR REALTY TRUST
PRO-FORMA CONSOLIDATED BALANCE SHEET
As of April 14, 1998
(Unaudited, In Thousands)
<TABLE>
<CAPTION>
Historical Adjustments ProForma (a)
------------ --------------------- -------------
<S> <C> <C> <C>
ASSETS
Cash ........................................... $ -- $ 139,625(b) $ 88,591
(52,034)(c)
1,000(e)
Property:
Land .......................................... 46,122(c) 46,122
Building and improvements ..................... 51,696(c) 51,696
-------- --------
Total property .............................. 97,818
-------- --------
Total assets .................................. $ -- $186,409
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgages payable .............................. $ -- 19,979(c) $ 19,979
-------- --------
Total liabilities ............................. 19,979
Minority interest .............................. 25,805(c)(d) 25,805
Shareholders' equity:
Common shares ................................. 1,000 10,000(b) 10,702
(298)(f)
Additional paid-in capital .................... 129,625(b) 129,923
298(f)
Less: share subscription receivable ........... (1,000) 1,000(e)
--------
Total shareholders' equity .................. 140,625
-------- --------
Total liabilities and shareholders' equity .... $ -- $186,409
======== ========
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma
consolidated financial statement.
F-10
<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 ProForma (a)
------------ ---------------- -------------
<S> <C> <C> <C>
Lease revenue ..................................................... $-- $ 10,632(g) $ 10,632
Expenses:
Depreciation ..................................................... 2,585(c) 2,585
General and administrative ....................................... 2,000(h) 2,000
Interest ......................................................... 1,788(c) 1,788
--------
Total expenses ................................................... 6,373
--------
Income before minority interest ................................... 4,259
Minority interest ................................................. (431)(d) (431)
--------
Net income ........................................................ $-- $ 3,828
=== ========
Earnings per share -- basic and diluted ........................... $-- $ .88
=== ========
Weighted average common shares outstanding -- basic and diluted ... -- 4,356(i)
=== ========
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma
financial statement.
F-11
<PAGE>
MAR MAR REALTY TRUST
PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the period from January 1, 1998 to April 14, 1998
(Unaudited, In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Historical Adjustments ProForma (a)
------------ --------------- -------------
<S> <C> <C> <C>
Lease revenue ..................................................... $-- $ 3,083(g) $ 3,083
Expenses:
Depreciation ..................................................... 750(c) 750
General and administrative ....................................... 580(h) 580
Interest ......................................................... 519(c) 519
--------
Total expenses ................................................... 1,849
--------
Income before minority interest ................................... 1,234
Minority interest ................................................. (125)(d) (125)
--------
Net income ........................................................ $-- $ 1,109
=== ========
Earnings per share -- basic and diluted ........................... $-- $ .25
=== ========
Weighted average common shares outstanding -- basic and diluted ... -- 4,356(i)
=== ========
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma
consolidated financial statement.
F-12
<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 protective rights of the
Limited Partners, full, exclusive and complete responsibility and
discretion in the management and unilateral 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>
<CAPTION>
<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 as of the date of commitment to acquire. For the 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. Final allocations will be calculated and recorded by the
Operating Partnership upon closing. Adjustments are comprised of the
following (in thousands):
<TABLE>
<CAPTION>
Total Land Building
---------- ---------- ---------
<S> <C> <C> <C>
Initial Dealership Properties ..................... $ 71,578 $39,368 $32,210
Advance Properties ................................ 26,240 6,754 19,486
-------- ------- -------
$ 97,818 $46,122 $51,696
======== ======= =======
Units issued -- minority interest ................. $ 25,805
Cash paid (including closing costs of $630)........ 52,034
Mortgage debt assumed ............................. 19,979
--------
$ 97,818
========
</TABLE>
Of the total mortgage debt of $20 million, $15.1 million is assumed to be
refinanced at an 8 percent interest rate. The remaining $4.9 million in
assumed debt bears interest at rates ranging from 8.13 percent to 10.25
percent per annum.
Depreciation is computed using the straight-line method assuming estimated
useful lives of 20 years for the building and improvements.
F-13
<PAGE>
(d) Represents the calculation of minority interest based on the ownership of
the Operating Partnership as follows (in thousands):
<TABLE>
<CAPTION>
Class B
Class A Units Units Total Units
------------------ -------- -------------------
Total
Amount Number % Number Number %
---------- -------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Partners' capital:
Initial Sellers -- minority interest $ 25,805 878 7.6% 983 1,861 14.8%
The Company ......................... 140,625 10,702 92.4 10,702 85.2
-------- ------ ----- ------ -----
Total ............................. $166,430 11,580 100.0% 983 12,563 100.0%
======== ====== ===== === ====== =====
</TABLE>
Class A Units are redeemable for cash or, at the Company's option, Common
Shares on a one-for-one basis beginning one year after the consummation of
the Offering. Each Class B Unit will have no distribution, allocation or
voting rights. Concurrent with an increase in rents expected to occur on
January 1, 2000, each Class B 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 B Units are valued at $12.86 per unit based upon the
absence of distributions until the scheduled rent increase on January 1,
2000.
Until January 1, 2000, the pro forma minority interest share of Operating
Partnership net income is attributable only to the Initial Sellers who hold
Class A Units (7.6%) except for the portion of net income attributable to
the straight-line rent adjustment which is allocated to the Initial Sellers
holding both Class A and Class B Units (14.8%).
(e) Represents payment of the share subscription receivable from the Company's
Chairman.
(f) Represents the reduction in the number of shares issued to the Company's
Chairman on the date of formation based on the assumed proceeds of the
Offering.
(g) 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.
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.
(h) Represents management's estimate for legal, audit, office costs, salaries
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>
Period Ended Year Ended
April 14, December 31,
1998 1997
-------------- -------------
<S> <C> <C>
Salaries and benefits -- executive officers ................... $ 278 $ 960
Other salaries and benefits ................................... 50 171
Directors and officers insurance .............................. 51 175
Legal and accounting .......................................... 73 250
Travel and entertainment ...................................... 49 172
Office rent, telephone, supplies and other administrative ..... 55 190
Other ......................................................... 24 82
----- -------
Total ......................................................... $ 580 $ 2,000
===== =======
</TABLE>
The above amounts may increase based on additional acquisition activity.
(i) Represent the number of Common Shares, the proceeds of which will be used
to acquire the Initial Properties along with the Common Shares issued to
the Company's Chairman. If the total number of shares issued in the
Offering had been used, weighted average common shares outstanding would
be approximately 10,720,000 for both the year ended December 31, 1997 and
the period ended April 14, 1998, resulting in earnings per share
outstanding of $.36 and $.10 for the year ended December 31, 1997 and the
period ended April 14, 1998, respectively. The potential redemption of the
Class A Units and Class B Units and the potential exercise of options
granted to acquire 515,000 Common Shares under the Plan are not dilutive
to earnings per share.
F-14
<PAGE>
SONIC AUTOMOTIVE, INC.
SUMMARY HISTORICAL FINANCIAL INFORMATION
Summarized historical financial information for Sonic Automotive, Inc. for
the year ended December 31, 1997 (derived from audited consolidated financial
statements) and for the three months ended March 31, 1998 (derived from
unaudited consolidated financial statements) is as follows (in thousands):
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of As of
March 31, December 31,
1998 1997
----------- -------------
<S> <C> <C>
Current assets ....................................... $199,973 $197,372
Property and equipment, net .......................... 19,796 19,081
Other assets ......................................... 86,723 74,997
-------- --------
Total assets ....................................... $306,492 $291,450
======== ========
Current liabilities .................................. $151,073 $152,696
Long-term debt ....................................... 49,982 38,640
Other liabilities .................................... 15,593 15,749
Stockholders' equity ................................. 89,844 84,365
-------- --------
Total liabilities and stockholders' equity ......... $306,492 $291,450
======== ========
</TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three For the Year
Months Ended Ended
March 31, December 31,
1998 1997
--------------- -------------
<S> <C> <C>
Revenues ................................................ $263,781 $536,001
Cost of sales ........................................... 228,600 471,253
-------- --------
Gross profit ............................................ 35,181 64,748
Selling, general and administrative expense ............. 26,640 48,520
Other expense, net ...................................... 5,067 10,230
-------- --------
Income before income taxes and minority interest ........ 3,474 5,998
Provision for income taxes .............................. 1,338 2,249
-------- --------
Income before minority interest ......................... 2,136 3,749
Minority interest ....................................... -- (47)
-------- --------
Net income .............................................. $ 2,136 $ 3,702
======== ========
</TABLE>
F-15
<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 .......................................... 11
Use of Proceeds ....................................... 23
Capitalization ........................................ 23
Dilution .............................................. 23
Selected Financial Information ........................ 24
Management's Discussion and Analysis of Financial
Condition and Results of Operations ................ 26
Business of the Company and its Properties ............ 28
Automotive Retailing and Motor Vehicle Aftermarket
Industries ......................................... 41
Management ............................................ 44
Policies and Objectives with Respect to Certain
Activities ......................................... 50
The Formation Transactions ............................ 51
Certain Relationships and Transactions ................ 52
Partnership Agreement ................................. 54
Principal Shareholders of the Company ................. 56
Description of Shares of Beneficial Interest .......... 56
Certain Provisions of Maryland Law and of the
Company's Declaration of Trust and Bylaws .......... 60
Common Shares Eligible for Future Sale ................ 65
Federal Income Tax Consequences ....................... 66
Certain United States Tax Considerations for Non-U.S.
Shareholders ....................................... 75
Underwriting .......................................... 78
Legal Matters ......................................... 79
Experts ............................................... 79
Additional Information ................................ 79
Glossary .............................................. 80
Index to Financial Statements ......................... F-1
</TABLE>
--------------------------------
Until , 1998 (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 Common Shares
[Logo Appears Here]
Mar Mar Realty Trust
Common Shares of
Beneficial Interest
--------------------------
PROSPECTUS
--------------------------
Wheat First Union
NationsBanc Montgomery Securities LLC
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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>
<CAPTION>
<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.
(1) On April 14, 1998, the Company sold an aggregate of 1,000,000 Common
Shares to O. Bruton Smith in connection with the formation of the Company.
(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 394,410 Class A
Units and 982,634 Class B Units to Mr. Smith and affiliates of Mr. Smith
and Sonic Automotive, Inc., and (ii) an aggregate of 483,267 Class A Units
to Primax Properties, L.L.C. and affiliates thereof.
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,
II-1
<PAGE>
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>
<CAPTION>
<S> <C>
INTRODUCTION TO FINANCIAL STATEMENTS ..................................................... F-2
MAR MAR REALTY TRUST:
Independent Auditors' Report ........................................................... F-3
Balance Sheet as of April 14, 1998 (Date of Formation) ................................. F-4
Notes to Balance Sheet ................................................................. F-5
Introduction to Pro Forma Consolidated Financial Statements ............................ F-9
Pro Forma Consolidated Balance Sheet as of April 14, 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 Period from January 1, 1998 to
April 14, 1998 (Unaudited) ............................................................. F-12
Notes to Pro Forma Consolidated Financial Statements (Unaudited) ....................... F-13
SONIC AUTOMOTIVE, INC:
Summary Historical Financial Information ............................................... F-15
</TABLE>
(b) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Description
- ---------------- -------------------------------------------------------------------------------
<S> <C>
1.1* Underwriting Agreement
3.1* Amended and Restated Declaration of Trust of Sonic REIT
3.2* Amended and Restated Bylaws of Sonic REIT
4.1* Specimen Common Shares certificate
5.1* Opinion of Parker, Poe, Adams & Bernstein L.L.P. regarding the validity of the
Common Shares being registered
5.2* Opinion of Ballard, Spahr, Andrews & Ingersoll, LLP
8.1* 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 1998 Shares Option Plan
10.3* Form of 1998 Formula Shares Option Plan
10.4* Strategic Alliance Agreement and Agreement for the Mutual Referral of
Acquisition Opportunities dated as of July , 1998 between Mar Mar Realty
L.P. and Sonic Automotive, Inc.
10.5* [ ] Purchase Agreement dated as of [ ], as amended
10.6* Form of Lease Agreement
10.7* Contribution Agreement dated July 10, 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
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description
- ---------------- --------------------------------------------------------------------------------
<S> <C>
21.1* Subsidiaries of the Company
23.1* Consent of Parker, Poe, Adams & Bernstein L.L.P. (included in Exhibit 5.1)
23.2* Consent of Ballard, Spahr, Andrews & Ingersoll, LLP
23.3 Consent of Deloitte & Touche LLP
23.4* 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>
- ---------
* 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.
(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-3
<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
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Charlotte, State of North Carolina, on July 10,
1998.
MAR MAR REALTY TRUST
By: /s/ BENJAMIN F. BRACY
------------------------------------
Benjamin F. Bracy
President
We, the undersigned trustees and officers of Mar Mar Realty Trust, do
hereby constitute and appoint each of Messrs. Smith and Bracy, each with full
power of substitution, our true and lawful attorney-in-fact and agent to do any
and all acts and things in our names and in our behalf in our capacities stated
below, which acts and things either of them may deem necessary or advisable to
enable Mar Mar Realty Trust to comply with the Securities Act of 1933, as
amended, and any rules, regulations and requirements of the Securities and
Exchange Commission, in connection with this Registration Statement, including
specifically, but not limited to, power and authority to sign for any or all of
us in our names, in the capacities stated below, any and all amendments
(including post-effective amendments) hereto and any subsequent registration
statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission; and we do
hereby ratify and confirm all that they shall do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this 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>
/s/ O. BRUTON SMITH Chairman July 10, 1998
----------------------------------
O. Bruton Smith
/s/ BENJAMIN F. BRACY President (principal executive officer) July 10, 1998
----------------------------------
Benjamin F. Bracy
/s/ JAMES A. MEZZANOTTE Executive Vice President, Director of July 10, 1998
---------------------------------- Acquisitions and Treasurer (principal
James A. Mezzanotte financial and accounting officer)
/s/ JAMES JOHNSTON Trustee July 10, 1998
----------------------------------
James Johnston
/s/ DONALD CARTER Trustee July 10, 1998
----------------------------------
Donald Carter
</TABLE>
II-4
EXHIBIT 23.3
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 Common Shares of Beneficial Interest of Mar Mar Realty Trust of
our report dated July 10, 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
July 10, 1998
